AN

INTERNAL

ORGANISATIONS

What are the SOURCES of COMPETITIVE ADVANTAGE

ENVIRONMENT:

Session 13 on 14 May 2013

SZABIST MBA

Strategic Management Process

Study

the EXTERNAL and INTERNAL environments

Identify

MARKETPLACE OPPORTUNITIES and THREATS

how to use CORE COMPETENCIES

Determine Use

strategic intent to LEVERAGE resources, capabilities and core competencies strategies

Integrate

FORMULATION and IMPLEMENTATION of

Seek

FEEDBACK to improve strategies

Background
Much

of our earlier discussion has focused on looking at the EXTERNAL ENVIRONMENT that has an impact on organisations take a look WITHIN for sources of competitive advantage

Lets

External and Internal Analyses

Examine opportunities and threats

Examine unique resources, capabilities, and competencies (sustainable competitive advantage)

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The Context of Internal Analysis

Effective

analysis of a firms internal environment (learning what the firm can do ) requires:

Fostering an organisational setting in which experimentation and learning are expected and promoted Using a global mind-set Thinking of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position

35

Components of Internal Analysis

Why Do an Internal Analysis?

Internal

analysis helps a firm: determine if its RESOURCES and CAPABILITIES are likely SOURCES of competitive advantage
establish

strategies that will EXPLOIT any sources of competitive advantage

Internal

analysis tells the strategist what is inside the organisationhelps answer the question, what STRENGTHS can we LEVERAGE?

Creating Value
By

exploiting their core competencies or competitive advantages, firms create VALUE is measured by A products performance characteristics The products attributes for which customers are willing to pay How much something is deemed important by customers

Value

Firms

create value by innovatively bundling and leveraging their resources and capabilities
38

Creating Competitive Advantage

CORE

competencies, in combination with PRODUCT/SERVICE-MARKET POSITIONS, are the firms most important sources of competitive advantage competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should DRIVE its selection of strategies

Core

The Challenge of Internal Analysis

Strategic

decisions in terms of the firms resources, capabilities, and core competencies

Are

non-routine ethical implications [example?]

Have

Significantly

influence the firms ability to earn above-average returns

The Challenge of Internal Analysis (contd)

To

develop and use core competencies, managers must have

Courage Self-confidence Integrity The

capacity to deal with uncertainty and complexity A willingness to hold people (and themselves) accountable for their work

Conditions Affecting Managerial Decisions about Resources, Capabilities and Core Competencies

SOURCE: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organisational rent, Strategic Management Journal, 14: 33.

Resources, Capabilities and Core Competencies

Resources
Are

the source of a firms capabilities Are broad in scope Cover a spectrum of individual, social and organisational phenomena Alone, do not yield a competitive advantage

Resources, Capabilities and Core Competencies

Resources
Are

a firms assets, including people and the value of its brand name Represent inputs into a firms production process, such as:

Capital equipment Skills of employees Brand names Financial resources Talented managers

Resources, Capabilities and Core Competencies

Resources
Tangible
Financial Physical

resources

resources resources resources

resources

Technological

Organisational

Intangible
Human innovation Reputation

resources

resources resources resources

Tangible Resources
Financial Resources internal The firms borrowing capacity The firms ability to generate funds

Organisational Resources The firms formal reporting structure and its formal planning, controlling and coordinating systems Physical Resources firms Technological Resources Sophistication and location of a plant and equipment Access to raw materials Stock of technology, such as patents, trade-marks, copyrights, and trade secrets

SOURCES: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100102.

Intangible Resources
Human Resources Knowledge Trust Managerial capabilities Organisational routines

Innovation Resources

Ideas Scientific capabilities Capacity to innovate Reputation with customers Brand name Perceptions of product quality, durability, and reliability Reputation with suppliers For efficient, effective, supportive, and mutually beneficial interactions and relationships

Reputational Resources

SOURCES: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101104.

Resources, Capabilities and Core Competencies

Capabilities

Are the firms capacity to deploy resources that have been purposely integrated to achieve a desired end state Emerge over time through complex interactions among tangible and intangible resources Often are based on developing, carrying and exchanging information and knowledge through the firms human capital

Resources, Capabilities and Core Competencies

Capabilities
The

foundation of many capabilities lies in:

The unique skills and knowledge of a firms employees The functional expertise of those employees

Capabilities

are often developed in specific functional areas or as part of a functional area

Examples of Firms Capabilities

Resources, Capabilities and Core Competencies

Core

Competencies

Resources and capabilities that serve as a source of a firms competitive advantage:

Distinguish a company competitively and reflect its personality Emerge over time through an organisational process of accumulating and learning how to deploy different resources and capabilities

Resources, Capabilities and Core Competencies

Core

Competencies

Activities that a firm performs especially well compared to competitors Activities through which the firm adds unique value to its goods or services over a long period of time

What is Competitive Advantage (CA)?

Competitive

advantage is what sets a company apart from rivals or a companys competitive edge Advantage is attained by: CONTROLLING or HAVING SOMETHING other rivals do not
have; or

Competitive

Doing something BETTER than other organisations can do; or Doing SOMETHING that other organisations CANNOT DO

What is Competitive Advantage?

Competitive

Advantage is a NECESSARY INGREDIENT for an organisations longterm success and survival

True

for for-profit, not-for-profit organisations and government agencies and departments

Building Sustainable Competitive Advantage

Four

Criteria of Sustainable Competitive Advantage

Valuable Rare Costly

to imitate Non-substitutable

The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities Rare Capabilities Help a firm neutralise threats or exploit opportunities Are not possessed by many others

Costly-to-Imitate Capabilities Historical: A unique and a valuable organisational culture or brand name Ambiguous cause: The causes and uses of a competence are unclear Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers Non-substitutable Capabilities No strategic equivalent

Building Sustainable Competitive Advantage

Valuable
Help

capabilities

a firm neutralise threats or exploit opportunities

Rare

capabilities

Are

not possessed by many others

Building Sustainable Competitive Advantage

Costly-to-Imitate Historical

Capabilities

A unique and a valuable organisational culture or brand name

Ambiguous

cause

The causes and uses of a competence are unclear

Social

complexity

Interpersonal relationships, trust, and friendship among managers, suppliers, and customers

Building Sustainable Competitive

Advantage
Non-substitutable

Capabilities
No

strategic equivalent

The Theory Behind Internal Analysis

The RESOURCE BASED VIEW

DO SOME FIRMS ACHIEVE BETTER ECONOMIC PERFORMANCE THAN OTHERS? used to help firms achieve COMPETITIVE ADVANTAGE and SUPERIOR ECONOMIC PERFORMANCE

developed to answer the question: WHY

assumes that a firms resources and capabilities are the PRIMARY DRIVERS of competitive advantage and economic performance

The Resource Based View

Resources
Resources: TANGIBLE and INTANGIBLE ASSETS of a firm

and Capabilities

tangible: factories, products; intangible: reputation,

Capabilities a subset of resources that enable a firm to TAKE FULL

intellectual property used to conceive of and implement strategies

ADVANTAGE of other resources

Examples: marketing skill, co-operative relationships

The Resource Based View

Two

RBV

Critical Assumptions of the

Resource

HETEROGENEITY: different firms may have different resources or similar resources put together in different ways Resource IMMOBILITY: it may be costly for firms without certain resources to acquire or develop them and some resources may not spread from firm to firm easily

The Resource Based View

What
if

do these assumptions really mean?

one firm HAS resources that are valuable and other firms dont, and if other firms CANT IMITATE these resources without incurring high costs, then the firm possessing these valuable resources will likely gain a sustained competitive advantage

The Resource Based View

Resource Heterogeneity
heterogeneity

of resources typically occurs as the

result of BUNDLING the resources and capabilities of a firm (e.g., bundles of HR practices, e.g., google has specific ones)
managers

of a firm could take resources that seem homogeneous and bundle them to create heterogeneous combinations competitive advantage typically stems from several resources and capabilities bundled together in a unique combination

What are Bundles?

Those particular bundles of resources and capabilities that provide unique advantages to the firm are considered CORE COMPETENCIES Core competencies give a firm competitive advantage over rivals and reflect its PERSONALITY Core competencies emerge over time through

resources and capabilities. Core competencies are crown jewels of any organisation, activities the company PERFORMS

ACCUMULATING and LEARNING how to deploy different

ESPECIALLY WELL compared to competitors and through

which it adds unique value to its goods or services over a [long] period of time

The Internal Analysis Tool

The

VRIO Framework
Important Questions:

FOUR

Value? Rarity? Imitability? Organisation?

The VRIO Framework

If

a firm has resources that are:

VALUABLE, RARE, and

to imitate, and the firm is ORGANISED to exploit these resources

COSTLY

then

the firm can expect to enjoy a sustained competitive advantage

The VRIO Framework

Applying
a

the Tool

resource or bundle of resources is SUBJECTED to each QUESTION to determine the competitive implication of the resource each question is considered in a COMPARATIVE sense and in a COMPETITIVE environment

Applying the VRIO Framework

The
in

Question of VALUE

theory: Does the resource enable the firm to EXPLOIT an external opportunity or NEUTRALISE an external threat? the practical: Does the resource result in an INCREASE in REVENUES, a DECREASE in COSTS, or some COMBINATION of the two? (Levis reputation allows it to charge a premium for its Dockers pants)

Applying the VRIO Framework

The
if

Question of RARITY

a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., NO COMPETITIVE ADVANTAGE, NO ABOVE NORMAL PROFITS)

resource must be rare enough that perfect competition has not set in thus, there may be other firms that possess the resource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-lowering
drugs, but the drugs are still scarcelook at prices)

Applying the VRIO Framework: Valuable and Rare

If a firms resources are: Not Valuable Valuable, but Not Rare Valuable and Rare The firm can expect: Competitive Disadvantage Competitive Parity Competitive Advantage (at least temporarily)

Applying the VRIO Framework

The

Question of IMITABILITY

the

temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a COST DISADVANTAGE in imitating the resource INTANGIBLE resources are usually more costly to
imitate than tangible resources (HarleyDavidsons styles may be easily imitated, but its reputation cannot)

Applying the VRIO Framework

The
if

Question of IMITABILITY

there are HIGH COSTS of imitation, then the firm may enjoy a PERIOD of sustained competitive advantage
a

sustained competitive advantage will last only until a DUPLICATE or SUBSTITUTE emerges

if a firm has a competitive advantage, others will attempt to imitate it; some will succeed

Applying the VRIO Framework

The

Question of IMITABILITY
of Imitation

Costs

Unique

HISTORICAL Conditions: an innovative firm gains low-cost access to rare resources in a particular time and space FIRST MOVER advantages PATH dependence - search for new sources
of competitive advantage is path dependent

Applying the VRIO Framework

The

Question of IMITABILITY
of Imitation
AMBIGUITY (Southwest Airlines HR)
links between resources and competitive advantage may not be understood by imitating firm of resources FOG/OBSCURE these causal links

Costs

CAUSAL

causal

bundles

Applying the VRIO Framework

The

Question of IMITABILITY
of Imitation
COMPLEXITY
social relationships entailed in resources may be so COMPLEX that managers cannot really manage them or replicate them

Costs
SOCIAL
the

Applying the VRIO Framework

The

Question of IMITABILITY
of Imitation

Costs

PATENTS
patents

may be a two-edged sword; offer a period of protection if the firm is able to defend its patent rights required disclosure and the timing may actually decrease the cost of imitation

Applying the VRIO Framework

Value,

Rarity, & Imitability

The firm can expect: Temporary Competitive Advantage Sustained Competitive Advantage (if Organised appropriately)

If a firms resources are: Valuable, Rare, but not Costly to Imitate Valuable, Rare, and Costly to Imitate

Applying the VRIO Framework

The
a

Question of ORGANISATION

firms structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firms resources

examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. these structure and control mechanisms complement other firm resourcestaken together, they can help a firm achieve sustained competitive advantage (3M, Google)

Summary: The VRIO Framework

Summary: Internal Analysis

Tells
what

Managers
BUNDLE

the firm SHOULD do, given the relative strengths and weaknesses of resources and capabilities

us:

RESOURCES and CAPABILITIES to achieve competitive advantage VRIO Framework helps managers RECOGNISE SOURCES of COMPETITIVE ADVANTAGE

Job:

Common Mistakes
Managers

tend to OVERESTIMATE the TRANSFERABILITY of specific assets and capabilities Managers tend to OVERESTIMATE their CAPABILITY to COMPETE in highly profitable industries [risk-taking vs. being foolish] Managers tend to assume that LEVERAGING GENERIC RESOURCES will be a major source of competitive advantage in a new market