BU3413:

BUSINESS STRATGEY
Miss Sithmi Ranawaka
MBA (UK), MSc Entrepreneurship & Innovation (UK), BSc International Business (UK)
Lecturer I Research Supervisor I Entrepreneur
https://www.linkedin.com/in/sithmi-ranawaka-551198200/
 Learning Outcomes
• Ways of diagnosing strategic capability including the analysis of value chains and networks, activity
systems, the role of benchmarking and SWOT analysis.
• Ways in which managers may develop strategic capabilities of organisations
 DIAGNOSING STRATEGIC CAPABILITY

Strategists need to go beyond the concepts to understand more specifically how strategic capabilities underpinning
competitive advantage can be examined.

The value chain and value network

If organisations are to achieve competitive advantage by delivering value to customers, they need to understand how
that value is created or lost. The value chain and value network concepts can be helpful in understanding how value
is created or lost in terms of the activities undertaken by organisations.

The value chain

The value chain describes the activities within and around an organisation which together create a product or
service. It is the cost of these value activities and the value that they deliver that determines whether or not best
value products or services are developed. The concept was used and developed by Michael Porter in relation to
competitive strategy.
Primary activities are directly concerned with the creation or delivery of a product or service and can be grouped into
five main areas. For example, for a manufacturing business:

Inbound logistics are the activities concerned with receiving, storing and distributing the inputs to the product or
service. They include materials handling, stock control, transport, etc.

Operations transform these various inputs into the final product or service: machining, packaging, assembly,
testing, etc.

Outbound logistics collect, store and distribute the product to customers. For tangible products this would be
warehousing, materials handling, distribution, etc. In the case of services, they may be more concerned with
arrangements for bringing customers to the service if it is a fixed location (e.g. sports events).

Marketing and sales provide the means whereby consumers/users are made aware of the product or service and
are able to purchase it. This would include sales administration, advertising, selling and so on. In public services,
communication networks which help users access a particular service are often important.

Service includes all those activities which enhance or maintain the value of a product or service, such as
installation, repair, training and spares.
Support activities help to improve the effectiveness or efficiency of primary activities. They can be divided into four
areas:
• Procurement. This refers to the processes for acquiring the various resource inputs to the primary activities. As
such, it occurs in many parts of the organisation.
• Technology development. All value activities have a ‘technology’, even if it is just know-how. The key
technologies may be concerned directly with the product (e.g. R&D, product design) or with processes (e.g.
process development) or with a particular resource (e.g. raw materials improvements). This area is fundamental
to the innovative capacity of the organisation.
• Human resource management. This is a particularly important area which transcends all primary activities. It is
concerned with those activities involved in recruiting, managing, training, developing and rewarding people
within the organisation.
• Infrastructure. The systems of planning, finance, quality control, information management, etc. important to an
organisation’s performance in its primary activities. Infrastructure also consists of the structures and routines of
the organisation which are part of its culture.
 The value network

The value network is the set of inter-organisational links and relationships that are necessary to create a product or
service.

Clayton Christensen defines a value network as a “collection of upstream suppliers, downstream channels to
market, and ancillary providers that support a common business model within an industry”.
 Activity Maps
Managers often find it difficult to identify with any clarity the strategic capability of their organisation. One way of
undertaking such diagnosis is through the mapping of activities. An activity map tries to show how the different
activities of an organisation are linked together.

How do you do the analysis?

1.Brainstorm a long list of unique/special aspects of your company. Include many different types of things assets,
resources, policies, culture and processes. Starting with the brainstorm will help you avoid missing things.
2.Then start with the most important differentiated benefit from the Value Proposition
3.Then ask yourself “How do we deliver this?”. Draw the cause and effect tree through several layers of cause and
effect
4.Do the same for each differentiated benefit from the Value Proposition. Note common causes
5.Combine the cause and effect trees to one map, linked by the common causes
6.Iterate – use Post-Its or a white board, shuffle to make links clearer. Best to do this as a team exercise, bringing in
people from diverse parts of the company.
7.Sense check :
a.From your brainstorm – is there anything important missing from your map?
b.Can you explain the business logic behind every cause and effect relationship?
c. Does it fit with your intuition?
Southwest Airlines has a very robust
strategy – one of the reasons it has been the
most consistently profitable airline in the
US.

It’s activity map shows great fit –

everything that it does is tailored to
delivering its low cost, convenience, on-
time, friendly but limited customer service.

The interlinkages indicate that it is very

hard for competitors to copy their strategy –
a competitor would have to match them on
multiple different areas at the same time
 Benchmarking
Benchmarking  is the process of continuously measuring and comparing the business processes against comparable
process of the leading organization to obtain the information that will help the organization   to identify and
implement improvement programs.

“An excellent tool to use in order to identify a performance goal for improvement, identify partners who have
accomplished these goals, identify applicable practices to incorporate into a redesign effort.” –  Kleine, 1994

First, benchmarking can be used  to understand competitors and any other organisation by  isolating and analyzing
common functions and comparing  the company’s own practices with them. Second, benchmarking can be used to
compare the details of processes  used in design, manufacture, marketing and services, as opposed to just the finished
result.

Benchmarking helps in improving performance by learning from best practices and the processes by which they are
achieved. It involves regularly comparing different aspects of performance with the best practices, identifying gaps
and finding out novel methods to not only reduce the gaps but to improve the situations so that the gaps are positive
for the organization.
1. Historical benchmarking. It is common for organisations to consider their performance in relation to previous
years in order to identify any significant changes. The danger with historical comparison alone, however, is that it
can lead to complacency since it is the rate of improvement compared with that of competitors that is important.

2. Industry/sector benchmarking. Insights about performance standards can be gleaned by looking at the comparative
performance of other organisations in the same industry sector or between similar public service providers. These
industry norms compare the performance of organisations in the same industry or sector against a set of
performance indicators.

3. Best-in class benchmarking: Compare the performance of specific procurement categories by taking part in our
specialist benchmarking studies. These independent benchmarking studies evaluate the maturity of Procurement’s
performance against that achieved in other corporate organisations.
 The value of benchmarking
1. Increase effectiveness and efficiency
Performing regular benchmarks contributes to a company's overall effectiveness and efficiency by allowing an
organization to identify any potential areas of improvement internally. This is true for both sales and manufacturing
businesses as well as service-oriented companies. Components that benchmarking can help an organization improve
upon include sales, marketing, support and advertising.

2. Set clear business goals

Performing regular benchmarks will allow you to set clearer business goals for your organization. Understanding why
the competition is succeeding will give you important insight that will allow you to create measurable goals by defining
success, develop innovative strategies to make an impact and effectively monitor your progress towards each goal over
time. As you monitor your progress, be sure to make adjustments when necessary to accommodate changes in the market
or changes within your organization.

3. Provide new opportunity for discovery

Another reason why benchmarking in business is important is because it gives you a way to discover new opportunities
for increased growth and success.

5. Motivate employees
Regular benchmarking in business also provides a great opportunity to rejuvenate employees and increase their overall
motivation and contribution to the organization.
A SWOT analysis summarises the key issues from the business environment and the strategic capability of an
organisation that are most likely to impact on strategy development.

If the strategic capability of an organisation is to be understood it must be remembered it is not absolute but relative to its
competitors. A SWOT analysis is really only useful if it is comparative – if it examines strengths, weaknesses,
opportunities and threats relative to those of competitors.

Strategy building SWOT analysis can be used effectively to build organization or personal strategy. Steps necessary to
execute strategy-oriented analysis involve: identification of internal and external factors, selection and evaluation of the
most important factors and identification of relations existing between internal and external features.

Matching and converting One way of utilizing SWOT is matching and converting. Matching is used to find competitive
advantage by matching the strengths to opportunities. Converting is to apply conversion strategies to convert weaknesses
or threats into strengths or opportunities. An example of conversion strategy is to find new markets. If the threats or
weaknesses cannot be converted, a company should try to minimize or avoid them. An illustration of transformation
procedure is to discover new markets. In the event that the threats or weaknesses can't be changed over, an organization
ought to attempt to minimize them
There are, however, some dangers in undertaking a SWOT analysis. The main ones are these:

A SWOT exercise can generate very long lists of apparent strengths, weaknesses, opportunities and threats. What
matters, however, is to be clear about what is really important and what is less important. There is a danger of over-
generalisation. Identifying a very general explanation of strategic capability does little to explain the underlying reasons
for that capability. So SWOT analysis is not a substitute for more rigorous, insightful analysis.
 MANAGING STRATEGIC CAPABILITY

Stretching and adding capabilities

• Extending best practices. It might be that management identify strategic cap- abilities in one area of the
business, perhaps customer service in some of the geographic business units of a multinational, that are not
present in other business units. They might seek to extend such best practice throughout all the business units.
Whilst this seems straightforward, studies find it is not. The capabilities of one part of an organisation might
not be easily transferred to another because of the problems of managing change.

• Adding and changing activities. Could activities be added, or existing activities be changed so that they
become more reinforcing of outcomes that deliver against critical success factors?

• Stretching competences. Managers may also see the opportunity to build new products or services out of
existing competences. For example, a chemicals business that undertook an activity mapping exercise to
identify its bases of competitive advantage learned that it was not its expertise in chemicals that mattered so
much as its competences in meeting and servicing varied and specific customer needs. Managers began to
realise that these competences might allow them to develop what amounted to an industrial services business
rather than seeing the business in terms of chemicals.
• Building on apparent ‘weaknesses’, firms faced with a situation of being unable to match rivals’ strategic
capability, may develop competitive advantage by developing what might historically have been seen as valueless
resources or activities, for example historically unproductive teams, underperforming businesses or difficult client
relation- ships.

They did so by recognising and relating potential benefits in such areas to potential market opportunities and then
developing and fostering them through experimentation within supportive cultures and, possibly, outside the
mainstream organisational structures.

• Trade-offs. Does the organisation face trade-off decisions? For example, could the activity system of the
organisation be improved to the benefit of customers by structuring the organisation in such a way as to avoid
overlapping or inconsistent activity systems? It can be the case that within a given business, customers in different
market segments have different requirements with the business trying to deal with them through the same business
unit.

• External capability development. There may also be ways of developing capabilities by looking externally. For
example, managers may seek to develop capabilities by building external relationships with other organisations or
by acquisition. One of the major reasons firms enter into alliances and joint ventures.
 Managing people for capability development

Strategic capability often lies in the day-to-day activities that people undertake in organisations, so developing the
capability of people to recognise the importance of what they do in terms of the strategic capability of the organisation is
important.

• Targeted training and development may be possible. Often companies design training and development programmes
that are very general.

• HR policies might be employed to develop particular competences. For example, in the 1990s KPMG, the accountancy
firm, realising that it needed to develop more general business and management skills in its future partners, changed its
HR policies on recruitment and assessment to favour those individuals with such aptitude; and an oil company that
sought to build its competitive advantage around the building of close customer relationships in markets for industrial
oils did so by ensuring that senior field managers with an aptitude for this were promoted and sent to different parts of
the world that needed to be developed in such ways.

• More generally, it may be important to develop people’s awareness of how what they do can matter at the strategic
level. It is a common complaint in organisations that ‘no one values what I do’.
 Building dynamic capabilities
Particularly in fast-changing conditions successful firms may be those that have grown the dynamic capabilities to
continually readjust required competences. In effect their competence becomes that of learning and development.

In this context, the characteristics of what has become known as a ‘learning organisation’ may become especially
important. These include:
• the recognition of the significance of the intuition of people in the organisation;
• the acceptance that different, even conflicting ideas and views are to be welcomed;
• and that experimentation is the norm and becomes part of the learning process

Managers also need to consider what additional activities might be helpful to support such learning, the way the
organisation should be organised to facilitate learning and what strategies the organisation should be following that
might add to the dynamic capabilities.
Organisational knowledge are relevant in such a context.

Nonaka and Takeuchi argue that truly innovative companies are ones that can modify and enlarge the knowledge of
individuals to create a ‘spiral of interaction’ between tacit and explicit knowledge through the four processes shown

1. Socialisation is a process of sharing experiences between individuals and thereby allowing them to acquire tacit
knowledge from others without a formal system or the use of language. The apprenticeship model in craft
industries is a good example.

2. Externalisation is the process of articulating tacit knowledge into explicit concepts. This can be very difficult. It
may require a combination of different methods such as model building, metaphors or analogies.

3. Combination is the process of systematising concepts into a ‘knowledge sys- tem’, for example by linking separate
bodies of explicit knowledge. Individuals achieve this through formal methods of meetings, documents or
computer networks.

4. Internalisation is the process of embodying explicit knowledge into tacit knowledge. It is closely related to
‘learning by doing’.
 Summary
• Strategic capability is concerned with the adequacy and suitability of resources and competences required for an
organisation to survive and prosper. Competitive advantage is achieved by organisations that are able to develop
strategic capabilities more appreciated by customers and in ways that competitors find difficult to imitate.

• Strategic capabilities comprise tangible and intangible resources and competences – the way such resources are
used and deployed. Organisations require such resources and competences at least to a threshold level in order to
be able to compete. If they are to achieve competitive advantage, they require resources and competences which
are both valuable to customers and difficult for competitors to imitate (such competences are known as core
competences).

• Thecontinualimprovementofcostefficiencyisavitalstrategiccapabilityifanorganisation is to continue to prosper.

• The sustainability of competitive advantage is likely to depend on strategic capabilities being valuable to
customers, rare, robust (i.e. difficult to imitate) or non-substitutable.

• In dynamic conditions, it is unlikely that such strategic capabilities will remain stable. In such circumstances
dynamic capabilities are important, i.e. the ability to continually change strategic capabilities.
• Analysing an organisation’s value chain and value network can be an important basis of understanding how value
to a customer is created and how it can be developed.

• The activities which underpin the strategic capabilities of an organisation may be under- stood by activity
mapping.

• Benchmarking can be a useful way of understanding the relative performance of organisations and challenging the
assumptions managers have about the performance of their organisation.

• A SWOT analysis can be a useful way of drawing together an understanding of strengths, weaknesses,
opportunities and threats an organisation faces.

• Managers need to think about how and to what extent they can manage the development of the strategic
capabilities of their organisation. They may do this by stretching such cap- abilities, managing people in the
organisation and, in fast-changing environments, building dynamic capabilities.