Post on 19-Oct-2015
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1La Trobe UniversityCORPORATE STRATEGY
MBA PROGRAMLECTURE 3
Internal Analysis: Distinctive Competencies, Competitive Advantage, and Profitability
Drawn from Hill & JonesStrategic Management - 8TH Edition - Chapter 3
& other contemporary sources of information
In preparing for battle I have always found that plans are useless,
but planning is indispensable.
- Dwight D.Eisenhower
External and Internal Analyses
General
Envi
ronm
ent
General
Environment
Gen
eral
Environment
SocioculturalSociocultural
GlobalGlobal
TechnologicalTechnological
Polit
ical/L
egal
Polit
ical/L
egal
Dem
ogra
phic
Dem
ogra
phic Econom
ic
Economic
IndustryIndustryEnvironmentEnvironment
CompetitorCompetitorEnvironmentEnvironment
By studying the external environment, firms identify what they might choose to domight choose to do
Opportunities and ThreatsOpportunities and Threats
2By studying the internal environment, firms identify what they can docan do
Unique resources, capabilities, and core competencies
(sustainable competitive advantage)
External and Internal Analyses
THE CONTEXT OF INTERNAL ANALYSIS
Global Economy Traditional sources of advantages can be overcome
by competitors international strategies and By the flow of resources throughout the global
economy.
Global Mind-Set The ability to study an internal environment in ways
that are not dependent on the assumptions of a Single country Single culture, or Single context.
THE CONTEXT OF INTERNAL ANALYSIS
Analysis Outcome Understanding how to leverage the firms
bundle of heterogeneous resources and capabilities.
3Challenge of Internal Analysis
How do we effectively manage current core competencies while simultaneously developing new ones?
How do we assemble bundles of resources, capabilities and core competencies to create value for customers?
How do we learn to change rapidly?
Internal Analysis The purpose of internal analysis is to
pinpoint the strengths and weaknesses of the organisation.
It includes assessments of: The firms resources and capabilities Distinctive competencies
Components ofInternal Analysis
Discovering CoreCompetencies
Resources Tangible Intangible
Capabilities
CoreCoreCompetencies
CompetitiveCompetitiveAdvantageAdvantage
Value Creation
Four CriteriaFour Criteriaof Sustainableof SustainableAdvantages
ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable
ValueChain
Analysis
Outsource
4Internal Analysis
Building and sustaining a competitive advantage requires a company to achieve superior: Efficiency Quality Innovations Responsiveness to Customers
Internal Analysis: Strengths and Weaknesses
Internal analysis + external analysis= Information
Strengths Assets that boost profitability
Weaknesses Liabilities that depress profitability
Key Strategic Leadership Actions: Establishing Balanced Organisational Controls
The Balanced Scorecard A framework used to verify that the firm
has established both strategic and financial controls to assess its performance.
Prevents over-emphasis of financial controls at the expense of strategic controls
5The Balanced Scorecard Developed by Robert Kaplan and
David Norton (1990s) Plan, set goals, and measure success A plan is more important than specific tools An approach that extends beyond financial
measures and incorporates other priorities of the organisation
Links strategic organisational plans and priorities
Kaplan & Norton
The first step Determine the organisations strategic objectives These should be precise and measurable
Curb Vagueness (eg Improve the organisations customer service)
Be Precise (eg Increase respond to customer orders by 33.3% by
completion of the next financial year) Strategic objectives must align with
organisational goals Must align with the organisations Vision and Mission
A Balanced Scorecard Approach
Allows for an increased focus on strategy and results
Aligns strategy with the Organisations Vision and Mission
Identifies the drivers of future performance for current strategic planning
Aligns strategy with human resources
The Balanced Scorecard
6A Balanced Scorecard Approach
Inte
rnal
Pro
cess
Stak
ehol
der
Lear
ning
& G
row
th
Reduce Re-Activities thru ABC/M
Establish Web Based Self Services
Knowledge Management
Human Capital
Improved Returns on Investments
More rapid and accessible services
Leadership Development
Inve
stm
ents
Strategy Mapping
IT InfrastructureFacilities and Fixed Assets
Economic Model
Process
Expand Global Facility Reach
Drivers and outcomes matched against the core competencies of the organisations business model
Strategy Mapping
Customer Growth Customer SatisfactionRetention Rate
Timely Delivery Quality Service Reputation
Customer PerspectiveOutcomes
Drivers
Price
Splitting the Perspective
7Strategy Maps: Communicating the Strategy
Executive consensus and Executive consensus and accountability:accountability:
Building the map eliminates ambiguity and clarifies
responsibility.
Educate and Communicate:Educate and Communicate:
Build awareness and understanding of organisation
strategy across the workforce.
Ensure Alignment:Ensure Alignment:
Each sub-unit and individual link their objectives
to the map.
Promote Transparency:Promote Transparency:
Communicate with and educate constituents, partners,
oversight bodies, and the general public.
Source: Robert S. Kaplan (2004) "Using Balanced Scorecard Technology to Create Strategy-Focused Public Sector Organisations
A Touch of Theory: Career Anchors
Edgar Schein
Most people have two strong career anchors
Our anchor is the "dominant motivator" that guides us into the type of work we want to do.
Technical / Functional Being good at something Will work to become a guru or expert
Edgar Schein
Career Anchors General Managerial
Want to be managers A liking for problem-solving and dealing
with other people Thrive on responsibility Need emotional competence
Autonomy / Independence Primary need to work under their own rules
and steam They avoid standards and prefer to work alone
8 Entrepreneurial Creativity Like to invent things, be creative and, most of all,
to run their own businesses Ownership very important Easily bored
Security / Stability Seek stability and continuity Avoid risks and are generally 'lifers' in their job
Career Anchors
Service / Dedication to a cause Driven by how they can help other people
Pure Challenge Driven by challenge Seek constant stimulation and
difficult problems Will change jobs when bored Career can be very varied
Career Anchors
Lifestyle Focused first on lifestyle and their whole pattern of
living Integrate work and life May take long periods off work
Schein also suggests that it is often mid-life (late 30s and 40s) before an individual's career anchor becomes clear
Also Recall McClellands Theory of Needs
Career Anchors
Source: Schein, Edgar H, (1990). Career Anchors (discovering your real values).
9 Life is short, Life is short, Life is short, the art long, the art long, the art long, opportunity fleeting, opportunity fleeting, opportunity fleeting, experiment treacherous, experiment treacherous, experiment treacherous, judgementjudgementjudgement difficultdifficultdifficult.
HippocratesHippocrates
Shifting the Analysis:From External to the Internal Environment
THE FIRMGoals and ValuesResources andCapabilitiesStructure and Systems
THE INDUSTRYENVIRONMENT
CompetitorsCustomersSuppliers
STRATEGY
TheFirm-Strategy
Interface
TheEnvironment-Strategy
Interface
Shifting the Analysis:From External to the Internal Environment
WHY?WHY? When the external environment is subject to
rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus.
Resources and capabilities are the primary sources of profitability
10
Organisational Capability Architecture
Organisational Capability Architecture
SKILLS &KNOWLEDGE
VALUES & NORMSMANAGERIAL
SYSTEMSTECHNICALSYSTEMS
Source: Dorothy Leonard-Barton Core Capabilities & Core RigiditiesWellsprings of Knowledge: Building and Sustaining the Sources ofInnovation. Robert M Grant: Contemporary Strategy Analysis.
RESOURCESHuman skills & know-how
TechnologyCulture (values, norms)
ManagementSystems
OrganisationStructure
ORGANISATIONAL CAPABILITY
Capabilities, Strategy, Resources, and Competencies
Organisational Capability
Core Competence as a Strategic Capability
Resources Inputs to a firms
production process
Capability A nonstrategic
team or resource
Core Competence A strategic
capability
The source of
Does it satisfy the criteria of sustainable competitive advantage?
Yes
No
Capability An integration of a
team of resources
11
ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFirm
Infra
stru
ctur
eFi
rm In
frast
ruct
ure
Hum
an R
esou
rce
Mgm
t.H
uman
Res
ourc
e M
gmt.
Tech
nolo
gica
l Dev
elop
men
tTe
chno
logi
cal D
evel
opm
ent
Pro
cure
men
tP
rocu
rem
ent
Margi
n Margin
Primary Activities
Supp
ort A
ctiv
ities
The BasicThe BasicValue ChainValue Chain
Margi
n Margin
Primary Activities
Sup
port
Act
iviti
es
Outsourcing
Outsourcing is the purchase of some or all of a value-creating activity from an external supplier
Usually this is because the specialty supplier can provide these functions more efficiently
Service
Marketing & Sales
Outbound LogisticsOutbound Logistics
Operations
Inbound LogisticsFirm
Fi
rm In
frast
ruct
ure
Hum
an R
esou
rce
Mgm
t.
Tech
nolo
gica
l Dev
elop
men
t
Pro
cure
men
t
Competitive Advantage Competitive Advantage
A firms profitability is greater than the average profitability for all firms in its industry.
Sustained Competitive Advantage A firm maintains above average and superior
profitability and profit growth for a number of years.
12
Competitive AdvantageHow does Competitive
Advantage emerge?
External sources ofchange e.g.:Changing customer demandChanging pricesTechnological change
Internal sources of change
Resource heterogeneity among firms meansdifferential impact
Some firms faster and more effective in exploiting change
Some firmshave greater creative
and innovativecapability
How profitable a company becomes depends on three basic factors: Value or utility the customer gets from owning the product
Price that a company charges for its products
Costs of creating that product Consumer surplus is the excess utility a
consumer captures beyond the price paid
Competitive Advantage, Value Creation, and Profitability
Basic Principle: the more utility that consumers get from a companys products or services, the more pricing options the organisation has.
Competitive Advantage
COST ADVANTAGE
COST ADVANTAGE
DIFFERENTIATIONADVANTAGE
DIFFERENTIATIONADVANTAGE
COMPETITIVEADVANTAGE
COMPETITIVEADVANTAGE
Similar
product
at lower
cost
from unique product
13
Before PorterBefore Porter..The McKinsey Business System
TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE
A business delivers its products or services sequentially. At each link of the business system, management can choose how to conduct the business.
The Porter Value Chain A business is a chain of activities for
transforming inputs into outputs that customers value including the primary and support activities.
Building Blocks ofCompetitive Advantage
14
Complexity Theory Organisations are complex systems
Human crowds, flocks of birds, ant colonies are also complex systems
They are all systems in which large numbers of independent agents interact
Complexity Theory shows that complex systems display common and predictable patterns of adaptive behaviour
15
Complexity Theory Premise is that there is a hidden order to the
behaviour (and evolution) of complex systems, whether that system is
A national economy An eco-system An organisation A production line
Used in business as a way to encourage innovative thinking and real-time responses to change by allowing business units to self-organise.
Complex adaptive systems have common features
Unpredictability Waves of change are constantly interacting
and re-shaping competitive landscapes
Complexity Theory
16
Self-organisation A key feature of biological and social systems
is their capacity for self-organisation
Similarly to shoals of fish, companies have the capacity to self-organise, adapt to change, and create new structures and systems in the absence of formal authority
Complexity Theory
Self-Organisation For human organisations there are three main
requirements for self-organisation Identity
Organisations need to have an intent that drives the sense-making process within the organisation
Information The medium through which an organisation relates
to its environment The medium through which individuals within the
organisation know how to react to external changes
Relationships Pathways through which information is transformed
into intelligent, co-ordinated action The more access individuals have to one another, the
greater the possibilities for organised activity Appropriate responses to external circumstances,
requires every person to have a wide range of connections to others, with the potential for unplanned connections
Networking!!
Self-Organisation
17
Complexity Theory
Inertia and Chaos Evolutionary processes in organisations can
produce three types of outcome Order change is so limited that the systems suffers inertia Disorder changes produce chaotic outcomes Intermediate small changes resulting in power and process
distribution Small and large shifts Most rapid evolutionary adaption
Step back from the day-to-day running of the organisation
Watch for Emergent properties and Organisational patterns
Those conditions or patterns that bring about the best solutions should be preserved whenever possible
Complexity Theory
Complexity Vs Chaos Complexity theory is very similar to
Chaos Theory
Complexity theorists maintain that chaos, by itself, does not account for the coherence of self-organising, complex systems.
There are advantages for systems that evolve to the edge of chaos...ie they know when to stop!
18
Analysing Competitive Advantage and Profitability
Competitive Advantage When a companys profitability is greater than the
average of all other companies in the same industry that compete for the same customers
Benchmarking Comparing company performance against that of
competitors and the companys historic performance
The Durability of Competitive Advantage
The durability of a companys competitive advantage over its competitors depends on:
Barriers to Imitation- Making it difficult to copy a companys
distinctive competencies
Capability of Competitors- Strategic commitment- Absorptive capacity
Industry Dynamism- Ability of an industry to change rapidly
Why Companies Fail
When a company loses its competitive advantage, its profitability falls below that of the industry.
It loses the ability to attract and generate resources.
Profit margins and invested capital shrink rapidly.
19
CAUTIONS AND REMINDERS
Never take for granted that core competencies will continue to provide a source of competitive advantage.
All core competencies have the potential to become core rigidities former core competencies that now generate inertia and stifle innovation.
CAUTIONS AND REMINDERS
Determining what the firm can do through continuous and effective analyses of its internal environment will increase the likelihood of long-term competitive success.
Developing a sound andhealthy organisation requiresunderstanding the environmentas much as understanding the organisation.
- Gary HamelManagement Guru & Author