Post on 17-Dec-2015
Key Questions in Situation Analysis
• Question 1: How well is the company’s strategy working?
• Question 2: What are the company’s resource strengths and weaknesses and its external opportunities and threats?
• Question 3: Are the company’s prices and costs competitive?
• Question 4: Is the company competitively stronger or weaker than key rivals?
• Question 5: What strategic issues and problems merit front-burner managerial attention?
Competitive Advantage
• Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectivelyAcquiredBundledLeveraged
• Over time, the benefits of any value-creating strategy can be duplicated by competitors
Competitive Advantage (cont’d)
• Sustainability of a competitive advantage is a function ofThe rate of core competence obsolescence due
to environmental changesThe availability of substitutes for the core
competenceThe difficulty competitors have in duplicating or
imitating the core competence
Outcomes from External and Internal Environmental Analyses
Examine opportunities and threats
Examine unique resources, capabilities, and competencies(sustainable competitive advantage)
The Context of Internal Analysis
• Effective analysis of a firm’s internal environment (learning what the firm can do ) requires:Fostering an organizational 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
Creating Value
• By exploiting their core competencies or competitive advantages, firms create value
• Value is measured by
A product’s performance characteristics
The product’s attributes for which customers are willing to pay
• Firms create value by innovatively bundling and leveraging their resources and capabilities
Creating Competitive Advantage
• Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage
• Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies
The Challenge of Internal Analysis
• Strategic decisions in terms of the firm’s resources, capabilities, and core competencies
Are non-routine
Have ethical implications
Significantly influence the firm’s ability to earn above-average returns
The Challenge of Internal Analysis (cont’d)
• To develop and use core competencies, managers must haveCourageSelf-confidence IntegrityThe capacity to deal with uncertainty
and complexityA willingness to hold people (and
themselves) accountable for their work
Resources, Capabilities and Core Competencies
• ResourcesAre the source of a
firm’s capabilitiesAre broad in scopeCover a spectrum of
individual, social and organizational phenomena
Alone, do not yield a competitive advantage
Resources, Capabilities and Core Competencies
• ResourcesAre a firm’s assets,
including people and the value of its brand name
Represent inputs into a firm’s production process, such as: Capital equipment Skills of employees Brand names Financial resources Talented managers
Resources, Capabilities and Core Competencies
• ResourcesTangible resources
Financial resources Physical resources Technological resources Organizational resources
Intangible resources Human resources innovation resources Reputation resources
Tangible Resources
Financial Resources •The firm’s borrowing capacity•The firm’s ability to generate internal funds
Organizational Resources •The firm’s formal reporting structure and its formal planning, controlling,and coordinating systems
Physical Resources •Sophistication and location of a firm’s plant and equipment
•Access to raw materials
Technological Resources •Stock of technology, such as patents, trademarks, copyrights, and trade secrets
Intangible ResourcesHuman Resources • Knowledge
• Trust• Managerial capabilities• Organizational routines
Innovation Resources • Ideas
• Scientific capabilities • Capacity to innovate
Reputational Resources • 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
Resources, Capabilities and Core Competencies
• Capabilities Are the firm’s 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 firm’s human capital
Resources, Capabilities and Core Competencies
• CapabilitiesThe foundation of many
capabilities lies in: The unique skills and
knowledge of a firm’s employees
The functional expertise of those employees
Capabilities are often developed in specific functional areas or as part of a functional area
EXAMPLES OF CAPABILITIES Capability Result
Logistics -- distributing vast amounts of goods quickly and efficiently to remote locations
An extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both techno-logical leadership and economies of scale
Generating new ideas then turning those ideas into new, profitable products
200,000-percent return to share-holders during first 30 years since IPO1
25,000-percent return to share-holders during the 30-plus year tenure of CEO John Connelly.2
As for ongoing expenses, share-holders in Vanguard equity funds pay, on average, just $30 per $10,000, vs. a $159 industry average. With bond funds, the bite is just $17 per $10,000
30 percent of revenue from products introduced within the past four years
Company
Performance implicationTest Competitive implication
Valuable? Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties?
If so, it satisfies the value require-ment. Valuable resources are needed just to compete in the indus-try, but value by itself does not convey an advantage
Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits which cover the cost of all inputs including the cost of capital)
Rare? Assuming the resource or capability is valuable, is it scarce relative to demand? Or, is it widely possessed by most competitors?
Valuable resources which are also rare convey a competitive advant-age, but its relative permanence is not assured. The advantage is likely only temporary
A temporary competitive advantage conveys the potential to achieve above normal profits, at least until the competitive advantage is nullified by other firms
Inimitable and non-substitut-able?
Assuming a valuable and rare resource, how difficult is it for com-petitors to either imitate the resource or capability or substitute for it with other resources and capabilities that accomplish similar benefits?
Valuable resources and capabilities which are difficult to imitate or substitute provide the potential for sustained competitive advantage
A sustained competitive advantage conveys the potential to achieve above normal profits for extended periods of time (until competitors eventually find ways to imitate or substitute or the environment changes in ways that nullify the value of the resources)
Exploit-able?
For each step of the preceding steps of the VRINE test, can the firm actually exploit the resources and capabilities that it owns or controls?
Resources and capabilities that satisfy the VRINE requirements but which the firm is unable to exploit actually result in significant opportu-nity costs (other firms would likely pay large sums to purchase the VRINE resources and capabilities). Alternatively, exploitability unlocks the potential competitive and perfor-mance implications of the resource or capability
Firms which control unexploited VRINE resources and capabilities generally suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy (though not as depressed as firms lacking resources and capabilities which do satisfy VRINE)
THE VRINE MODEL
Resources, Capabilities and Core Competencies
• Core CompetenciesResources and capabilities
that serve as a source of a firm’s competitive advantage: Distinguish a company
competitively and reflect its personality
Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities
Resources, Capabilities and Core Competencies
• Core CompetenciesActivities 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
Building Sustainable Competitive Advantage
• Four Criteria of Sustainable Competitive AdvantageValuableRareCostly to imitateNonsubstituable
The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities • Help a firm neutralize threats or exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture or brand name
• Ambiguous cause: The causes and uses of a competence are unclear
• Social complexity: Interpersonalrelationships, trust, and friendshipamong managers, suppliers, andcustomers
Nonsubstitutable Capabilities • No strategic equivalent
Building Sustainable Competitive Advantage
• Valuable capabilitiesHelp a firm neutralize
threats or exploit opportunities
• Rare capabilitiesAre not possessed by
many others
Building Sustainable Competitive Advantage • Costly-to-Imitate
CapabilitiesHistorical
A unique and a valuable organizational culture or brand name
Ambiguous cause The causes and uses of a
competence are unclear (causal ambiguity)
Social complexity Interpersonal relationships, trust,
and friendship among managers, suppliers, and customers
Performance implicationTest Competitive implication
Valuable? Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties?
If so, it satisfies the value require-ment. Valuable resources are needed just to compete in the indus-try, but value by itself does not convey an advantage
Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits which cover the cost of all inputs including the cost of capital)
Rare? Assuming the resource or capability is valuable, is it scarce relative to demand? Or, is it widely possessed by most competitors?
Valuable resources which are also rare convey a competitive advant-age, but its relative permanence is not assured. The advantage is likely only temporary
A temporary competitive advantage conveys the potential to achieve above normal profits, at least until the competitive advantage is nullified by other firms
Inimitable and non-substitut-able?
Assuming a valuable and rare resource, how difficult is it for com-petitors to either imitate the resource or capability or substitute for it with other resources and capabilities that accomplish similar benefits?
Valuable resources and capabilities which are difficult to imitate or substitute provide the potential for sustained competitive advantage
A sustained competitive advantage conveys the potential to achieve above normal profits for extended periods of time (until competitors eventually find ways to imitate or substitute or the environment changes in ways that nullify the value of the resources)
Exploit-able?
For each step of the preceding steps of the VRINE test, can the firm actually exploit the resources and capabilities that it owns or controls?
Resources and capabilities that satisfy the VRINE requirements but which the firm is unable to exploit actually result in significant opportu-nity costs (other firms would likely pay large sums to purchase the VRINE resources and capabilities). Alternatively, exploitability unlocks the potential competitive and perfor-mance implications of the resource or capability
Firms which control unexploited VRINE resources and capabilities generally suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy (though not as depressed as firms lacking resources and capabilities which do satisfy VRINE)
THE VRINE MODEL
The Company’s Strengths, Weaknesses, Opportunities and Threats
• S W O T represents the first letter inStrengths
Weaknesses
Opportunities
Threats
• For a company’s strategy to be well-conceived, it must be Matched to its resource strengths and
weaknesses Aimed at capturing its best market
opportunities and defending against external threats to its well-being
Identifying Resource Strengthsand Competitive Capabilities
• Common types of resource strengths includeSkills or specialized expertise in a competitively
important capabilityValuable physical assetsValuable human assets or intellectual capitalValuable organizational assetsValuable intangible assetsCompetitively valuable alliances or cooperative
ventures
Identifying Resource Weaknessesand Competitive Deficiencies• A weakness is something a firm lacks, does
poorly, or a condition placing it at a disadvantage in the marketplace
• Resource weaknesses relate to Inferior or unproven skills,
expertise, or intellectual capital
Deficiencies in competitively important physical, organizational, or intangible assets
Missing or competitive inferior capabilities in key areas
Identifying a Company’sMarket Opportunities
• Opportunities most relevant to a company are those offering
Good match with its financial andorganizational resource capabilities
Best prospects for growth and profitability
Most potential for competitive advantage
Identifying External Threats to Profitability and Competitiveness
• Emergence of cheaper/better technologies
• Introduction of better products by rivals
• Entry of lower-cost foreign competitors
• Onerous regulations
• Rise in interest rates
• Potential of a hostile takeover
• Unfavorable demographic shifts
• Adverse shifts in foreign exchange rates
• Political upheaval in a country
Value Chain Analysis
• Allows the firm to understand the parts of its operations that create value and those that do not
• A template that firms use to:
Understand their cost position
Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy
Value Chain Analysis (cont’d)
• Primary activities involved with:
A product’s physical creation
A product’s sale and distribution to buyers
The product’s service after the sale
• Support activities
Provide the support necessary for the primary activities to take place
Value Chain Analysis (cont’d)
• Value chain
Shows how a product moves from raw-material stage to the final customer
• To be a source of competitive advantage, a resource or capability must allow the firm:
To perform an activity in a manner that is superior to the way competitors perform it, or
To perform a value-creating activity that competitors cannot complete
The Basic Value Chain
Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
Service
Fir
m I
nfr
astr
uct
ure
Hu
ma
n R
eso
urc
e M
an
agem
ent
Tec
hn
olo
gic
al D
eve
lop
men
t
Pro
cure
me
nt
The Value-Creating Potential of Primary Activities
• Inbound logistics Activities used to receive, store, and disseminate inputs to
a product (materials handling, warehousing, inventory control, etc.)
• Operations Activities necessary to convert the inputs provided by
inbound logistics into final product form (machining, packaging, assembly, etc.)
• Outbound logistics Activities involved with collecting, storing, and physically
distributing the product to customers (finished goods warehousing, order processing, etc.)
The Value-Creating Potential of Primary Activities (cont’d)
• Marketing and sales Activities completed to provide means through which
customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.)
• Service Activities designed to enhance or maintain a product’s
value (repair, training, adjustment, etc.)
Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent or inferior
The Value-Creating Potential of Primary Activities: Support
• Procurement Activities completed to purchase the inputs needed to
produce a firm’s products (raw materials and supplies, machines, laboratory equipment, etc.)
• Technological development Activities completed to improve a firm’s product and the
processes used to manufacture it (process equipment, basic research, product design, etc)
• Human resource management Activities involved with recruiting, hiring, training,
developing, and compensating all personnel
The Value-Creating Potential of Primary Activities: Support (cont’d)
• Firm infrastructure Activities that support the work of the entire value chain
(general management, planning, finance, accounting, legal, government relations, etc.) Effectively and consistently identify external opportunities and
threats Identify resources and capabilities Support core competencies
Each activity should be examined relative to competitors’ abilities and rated as
superior, equivalent or inferior
Southwest made choices so that competitors did not copy - because copying would require them to abandon activities essential to their strategies
Technologyand design
Operations
Marketing
Southwest
• Single aircraft
• Short segment flights
• Smaller markets and secondaryairports in major markets
• No baggage transfers to others airlines
• No meals
• Single class of service
• No seat assignments
• Limited use of travel agents
• Word of mouth
Major Airlines
• Multiple types of aircrafts
• Hub and spoke system
• Meals
• Seat assignments
• Multiple classes of service
• Baggage transfer to other airlines
• Extensive use of travel agents
Selected difference between Southwest and large Airlines
Outsourcing
• The purchase of a value-creating activity from an external supplierFew organizations possess the resources and
capabilities required to achieve competitive superiority in all primary and support activities
• By forming and emphasizing fewer capabilitiesA firm can concentrate on those areas in which it
can create valueSpecialty suppliers can perform outsourced
capabilities more efficiently
Operations
Marketing and SalesF
irm
In
fras
tru
ctu
re
Outsourcing Decisions
A firm may A firm may outsource all or only outsource all or only part of one or more part of one or more primary and/or primary and/or support activities.support activities.
Outsourced activity
Inbound Logistics
Service
Outbound LogisticsH
um
an
Re
sou
rce
Ma
nag
emen
t
Tec
hn
olo
gic
al D
eve
lop
men
t
Pro
cure
me
nt
Strategic Rationales for Outsourcing
• Improve business focusLets a company focus on broader business
issues by having outside experts handle various operational details
• Provide access to world-class capabilitiesThe specialized resources of outsourcing
providers makes world-class capabilities available to firms in a wide range of applications
Strategic Rationales for Outsourcing (cont’d)• Accelerate business re-engineering benefits
Achieves re-engineering benefits more quickly by having outsiders—who have already achieved world-class standards—take over process
• Sharing risksReduces investment requirements and makes
firm more flexible, dynamic and better able to adapt to changing opportunities
• Frees resources for other purposesRedirects efforts from non-core activities toward
those that serve customers more effectively
Outsourcing Issues
• Greatest valueOutsource only to firms possessing a core
competence in terms of performing the primary or supporting the outsourced activity
• Evaluating resources and capabilitiesDo not outsource activities in which the firm
itself can create and capture value
• Environmental threats and ongoing tasksDo not outsource primary and support activities
that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks
Outsourcing Issues (cont’d)
• Nonstrategic team of resourcesDo not outsource capabilities that are critical to
the firm’s success, even though the capabilities are not actual sources of competitive advantage
• Firm’s knowledge baseDo not outsource activities that stimulate the
development of new capabilities and competencies
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
• Core rigidities are former core competencies that now generate inertia and stifle innovation
• Determining what the firm can do through continuous and effective analyses of its internal environment increases the likelihood of long-term competitive success