Creating Value

Copyright © 2012 eCornell. All rights reserved. All other copyrights, trademarks, trade names, and logos are the sole property of their respective owners.

SHA552: Strategic Hospitality Management II: CreatingValue


MODULE OVERVIEW

Module 1: Determining Competitive Advantage through Internal Analysis

An organization is unique based on the resources and capabilities it possesses, and the way it bundles those resourcestogether with skills and technologies to create competencies. This module looks at the component parts of competitiveadvantage-resources, capabilities, and competencies-and suggests that the challenge each organization faces is in doingthe best it can with those parts to create an advantage. It presents examples of a value chain and uses a value-chainanalysis to assess competitive advantage. Finally, it outlines how to use the key success factors of an industry todetermine the competitive advantage of an individual firm within that industry.

When you have completed this module, you will be able to:

Discuss the building blocks of internal capability buildingExplain how sustainable competitive advantage emergesAssess the competitive value of internal resources and capabilitiesAnalyze the value chain of activities at your hotel to determine your internal capabilitiesUse the value chain to discover opportunities to create valueCreate a competitor analysis using the KSFs for an industryUse a competitor analysis to examine the strengths and weaknesses of competitorsUse a competitor analysis to determine your organization's competitive advantage as compared with that of yourindustry rivals


TOPIC OVERVIEW

Topic 1.1: Internal Capability

is an important aspect of strategy formulation and critical to the strategic management process. Internal analysis and are the key building blocks for organizational success; however, not all resources andResources capabilities

capabilities are equal in their ability to help an organization achieve success. Through internal analysis, the firmdetermines its most critical resources and capabilities and identifies its : the bundles of capabilities thatcore competenciesenable it to provide benefit to customers. Taken together, well-developed core competencies may lead the firm to a

.sustainable competitive advantage

This topic explores individual resources and capabilities, considers how they can be bundled into core competencies, andhow these in turn may lead to a competitive advantage. Through internal analysis, the firm identifies those internalcapabilities that can both confer competitive advantage and set the stage for the selection of strategy.

When you have completed this topic, you will be able to:

Discuss the building blocks of internal-capability buildingExplain how sustainable competitive advantage emergesAssess the competitive value of internal resources and capabilities


About the Course Project

This course includes a project assignment designed to help you apply the tools and skills you acquire here to strategyformulation at your organization. You begin the project in this module and continue working on it throughout the course,building a detailed set of notes on internal analysis and strategy selection as you go.

In this module, where you approach internal analysis from the standpoint of value creation, the project asks that youidentify key internal resources and capabilities essential to value creation and recommend ways of using them to achievesustainable competitive advantage. In addition, you analyze the value-chain activities that characterize your organizationand assess your competitors using the key success factors that characterize your industry.

In the modules about business-level and corporate-level strategies, you develop your understanding of how to select andevaluate strategy at your hotel. You critique your organization's value proposition and consider ways to apply a best-valuestrategy. In the final portion of the project, you evaluate your corporate-level strategy and revisit your business-levelstrategy in light of it.

The Strategy Process Model

Your completed project should serve as a step-by-step guide to strategy formulation at your hotel and as a reference forthe specific approaches to the strategy process.

How do you get started? If you follow the recommended learning path, you encounter the course project for the first timein this topic, in the activity entitled Analyze Your Capabilities. You can download the blank project template there andbegin your work. When you've completed the project, you'll submit it to your instructor for evaluation and feedback.


Resources and Capabilities

The of the firm are the tangible and intangible assets that define what the firm can do. are a subsetresources Capabilitiesof the firm's resources that enable the firm to take full advantage of other resources it controls. An internal analysis buildsa firm's understanding of its own resources and capabilities, which the firm can use in turn to choose its strategies.

A firm's resources fall into five general, interconnected categories: financial, physical, human, knowledge-based, andgeneral organizational. Here are some examples of the resources belonging to each category.

Tangible Resources

Financial: excellent cash flow, strong balance sheet, superior past performance, strong links to financiers

Physical: state-of-the-art plant or machinery, superiority in a value-adding process or function, superior locations orraw materials, outstanding products and/or services

Intangible Resources

Knowledge-based: superior technology development, excellent innovation processes and organizationalentrepreneurship, outstanding learning processes

Human: superior CEO characteristics; experienced managers; well-trained, motivated, and loyal employees;high-performance structure or culture

General organizational: excellent reputation or brand name, patents, exclusive contracts, superior linkages withstakeholders

The Value of Resources

Certain resources and capabilities are of particular value to the firm because, when bundled together with skills andtechnologies, they provide valuable benefits to stakeholders. A valuable bundle of resources, capabilities, skills, andtechnologies is called a . A resource or capability that is a source of core competence may also be acore competencesource of competitive advantage-or even sustainable advantage.


Core Competencies

An illustrated presentation with audio appears below, along with a text transcript. Use these resources to learn about howfirms build competencies and what makes a competency "core."

Transcript: Core Competencies

A core competence is a bundle of resources and capabilities, skills and technologies, that enable a firm to provide aparticular benefit to customers. So think about all the capabilities and resources a firm has, and it assembles those andbundles them and deploys them in a focused and clear, integrated, complementary way in order to build a uniquecompetitive advantage.

What makes a competency "core"? A core competency comes from delivering a clear benefit to the customer. So there isa benefit, a strong value added. Another thing that makes a competency core is that it is hard for competitors to copy orimitate-it's not easy for others to build that same bundle of resources to accomplish the same customer benefit. And lastly,a competency is a broad set of activities, not a narrow set of activities, so it gives access to a wide variety of marketsrather than a very small niche.

Sometimes it's easier to think about what a competency isn't. A competency isn't a single skill. It's about a bundle ofresources, a bundle of skills. A competency is not something that all competitors have. If all competitors have it, then it isnot a core competency.

Next, a competency is not a product. It is a bundle of resources, not an individual product offered in the marketplace.Finally, it is not something possessed by only one small area of the organization. So, we don't talk about a firm having justa marketing competency. If it has an orientation toward selling, then that needs to be something that's bundled with thecapabilities of a broad range of different functional areas, including those outside of marketing.

To plan for the development of core competencies, there are a few questions you might wish to ask. Begin by asking"What is the benefit we provide our customers?" This question helps you start to think about that value equation.

What are the competencies or bundles of resources that your organization possesses? Here you're interested in thinkingabout the skills, the resources that you've pulled together that make you unique. What should the core competencies be inthe future? As the competition shifts, as customers change, you need to think about which competencies you need topossess not today, but in five years. Which existing competencies do you need to nurture and grow?

You may have wondered why low cost carriers are able to compete in an unattractive airline industry. The answer can beexplained in how they build core capabilities. Let's take for example a low cost carrier who needs to assemble acompetitive advantage. Their approach is to manage costs and some of the ways they can do this might be to offer onlyshort-haul flights, or a single type of aircraft, like a Boeing 737 so that all the maintenance and aircraft flying expertise isconsolidated in a simple, single aircraft use, they might use smaller airports because the cost of landing and handling inthose locations is substantially less. They might fly point-to-point as opposed to using the large hub-and-spoke model.Again, it allows them to reduce costs. They could even go so far as to rent the seat backs for advertising-again, findingsources of revenue in places other airlines might not have looked.

Not offering food, which is now rather common in most airlines, is another way of reducing costs but also reducing somecustomer amenities. A low-cost provider has to provide a basic product, not a highly-differentiated product, because thename of the game for them is cost management. And one of the other things they can do is think about how they sell.They can use online distribution channels. In fact many airlines that are low-cost providers do just that thing.

So let's put all these together. A low-cost provider needs to build a set of skills and abilities, technologies, capabilities,asset utilization, so they can deliver on low cost. In the airline industry, short flight schedules, a single type of aircraft,small airports, low fees for landing, finding alternative sources of revenue through seat-back advertising, not offering food,often times limiting the number of luggage, and selling online are all choices that a firm makes that helps it bundle acapability and, done very well, allows them to deliver on a low cost strategy.


The firm determines the strategic value ofa capability or resource by asking if:

It is aluedVIt is areRIt is costly to mitateIThe rganizational systems neededOto exploit it actually existThis set of questions is referred toas .VRIO

1.

1.

1.

2.

1.

1.

Sustainable Advantage

A exists when a firm has a significant edge overcompetitive advantageits competition. Usually this means the firm can do somethingcompetitors can't do or has something competitors lack. While it isextremely difficult to sustain a competitive advantage, firms work tocreate advantage through the development of resources andcapabilities. Firms use the questions that follow to determine whether aparticular resource or capability can lead to a sustainable competitive

.advantage

Is the resource or capability valued in the market?Resources and capabilities that are valued in the market enablea firm to exploit opportunities and to neutralize threats.

This question can beIs the resource or capability rare?looked at in two ways.

If an organization is one of only a few with a particular resource orIs the resource or capability unique?capability, then that resource or capability may be a source of competitive advantage. If numerousorganizations possess that resource or capability, then the situation is described as one of competitive parity,where no advantage exists. Note that uniqueness does not mean that a capability or resource is the exclusivepossession of a single organization, only that few firms possess it. Uniqueness also implies that a resource orcapability is not easily transferable-that is, it is not readily available in the market for purchase.

Are there no readily available substitutes for the resource or capability? Although sometimes competingorganizations may not have the exact resource or capability you do, they may have easy access to anotherresource or capability that will help them achieve the same results. Strategists should consider this possibilitywhen evaluating whether a resource or capability is rare.

Positive answers to the foregoing questions mean that a resource or capability has the potential to lead to competitiveadvantage for the firm. However, the firm won't realize that potential unless the resource or capability also meets thefollowing conditions.

The more difficult or costly to imitate a resourceIs the resource or capability difficult or costly to imitate?or capability is, the more value it has for the firm in producing a sustainable competitive advantage.

The resource or capability isDo organizational systems exist that enable the realization of this potential?not of value to the firm if the firm does not have the necessary systems in place to take advantage of it.

An important question related to this one is this: Is the organization aware of and realizing the advantages afforded A group of employees may possess great potential in a particular area, but if theby the resource or capability?

organization and its key managers are unaware of it, that resource cannot contribute to competitive advantage. In fact,even if that organization has the systems in place that would enable the realization of that potential, it won't realize acompetitive advantage unless it can recognize that a valuable untapped resource exists.

Positive answers to question four and its related question indicate that an organization is using its systems and knowledgeto take advantage of a rare and valuable resource or capability.

These four questions, taken together as an analysis tool, are often referred to as VRIO (for Valued, Rare, not easilyImitated, and exploited by the Organization). By using the VRIO analysis, you can determine if a resource or capability is apossible source of sustainable advantage.

It's important to remember that resources and capabilities do not confer competitive advantage individually. They worktogether to create core competencies which in turn create competitive advantage. In the best-case scenario, they create asustainable advantage, which has the greatest strategic value to the organization.


An Evaluation Tool

The process of internal analysis must determine both the identity and the competitive value of the firm's resources andcapabilities. Managers and strategists can assess competitive value by using a simple evaluation tool like the onepresented below. This table provides space to list tangible and intangible resources and capabilities according to fivecategories. It also provides space to indicate whether each resource or capability is alued, are, and costly to mitate,V R Iand whether rganizational systems exist that enable the realization of its potential (VRIO). The last column of the tableOprovides space to record an interpretation of the VRIO results. Click the table to reveal some sample results.

A tool for evaluating the competitive value of resources and capabilities. It asks you to indicate whether each resource orcapability is alued, are, and costly to mitate, and whether rganizational systems exist that enable the realization of itsV R I O

potential (VRIO).

Depending on your evaluation of the resource or capability, you may determine that it's very valuable-a source ofsustainable advantage. You may also determine that it's not very valuable at all-a source of competitive disadvantage. Inmany cases, you are likely to find that it's something in between.

Here is a guide to interpreting evaluation results.

Potential for core competency: the resource or capability is both valued and rareSource of competitive advantage: the resource or capability is both valued and rare, and organizational systemsexist to exploit itSource of sustainable advantage: the resource or capability is valued and rare, organizational systems exist toexploit it, and it is difficult or costly to imitate

Assessing the value of the firm's resources and capabilities is an important part of the strategic management process.You'll have an opportunity to analyze your organization's internal capabilities in the context of the course project.


Analyze Your Capabilities

This is the first of a multi-part course project designed to help you apply the concepts and ideas presented in this courseto your organization. Your assignment here is to perform an analysis of your organization's internal resources andcapabilities and determine whether you have a competitive advantage. Use the evaluation tool provided in this course toidentify key capabilities and resources in your organization; assess their value using VRIO; and look for sources of corecompetency, competitive advantage, and sustainable advantage.

To get started, please .download the evaluation tool

When you have completed the evaluation chart, and complete question 1. Usedownload the course project documentyour completed evaluation chart to help you answer the question.

Remember, you are to complete only question 1 at this time.

When you have completed question 1, please save the course project document to a convenient location on your harddrive. You will return to it throughout the course.

Note: The completed evaluation chart is for your reference only; you do not submit it to the instructor.

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_116_analyzechart-en-us.doc

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_courseproject_en-us.doc


TOPIC OVERVIEW

Topic 1.2: Value-Chain Analysis

One way to analyze the firm's organizational resources and capabilities is to consider its . The value chainvalue chaindivides organizational processes into distinct activities that create value for the customer. The value chain is usuallydeveloped as a graphical representation of organizational processes that shows them as distinct value-creating activities.Developing a value chain provides an opportunity to examine the ways an organization's resources and capabilitiescurrently add value to the services it provides, and how they might add value to them in the future.


Analyze the value chain of activities at your hotel to determine your internal capabilitiesUse the value chain to discover opportunities to create value


Elements of the Value Chain

An illustrated presentation with audio appears below, along with a text transcript. Use these resources to enhance yourunderstanding of how a value chain is constructed and how it is used in an analysis of the firm.

Transcript: Elements Of The Value Chain

One way to think about organizational resources and capabilities is to visualize the activities and processes of anorganization and determine how they add value to the services that the organization provides in the marketplace. Thevalue chain divides organizational processes into distinct activities that create value for the customer.

The operations of a hotel or a restaurant can be envisioned as a complicated assembly operation. Like manufacturingfirms that divide their activities based on whether they are a primary part of the production chain or an activity thatsupports those production activities, a similar thought process takes place when a service firm such as a hotel orrestaurant divides its activities in what we will call core and support activities. In a hotel, these core activities include:

site development and construction, often times by a local owner,marketing and sales, frequently by a brand or regional office, and also at the property level,service delivery and operations-that could be check-in, check-out, in-room services, all at the property level, oftentimes executed by a management companyservice monitoring and post-stay service enhancement.

These are all examples of core activities.

Different firms build capabilities in different parts of the value chain. Some firms may be very good at site developmentand construction, others may be extraordinary at service delivery and operations. Still others might be excellent atmarketing, sales, and branding.

Support activities in the value chain allow the hotel to function and to provide core activities. Examples can include: humanresources, maintenance, information technology, accounting, and purchasing. One of the reasons the break downbetween core and support activities is useful is that it can help focus attention on areas in which the experience of guestsor key stakeholders are most strongly influenced.

Look at each activity in the value chain and then ask yourself an important question: do we really need to perform thisactivity? If the answer is no, then you might want to consider whether you can sell or lease or outsource a given activity. Ifthe answer is yes, this is an important activity that is central to who we are, then you want to ask yourself: do we have theresources and capabilities that add value in a way better than our rivals do. If the answer is yes, then keep doing whatyou're doing. Get better at it. Build on it. Establish your skills in a stronger way. However, if the answer is no, then youneed to either acquire additional resources, building your capabilities in-house, or consider strategically forming allianceswith others who can bring those capabilities on those key activities to your operation.

The important aspect of doing a value chain is to fully understand your own value-adding activities and to assure that foryour firm, you focus all of your energies on enhancing what you do really well, whether what you do well is managinghuman resources or building an excellent reservation system.


1. 1. 2.

1.

How to Analyze a Value Chain

The value chain depicts the firm as an assembly operation consisting of core and support activities. Through a value-chainanalysis, the firm can compare the skills it possesses with those commonly associated with its core and support activities.The firm can use the analysis to understand its cost structure, focus its attention on key activities, and identify newapproaches to creating value for stakeholders.

Core and Support Activities

are those activities that most strongly influence guests and other key stakeholders. In a hotel, core activitiesCore activitiesmay include site development and construction, marketing and sales, service delivery and operations, and servicemonitoring and post-stay service enhancement. are those activities that enable the hotel to provide theSupport activitiescore activities. Examples of support activities typically include human resources, maintenance, information technology,accounting, and purchasing.

Note: As you create your own value chain, you may choose to classify activities differently, listing as core some of thosethat we list as support and as support some of those that we list as core. Differences in categorization aren't important.What is important is that your value chain includes all the major activities that add value to the firm's overall process andthus influence performance.

A typical hotel value chain

Analyze a Value Chain

Let's look at a step-by-step approach to developing a value chain and performing a value-chain analysis.

Develop a value chain for the company.Identify all core activities and represent them in order.Identify all support activities.

You can list these activities in a value-chain template similar to the one illustrated here. (You'll have an opportunity to workwith a value-chain template in the context of the course project.)

Identify the points in the value chain where specific resources and capabilities are adding value. Note these on thetemplate or in a list.


1. 1. 2.

1.

2.

For each activity, ask if it is really in the best interests of the firm to perform it.If the answer is no, then make a note that the firm should either sell, lease, or outsource that activity.If the answer is yes, then ask if your firm has resources and capabilities that create value in a way betterthan its rivals do.

If the answer is yes, then the firm is in a good position to enhance its competitive position. Make anote that the firm should continue with this activity, building on it and improving it where possible.If the answer is no, make a note that the firm should either build its capabilities in-house by acquiringadditional resources, or consider forming alliances with others who can bring those capabilities to theoperation.

When your value-chain analysis is complete, you will have a clear idea of how value is created in your organization, andyou may even have some new ideas about how to build your competitive advantage.


Some Examples

Let's look at a few more examples of value chains, in one case contrasting the business level with the corporate level inthe hotel industry and in another case contrasting new businesses with old in the wine industry.

Hotels: Property Level vs. Corporate Level

When a corporation includes two or more businesses, as in the case of a hotel chain, it is useful to consider the verydifferent value chains that characterize the corporate level and the property level. Let's compare the value chain for a hotelproperty with the value chain for the hotel corporation.

At the property level, the core activities (operations) include local sales, reservations, bell and check-in and check-outservices, housekeeping, in-room services, and other services such as pool or patio services.

Support activities at the property level include maintenance, local hiring and personnel-management activities, purchasing,and accounting.

Core and support activities at the property level in the hotel industry

On the other hand, corporate-level core activities in this example are fewer. They may include reservations through the800 number or corporate Web site, brand advertising, and property development. Support activities at the corporate levelinvolve technical and information systems, accounting and budgeting support, human-resources support and training,public relations, purchasing, legal services, and market research.


Core and support activities at the corporate level in the hotel industry

Wine-Industry Value Chain

Firms in the same industry may evolve significantly different value chains. New World winemakers, for example, differfrom their Old World counterparts in their approach to core activities. For years, New World growers in Australia haveinnovated growing and grape-making activities, using drip irrigation, new trellis systems, and new techniques underutilizedby their Old World competition. Because Australian growers have used economies of scale to reduce their costs, they arebetter positioned to take advantage of the retail trend toward high volumes and low margins.

By ensuring product consistency and quality with the latest methods, Australian growers have competed successfully withOld World growers that offer terroir (regional ambience) and history. In addition, New World growers may have increasedtheir competitive advantage in distribution and marketing by using clear and flexible labeling and by making available acritical mass of supply.

This example illustrates that in the same industry, different competitors can build competencies around aspects of thevalue chain uniquely their own.

A winemaker's value chain


Analyze the Chain

For this assignment, develop a value chain for your organization and perform a value-chain analysis. First, use the valuechain template to identify the core and support activities for your organization. Then, as part of the course project, identifythe points in the value chain where specific resources and capabilities are adding value.

Here's a you can download for your convenience.value-chain template

When you have completed the template, please open your saved course-project document and complete questions 2 and3. (If you've yet to download the document, you can do so .) Then resave the document so you can continue addinghereto it throughout the course.

Note: Do not submit the completed value-chain template to the instructor.

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_124_analyzechain_en-us.doc



TOPIC OVERVIEW

Topic 1.3: Analysis of Competitive Advantage

(KSFs) are significant characteristics associated with a particular industry and are, in addition, criticalKey success factorsto the strategic planning of the organizations within that industry. Because of their significance in defining the operatingenvironment, KSFs are used to provide a framework for the analysis of competitive advantage, much as the value chainis. In this topic, get to know KSFs in general and for the hospitality industry in particular. Build a competitor analysis usingKSFs to determine your competitive advantage relative to that of your industry rivals.


Create a competitor analysis using the KSFs for an industryUse a competitor analysis to examine the strengths and weaknesses of competitorsUse a competitor analysis to determine your organization's competitive advantage as compared with that of yourindustry rivals


The practice of servingcomplimentary chickenwings to waitingcustomers is a simpleexpression of the firm'shospitality. ...Thisapproach has been sowell received that U.S.Outback Steakhouse hasadopted the practice forits American restaurants.

Outback Steakhouse Korea

Outback Steakhouse Korea is a successful casual-dining restaurant that wastransplanted to Asia from the United States. This study by authors Kyuho Lee,Mahmood A. Khan, and Jae-Youn Ko describes the critical success factors (alsoreferred to as key success factors) for this restaurant company. The authors note thatthe Korean chain employed a flexible approach that enabled its restaurants torespond to Korea's cultural patterns and market preferences. That flexibility wasbalanced with a strict approach to hiring and training.

The study highlights Outback Steakhouse's competitive strategies for success andpresents a list of suggestions for restaurant executives planning to develop Asianmarkets. Read the full article, provided below, and begin thinking about how featuresof the industry help to determine competitive advantage.

Note: You have an opportunity to read Professor Enz's response to this article, too,provided elsewhere in this course topic.

View the article

Note: you will need Adobe Reader® to be able to view the article. If it is not already installed on your computer, you candownload it (free) from the .Adobe Web site

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_131_outbackarticle_en-us.pdf

http://www.adobe.com/index.html


Key Success Factors

Now let's turn our attention to key success factors in the firm's industry. Like the evaluation of core competencies and thevalue-chain analysis, scrutiny of these key factors will enable a company to see itself as distinct from others in themarketplace and to position itself according to its unique strengths. Each of the three techniques presented in this moduleare part of the internal analysis through which a firm determines its competitive advantage, and which is itself a part of thestrategy process model.

The firm uses key success factors, identified through external analysis, to determine its competitive advantage as part ofinternal analysis.

In determining competitive advantage, it's useful for firms to consider the key success factors of their respective industries.A key success factor (KSF), unlike a core competency or an activity of the value chain, is a characteristic of an industry.KSFs are the things the firm must do well if it is to succeed in the industry. Like core competencies, KSFs are significantcontributors to organizational strategy.

Industry and organizational factors contributing to strategy and competitive advantage

Some examples of hospitality-industry KSFs are:

LocationPhysical product quality, including

DecorDesignAmbience

Customer-service deliveryDistribution-channel managementRevenue managementHuman-resource talentStrength of brand reputation

Repeat businessCustomer base

Technological skillsLow costsFinancial strength

Key success factors for the hospitality industry are often summarized by leading firms. For example, Starwood states onits Web site that KSFs in the industry include quality and consistency of the guest room, quality of restaurant and meetingfacilities and services, attractiveness of locations, availability of a global distribution system, price, and the opportunity toearn and redeem loyalty-program points.


A Competitor-Analysis Tool

How does your company compare to others in your industry? What are your strengths and weaknesses, and how can youbuild your competitive advantage? The competitor-analysis tool can help you explore these questions. Click for ahereprint-friendly version of the competitor-analysis tool.

Using the competitor-analysis tool, you identify factors critical to success in the industry, assign a numerical weight orimportance to each of them, rate your own company and competitors regarding each factor, and calculate a final score. Asyou can see, the tool is composed of three main sections: the industry-success-factors section, the ratings section, andthe final-score section.

To complete a competitor analysis using the tool, address the industry environment by listing and weighting the keysuccess factors for your industry, rate your company on all KSFs, and rate two significant competitors on all KSFs. Finally,calculate final scores for your company and the two competitors and compare. Low-score KSFs may need attention, whilehigh-score KSFs may indicate your competitive advantage. You'll have an opportunity to use this tool in the context of thecourse project.

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_133_analysistool_en-us.doc


It is important to note thata single resource doesnot create a competitiveadvantage, even whenthat resource confers anadvantage in themarketplace.

Outback Advantage

In the article about Outback Steakhouse Korea found at the beginning of this topic,the authors analyze the management and policies that have enabled the Koreanorganization to develop and expand distinctive and difficult-to-imitate competencies.In this article, Professor Cathy Enz observes that the Outback Steakhouse caseprovides a textbook example of a five-point framework for competitive advantage, andshe presents her view of the mechanisms by which Outback Korea has developed itscompetitive advantage.

Professor Enz notes that superior financial and physical resources, human resources,organizational knowledge and learning, and general organizational resources arewhat firms use to build advantage. Successful companies like Outback Steakhousepay careful attention to developing and applying their resources and capabilities tocreate sustainable competitive advantage.

Read Professor Enz's full analysis of Outback Steakhouse Korea's competitiveadvantage in the complete article .here

If you wish to review the original Outback Steakhouse Korea article from the beginning of this topic, you can .download it again

View the article


https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_134_outbackenzreply_en-us.pdf





1. 2.

Analyze Your Competitive Advantage

For this assignment, perform a competitive analysis of your organization using the tool presented in this topic. Thecompetitor-analysis tool is provided . Instructions for using the tool are provided below.here

When you have completed your analysis, continue your work on the course project. Open your saved project document. (Ifyou've yet to download the project template, you can do so ).here

Answer questions 4, 5, and 6. Then re-save the document so you can continue working on it throughout the course.

Note: Do not submit the completed analysis tool to the instructor.

A Step-by-Step Guide to Using the Competitor-Analysis ToolFollow these steps to perform an analysis of your competitive advantage using the competitor-analysis tool.

Describe Key Factors of the Industry

In the first column of the evaluation tool, list the key success factors (KSFs) for your industry.Assign a weight to each KSF. Each weight should be a value between 1 and 100%. Assign weights so that the totalweight of all KSFs equals 100%.

Note: Be careful not to give various factors the same weight. In addition, you need to decide what factors are more or lessimportant for you and your competitors in particular and assign weights to reflect their comparative import for your industrycircle alone. For example, although location may be more important in some competitive environments than in others,concern yourself only with your competitive environment here. Give location a weight reflecting its importance for industryplayers in your competitive situation.

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_135_competitortool_en-us.doc



1.

2. 3. 4.

Assign Ratings for Each KSF

Rate your company on each KSF using a scale from 0 to 1. Assign a rating of 1 if your company is strongest in thatarea and a rating of 0 if your company has no strength in that area.Choose two main competitors to evaluate as competitor A and competitor B.Rate competitor A on each KSF using a scale from 0 to 1.Rate competitor B on each KSF using a scale from 0 to 1.

Calculate Final ScoresCalculate final scores for each organization: my company, competitor A, and competitor B. Within each organization,calculate a final score for each KSF (each row of the table). Derive these final scores by multiplying the weight of each


1.

2.

3.

1.

KSF by the rating for it earned by the relevant company.

Calculate your organization's final score for each KSF listed. Multiply KSF weight by your organization's rating(weight x rating). Enter that value in the my-company column of the final-score section.Calculate competitor A's final score for each KSF listed. Multiply KSF weight by competitor A's rating and enter thevalue in the competitor-A column of the final-score section.Calculate competitor B's final score for each KSF listed. Multiply KSF weight by competitor B's rating and enter thevalue in the competitor-B column of the final-score section.

Compare Scores

Compare your organization's final scores with the final scores of your competitors.


Module 1 Wrap-Up

This module looked at internal analysis in three important ways: through an examination of the resources, capabilities, andcompetencies of the organization; through the organization's value chain; and through the key success factors of therelevant industry. It viewed competitive advantage in terms of bundles of resources-core competencies-and introducedtools to identify competitive strengths and weaknesses.

Having completed this module, you should now be able to:

Discuss the building blocks of internal-capability buildingExplain how sustainable competitive advantage emergesAssess the competitive value of internal resources and capabilitiesAnalyze the value chain of activities at your hotel to determine your internal capabilitiesUse the value chain to discover opportunities to create valueCreate a competitor analysis using the KSFs for an industryUse a competitor analysis to examine the strengths and weaknesses of competitorsUse a competitor analysis to determine your organization's competitive advantage as compared to that of yourindustry rivals


MODULE OVERVIEW

Module 1: Determining Competitive Advantage through Internal Analysis

An organization is unique based on the resources and capabilities it possesses, and the way it bundles those resourcestogether with skills and technologies to create competencies. This module looks at the component parts of competitiveadvantage-resources, capabilities, and competencies-and suggests that the challenge each organization faces is in doingthe best it can with those parts to create an advantage. It presents examples of a value chain and uses a value-chainanalysis to assess competitive advantage. Finally, it outlines how to use the key success factors of an industry todetermine the competitive advantage of an individual firm within that industry.


Discuss the building blocks of internal capability buildingExplain how sustainable competitive advantage emergesAssess the competitive value of internal resources and capabilitiesAnalyze the value chain of activities at your hotel to determine your internal capabilitiesUse the value chain to discover opportunities to create valueCreate a competitor analysis using the KSFs for an industryUse a competitor analysis to examine the strengths and weaknesses of competitorsUse a competitor analysis to determine your organization's competitive advantage as compared with that of yourindustry rivals


TOPIC OVERVIEW


is an important aspect of strategy formulation and critical to the strategic management process. Internal analysis and are the key building blocks for organizational success; however, not all resources andResources capabilities

capabilities are equal in their ability to help an organization achieve success. Through internal analysis, the firmdetermines its most critical resources and capabilities and identifies its : the bundles of capabilities thatcore competenciesenable it to provide benefit to customers. Taken together, well-developed core competencies may lead the firm to a

.sustainable competitive advantage

This topic explores individual resources and capabilities, considers how they can be bundled into core competencies, andhow these in turn may lead to a competitive advantage. Through internal analysis, the firm identifies those internalcapabilities that can both confer competitive advantage and set the stage for the selection of strategy.


Discuss the building blocks of internal-capability buildingExplain how sustainable competitive advantage emergesAssess the competitive value of internal resources and capabilities


About the Course Project

This course includes a project assignment designed to help you apply the tools and skills you acquire here to strategyformulation at your organization. You begin the project in this module and continue working on it throughout the course,building a detailed set of notes on internal analysis and strategy selection as you go.

In this module, where you approach internal analysis from the standpoint of value creation, the project asks that youidentify key internal resources and capabilities essential to value creation and recommend ways of using them to achievesustainable competitive advantage. In addition, you analyze the value-chain activities that characterize your organizationand assess your competitors using the key success factors that characterize your industry.

In the modules about business-level and corporate-level strategies, you develop your understanding of how to select andevaluate strategy at your hotel. You critique your organization's value proposition and consider ways to apply a best-valuestrategy. In the final portion of the project, you evaluate your corporate-level strategy and revisit your business-levelstrategy in light of it.


Your completed project should serve as a step-by-step guide to strategy formulation at your hotel and as a reference forthe specific approaches to the strategy process.

How do you get started? If you follow the recommended learning path, you encounter the course project for the first timein this topic, in the activity entitled Analyze Your Capabilities. You can download the blank project template there andbegin your work. When you've completed the project, you'll submit it to your instructor for evaluation and feedback.


Resources and Capabilities

The of the firm are the tangible and intangible assets that define what the firm can do. are a subsetresources Capabilitiesof the firm's resources that enable the firm to take full advantage of other resources it controls. An internal analysis buildsa firm's understanding of its own resources and capabilities, which the firm can use in turn to choose its strategies.

A firm's resources fall into five general, interconnected categories: financial, physical, human, knowledge-based, andgeneral organizational. Here are some examples of the resources belonging to each category.

Tangible Resources

Financial: excellent cash flow, strong balance sheet, superior past performance, strong links to financiers

Physical: state-of-the-art plant or machinery, superiority in a value-adding process or function, superior locations orraw materials, outstanding products and/or services

Intangible Resources

Knowledge-based: superior technology development, excellent innovation processes and organizationalentrepreneurship, outstanding learning processes

Human: superior CEO characteristics; experienced managers; well-trained, motivated, and loyal employees;high-performance structure or culture

General organizational: excellent reputation or brand name, patents, exclusive contracts, superior linkages withstakeholders

The Value of Resources

Certain resources and capabilities are of particular value to the firm because, when bundled together with skills andtechnologies, they provide valuable benefits to stakeholders. A valuable bundle of resources, capabilities, skills, andtechnologies is called a . A resource or capability that is a source of core competence may also be acore competencesource of competitive advantage-or even sustainable advantage.


Core Competencies

An illustrated presentation with audio appears below, along with a text transcript. Use these resources to learn about howfirms build competencies and what makes a competency "core."

Transcript: Core Competencies

A core competence is a bundle of resources and capabilities, skills and technologies, that enable a firm to provide aparticular benefit to customers. So think about all the capabilities and resources a firm has, and it assembles those andbundles them and deploys them in a focused and clear, integrated, complementary way in order to build a uniquecompetitive advantage.

What makes a competency "core"? A core competency comes from delivering a clear benefit to the customer. So there isa benefit, a strong value added. Another thing that makes a competency core is that it is hard for competitors to copy orimitate-it's not easy for others to build that same bundle of resources to accomplish the same customer benefit. And lastly,a competency is a broad set of activities, not a narrow set of activities, so it gives access to a wide variety of marketsrather than a very small niche.

Sometimes it's easier to think about what a competency isn't. A competency isn't a single skill. It's about a bundle ofresources, a bundle of skills. A competency is not something that all competitors have. If all competitors have it, then it isnot a core competency.

Next, a competency is not a product. It is a bundle of resources, not an individual product offered in the marketplace.Finally, it is not something possessed by only one small area of the organization. So, we don't talk about a firm having justa marketing competency. If it has an orientation toward selling, then that needs to be something that's bundled with thecapabilities of a broad range of different functional areas, including those outside of marketing.

To plan for the development of core competencies, there are a few questions you might wish to ask. Begin by asking"What is the benefit we provide our customers?" This question helps you start to think about that value equation.

What are the competencies or bundles of resources that your organization possesses? Here you're interested in thinkingabout the skills, the resources that you've pulled together that make you unique. What should the core competencies be inthe future? As the competition shifts, as customers change, you need to think about which competencies you need topossess not today, but in five years. Which existing competencies do you need to nurture and grow?

You may have wondered why low cost carriers are able to compete in an unattractive airline industry. The answer can beexplained in how they build core capabilities. Let's take for example a low cost carrier who needs to assemble acompetitive advantage. Their approach is to manage costs and some of the ways they can do this might be to offer onlyshort-haul flights, or a single type of aircraft, like a Boeing 737 so that all the maintenance and aircraft flying expertise isconsolidated in a simple, single aircraft use, they might use smaller airports because the cost of landing and handling inthose locations is substantially less. They might fly point-to-point as opposed to using the large hub-and-spoke model.Again, it allows them to reduce costs. They could even go so far as to rent the seat backs for advertising-again, findingsources of revenue in places other airlines might not have looked.

Not offering food, which is now rather common in most airlines, is another way of reducing costs but also reducing somecustomer amenities. A low-cost provider has to provide a basic product, not a highly-differentiated product, because thename of the game for them is cost management. And one of the other things they can do is think about how they sell.They can use online distribution channels. In fact many airlines that are low-cost providers do just that thing.

So let's put all these together. A low-cost provider needs to build a set of skills and abilities, technologies, capabilities,asset utilization, so they can deliver on low cost. In the airline industry, short flight schedules, a single type of aircraft,small airports, low fees for landing, finding alternative sources of revenue through seat-back advertising, not offering food,often times limiting the number of luggage, and selling online are all choices that a firm makes that helps it bundle acapability and, done very well, allows them to deliver on a low cost strategy.


The firm determines the strategic value ofa capability or resource by asking if:

It is aluedVIt is areRIt is costly to mitateIThe rganizational systems neededOto exploit it actually existThis set of questions is referred toas .VRIO

1.

1.

1.

2.

1.

1.

Sustainable Advantage

A exists when a firm has a significant edge overcompetitive advantageits competition. Usually this means the firm can do somethingcompetitors can't do or has something competitors lack. While it isextremely difficult to sustain a competitive advantage, firms work tocreate advantage through the development of resources andcapabilities. Firms use the questions that follow to determine whether aparticular resource or capability can lead to a sustainable competitive

.advantage

Is the resource or capability valued in the market?Resources and capabilities that are valued in the market enablea firm to exploit opportunities and to neutralize threats.

This question can beIs the resource or capability rare?looked at in two ways.

If an organization is one of only a few with a particular resource orIs the resource or capability unique?capability, then that resource or capability may be a source of competitive advantage. If numerousorganizations possess that resource or capability, then the situation is described as one of competitive parity,where no advantage exists. Note that uniqueness does not mean that a capability or resource is the exclusivepossession of a single organization, only that few firms possess it. Uniqueness also implies that a resource orcapability is not easily transferable-that is, it is not readily available in the market for purchase.

Are there no readily available substitutes for the resource or capability? Although sometimes competingorganizations may not have the exact resource or capability you do, they may have easy access to anotherresource or capability that will help them achieve the same results. Strategists should consider this possibilitywhen evaluating whether a resource or capability is rare.

Positive answers to the foregoing questions mean that a resource or capability has the potential to lead to competitiveadvantage for the firm. However, the firm won't realize that potential unless the resource or capability also meets thefollowing conditions.

The more difficult or costly to imitate a resourceIs the resource or capability difficult or costly to imitate?or capability is, the more value it has for the firm in producing a sustainable competitive advantage.

The resource or capability isDo organizational systems exist that enable the realization of this potential?not of value to the firm if the firm does not have the necessary systems in place to take advantage of it.

An important question related to this one is this: Is the organization aware of and realizing the advantages afforded A group of employees may possess great potential in a particular area, but if theby the resource or capability?

organization and its key managers are unaware of it, that resource cannot contribute to competitive advantage. In fact,even if that organization has the systems in place that would enable the realization of that potential, it won't realize acompetitive advantage unless it can recognize that a valuable untapped resource exists.

Positive answers to question four and its related question indicate that an organization is using its systems and knowledgeto take advantage of a rare and valuable resource or capability.

These four questions, taken together as an analysis tool, are often referred to as VRIO (for Valued, Rare, not easilyImitated, and exploited by the Organization). By using the VRIO analysis, you can determine if a resource or capability is apossible source of sustainable advantage.

It's important to remember that resources and capabilities do not confer competitive advantage individually. They worktogether to create core competencies which in turn create competitive advantage. In the best-case scenario, they create asustainable advantage, which has the greatest strategic value to the organization.


An Evaluation Tool

The process of internal analysis must determine both the identity and the competitive value of the firm's resources andcapabilities. Managers and strategists can assess competitive value by using a simple evaluation tool like the onepresented below. This table provides space to list tangible and intangible resources and capabilities according to fivecategories. It also provides space to indicate whether each resource or capability is alued, are, and costly to mitate,V R Iand whether rganizational systems exist that enable the realization of its potential (VRIO). The last column of the tableOprovides space to record an interpretation of the VRIO results. Click the table to reveal some sample results.

A tool for evaluating the competitive value of resources and capabilities. It asks you to indicate whether each resource orcapability is alued, are, and costly to mitate, and whether rganizational systems exist that enable the realization of itsV R I O

potential (VRIO).

Depending on your evaluation of the resource or capability, you may determine that it's very valuable-a source ofsustainable advantage. You may also determine that it's not very valuable at all-a source of competitive disadvantage. Inmany cases, you are likely to find that it's something in between.

Here is a guide to interpreting evaluation results.

Potential for core competency: the resource or capability is both valued and rareSource of competitive advantage: the resource or capability is both valued and rare, and organizational systemsexist to exploit itSource of sustainable advantage: the resource or capability is valued and rare, organizational systems exist toexploit it, and it is difficult or costly to imitate

Assessing the value of the firm's resources and capabilities is an important part of the strategic management process.You'll have an opportunity to analyze your organization's internal capabilities in the context of the course project.


Analyze Your Capabilities

This is the first of a multi-part course project designed to help you apply the concepts and ideas presented in this courseto your organization. Your assignment here is to perform an analysis of your organization's internal resources andcapabilities and determine whether you have a competitive advantage. Use the evaluation tool provided in this course toidentify key capabilities and resources in your organization; assess their value using VRIO; and look for sources of corecompetency, competitive advantage, and sustainable advantage.

To get started, please .download the evaluation tool

When you have completed the evaluation chart, and complete question 1. Usedownload the course project documentyour completed evaluation chart to help you answer the question.

Remember, you are to complete only question 1 at this time.

When you have completed question 1, please save the course project document to a convenient location on your harddrive. You will return to it throughout the course.

Note: The completed evaluation chart is for your reference only; you do not submit it to the instructor.




TOPIC OVERVIEW


One way to analyze the firm's organizational resources and capabilities is to consider its . The value chainvalue chaindivides organizational processes into distinct activities that create value for the customer. The value chain is usuallydeveloped as a graphical representation of organizational processes that shows them as distinct value-creating activities.Developing a value chain provides an opportunity to examine the ways an organization's resources and capabilitiescurrently add value to the services it provides, and how they might add value to them in the future.


Analyze the value chain of activities at your hotel to determine your internal capabilitiesUse the value chain to discover opportunities to create value


Elements of the Value Chain

An illustrated presentation with audio appears below, along with a text transcript. Use these resources to enhance yourunderstanding of how a value chain is constructed and how it is used in an analysis of the firm.

Transcript: Elements Of The Value Chain

One way to think about organizational resources and capabilities is to visualize the activities and processes of anorganization and determine how they add value to the services that the organization provides in the marketplace. Thevalue chain divides organizational processes into distinct activities that create value for the customer.

The operations of a hotel or a restaurant can be envisioned as a complicated assembly operation. Like manufacturingfirms that divide their activities based on whether they are a primary part of the production chain or an activity thatsupports those production activities, a similar thought process takes place when a service firm such as a hotel orrestaurant divides its activities in what we will call core and support activities. In a hotel, these core activities include:

site development and construction, often times by a local owner,marketing and sales, frequently by a brand or regional office, and also at the property level,service delivery and operations-that could be check-in, check-out, in-room services, all at the property level, oftentimes executed by a management companyservice monitoring and post-stay service enhancement.

These are all examples of core activities.

Different firms build capabilities in different parts of the value chain. Some firms may be very good at site developmentand construction, others may be extraordinary at service delivery and operations. Still others might be excellent atmarketing, sales, and branding.

Support activities in the value chain allow the hotel to function and to provide core activities. Examples can include: humanresources, maintenance, information technology, accounting, and purchasing. One of the reasons the break downbetween core and support activities is useful is that it can help focus attention on areas in which the experience of guestsor key stakeholders are most strongly influenced.

Look at each activity in the value chain and then ask yourself an important question: do we really need to perform thisactivity? If the answer is no, then you might want to consider whether you can sell or lease or outsource a given activity. Ifthe answer is yes, this is an important activity that is central to who we are, then you want to ask yourself: do we have theresources and capabilities that add value in a way better than our rivals do. If the answer is yes, then keep doing whatyou're doing. Get better at it. Build on it. Establish your skills in a stronger way. However, if the answer is no, then youneed to either acquire additional resources, building your capabilities in-house, or consider strategically forming allianceswith others who can bring those capabilities on those key activities to your operation.

The important aspect of doing a value chain is to fully understand your own value-adding activities and to assure that foryour firm, you focus all of your energies on enhancing what you do really well, whether what you do well is managinghuman resources or building an excellent reservation system.


1. 1. 2.

1.

How to Analyze a Value Chain

The value chain depicts the firm as an assembly operation consisting of core and support activities. Through a value-chainanalysis, the firm can compare the skills it possesses with those commonly associated with its core and support activities.The firm can use the analysis to understand its cost structure, focus its attention on key activities, and identify newapproaches to creating value for stakeholders.

Core and Support Activities

are those activities that most strongly influence guests and other key stakeholders. In a hotel, core activitiesCore activitiesmay include site development and construction, marketing and sales, service delivery and operations, and servicemonitoring and post-stay service enhancement. are those activities that enable the hotel to provide theSupport activitiescore activities. Examples of support activities typically include human resources, maintenance, information technology,accounting, and purchasing.

Note: As you create your own value chain, you may choose to classify activities differently, listing as core some of thosethat we list as support and as support some of those that we list as core. Differences in categorization aren't important.What is important is that your value chain includes all the major activities that add value to the firm's overall process andthus influence performance.

A typical hotel value chain

Analyze a Value Chain

Let's look at a step-by-step approach to developing a value chain and performing a value-chain analysis.

Develop a value chain for the company.Identify all core activities and represent them in order.Identify all support activities.

You can list these activities in a value-chain template similar to the one illustrated here. (You'll have an opportunity to workwith a value-chain template in the context of the course project.)

Identify the points in the value chain where specific resources and capabilities are adding value. Note these on thetemplate or in a list.


1. 1. 2.

1.

2.

For each activity, ask if it is really in the best interests of the firm to perform it.If the answer is no, then make a note that the firm should either sell, lease, or outsource that activity.If the answer is yes, then ask if your firm has resources and capabilities that create value in a way betterthan its rivals do.

If the answer is yes, then the firm is in a good position to enhance its competitive position. Make anote that the firm should continue with this activity, building on it and improving it where possible.If the answer is no, make a note that the firm should either build its capabilities in-house by acquiringadditional resources, or consider forming alliances with others who can bring those capabilities to theoperation.

When your value-chain analysis is complete, you will have a clear idea of how value is created in your organization, andyou may even have some new ideas about how to build your competitive advantage.


Some Examples

Let's look at a few more examples of value chains, in one case contrasting the business level with the corporate level inthe hotel industry and in another case contrasting new businesses with old in the wine industry.

Hotels: Property Level vs. Corporate Level

When a corporation includes two or more businesses, as in the case of a hotel chain, it is useful to consider the verydifferent value chains that characterize the corporate level and the property level. Let's compare the value chain for a hotelproperty with the value chain for the hotel corporation.

At the property level, the core activities (operations) include local sales, reservations, bell and check-in and check-outservices, housekeeping, in-room services, and other services such as pool or patio services.

Support activities at the property level include maintenance, local hiring and personnel-management activities, purchasing,and accounting.

Core and support activities at the property level in the hotel industry

On the other hand, corporate-level core activities in this example are fewer. They may include reservations through the800 number or corporate Web site, brand advertising, and property development. Support activities at the corporate levelinvolve technical and information systems, accounting and budgeting support, human-resources support and training,public relations, purchasing, legal services, and market research.


Core and support activities at the corporate level in the hotel industry

Wine-Industry Value Chain

Firms in the same industry may evolve significantly different value chains. New World winemakers, for example, differfrom their Old World counterparts in their approach to core activities. For years, New World growers in Australia haveinnovated growing and grape-making activities, using drip irrigation, new trellis systems, and new techniques underutilizedby their Old World competition. Because Australian growers have used economies of scale to reduce their costs, they arebetter positioned to take advantage of the retail trend toward high volumes and low margins.

By ensuring product consistency and quality with the latest methods, Australian growers have competed successfully withOld World growers that offer terroir (regional ambience) and history. In addition, New World growers may have increasedtheir competitive advantage in distribution and marketing by using clear and flexible labeling and by making available acritical mass of supply.

This example illustrates that in the same industry, different competitors can build competencies around aspects of thevalue chain uniquely their own.

A winemaker's value chain


Analyze the Chain

For this assignment, develop a value chain for your organization and perform a value-chain analysis. First, use the valuechain template to identify the core and support activities for your organization. Then, as part of the course project, identifythe points in the value chain where specific resources and capabilities are adding value.

Here's a you can download for your convenience.value-chain template

When you have completed the template, please open your saved course-project document and complete questions 2 and3. (If you've yet to download the document, you can do so .) Then resave the document so you can continue addinghereto it throughout the course.

Note: Do not submit the completed value-chain template to the instructor.




TOPIC OVERVIEW


(KSFs) are significant characteristics associated with a particular industry and are, in addition, criticalKey success factorsto the strategic planning of the organizations within that industry. Because of their significance in defining the operatingenvironment, KSFs are used to provide a framework for the analysis of competitive advantage, much as the value chainis. In this topic, get to know KSFs in general and for the hospitality industry in particular. Build a competitor analysis usingKSFs to determine your competitive advantage relative to that of your industry rivals.


Create a competitor analysis using the KSFs for an industryUse a competitor analysis to examine the strengths and weaknesses of competitorsUse a competitor analysis to determine your organization's competitive advantage as compared with that of yourindustry rivals


The practice of servingcomplimentary chickenwings to waitingcustomers is a simpleexpression of the firm'shospitality. ...Thisapproach has been sowell received that U.S.Outback Steakhouse hasadopted the practice forits American restaurants.

Outback Steakhouse Korea

Outback Steakhouse Korea is a successful casual-dining restaurant that wastransplanted to Asia from the United States. This study by authors Kyuho Lee,Mahmood A. Khan, and Jae-Youn Ko describes the critical success factors (alsoreferred to as key success factors) for this restaurant company. The authors note thatthe Korean chain employed a flexible approach that enabled its restaurants torespond to Korea's cultural patterns and market preferences. That flexibility wasbalanced with a strict approach to hiring and training.

The study highlights Outback Steakhouse's competitive strategies for success andpresents a list of suggestions for restaurant executives planning to develop Asianmarkets. Read the full article, provided below, and begin thinking about how featuresof the industry help to determine competitive advantage.

Note: You have an opportunity to read Professor Enz's response to this article, too,provided elsewhere in this course topic.

View the article





Key Success Factors

Now let's turn our attention to key success factors in the firm's industry. Like the evaluation of core competencies and thevalue-chain analysis, scrutiny of these key factors will enable a company to see itself as distinct from others in themarketplace and to position itself according to its unique strengths. Each of the three techniques presented in this moduleare part of the internal analysis through which a firm determines its competitive advantage, and which is itself a part of thestrategy process model.

The firm uses key success factors, identified through external analysis, to determine its competitive advantage as part ofinternal analysis.

In determining competitive advantage, it's useful for firms to consider the key success factors of their respective industries.A key success factor (KSF), unlike a core competency or an activity of the value chain, is a characteristic of an industry.KSFs are the things the firm must do well if it is to succeed in the industry. Like core competencies, KSFs are significantcontributors to organizational strategy.

Industry and organizational factors contributing to strategy and competitive advantage

Some examples of hospitality-industry KSFs are:

LocationPhysical product quality, including

DecorDesignAmbience

Customer-service deliveryDistribution-channel managementRevenue managementHuman-resource talentStrength of brand reputation

Repeat businessCustomer base

Technological skillsLow costsFinancial strength

Key success factors for the hospitality industry are often summarized by leading firms. For example, Starwood states onits Web site that KSFs in the industry include quality and consistency of the guest room, quality of restaurant and meetingfacilities and services, attractiveness of locations, availability of a global distribution system, price, and the opportunity toearn and redeem loyalty-program points.


A Competitor-Analysis Tool

How does your company compare to others in your industry? What are your strengths and weaknesses, and how can youbuild your competitive advantage? The competitor-analysis tool can help you explore these questions. Click for ahereprint-friendly version of the competitor-analysis tool.

Using the competitor-analysis tool, you identify factors critical to success in the industry, assign a numerical weight orimportance to each of them, rate your own company and competitors regarding each factor, and calculate a final score. Asyou can see, the tool is composed of three main sections: the industry-success-factors section, the ratings section, andthe final-score section.

To complete a competitor analysis using the tool, address the industry environment by listing and weighting the keysuccess factors for your industry, rate your company on all KSFs, and rate two significant competitors on all KSFs. Finally,calculate final scores for your company and the two competitors and compare. Low-score KSFs may need attention, whilehigh-score KSFs may indicate your competitive advantage. You'll have an opportunity to use this tool in the context of thecourse project.



It is important to note thata single resource doesnot create a competitiveadvantage, even whenthat resource confers anadvantage in themarketplace.

Outback Advantage

In the article about Outback Steakhouse Korea found at the beginning of this topic,the authors analyze the management and policies that have enabled the Koreanorganization to develop and expand distinctive and difficult-to-imitate competencies.In this article, Professor Cathy Enz observes that the Outback Steakhouse caseprovides a textbook example of a five-point framework for competitive advantage, andshe presents her view of the mechanisms by which Outback Korea has developed itscompetitive advantage.

Professor Enz notes that superior financial and physical resources, human resources,organizational knowledge and learning, and general organizational resources arewhat firms use to build advantage. Successful companies like Outback Steakhousepay careful attention to developing and applying their resources and capabilities tocreate sustainable competitive advantage.

Read Professor Enz's full analysis of Outback Steakhouse Korea's competitiveadvantage in the complete article .here

If you wish to review the original Outback Steakhouse Korea article from the beginning of this topic, you can .download it again

View the article







1. 2.

Analyze Your Competitive Advantage

For this assignment, perform a competitive analysis of your organization using the tool presented in this topic. Thecompetitor-analysis tool is provided . Instructions for using the tool are provided below.here

When you have completed your analysis, continue your work on the course project. Open your saved project document. (Ifyou've yet to download the project template, you can do so ).here

Answer questions 4, 5, and 6. Then re-save the document so you can continue working on it throughout the course.

Note: Do not submit the completed analysis tool to the instructor.

A Step-by-Step Guide to Using the Competitor-Analysis ToolFollow these steps to perform an analysis of your competitive advantage using the competitor-analysis tool.

Describe Key Factors of the Industry

In the first column of the evaluation tool, list the key success factors (KSFs) for your industry.Assign a weight to each KSF. Each weight should be a value between 1 and 100%. Assign weights so that the totalweight of all KSFs equals 100%.

Note: Be careful not to give various factors the same weight. In addition, you need to decide what factors are more or lessimportant for you and your competitors in particular and assign weights to reflect their comparative import for your industrycircle alone. For example, although location may be more important in some competitive environments than in others,concern yourself only with your competitive environment here. Give location a weight reflecting its importance for industryplayers in your competitive situation.




1.

2. 3. 4.

Assign Ratings for Each KSF

Rate your company on each KSF using a scale from 0 to 1. Assign a rating of 1 if your company is strongest in thatarea and a rating of 0 if your company has no strength in that area.Choose two main competitors to evaluate as competitor A and competitor B.Rate competitor A on each KSF using a scale from 0 to 1.Rate competitor B on each KSF using a scale from 0 to 1.

Calculate Final ScoresCalculate final scores for each organization: my company, competitor A, and competitor B. Within each organization,calculate a final score for each KSF (each row of the table). Derive these final scores by multiplying the weight of each


1.

2.

3.

1.

KSF by the rating for it earned by the relevant company.

Calculate your organization's final score for each KSF listed. Multiply KSF weight by your organization's rating(weight x rating). Enter that value in the my-company column of the final-score section.Calculate competitor A's final score for each KSF listed. Multiply KSF weight by competitor A's rating and enter thevalue in the competitor-A column of the final-score section.Calculate competitor B's final score for each KSF listed. Multiply KSF weight by competitor B's rating and enter thevalue in the competitor-B column of the final-score section.

Compare Scores

Compare your organization's final scores with the final scores of your competitors.


Module 1 Wrap-Up

This module looked at internal analysis in three important ways: through an examination of the resources, capabilities, andcompetencies of the organization; through the organization's value chain; and through the key success factors of therelevant industry. It viewed competitive advantage in terms of bundles of resources-core competencies-and introducedtools to identify competitive strengths and weaknesses.


Discuss the building blocks of internal-capability buildingExplain how sustainable competitive advantage emergesAssess the competitive value of internal resources and capabilitiesAnalyze the value chain of activities at your hotel to determine your internal capabilitiesUse the value chain to discover opportunities to create valueCreate a competitor analysis using the KSFs for an industryUse a competitor analysis to examine the strengths and weaknesses of competitorsUse a competitor analysis to determine your organization's competitive advantage as compared to that of yourindustry rivals


MODULE OVERVIEW

Module 2: Business-Level Strategies

are formulated on the basis of the existing or potential resources of the firm, and how well theBusiness-level strategiesfirm expects the market to receive its products and services. Without acknowledging these considerations, even a firmwith the most wonderful product or service may meet with failure in the marketplace. In this module, review twowell-known strategies: cost leadership and differentiation. Then take an in-depth look at the best-value strategy. Consideryour own organization and how you might answer the business-level question of how to compete.


Define and value value propositionContrast narrow and broad competitive scopeDefine business-level strategyDescribe what a cost-leadership strategy is and how to use itDescribe what a differentiation strategy is and how to use itDescribe what a best-value strategy is and what its benefits areDiscuss the commoditization trap in the context of best valueApply the best-value strategy to your hotel


TOPIC OVERVIEW

Topic 2.1: Value and the Value Proposition

To begin our study of business-level strategies, let's take a look at and what is meant by the . Thevalue value propositionvalue proposition is the single most important element in creating shareholder value. It is the entire set of experiences anorganization provides its customers at a given price. Value, on the other hand, is (the level of quality theperceived qualitycustomer perceives) divided by the price paid. Businesses can either increase perceived quality or decrease price toincrease value. Decreasing price is the easier option, but presents challenges to the business. Business strategistsaddress the more difficult question: how to increase perceived quality.


Define value and value propositionContrast narrow and broad competitive scope


The Westward Timeline

- The Westward opens for business 1992 - Heller purchases the Westward and2000

makes Andy Brown the new generalmanager

- The Westward has a new vision: the2001friendliest place to visit

- The Westward is renovated; the2003restaurant is reconstructed and leased toan outside group

- Brown moves from the Westward to2004a corporate position with Heller

The Westward Horton

The Westward Horton and Towers is a thirteen-story, full-service hotel,sitting on 8.5 acres in downtown Phoenix, Arizona. Offeringapproximately 300 guest rooms, the Westward commands about151,000 square feet. Board and conference rooms, executive offices, afitness center, and a large main lobby also characterize the property.When Heller Enterprises purchased the Westward Horton and Towersin 2000 and invited Andy Brown to be its general manager, the hotelwas almost nine years old and had operated at a loss for five of thoseyears. On the other hand, a convention hotel across the street from theWestward was very profitable and busy. Heller hoped Brown would beable to turn around this low-performing business.

What characterized the Westward Horton? On his arrival, Brownnoticed that the building and grounds were in disrepair-it was clear thatprevious management had not devoted capital to renovation andupkeep. He observed, similarly, that employee morale was low in anenvironment managed in a command-and-control style.

Brown was initially concerned about the Westward's approach to customer service. He observed that it seemed to focuson providing "stuff" rather than providing genuine care. Guest rooms teemed with chocolates, cheeses, and otheramenities, but there was a lack of sensitivity on the part of management and staff regarding what guests might actuallywant. Brown also found it interesting that the Westward's mission statement was copied directly from that of the RitzCarlton. Did the Westward even know what it was? Did it know what it wanted to be?

Brown felt that previous management had tried to make the hotel something it was not. Perhaps as a result, theWestward's managers talked continuously about the success of the large convention hotel across the street, instead offocusing on what the Westward had to offer-or imagining what it might become. A new, clear vision of the hotel wasneeded, in addition to a new approach to customer service, knitted together by a new approach to management.

about the Westward Horton and Andy Brown's efforts to transform it.Learn more

A New Vision

The process of re-envisioning the Westward took place through Brown's discussions with senior management staff. In2001, the new vision emerged as "the friendliest place to visit." To support that vision, Brown and his team developed themission statement, "Making people's lives better through business." Here's what Brown believed:

We will achieve our vision by making our employees', customers', and owners' lives better. Employees' lives are madebetter by treating them with dignity, rewarding and recognizing their contributions to our success, and providing a safe,secure, flexible, and fun working environment. Customers' lives are made better by providing a safe environment,excellent service, friendliness, and that extra thoughtfulness that makes visiting the Westward like visiting a friend. Finally,we make our owners' lives better by ensuring that the hotel is a leader in return on investment, a positive influence on the

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_211_westwardhorton_en-us.pdf


The Westward Guest Rooms

The Westward guest rooms are wellappointed. Each room includes a full bath,a king-size or two queen-size beds, achaise lounge and ottoman, a work desk,an armoire, one or two nightstands, andthree or four lamps.

Standard guest rooms feature 24-hourin-room dining, free cable channels withHBO, a coffee/tea maker, a minibar, analarm-clock radio, card-key access, a PCphone line, a modem hookup, an oversizedesk, and a complimentary newspaper.

Executive business rooms include inaddition a fax/copier machine, a desk-jet

local community, and successful on a long-term basis. We aspire to be a role model for other companies in the serviceindustry: admired for the support we provide our employees, the friendly experience we provide to our customers, and theexceptional rewards and satisfaction we provide to our owners.

Close to Customers

Brown made it a priority to get close to customers. He was available in the hotel lobby most mornings from 7-9am,meeting his customers and modeling a commitment to guest satisfaction for employees. In addition, he demonstrated toemployees that he could and would do their work-he was there to help them, too.

He used customer-comment cards in a new way. He asked customers to complete the comment cards at check-out,rather than to just leave the cards in the guest rooms. As a result, Brown got a much better response rate. It also helpedthat he redesigned the customer-comment cards so each card contained just four questions. This way, customers wereable to complete a card in just a few seconds. (Note that the Westward survey contained 40 questions overall. To keepthe number of questions per card low, the Westward created 10 different cards, each composed of four questions.)

Instead of sending completed customer-comment cards to the corporate office for data analysis, the Westward staffentered the card data in-house and created feedback reports on a daily basis. The accessibility and quick turnaround ofcrucial data led to big improvements in service and guest satisfaction.

Valuing Employees

Another key component of the Westward's culture under Brown's management was the valuing-others approach heinstituted. The essence of Brown's management philosophy was that members of the organization at every level should bewilling to do what they ask others to do. His human-resource approach was rooted in his belief in the dignity of allemployees.

Brown realized that good service and quality facilities were a minimum expectation of customers in the Phoenix market.Excellent service was taken for granted, and the competition could deliver just as easily as the Westward could. Given thiscompetitive environment, the question was, what could the Westward do to attract and retain customers over time? ForBrown, the answer was to build a strong system of rewards for his employees, and so he drafted the hotel's policyaccordingly: "The opportunity for advancement and self-improvement must be available to each employee. Satisfiedemployees create satisfied guests, and satisfied guests return and remain loyal."

The philosophy behind the design of the wage-and-benefit system fit with Brown's notion that dignity was important forcustomers and employees alike, and so 50% of employee bonuses were tied to customer-comment scores. Through asimple and understandable bonus system, managers as well as both part-time and full-time hourly employees receivedquarterly bonuses based on customer scores, hotel profit, and employee turnover.

Brown's Results

As a consequence of Brown's efforts, the Westward saw results. Forfour years, the Westward Horton performed at or near the top of thePhoenix market. According to the comparative data from Smith TravelResearch, the Westward Horton outperformed the Phoenix market in2007, at a time when demand was gradually slipping in the city. TheWestward's excellent performance was due in part to the redirection ofthe hotel's marketing efforts away from groups and toward transientcorporate travelers.

According to recent investor reports, the Westward's above-averageperformance was a result of the hotel's affiliation with the prominentHorton Hotels brand, as well as its highly visible location. TheWestward Horton was in the top ten of all Horton Hotels with anincrease in profitability of about 273% during the 2001-2007 period.House profit increased from the takeover (2001) figure of $1,817,137 to$6,769,482 (2007).

The current value of the property is about $65 million. This value isderived from projected earnings and a terminal capitalization rate of10.5%. The expected average annual asset return on this investment is12.28%, and the expected average annual equity return is 30.23%,


printer, a DVD player, two private phonelines with a speakerphone, and acalculator.

assuming a loan-to-value ratio of 60%. These returns are the IRR on aninitial investment of the current value of the property, where theproperty is held through its projected sale at the end of 2016.

All in all, Andy Brown's management had very favorable results.

Think about how the revitalized Westward Horton creates value. What is its value proposition?


The Value Proposition

An illustrated presentation with audio appears below, along with a text transcript. Use these resources to discover thesignificance of the value proposition and its role in strategy.

Transcript: The Value Proposition

What are your company's most important assets? Have these assets changed in the last few years? If so, how? How doesyour company invest in all of its various assets-does it have a framework, or context, for making these investmentdecisions? If it does, it may be using a value proposition to guide how it builds assets and makes investment decisions.

The value proposition is the single most important element in creating shareholder value. Without this crucialunderstanding of what you are, what value you offer, how can the customer be expected to select your offering overothers? Without this critical element in place, how can your employees possibly know how to execute? A value propositionshapes decisions that managers make about budgets, distribution channels, and corporate culture. So what is a valueproposition? Simply, a value proposition is the entire set of resulting experiences at some price that an organizationprovides its customers.

Let's take a simple formula as a starting point. Value is perceived quality divided by the price paid. So if you want to thinkof a three-variable equation: V is equal to the value and value is a function of perceived quality divided by a given price (V= Q/P).

Let's take a look at how this equation works. In order to increase value, you can either increase perceived quality or youcan decrease the price you charge the customer. As you can see, raising the numerator (quality) or dropping thedenominator (price) will both contribute to increasing value. It is, however, easier to drop price than it is to raise quality.You can in fact drop price dynamically at any moment in time but in order to increase quality, you have to have a strategy,a strategy about how to build value for the customer.

Raising the numerator, increasing perceived quality, is what strategists have to work on. When we look at the valueequation, it's easier to drop price than it is to increase quality when trying to increase value. However, when a firm seeksto increase value in a world in which your competitors can easily drop price, you are better off working on the numerator,not the denominator.

While understanding how you create value via quality and price is a starting point, value creation is designed to increaseshareholder wealth. There is however, a tradeoff between increasing value to the customer and increasing shareholderwealth. Let's talk a little bit about the dynamics of those relationships.

Frequently, when you're increasing customer satisfaction, it contributes to increasing value for the customer andincreasing value for the stockholders. However, there comes a point at which you can continue to increase customersatisfaction but start to diminish shareholder value. This is an undesirable set of circumstances in which you can provideextraordinary customer service, but the return you're able to reap from that effort could be less than you would desire andhence, shareholder value starts to diminish.

So your job as an effective strategist is to increase customer satisfaction up to the point where you can maximize value forboth the shareholders and the customers. Beyond that point, you have a conflict of interest, diminishing value forshareholders while managing to maintain customer satisfaction. The important thing to keep in mind while looking at thisrelationship is that we are not unlimited in our ability to create customer value. We have to create customer value in sucha way that it also produces economic value for shareholders.

How a firm goes about creating value for its most important stakeholders, customers, will vary depending on the firm'sapproach to competing in its chosen market. Firms pursue distinct strategies, such as being a low-cost provider or adifferentiator on service quality, to create unique value propositions.


The Four Seasons Hotel, which courts theluxury consumer, adopts a narrow focus:

"We have chosen to specialize withinthe hospitality industry, by offeringonly experiences of exceptionalquality. Our objective is to berecognized as the company thatmanages the finest hotels, resorts,residence clubs, and other residentialprojects wherever we locate. Wecreate properties of enduring valueusing superior design and finishes,and support them with a deeplyinstilled ethic of personal service.Doing so allows Four Seasons tosatisfy the needs and tastes of ourdiscriminating customers, and tomaintain our position as the world'spremier luxury hospitality company."

Excerpt from Four Seasons Hotel AnnualReport, 2001.

Strategic Scope

Now let's consider the question of scope. Value creation always occurs within some competitive scope, narrow or broad.An organization pursuing a broad-scope approach offers products or services that target as many customer segments aspossible. This is a common approach. The narrow-scope approach, in contrast, is designed to serve just one segment orone group of segments.

Organizations choosing to pursue a narrow-focus strategy (also referred to as a "focus strategy") offer distinctive productsor services designed to appeal to a particular market segment. Certain online travel sites provide information about justone type of lodging option-for example, bed-and-breakfasts-and certain hotels specialize in serving particularcommunities, like the gay or lesbian community. If organizations pursuing focus strategies are going to be profitable, theymust accurately assess their target market and then meet its needs and desires better than their competitors do.

The risks of pursuing a focus strategy vary and depend on theparticulars of how the strategy is pursued; however, two risks stand outas generally applicable. First, there is the risk that the desires of thenarrow target market may become too similar to the desires of themarket as a whole, thus eliminating the advantage associated withfocusing. Second, there is a risk that a competitor may be able to focuson an even more narrowly defined target, rendering the original focusstrategy less successful by making it too broad by comparison. Forexample, new, upscale boutique and lifestyle hotels that successfullycapture market segments within the luxury segment can be said to haveout-focused the more traditional luxury-segment focusers.


The Westward Decision

This is Part Two of the Westward Horton story. If you have not read Part One of this story, you can .download it now

The Heller Hotels subsidiary of Heller Enterprises owns and manages all of its hotels, branding them with a variety ofdifferent mid-priced and upper-priced hotel franchisers. The portfolio has grown over a twelve-year period toapproximately a dozen properties at any given time. This number isn't stable, as a result of Heller's corporate strategy: tobuy undervalued, underperforming properties and turn them around.

Each hotel in the Heller portfolio is operated as a fully self-sufficient operation. When the possibility of selling a property ata healthy profit has presented itself, Heller's management team generally has taken advantage of the opportunity. With theexception of a Phoenix property managed as an independent (unbranded) hotel and acquired in 2006 to be the group'sflagship, no property was supposed to be untouchable. However, since 2004, only one Heller property has been sold. Theinvestors are reaping healthy benefits from the portfolio.

A recent inquiry from an REIT (real estate investment trust) as to the availability of the Westward Horton and Towers, oneof Heller's hotels, has prompted a discussion among top management about selling the property.

The Westward's former GM and Heller's current executive vice president of operations, Andy Brown, thinks it might be theright time to sell. Hotel sales transactions are beginning to drop. In addition, tightening credit and stricter loan underwritinghave increased the cost of capital, making it more difficult for a potential buyer to obtain a loan. New products haveemerged in the Phoenix market, and the hotel's performance may have peaked. Whereas Phoenix had experiencedexplosive growth in the late 1990s, and supply growth had continued up through 2003, recently both room supply anddemand have begun to fall.

On the other hand, all market segments in the Phoenix area have experienced healthy ADR (average daily rate) andtotal-revenue growth since 2002. The long-term outlook for Phoenix is strong with its 300 days of sunshine, goodtransportation support, natural wonders, and abundance of golf courses.

Heller Hotels itself is profitable. The rest of the portfolio is performing well-with the exception of one recently acquiredproperty, all are profitable. The parent company, Heller Enterprises, which owns and operates a bank and several otherbusinesses, is prospering. Further, all the Heller businesses are privately held. Thus, there is little of the short-termperformance pressure to which publicly held companies are subject.

Brown knows that at its next formal meeting, the management/ownership group will make a decision that, one way oranother, will affect people's lives at the Westward. Perhaps selling will even affect the way Heller's employees at its otherproperties feel about the company.

Would the decision to sell the Westward be the right one? Why or why not?



Consider Your Value Proposition

This part of the course project invites you to answer several fundamental questions about value and the value propositionin relation to your organization. What is your hotel's approach to creating value? What is its value proposition?

To begin the assignment, please open your saved version of the course project document. (If you haven't downloaded italready, you can do so .) Complete question 7 for this assignment. Then re-save the document to a convenientherelocation on your hard drive so you can return to it later.



TOPIC OVERVIEW

Topic 2.2: Cost-Leadership and Differentiation Strategies

An organization's approach to competing in its chosen markets is defined by its . This topicbusiness-level strategyconsiders several generic types of business-level strategies, including those proposed by Michael Porter, which areamong the most widely used and understood. According to Porter, firms create superior value for customers in one of twoways: either by offering them a basic product or service produced at the lowest possible cost or by offering them apreferred product or service at a somewhat higher price. These approaches are called cost-leadership and differentiation

, respectively. This topic examines both approaches in both broad- and narrow-focus applications. It also takes astrategiesdetailed look at the , a combination of cost-leadership and differentiation.best-value strategy


Define business-level strategyDescribe what a cost-leadership strategy is and how it is usedDescribe what a differentiation strategy is and how it is used


Guide to Business-Level Strategies

According to Michael Porter, organizations create superior value for customers either by offering them a basic product orservice produced at the lowest possible cost or by offering them a preferred product or service at a somewhat higher price(Porter, 1980). The first option is called (or ) and is based on efficient production. Thecost leadership low-cost leadershipsecond option is called and requires organizations to distinguish their products or services on the basis ofdifferentiationattributes like higher quality, more innovative features, and greater selection. Both of these strategies assume that anorganization is marketing its products or services to a broad segment of the public (broad focus).

In addition to these strategies, Porter identified a third approach he called a focus strategy. A focus strategy is one thattargets a narrow segment of the market (narrow focus). Because organizations can pursue a focus strategy through costleadership or through differentiation, Porter's three options create a set of four strategies: cost leadership, differentiation,focus through cost leadership, and focus through differentiation.

An additional strategic option, called a , is a combination of cost leadership and differentiation andbest-value approachcan have either a broad or a narrow scope.

The following table provides an overview of these business-level strategies.

Six Generic Business-Level Strategies

The selection of a business-level strategy is part of the strategy-formulation stage of the strategy process model. The foregoing discussion of generic strategies draws extensively from work by Michael Porter, especially his book

(New York: The Free Press, 1980).Competitive strategy: Techniques for Analyzing Industries and Competitors


Cost-Leadership Strategy

The goal of a cost-leadership strategy is to become the lowest-cost provider of a good or service. In general, organizationspursue cost leadership as a broad-scope strategy, attempting to serve a large percentage of the total market. (Althoughorganizations can pursue cost leadership with a narrow scope, this is difficult to do in the hospitality industry without someform of differentiation.)

Organizations pursuing a cost-leadership strategy typically employ one or more of the following approaches to create theirlow-cost positions: high capacity utilization, economies of scale, outsourcing, learning effects, and technological advances.

High Capacity Utilization

When demand is high and capacity is fully utilized, a firm's fixed costs are spread over more units, lowering average unitcosts. When demand trails off, the fixed costs are spread over fewer units, so unit costs increase. This basic conceptsuggests that a firm that is able to maintain higher levels of capacity utilization is better able to maintain a lower coststructure than a competitor of equal size and capability. Consequently, the lodging industry puts great emphasis onoccupancy rates, and restaurants pay close attention to meals served per day part and per hour.

High capacity utilization is particularly important in industries like the hotel, car-rental, and airline industries, in which fixedcosts represent a large percentage of total costs.

Economies of Scale

The second major factor with the potential to produce cost advantages is economies of scale. Economies of scale areoften confused with increases in volume. As described previously, increases in capacity utilization that spread out fixedexpenses can lead to lower unit costs. However, true economies of scale are associated with size rather than capacityutilization. The central principle of economies of scale is that costs per unit are less when a firm expands its scale or sizeof operation. For example, the cost of constructing a 200-room hotel will not necessarily be twice the cost of building a100-room hotel, so the initial fixed cost per unit of capacity in the construction of a 200-room hotel will be lower. Inaddition, activities such as quality control, purchasing, and reservations in a 200-room hotel typically do not require twiceas much time or twice as many laborers to perform as in a 100-room hotel.

Larger hotel firms may provide owners and operators with per-unit savings in fixed costs and indirect labor costs.However, occur when a firm builds facilities that are so large that the confusion associated with thediseconomies of scaleadded bureaucracy, as well as the additional administrative costs that result, overwhelm any potential cost savings.Nevertheless, many of the largest hotel companies view their scale of operations as a key competitive strength.

Outsourcing

Traditional thinking in management was that organizations should perform as many value-adding functions in-house aspossible in order to retain control of the production process and to gain technological efficiencies through establishingsynergies among processes. However, corporations realize that sometimes another company can perform a processbetter or more efficiently than they can. This has led to outsourcing-contracting with another firm to provide services thatwere previously supplied from within the company. For example, an outsourcing hospitality firm could subcontract itsaccounting, reservations, or its information systems, or even its hotel management. An individual hotel might outsourcefood and beverage, janitorial, airport-shuttle, valet, human-resource, or even housekeeping services.

Outsourcing enables a firm to concentrate resources on the core business activities; but too much outsourcing can lead toa loss of innovative activity. In addition, recent studies have revealed that unforeseen complexities and conflicts due to


outsourcing practices can lead to higher total costs than anticipated. When costs begin to rise and outsourcing can nolonger be justified, firms revert to in-house provision of formerly outsourced services, a process known as .backsourcing

Learning Effects

A final factor that influences cost structures is . When an employee learns to do a job more efficientlylearning effectsthrough repetition, learning effects are taking place. The learning-curve effect suggests that the time required to completea task will decrease predictably as a function of the number of times the task is repeated. Dramatic time savings areachieved early in the life of a company because of this effect. However, as the company matures, tangible cost savingsfrom labor learning are harder to achieve, because it has already exploited most of the opportunities for learning. Alsonote that learning effects do not happen automatically. They occur only when management creates an environment that isfavorable to both learning and change, and then rewards employees for their improvements in productivity.

Risks

There are risks attendant upon cost-leadership strategies. Organizations pursuing cost leadership may resist introducinginnovations in their new properties that would enable them to stay current with consumer expectations, especially if thoseinnovations would make new properties incompatible with existing ones. In fact, cost leaders can become so preoccupiedwith reducing costs, they may not notice changes in consumer expectations at all. These organizations run the risk oflosing their investments in new properties or businesses due to changing trends.

Another risk of cost leadership is that competitors can always imitate the technologies that have reduced costs for themarket leader. And finally, there is the concern that the organization may go too far in its efforts to keep costs low-perhapseven endangering customers or employees in the process.


Differentiation Strategy

Organizations pursuing a differentiation strategy create value through uniqueness. Let's look at what this means in thecontext of the hospitality industry. Because hospitality products must satisfy a wide range of needs for a wide variety ofconsumers, hospitality firms must offer a vast array of choices. Consumers interested in hotel accommodations might betraveling alone on business or accompanied by their families on vacation; they might prefer accommodations designed toappeal to a particular class or affiliation; or they might require certain amenities or services. Because of this, hospitalityproducts present tremendous opportunities for differentiation. Not surprisingly, differentiation strategies are very popularamong hospitality firms.

In the hotel industry, differentiation occurs only when companies offer significantly more than just a clean, comfortableroom. An organization pursuing a differentiation strategy does so by taking advantage of product features, the skill andexperience of its employees, its location, the complementary services it offers, and the technology embedded in thedesign of its products.

Organizations must understand customer lifestyles and aspirations in order to develop differentiation strategies thatprovide unique offerings that appeal to customers. By designing service experiences to complement the lifestyles of theirguests and by generating brands to reflect consumers' aspirations, organizations may find they can charge premiumprices. (In fact, they may have to charge premium prices to cover the extra costs incurred in offering a unique experience.)

Differentiation is a strategic choice and as such is engineered according to a bundle of resources and capabilities. Amongthese, some resources are more likely to drive sustainable differentiation than others. For example, reputations andbrands are difficult to imitate and are thus sustainable, whereas particular service features are often easy to imitate,making the advantage derived from them less reliable. In general, intangible resources such as a high-performanceorganizational culture are hard to imitate, whereas tangible resources such as the fixtures and furnishings in a hotel roomare easy to imitate. Hard-to-imitate resources are more likely to lead to a sustainable advantage.

Differentiation vs. Segmentation

It's easy to confuse differentiation with segmentation because both involve making judgments about difference. Let's lookat how these concepts are different.

Segmentation refers to customers and demand. Through segmentation, firms assign consumers to categories based onidentifying characteristics-for example, needs or behaviors. Once a firm has created customer segments, it can reacheach segment in a unique and effective way based on its characteristics.

Differentiation, on the other hand, refers to products and services. A differentiation strategy offers unique products orservices that are intended to be perceived as different from or better than those offered by the competition.

Risks Associated with a Differentiation Strategy

Every strategic approach has its risks. Let's take a look at some of the most significant risks associated with differentiationstrategies.

The differentiation strategy is as much a matter of perception as it is about the product itself: it's not enough for a productto be different; it must be perceived as different. This is a particular concern for hospitality organizations. A stay at a hotelor an evening at a restaurant can't be sampled before purchase, so hospitality customers depend on branding andadvertising for information about quality and credibility. As a result, effective branding and advertising of products mayhave a greater effect on consumer behavior than the products and services themselves. This is a major risk involved with


the differentiation strategy: it's possible that a competitor using more persuasive advertising can outperform anorganization offering a higher-quality product at a similar price.

Another major risk of differentiation is that customers will sacrifice some of the features, services, or lifestyle associationsthat differentiate one product from others because that product's price is too high. A related risk is that customers whoonce gladly paid extra for differentiating features will cease to perceive those features as differentiating. Consumers mayarrive at a point at which they are so accustomed to the service that brand image is no longer a factor in their choice ofwhere to go to enjoy it. If a source of differentiation is easy to imitate, then imitation will soon send differentiationstrategists back to the drawing board.

Because of the complexity of the playing field of differentiation, staying ahead of the competition in service developmentrequires constant innovation.


TOPIC OVERVIEW

Topic 2.3: Best-Value Strategy

To compete in its chosen markets, an organization selects and implements a business-level strategy. Strategy selection isan important step in the strategic management process and is a key feature of the strategy process model. This topicconsiders one generic type of business-level strategy: the best-value approach. This approach combines elements of costleadership and differentiation to arrive at what may be a best-of-both-worlds position from which to create value forstakeholders.


Describe what a best-value strategy is and what its benefits areDiscuss the commoditization trap in the context of best valueApply the best-value strategy to your hotel


The Best of Both Worlds

An illustrated presentation with audio appears below, along with a text transcript. Use these resources to build yourfamiliarity with the best-value strategy.

Transcript: The Best Of Both Worlds

Firms create superior value for customers either by offering them a basic product or service that is produced at the lowestpossible cost, oftentimes called "low-cost leader," or by offering them a preferred product or service at a somewhat higherprice, where the additional value received exceeds the additional cost of obtaining it. These two approaches to creatingvalue are the most widely understood strategies. The first option is based on efficient cost production. The second optionrequires the company to distinguish its products or services on the basis of attributes such as a higher-quality product,location, the skill and expertise of service employees, technology embedded in design, better service, or intensemarketing activities. The second option we call differentiation.

Some argue that a combination of strategic elements from both the differentiation and low-cost strategies may benecessary to create a sustainable competitive advantage. This is a "best value strategy." To illustrate a best valuestrategy, let's assume that three vendors sell hotdogs on the street corners of a major city. The first vendor pursues alow-cost strategy. She is able to buy hotdogs at twenty cents each and buns at eight cents each. Her hotdogs are knownby locals to be of low quality, but some of them buy from her anyway and she gets almost all of the drive-by business at aprice of one dollar. Her average daily sales are one hundred for a gross profit of seventy two dollars. Her cart costs thirtydollars per day, so she nets forty two dollars at the end of the day.

Now, another vendor specializes in the highest quality imported sausages. They cost him two dollars each and he buys alittle better bun at ten cents. He sells an average of forty sausages for four dollars each. His nicer cart costs him fortydollars per day and after making calculations you will see that his gross is seventy six dollars and his net is thirty sixdollars a day.

Now, let's assume we have a third vendor. The third vendor can buy a domestic sausage that is almost as good as thehighly-differentiated imported sausage, and can sell eighty per day at three dollars. She buys the sausages locally for onedollar each, which is five times as much as the first vendor pays for cheap hotdogs, but half the cost of the importedsausages. The better buns are ten cents each and the nicer cart is forty dollars per day. Gross profit is one hundred andfifty two dollars and net is one hundred and twelve.

Obviously, this third vendor has found a better strategy. She has combined the best of low-cost with the best ofdifferentiation, put them together, and created value.

Hospitality is often a lot like the hotdog vendors. A little extra service in a room, better technology, new channels ofdistribution, a fun and engaged service provider with careful management of costs through outsourcing or economies ofscales, and a best-value strategy emerges. Best value is about making sure that the things that provide the mostperceived value to a customer are done very well, while looking for ways to keep costs low, through technology,economies of scale, learning, or reducing waste.

A best-value strategy is fundamentally attempting to identify ways of creating unique perceived value to the customerwhile managing all the costs that are not relevant to that unique value out of the equation. So it's simultaneouslyattempting to do what a low-cost provider would focus on and what a differentiator would focus on. It's a tricky strategyand it can be done poorly because you might spend too little money and then lose the point of differentiation.

Honestly, there isn't a single competitor that isn't trying to do a best-value strategy. The net effect, however, is thatdifferent competitors do it in slightly different ways and some of those ways are more successful in the marketplace. Whenyou try to create quality in a lot of different ways, you can have a variety of different models of value. If, however, you'relike all the other competitors, then you clump together in a value place-it might be a differentiation place or it might be alow-cost provider place-and that is not what a thoughtful strategist wants to do. They want to be very careful not tooveruse price: not to drop it, not to discount, not to erode their value while simultaneously squeezing costs, and they onlywant to differentiate on the things that matter to the customers that they are trying to serve.


1. 2. 3. 4.

1. 2. 3.

Best-Value Risks

The is a combination of differentiation and low-cost strategic elements-a mixbest-value strategysome strategy scholars argue may be necessary to create a sustainable competitiveadvantage. Because a differentiation strategy is one part of this approach, unit costs areexpected to increase at first. This seems incompatible with best value's other half, thecost-leadership strategy; however, unit costs should decrease over time, as volume increases.If the organization is able to make the product or service attractive to the market throughdifferentiation, volume will go up and low unit costs will be achievable.

In essence, the best-value strategy requires doing those things well that provide the mostperceived value to customers, while keeping costs low through the use of technology,economies of scale, learning, and reducing waste. A best-value approach in fact may be abest-of-both-worlds approach for some organizations-so why wouldn't everyone adopt it? As is true with other types ofstrategies, there are risks involved even with the best approach. Let's review the risks associated first with cost leadershipand then with differentiation to begin an exploration of best value's risks.

Risks associated with cost leadership

An organization might become preoccupied with cost and lose sight of the market.Technological breakthroughs might make process-cost savings obsolete.Competitors might quickly imitate any sources of cost advantage.An organization might take the cost-reduction emphasis too far, thus endangering stakeholders.

Risks associated with differentiation

The company might spend more to differentiate its service than it can recover in the selling price.Competitors might quickly imitate the source of differentiation.At some point, customers may no longer consider the source of differentiation valid.

A best-value strategy represents a trade-off between these two sets of risks. The risk that technological breakthroughs willmake the strategy obsolete is as much a problem with best value as it is with cost leadership, and the risk of imitation,found in both other strategies, is evident in a best-value strategy as well. On the other hand, an organization pursuing bestvalue is unlikely to become preoccupied with either cost-savings or differentiation, or to take either perspective too far.Instead, it will seek to maintain a balance between the two, countering the weaknesses of one with the strengths of theother.


Push for innovation anddo the things necessaryto once again differentiateStarbucks from all others.

The Commoditization Problem

Why do customers willingly pay premium prices for a Starbucks cup of coffee? Theanswer may lie in the overall signature coffee experience Starbucks provides. Richaromas, good service, and a style-conscious decor are all part of what Starbuckscustomers have come to expect with their double lattes. However, it isn't easy tosustain a differentiation advantage, and even this coffee giant may have stumbled.

This from Howard Schultz (then Starbucks chairman) to Jim Donald (StarbucksmemoCEO at that time) expresses Schultz's opinion that rapid expansion of theorganization has diluted the customer experience and led to the commoditization ofthe brand by eliminating its differentiating qualities.

View the memo

Note: you will need Adobe Reader® to be able to view the memo. If it is not already installed on your computer, you candownload it (free) from the .Adobe Web site

Source: This memorandum was sent on February 14, 2007, and first appeared on the Web sitewww.starbucksgossip.com.

https://d31owemgwclw9w.cloudfront.net/content/SHA/SHA552/sha552_233_starbucksmemo_en-us.pdf




Best-Value Quality

Hotels and other businesses provide value for their customers usingvarious approaches to price and quality. A successful hotel couldhave a high-priced product of very high quality, or it could have alower-priced product at a lower quality level. The two options, thoughdifferent, may offer equal levels of value. In fact, we can imagineequivalent and positive value propositions at an array of differentlevels of quality and price. This is one way to look at low-costproviders and differentiators.

However, the best-value strategy requires that we diverge from thisperspective on balancing price and quality. In the best-value regime,businesses that are able to achieve lower costs don't necessarily passa savings on to the consumer, as the low-cost provider would. So costand price are related to each other in a new way. This is particularlytrue for those businesses that have something unique to offer, and can justify higher prices. Best-value strategists workwith difference and cost management simultaneously, which permits-and may even require-them to take a differentapproach than they would take to working with either singly.

As these best-value strategists do more and more to differentiate their services, how can they keep their prices lowenough to continue to serve their target market segments? One way is to approach differentiation in a cost-effective way.In the hospitality industry, difference is often achieved through the delivery of high-quality service. The pursuit of quality isa particularly good fit for the best-value strategy in that it not only differentiates, it can lead to reduced costs. After all,something that is built correctly or performed correctly in the first place will not require costly fixes or follow-ups later. Forthese reasons, quality-control systems like Total Quality Management and Six Sigma, often identified with manufacturingpractices, are relevant to hospitality and other services interested in pursuing higher quality while managing costs.Starwood Hotels and Resorts provides an excellent example.

Starwood Example

Starwood was one of the first hospitality companies to implement a Six Sigmaprogram and claims to have added more than $100 million in profit to itsbottom line annually as a result of using it. Since 2001, Starwood hascompleted hundreds of projects using the process, including:

A menu-engineering program for in-room refrigerators. The programselected items for the refrigerators based on popularity in order to drivehigher profits.The development of a pool concierge who books spa appointmentsand makes restaurant reservationsUnwind, a program that creates a set of nightly activities designed todraw guests out of their rooms and into the lobby where they can meetand mingle. The goal of this program is to develop greater loyalty tothe hotel.

Since the program launch, the vice president of Starwood's Six Sigmaprogram and his group have trained 150 employees as "black belts" and morethan 2,700 as "green belts" in the arts of Six Sigma. Based mostly at thehotels, the specialists design and oversee the development of projects. Theyoperate like partners to help the hotels meet their own objectives.


Apply Best Value

For this assignment, continue looking at how your hotel creates value. Examine the value proposition for your hotel, andcritique it based on the examination of business-level strategies presented here.

What is your hotel's (or your organization's) strategy? How do you or might you apply the best-value strategy?

Please open your saved version of the course project document. (If you haven't downloaded it already, you can do so here.) Complete question 8 for this assignment. Then re-save the document to a convenient location on your hard drive so youcan return to it later.



Module 2 Wrap-Up

This module looked at three types of business-level strategy-cost leadership, differentiation, and best value-andconsidered the risks and benefits of each. It also re-examined the issue of value creation and examined the question ofstrategic scope. Finally, it invited you to create a value proposition for your organization.

Having completed this module, you should be able to:

Define value and value propositionContrast narrow and broad competitive scopeDefine business-level strategyDescribe what a cost-advantage strategy is and how it is usedDescribe what a differentiation strategy is and how it is usedDescribe what a best-value strategy is and what its benefits areDiscuss the commoditization trap in the context of best valueApply the best-value strategy to your hotel


MODULE OVERVIEW

Module 2: Business-Level Strategies

are formulated on the basis of the existing or potential resources of the firm, and how well theBusiness-level strategiesfirm expects the market to receive its products and services. Without acknowledging these considerations, even a firmwith the most wonderful product or service may meet with failure in the marketplace. In this module, review twowell-known strategies: cost leadership and differentiation. Then take an in-depth look at the best-value strategy. Consideryour own organization and how you might answer the business-level question of how to compete.


Define and value value propositionContrast narrow and broad competitive scopeDefine business-level strategyDescribe what a cost-leadership strategy is and how to use itDescribe what a differentiation strategy is and how to use itDescribe what a best-value strategy is and what its benefits areDiscuss the commoditization trap in the context of best valueApply the best-value strategy to your hotel


TOPIC OVERVIEW


To begin our study of business-level strategies, let's take a look at and what is meant by the . Thevalue value propositionvalue proposition is the single most important element in creating shareholder value. It is the entire set of experiences anorganization provides its customers at a given price. Value, on the other hand, is (the level of quality theperceived qualitycustomer perceives) divided by the price paid. Businesses can either increase perceived quality or decrease price toincrease value. Decreasing price is the easier option, but presents challenges to the business. Business strategistsaddress the more difficult question: how to increase perceived quality.


Define value and value propositionContrast narrow and broad competitive scope


The Westward Timeline

- The Westward opens for business 1992 - Heller purchases the Westward and2000

makes Andy Brown the new generalmanager

- The Westward has a new vision: the2001friendliest place to visit

- The Westward is renovated; the2003restaurant is reconstructed and leased toan outside group

- Brown moves from the Westward to2004a corporate position with Heller

The Westward Horton

The Westward Horton and Towers is a thirteen-story, full-service hotel,sitting on 8.5 acres in downtown Phoenix, Arizona. Offeringapproximately 300 guest rooms, the Westward commands about151,000 square feet. Board and conference rooms, executive offices, afitness center, and a large main lobby also characterize the property.When Heller Enterprises purchased the Westward Horton and Towersin 2000 and invited Andy Brown to be its general manager, the hotelwas almost nine years old and had operated at a loss for five of thoseyears. On the other hand, a convention hotel across the street from theWestward was very profitable and busy. Heller hoped Brown would beable to turn around this low-performing business.

What characterized the Westward Horton? On his arrival, Brownnoticed that the building and grounds were in disrepair-it was clear thatprevious management had not devoted capital to renovation andupkeep. He observed, similarly, that employee morale was low in anenvironment managed in a command-and-control style.

Brown was initially concerned about the Westward's approach to customer service. He observed that it seemed to focuson providing "stuff" rather than providing genuine care. Guest rooms teemed with chocolates, cheeses, and otheramenities, but there was a lack of sensitivity on the part of management and staff regarding what guests might actuallywant. Brown also found it interesting that the Westward's mission statement was copied directly from that of the RitzCarlton. Did the Westward even know what it was? Did it know what it wanted to be?

Brown felt that previous management had tried to make the hotel something it was not. Perhaps as a result, theWestward's managers talked continuously about the success of the large convention hotel across the street, instead offocusing on what the Westward had to offer-or imagining what it might become. A new, clear vision of the hotel wasneeded, in addition to a new approach to customer service, knitted together by a new approach to management.

about the Westward Horton and Andy Brown's efforts to transform it.Learn more

A New Vision

The process of re-envisioning the Westward took place through Brown's discussions with senior management staff. In2001, the new vision emerged as "the friendliest place to visit." To support that vision, Brown and his team developed themission statement, "Making people's lives better through business." Here's what Brown believed:

We will achieve our vision by making our employees', customers', and owners' lives better. Employees' lives are madebetter by treating them with dignity, rewarding and recognizing their contributions to our success, and providing a safe,secure, flexible, and fun working environment. Customers' lives are made better by providing a safe environment,excellent service, friendliness, and that extra thoughtfulness that makes visiting the Westward like visiting a friend. Finally,we make our owners' lives better by ensuring that the hotel is a leader in return on investment, a positive influence on the
