Chapter 3Examining the Internal Context of Strategy

OBJECTIVES 12345Explain the internal context of strategyIdentify a firms resources and capabilities and explain their role in its performanceDefine dynamic capabilities and explain their role in both strategic change and a firms performanceExplain how valuechain activities are related to firm performance and competitive advantageExplain the role of managers with respect to resources, capabilities, and valuechain activities

COMPARATIVE INDUSTRY REFORMANCESemiconductorHow do such differences in profitability materialize? ROAROSGrocery StoreGlobal Auto

TWO THEORIES FOR HOW AND WHY SOME FIRMS PERFORM BETTER THAN OTHERSA firms resources and capabi- lities determine performanceSuccess issues from fundamental differences in what firms own and what they can doA firms activities determine performanceSuccess is driven by a firms value chain activities: How it configures these activities to add more value than competitors

RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS StrategyCompetitive advantage/ disadvantageManagement strategic decision makingCapabilitiesManagersResourcesPerformance

RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING BLOCKS OF STRATEGY The inputs that firms use to create goods and services Undifferentiated or firms-specific Tangible or intangible Easy to acquire or difficultA firms skill in using its resources to create goods and services. The combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services Capabilities (competencies)ResourcesStrategy

EXAMPLES OF CAPABILITIES 1: Stalk, Evans, and Shulman, 19922: Makadok, 2003CapabilityResultLogistics -- distributing vast amounts of goods quickly and efficiently to remote locationsAn extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both techno-logical leadership and economies of scaleGenerating new ideas then turning those ideas into new, profitable products200,000-percent return to share-holders during first 30 years since IPO125,000-percent return to share-holders during the 30-plus year tenure of CEO John Connelly.2 As for ongoing expenses, share-holders in Vanguard equity funds pay, on average, just $30 per $10,000, vs. a $159 industry average. With bond funds, the bite is just $17 per $10,00030 percent of revenue from products introduced within the past four yearsCompany

THE VRINE MODEL Performance implicationTestCompetitive implication

THE VRINE MODEL: VALUE Value: A resource or capability is valuable if it allows a firm to take advantage of opportunities or to fend off threats in its environmentUnion Pacific Railroads rail system is a tangible resource that allows UP to compete with other carriers in the long-haul transportation of a variety of goodsMaintain an extensive network of rail-line property and equipment on the U.S. Gulf costOperates in the western two-third of the United States serving 23 states, linking every major West Coast and Gulf Coast port, and reaching east through major gateways in Chicago, St.Louis, Memphis, and New OrleansAlso operates in key north-south corridorsThe only U.S. railroad serving all six gateways to MexicoInterchanges traffic with Canadian rail systems ExampleDefinition

THE VRINE MODEL: RARITY ExampleWhen McDonalds signs an agreement to build a restaurant inside a Wal-Mart store, it has an intangible advantage over Burger King that is valuable and rare A useful resource or capability that is scarce relative to demand.

Valuable resources that are available to most competitors (i.e., that are not rare) simply allow firms to achieve parityDefinition

THE VRINE MODEL: INIMITABILITY AND NON-SUBSTITUTABILITY ExampleBarnes & Nobles large store network gave it access to customers and purchasing power that was inimitable but Amazon.com found a substitute

TANGIBLE AND INTANGIBLE ADVANTAGES===Intangible Location selectionBrand Tangible Rural real-estate High traffic real-estate+++Wal-MartMcDonalds

THE VRINE MODEL: EXPLOITABLITYNovell: I walk down Novell hallways and marvel at the incredible potential for innovation here, but Novell has had a difficult time in the past turning innovation into product in the market place- CEO Eric Schmidt

Xerox: Xerox invented the laser printer, Ethernet, graphical-interface software and computer mouse but could not capitalize on these ExampleA resource of capability that the organization has the capability to exploit (i.e., the capability to generate value from)Definition

HOW WOULD YOU DO THAT?Inimitable and non-substitutable? Can competitors imitate?Can they substitute? Exploitable?Can Pfizer exploit?Rare? Do Pfizer's patents provide rarity?Valuable?Do patents on Zoloft provide value?Pfizers Zoloft

STOCK AND FLOW OF CAPABILITIES CapabilityStock Flow

DYNAMIC CAPABILITIESMail Boxes Etc. franchiseDynamic capability: how we integrate recon- figure, acquire, or divest resources for competitive advantage? Mail boxes, etc., has developed the ability to combine resources better than the competitionStart-up plansPeopleBrandLocationProcesses

VALUE CHAIN: INTERNET STARTUP EXAMPLEInbound shipment of top titlesWarehousingServer operations

Billing

CollectionsPicking and shipment of top titles from warehouse

Shipment of other titles from third- party distributors

PricingPromotionsAdvertisingProduct information and reviewsAffiliations with other websitesReturned items

Customer feedbackFinancing, legal support, accountingRecruiting, training, incentive system, employee feedbackProcurementTechnologyDevelopmentHuman ResourcesFirmInfrastructureSupportActivitiesInboundLogisticsOperationsOutboundLogisticsMarketing& SalesAfter-Sales ServicePrimary Activities

USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGEIdenticalDifferentiatedFind a different way to perform activities Find a better way to perform the same activitiesLonger-lasting advantage Shorter-term advantage (competitors catch up)

TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU Selected difference between Southwest and large AirlinesSouthwest made choices so that competitors did not copy - because copying would require them to abandon activities essential to their strategies

RESULTS OF TRADE OFF PROTECTIONAirlineAirTranAlaskaAmericanAmericaWestContinentalDeltaJetBlueNorthwestSouthwestUnitedUS Air2004 Revenue ($000,000)2796564,5415792,3973,6413342,7531,6553,9881,6602004 Cost of Available Seat Miles (CASM)8.4210.039.727.819.4910.236.0310.317.7710.1611.34

INNOVATION AND INTEGRATION OF THE VALUE CHAIN

Transferred assembly and delivery to the consumerChoose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing IKEADellSourceAssembleDeliverArea of innovation

STRATEGIC LEADERSHIPCompanies that overlook the role of leadership in the early phases of strategic planning often find themselves scrambling when its time to execute. No matter how thorough the plan, with-out the right leaders it is unlikely to succeed McKinsey & Company

SENIOR VS. MIDDLE MANAGERSSeniorMiddleDecide how to use other resources and capabilities, configure their firms value-chain activities, and set the context which determines how front-line and middle managers can add valueAre better positioned than senior managers to contribute to competitive advantage and firm success in four areas Entrepreneurship Communications Psychoanalyst Tightrope walkerSource: Quy Nguyen Huy

SUMMARY12345Explain the internal context of strategyIdentify a firms resources and capabilities and explain their role in its performanceDefine dynamic capabilities and explain their role in both strategic change and a firms performanceUnderstand how valuechain activities are related to firm performance and competitive advantageExplain the role of managers with respect to resources, capabilities, and valuechain activities

BLANK SLIDE

Full quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl JungFull quote:The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.

- Carl Jung