The Internal Organization

Resources, Capabilities, Core Competencies, and Competitive AdvantagesPages 68 - 94

Profitability in the U.S. Retailing Industry, 1996-2001

Why Internal Analysis?

Early strategy theory rooted in industry structural analysis - external focus

This approach has lost its appeal because: internationalization & deregulation has all but

removed safe havens technology and changes in demand have

blurred industry lines

4

Innovation vs. Efficiency: 3M

Diversified technology into 6 business segments

Historically: Commitment to innovation Slogan: The Spirit of Innovation. That’s 3M. Relied on skills of scientists and engineers Historically 1/3 annual sales from products introduced

into marketplace in most recent 5 yrs. 30-plus core technologies basis for > 55,000 products Changing times: by mid-2007 only 25% sales earned

from products introduced over previous 5 yrs – why?

5

Innovation vs. Efficiency: 3M (Cont’d)

…Leadership CEO McNerney (formerly of GE) implemented Six-

Sigma, a management technique to decrease product defects and increase efficiency

Six Sigma doesn’t lend itself to creativity / innovation, something imperative in the R&D arena

Six Sigma Focuses on actions to define, measure, analyze,

improve and control – efficiency Efficiency vs. innovation – it’s one or the other!

New CEO Buckley – reenergized R&D

6

Analyzing the Internal Organization

Context of Internal Analysis ‘Global mind-set’

Ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context

Analyze firm’s portfolio of resources and bundle heterogeneous resources and capabilities

Understand how to leverage these bundles An organization's core competencies creates and sustains

its competitive advantage Creating Value

7

Resource Based View Model of Competitive Advantage and Strategic Competitiveness

8

Resources and Capabilities

Tangible Financial, Organizational, Physical, and Technological Assets that can be seen, touched and quantified Examples include equipment, facilities, distribution

centers, formal reporting structures Intangible

Human, Innovation and Reputational Resources Assets rooted deeply in the firm’s history, accumulated

over time Usually can’t be seen or touched Examples include knowledge, trusts, organizational

routines, capabilities, innovation, brand name, reputation

Resources & Capabilities

Resources are what you have; Capabilities are what you can do

Evaluation of Resources

Strength or Weaknessrelative to competitorsbasic business requirementskey vulnerabilities

Core Competencies central to the firm’s competitiveness rewarded in market place combination of skills & knowledge, not products or

functions flexible, long term platforms embedded in the organization’s systems distinctive competencies are those the firm

performs better than rivals All core competencies have the potential to

become core rigidities

Sony

Sustainable Competitive AdvantageMust be valuable, rare, inimitable, and non-

substitutableSustainability is a function of

Durability - how long will it last? Technology? Reputation? Fixed Assets?

Imitability - how quickly can it be copied? Transparent - easy to see? Transferable - can it be done

elsewhere? Replicable - can we do it here?

Factors that Limit Imitation

Physical Uniqueness Path Dependency Causal Ambiguity Social Complexity Absorptive Capacity

Sustainable Competitive Advantage? Competitive consequences include

Disadvantage, parity, temporary advantage and sustainable advantage

Performance implications include returns Above, below or average

Another Tool to Consider

Porter’s Value Chain

Relative costs and prices

Where do cost/price differences come from?raw materials and componentsdifferences in technology, plant, equipmentefficiencies, learning, experience, wages,

productivitymarketing, sales, promotion, warehousing,

distribution, administration costsdistribution inflation, exchange and tax rates

Value Creation per Unit

Comparing Toyota and General Motors

Porter’s Value Chain

Views the organization as a series (chain) of activities, which may or may not create value

Porter’s Value Chain (cont.) Primary Activities

– Inbound logistics – Supply Chain Management

– Operations– Outbound logistics - Distribution– Marketing and sales– Customer service

– Contribute to the physical creation of the product/service, its sale and transfer to the buyer, and its service after the sale

Porter’s Value Chain (cont)

Support ActivitiesCompany infrastructure – General AdminHuman resource managementR&D, Technology and Systems DevelopmentProcurement

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The Basic Value Chain

A low cost strategy…..Company Infrastructure

HRM

Procurement

Inbo

und

Logi

stics

Oper

ati o

n s

Outb

ound

Logi

stics

Mar

k etin

g&

Sal e

sSe

rvice

Margin

Margin

…tries to pull the arrow back…..

R&D, Technology & Systems Development

Think back to the Southwest example… Single aircraft Short hauls No meals, transfers, seat assignments Secondary airports No use to travel agents…..

Fewer layers of management

Policies to reduce turnover

WalMart’s inventory system

Monitor supplier performance

Inbo

und

Logi

stics

Ope r

atio

n s

Outb

ound

Logi

stics

Mar

ket in

g&

Sale

s

Serv

ice

Margin

Margin

Low Cost - Support Activity examples…...

Low cost - Primary Activity examples….

Inbound - Toyota Operations - Subway Outbound - Campbell Soup’ Continuous

Replenishment Marketing/Sales - WalMart Customer Service - Federal Express

A differentiation strategy…..Company Infrastructure

HRM

Procurement

Inbo

und

Logi

stics

Oper

ati o

n s

Outb

ound

Logi

stics

Mar

k etin

g&

Sal e

sSe

rvice

Margin

Margin

….tries to pull the arrow forward...

R&D, Technology & Systems Development

Commitment to quality

Compensation rewarding innovationAmazon recommendations

Purchasing high-quality components

Inbo

und

Logi

stics

Ope r

atio

n s

Outb

ound

Logi

stics

Mar

ket in

g&

Sale

s

Serv

ice

Margin

Margin

Differentiation - Support Activity examples…...

Inbound - Dell Operations - Marriott Outbound - WebVan Market/Sales - Nordstrom’s Customer Service - Pirtek

Differentiation - Primary Activity examples…...

Suppliers Buyers

Your Firm

Your Rivals

Suppliers Buyers

Your Firm

Your Rivals

Opportunities forAdvantage

Suppliers Buyers

Your Firm

Your Rivals

Opportunities forAdding Value

Opportunities forAdding Value

37

Outsourcing

Definition: Purchase of a value-creating activity from an external supplier Effective execution includes an increase in flexibility, risk

mitigation and capital investment reduction Trend continues at a rapid pace Firms must outsource activities where they cannot

create value or are at a substantial disadvantage compared to competitors

Can cause concerns Usually revolves around innovative ability and loss of

jobs