An attempt at a MGT 3830 Exam 1 Study Guide Chapter 1 - The Concept of Strategy The Role of Strategy in Success ∙ Madonna, Vietnam War, Lance Armstrong o None of these examples can success be attributed to overwhelmingly  superior resources. o Strategies did not exist as a plan, nor was it even explicitly stated. ∙ Successful strategy consists of 4 common factors: o Goals that are simple, consistent and long term  Single-minded commitment to a clearly recognized goal that was pursued steadfastly over a substantial part of their lifetime o Profound understanding of the competitive environment  Design strategies around deep and insightful appreciation of  arena of competition. o Objective appraisal of resources  Effective in exploiting internal strengths, while protecting areas  of weakness. o Effective implementation  Capacity to reach decisions, energy in implementing them,  ability to foster loyalty and commitment among subordinates. The Basic Framework for Strategy Analysis ∙ 4 factors of successful strategy are recast into two groups – the firm and  industry environment – with strategy forming the link between the two. o The Firm  Goals and values (simple, consistent, long term)  Resources and capabilities (objective appraisal of resources)  Structure and systems (effective implementation o The Industry Environment  Profound understanding of competitive environment ∙ What’s wrong with SWOT? (strengths, weaknesses, opportunities, and  threats) o Strengths and weaknesses = internal environment o Opportunities and threats = external environment o Arbitrary classification of external factors into O&P, and internal factors into S&W is less important than a careful identification of these  external and internal factors followed by an appraisal of their  implications.

THE FIRM ∙ Goals and values ∙ Resources and  capabilities ∙ Structure and  systems

o What industries should we compete in?

How is Strategy Made?

∙ What’s wrong with SWOT?

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Strategy

THE INDUSTRY ∙ Competitors  ∙ Customers ∙ Suppliers

A Brief History of Business Strategy ∙ Enterprises need strategies to give direction and purpose, to deploy  resources in the most effective manner, and to coordinate the decisions  made by different individuals. ∙ Strategy – overall plan for deploying resources to establish a favorable  position ∙ Tactic – a scheme for a specific action ∙ Strategic decisions, whether military or business, share 3 common  characteristics o They are important o They involve a significant commitment of resources o They are not easily reversible ∙ During 60s and 70s diversification became major emphasis of corporate  planning ∙ But oil shocks and international competition in the 70s made companies no  longer able to plan far into the future ∙ Result was a shift in emphasis from planning to strategy making, where the  focus was less on the detailed management of company’s growth paths than  on positioning the company in markets and in relation to competitors in order to maximize potential profit. ∙ Transition from corporate planning to strategic management was associated  with increasing focus on competition as the central characteristic of the  business environment and competitive advantage as the primary goal of  strategy. ∙ This emphasis on strategy as a quest for performance directed attention to  the sources of profitability. ∙ During 90s the focus of strategy analysis shifted from sources of profit in the  external environment to the sources of profit within the firm. Resource-based view of firm. o Emphasis in internal resources encouraged firms to ID how they are  different from their competitors and design strategies that exploit  these differences. ∙ Digital technologies have been major drivers of change and sources of new  O&T∙ As the business environment has become more unstable and unpredictable,  strategy has become less concerned with detailed plans and more about  mission, vision, principles, guidelines, and targets. Strategic Management Today ∙ Strategy is not about doing things better its about doing things differently  and making choices. o 2 basic questions:  Where to compete and how to compete. ∙ Two basic levels of strategy within an enterprise o Corporate strategy – defines the scope of the firm in terms of the  industries and markets in which it competes.  Investment in diversification, vertical integration, acquisitions,  and new ventures  Responsibility of the top management team and the corporate  strategy staff.  Domain selection o Business strategy – is concerned with how the firm competes within  a particular industry or market. If the firm is to prosper, it must  establish a competitive advantage over its rivals. Also known as  competitive strategy.  Responsibility of divisional management  Domain navigation Describing a Firm’s Strategy ∙ For a start-up company, strategy is written down in the business plan ∙ For established companies, strategy is communicated in a number of ways: o Vision – an aspirational view of what the organization will be like in  the future.  an ideal picture of what the company could be if it fulfilled all of  its potentialo Mission - statement of purpose. What org. seeks to achieve over LT.  overall direction. o Business model – statement of the basis on which a business will  generate revenue  Preliminary to strategy. Concerned with viability of basic  business concept. o Strategic plans – documents its strategy in terms of performance  goals, approaches to achieving goals, and planned resource  commitments over a specific time period (3-5 yrs) How is Strategy Made? Design vs. Emergence ∙ So far, strategy has been described as being created deliberately by top  management utilizing tools and techniques of strategic analysis. o But many companies are successful because of intuition and historical  incidents. ∙ Henry Mintzberg distinguishes intended, realized, and emergent  strategies. ∙ Intended strategy – strategy as conceived of by top management team.  o Process of negotiation, bargaining, and compromising.  ∙ Realized strategy – actual strategy implemented.  o Only 10-30% of intended strategy is realized.  ∙ Emergent strategy – primary determinant of realized strategy o Decisions that emerge from the complex processes in which individual  managers interpret the intended strategy and adapt to changing  circumstances. ∙ Design School - Those who view strategy making as primarily a rational,  analytical process of deliberate planning ∙ Emergence or Learning School – Those who view strategy as emerging from a complex process of organizational decision making ∙ Not only is rational design an inaccurate account of how strategies are  actually formulated it is a poor way of making strategy. o It fails to allow for learning through continuous interaction b/w  formulation and implementation.  ∙ In most organizations, strategy is made through a combination of design and  emergence. ∙ Strategic planning typically combines both top-down and bottom-up strategy  making. ∙ The optimal balance between design and emergence depends on the stability of the external environment. o Stable environments use top-down, formalized approaches to strategy o Unpredictable environments must limit strategy planning to few  principles and guidelines, the rest must emerge as circumstances  unfold. Multiple Roles of Strategy ∙ The reason “strategic management” has replaced “long-range planning” and  “corporate planning: is partly to disassociate strategy from planning, but also  to emphasize that strategy making is a central component of what managers  do. ∙ Strategy improves decision making by  o Constraining decision alternatives and acting as a heuristic  o Allows knowledge form different people to be pooled and integrated o Facilitates use of analytic tools – frameworks and techniques. ∙ Strategy as a coordinating device ∙ Strategy as a target o Strategy should be less about fit and resource allocation, and more  about stretch and resource leverage.  Strategic management  - Consists of the ongoing processes of analyses, decisions and actions an  organization undertakes in order to create and sustain competitive  advantage. (Pg.6) Captures two main elements: - Three strategy processes  - Why some firms outperform others (creation of competitive advantage) o Superior performance compared to others in the industry  Three strategy processes: - Analysis – sets the stage for competitive advantage o Strategic goals (vision, mission, strategic objectives) o Internal and external environment of the firm - Strategic decisions – select strategies o What industries should we compete in? (corporate level) o How should we compete in those industries? ( business-level) - Implementation – implement strategy, control outcomes o Design organization to realize intended strategies o Strategic control  Fundamental question: Why do some firms outperform others? - How should we compete in order to create competitive advantages in the  marketplace? - How can we create competitive advantages in the marketplace that are  not only unique and valuable but also difficult for competitors to copy or  substitute? - Basically, to create and sustain competitive advantages, they must be: o Unique and valuable o Difficult for competitors to copy or substitute  Key attributes of Strategic Management: - Directed toward overall organizational goals and objectiveso What is best for the total organization, not just a single functional  area. - Includes multiple stakeholders in decision making o Management incorporates demands of many stakeholders when  making decisions. - Requires incorporating short-term and long-term perspectives o Need of “creative tension”. o Managers must maintain a vision for the future as well as focusing  on its present operating needs. - Recognizing trade-offs between efficiency and effectiveness  o Aware of the need for organizations to strive to act efficiently and  effectively. o Referred to as the difference between “doing the right thing”  (effectiveness) and “doing things right” (efficiency)  Intended vs. Realized Strategies: - Intended strategy – decisions following from analysis o Rarely survives in its original form o Parts remain unrealized  Due to changes like unforeseen environmental  developments, etc. o Good managers take advantage of these new opportunities - Realized strategy- a combination of deliberate and emergent strategies The Strategic Management Process: 1. “Strategy Analysis” - Setting the Stage for Competitive Advantage 2. “Strategy Formulation” – The Selection of Strategies  3. “Strategy Implementation” – Strategy Implementation and Control 4. Case analysis (within cycle) Three types of Goals: - Vision - Mission - Strategic Objectives Resource –Based View of the firm - Perspective that firm’s competitive advantages are due to their  endowment of strategic resources that are valuable, rare, costly to  imitate, and costly to substitute. - Combines 2 perspectives: o The internal analysis of phenomena within a company o An external analysis of the industry and its competitive  environment - Evaluate resources in terms of how valuable, rare and hard for  competitors to duplicate - Resources by themselves typically don’t yield competitive advantage - 3 key types of resources: o Tangible resources  Assets that are relatively easy to identify∙ Financial resources: o Firm’s cash accounts, capacity to raise capital  and ability to borrow funds ∙ Physical resources: o Company’s plant, equipment, machinery and  favorable manufacturing locations (proximity to  customers and suppliers) ∙ Technological resources: o Trade secrets, patents and copyrights,  innovative production processes ∙ Organizational resources o Company’s strategic planning processes and  employee development, evaluation and reward  systems o Intangible resources  Difficult for competitors to account for or imitate, typically  embedded in unique routines and practices that have  evolved and accumulated over time. ∙ Human resources o Experience and capabilities of employees, trust,  managerial skills, firm-specific practices and  procedures ∙ Innovation resources o Technical and scientific sills, innovative  capabilities ∙ Reputation resources o Brand name, reputation with customer for  quality and reliability, reputation with suppliers  for fairness, non-zero relationships o Organizational capabilities   Competencies and skills that a firm employs to transform  inputs into outputs.   Capacity to deploy tangible and intangible resources  overtime, leverage resources to bring a desired end.  Examples: ∙ Outstanding customer service, flexibility in  manufacturing processes, excellent product  development capabilities, innovativeness of products  and services, ability to hire, motivate and retain  human capital. Key for strategy: (VRINS) Is the resource or capability: - Valuable o Neutralize threats and exploit opportunities  o Enable a firm to formulate and implement strategies that improve  efficiency or effectiveness.  - Rare o Not many firms possess - Inimitableo Difficult for competitors to successfully imitate the resource o Physically uniqueness (inherently difficult to copy) o Path dependency (how accumulated over time, can’t just go buy) o Casual ambiguity (difficult to disentangle what it is or how it could  created) - Non-substitutable  o No equivalent strategic resource or capabilities - - What is value? Extent that a good or service satisfies customer needs - Who benefits from value created? - -Shareholder (narrow view) - -Stakeholder (broad view) - -All parties involved - - Corporate Social Responsibility - -Companies are increasingly accepting responsibilities that extend well  beyond the immediate interest of shareholders: - -For ethical reasons - -For reasons of self interest: - -Sustainability – it is in both society’s and the firm’s interests to sustain  the ecosystem - -Reputation – CSR enhances the firm’s reputation w/ consumers and 3rd parties - -License to operate – firms need the approval and support of the  constituencies on which they depend - - Focus on profitability because - -Competition erodes profitability - -Market responds to fluctuations in profitability - -Profitability is a common interest across stakeholders - -Need to simplify (all stakeholder interests become very complex) - - Strategy is a link between the firm and its environment - Common elements in successful strategies: - -No superior resources - -Ability to recognize opportunities as they appear - -Clear Direction - -Soundly formulated and implemented strategy - -A consistency of direction based on a clear understanding of the  ‘game’ being played and an awareness of how to maneuver into a position of advantage. - -Single minded commitment to a clearly recognized goal - -Deep and insightful appreciation of the context - -Effective exploitation of internal strengths (resources and capabilities) - -W/o implementation, the best-laid strategies are of little use - -Effective leadership - -Energy/Commitment/Passion - -Motivation of Others -- Origin of Strategy - -Military strategies were first ones - -‘Strategia’ = generalship - -Sun Tzu writes Art of War about strategy - -Strategy is the overall plan for deploying resource to establish a favorable position (win overall war) - -Tactic is the scheme for a specific action (minor moves during battle) - -Strategic decisions are important, involve commitment of resources, and  are not easily reversible. - - 1950 – Financial Budgeting - -DCF based capital budgeting - -Financial control through operating budgets - 1960 – Corporate Planning - -Medium term economic forecasting - -Formal corporate planning - -Diversification and quest for synergy - -Creation of corporate planning departments - 1970 – Strategy of positioning - -Industry analysis - -Market segmentation - -The experience curve - -PIMS analysis - -Planning business portfolios - - Strategy: the means by which individuals or organizations achieve their  objectives - -Today less about plans and more about the path to success - Commonalities across strategies: - -Certain goals, allocation of resources,  consistency/integration/cohesiveness - - How do we identify a firm’s strategy? - -Mission statement - -Statement of principles/values - -Vision statement - -Strategy statement - -Company websites/investor relations - -Annual reports/Letter to the investor - -Other clues - -Where is the company investing its money? (Financial statements) - -What technologies are they developing? (Patent data) - -What new products/services released? (Press releases) - - How is strategy made? - -Intended strategy - -Non-realized strategies - -Deliberate strategies + Emergent strategies = realized strategies Chapter 3 – Industry Analysis: The Fundamentals From Environmental Analysis to Industry Analysis ∙ Environmental influences can be classified by  o Source (political, economic, social, and technological factors “PEST  analysis”) o Proximity – micro-environment or task environment vs the macro  environment ∙ Industry Environment - core of firm’s business environment formed by  relationship with o Customers o Suppliers o Competitors The Determinants of Industry Profit: Demand and Competition ∙ The stronger the competition among producers, the more of the surplus is  received by customers in consumer surplus and less surplus received by  producers (producer surplus or economic rent) ∙ Surplus earned by producers is not entirely captured in profits. If they have  powerful suppliers they may appropriate some of the profits. ∙ Profits earned by firms in an industry are determined by 3 factors o Value of the product to customers o Intensity of competition o Bargaining power of producers relative to suppliers ∙ The underlying theory of how industry structure drives competitive behavior  and determines profitability is provided by industrial organization economics. o Theory of monopoly o Theory of perfect competition  No restrictions to entry or exit  Rate of profit falls to a level that just covers the firm’s cost of  capital o Most manufacturing industries and many service industries tend to be  oligopolies Porter’s Five Forces of Competition Framework∙ Three forces of horizontal competition o Threat of substitutes, threat of entrants, and competition from  established rivals ∙ Two sources of vertical competition o Power of suppliers, power of buyers ∙ Competition from Substitutes o Absence of substitute means that consumers are comparatively  insensitive to price  Demand is inelastic with respect to price o Existence of close substitutes means customers will switch to  substitutes in response to price increases  Demand is elastic with respect to price o The extent to which substitutes depress prices and profits depends on  the propensity of buyers to substitute between alternatives  The more complex the product and more difficult it is to discern  performance differences, the lower the extent of substitution by  customers on the basis of price differences.  ∙ Threat of Entry o An industry where no barriers to entry or exit exist is contestable:  prices and profits tend towards the competitive level, regardless of  number of firms in industry. Contestability depends on the absence of sunk costs – investments whose value cannot be recovered on exit.  Makes industry vulnerable to hit and run entry. o Capital Requirements o Economies of Scale  For capital or research intensive industries, efficiency requires  large-scale operation.  New entrants are faced with choice of entering on small sale and accepting high unit costs, or entering on a large scale and  bearing costs of underutilized capacity.  Airbus’ super jet cost $15billion to develop and must sell over  300 to break even. ∙ Once Airbus committed to project, Boeing was effectively  excluded from superjumbo segment o Absolute Cost Advantage  Some companies may have access to suppliers that reduce  costs.   May also result from economies of learning o Product Differentiation  Established firms have advantage of brand recognition and  customer loyalty  30% batteries, canned veggies, and GB, 61% in toothpaste, 65% in mayonnaise, 71% in cigarettes.  Late entrants to consumer goods markets incurred additional  advertising and promo costs accounting to 2.12% of sales  revenue. o Access to Channels of Distribution  Limited capacity within distribution channels (shelf space), risk  aversion by retailers, and fixed costs associated with carrying an additional product result in retailer’s reluctance to carry new  product.  Internet has allowed new companies to circumvent barriers to  distribution. o Governmental and Legal Barriers  Granting of a license required  In knowledge-intensive industries, patents, copyrights, and other legally protected forms of intellectual property are major barriers of entry.  Regulatory compliance costs tend to weigh more on new  entrants. o Retaliation  Aggressive price cutting, increased advertising, sales promotion, or litigation o The effectiveness of barriers to entry  Industries protected by high entry barriers earn above average  rates of profit. Effectiveness of barriers to entry depends on resources and  capabilities that potential entrants possess. Barriers that are  effective against new companies may be ineffective against  established firms that are diversifying from other industries. ∙ Rivalry Between Established Competitors o Concentration  Number and size distribution of firms competing within a market  Markets dominated by single firm = lots of price control  Oligopoly = price competition restrained through parallelism  Two companies = prices similar and competition focused on  advertising  As the number of firms goes up, coordination of prices becomes  more difficult, and the likelihood that one firm will initiate price  cutting increases.  Relation, if any, between seller concentration and profitability is  weak. o Diversity of Competitors  Depends on origins, objectives, costs, and strategies o Product Differentiation  The more similar the offerings, the more willing customers are to substitute and the greater incentive for companies to cut costs  to increase sales.  Commodity industries (agriculture, mining, petrochemicals) are  plagued with price wars and low profits  Highly differentiated firms (perfumes, pharmaceuticals,  restaurants) price competition is weak, even though there are  many firms competing. o Excess Capacity and Exit Barriers  Unused capacity encourages firms to offer price cuts to attract  new business in order to spread fixed costs over a greater sales  volume.  Exit barriers – where resources are durable and specialized and  where employees are entitled to job protection, exit barriers may be substantial. o Cost Conditions: Scale Economies and the Ratio of Fixed to Variable  Costs  Where fixed costs are high relative to variable costs, firm will  take on marginal business at any price that covers variable  costs.   2001-2005 US airline industry’s losses exceeded cumulative  profits earned during entire history bc of low variable cost of  filling in seats. ∙ Bargaining Power of Buyers o Buyer’s Price Sensitivity  The greater importance of an item is a proportion of total cost,  the more sensitive buyers will be about the price they pay. The less differentiated the products of the supplying industry,  the more willing the buyer is to switch suppliers on the basis of  price.  The more intense the competition among buyers, the greater  their eagerness for price reductions from their sellers.  The more critical an industry’s product to the quality of the  buyer’s product or service, the less sensitive buyers are to the  prices they are charged. o Relative Bargaining Power  Size and concentration of buyers relative to suppliers ∙ The smaller the number of buyers and the bigger their  purchases, the greater the cost of losing one. o Buyer’s information  The better informed buyers are about suppliers and their prices  and costs, the better they are able to bargain.  Knowing the prices is of little value if the quality of the product  is unknown. o Ability to integrate vertically  The leading retail chains have increasingly displaced their  supplier s brands with their own-brand products. Backward  integration need not necessarily occur – a credible threat may  suffice. ∙ Bargaining Power of Suppliers o The key issues are the ease with which the firms in the industry can  switch between different input suppliers and the relative bargaining  power of each party. o Because raw materials are often commodities supplied by small  companies to large manufacturing companies their suppliers usually  lack bargaining power. Hence, commodity suppliers often seek to boost their bargaining power through cartelization. (a similar logic explains  labor unions). o Conversely, the suppliers of complex, technically sophisticated  components may be able to exert considerable bargaining power.  Industries and Markets ∙ The difference between analyzing industry structure and market structure?  o Industry analysis (5 forces analysis) looks at industry profitability being determined by competition in two markets: product markets and input  markets ∙ Industry is IDed with relatively broad sectors, while markets refer to specific  products.  ∙ Substitutability on demand and supply level ∙ If customers are willing and able to substitute cars available on different  national markets, or if manufacturers are willing and able to divert their output among different countries to take account if differences in margins,  then a market is global. ∙ The basic premise that underlies industry analysis is that the level of industry profitability is neither random nor entirely the result of industry specific  influences, it is determined by the industry’s underlying economic  characteristics ∙ INDUSTRY STRUCTURE ∙ ∙ How to differentiate yourself? ∙ How to deal w/ suppliers and customers high level of bargaining power? ∙  ∙     Analyzing the Business Environment ∙ The business environment of the firm consists of the external influences that  affect its decisions and performance. ∙ How can mgrs. monitor the vast array of possible influences? ∙ -Need to distinguish the “vital” from the merely important ∙ -Classification schemes like PEST can help ∙ ∙ PEST Analysis ∙ How macro-environmental factors might impact a business organization ∙ Political – changes in government economic policy (taxation, government  spending, monetary policy), changes in legal requirement (employment law,  health and safety legislation, licensing practices, environmental regulations,  competition policy), changes in government ownership (nationalization,  privatization, de-regulation) ∙ Economic – changes in the level of economic activity (growth rates, rates of  unemployment, inflation), changes in wage rates and income distribution,  changes in exchange rats ∙ Social – changes in demographics (the size of the population, the age  distribution w/ the population), changing attitudes (work/life balance, concern for the environment, ethical standards), changes in social structure (socio economic groupings, social mobility) ∙ Technological – development of new products and processes, developments in information and communication technologies, developments in natural  sciences ∙ ∙ Industry Environment (suppliers, competitors, customers) ∙ ∙ Value creation does not always translate into profit (consumer vs. producer  surplus) ∙ Profits determined by: ∙ -The value of the product to consumers Chapter 5 – Analyzing Resources and CapabilitiesThe Role of Resources and Capabilities in Strategy Formulation ∙ As firms’ industry environments have become more unstable, so internal  resources and capabilities rather than external market focus has been viewed as a securer base for formulating strategy. ∙ It is apparent that competitive advantage rather than industry attractiveness  is the primary source of superior profitability. o A market focused strategy may not provide the stability and constancy  of direction needed to guide strategy over the long term.  ∙ When a company faces the imminent obsolescence of its core product, should its strategy focus on continuing to serve fundamental customer needs or on  deploying its resources and capabilities in other markets? Resources and Capabilities as Sources of Profits ∙ 2 major sources of superior profitability: industry attractiveness and  competitive advantage o Competitive advantage is the most important  ∙ Profits arising from market power are referred to as monopoly rents. Those  arising from superior resources are Ricardian rents.  o Ricardo showed that even when the market for wheat was competitive, fertile land would yield high returns. Ricardian rent is the return earned by a scarce resource over and above the cost of bringing it into  production. ∙ When the primary concern of strategy was industry selection and positioning, companies tended to adopt similar strategies.  o The resource-based view, by contrast, emphasizes the uniqueness of  each company and suggests that the key to profitability is not through  doing the same as other firms, but exploiting differences. The Resources of the Firm ∙ Resources are the productive assets owned by the firm. ∙ Capabilities are what the firm can do. ∙ Three principle types of resource: tangible, intangible, and human resources o Tangible Resources  Primary goal of resource analysis is not to value a company’s  assets, but to understand their potential for creating competitive advantage. Information that British Airways possesses tangible  fixed assets with book value of 8.3 billion of little use in  assessing their strategic value. We need to know about  composition of assets, location of land and buildings, etc. o Intangible Resources  The exclusion or undervaluation of intangible resources is a  major reason for the large and growing divergence between  companies’ book values and their stock market values.∙ Very important: brand names, intellectual property o Human Resources  Organizations are relying less on formal qualifications and years  of experience and more on attitude, motivation, learning  capacity.  Organizational Capabilities ∙ Organizational capability – a firm’s capacity to deploy resources for a  desired end result. ∙ Distinctive competence describes things that company does well relative to  competitors. ∙ Core competence distinguishes those capabilities fundamental to a firm’s  strategy and performance o Make a disproportionate contribution to ultimate customer value o Provide basis for entering new markets ∙ Functional analysis – IDs organizational capabilities in relation to each of the  principal functional areas of the firm ∙ Value chain analysis separates the activities of the firm into a sequential  chain. Distinguishes b/w primary and support activities.  Architecture of Capability ∙ Organizational routines are regular and predictable patterns of activity made  up of a sequence of coordinated actions by individuals. ∙ Hierarchy of capabilities where more general, broadly defined capabilities are  formed from integration of specialized capabilities. Appraising Resources and Capabilities ∙ The profits that a firm obtains from its resources and capabilities depend of 3  factors: o Ability to establish competitive advantage  2 conditions must be present ∙ Scarcity – if widely available within industry, it may be  essential to compete, but will not be a sufficient basis for  CA ∙ Relevance – must be relevant to key success factors of  market o Ability to sustain the advantage  Whether R&C are durable  Whether they are imitated ∙ Transferable o Simplest means of acquiring R&C of another  company is to buy them o Some are not easily transferred  Geographic immobility Imperfect information  Detachment from home brand reduces value  Organizational compatibility  ∙ Replicable o Advantages of being an incumbent  Asset mass efficiencies  Time compression diseconomies o Ability to appropriate returns to the advantage Putting R&C Analysis to Work ∙ Step 1. Identify the Key R&C o From external focus, begin with key success factors ∙ Step 2. Appraising R&C o Which R&C are most important in conferring sustainable CA?  Temptation is to concentrate on customer choice criteria.   Must keep in mind that ultimate objective is not to attract  customers but to make superior profit through establishing CA. o What are our strengths and weaknesses compared to competitors?  Benchmarking  Don’t fall victim to past glories and thinking you are hot stuff. ∙ Step 3. Developing Strategy Implications o Managing weaknesses  Most successful solution is to outsource o Lower investment in strong areas that aren’t sources of CA. o Developing R&C ∙ Conventional approaches to developing R&C have emphasized gap analysis –  ID discrepancies b/w current position and desired future position, then  adopting policies to fill gaps.  o For resources, investing in weaknesses can be expensive and may  deliver limited returns o Capabilities’ structure or operation are not well known so it is  dangerous to develop. ∙ We know very little about the linkage b/w R&C ∙ Firms that demonstrate most outstanding capabilities are not necessarily  ythose with greatest resource endowments o GM has 4x output of Honda and 4x the R&D expenditure, yet Honda is  the world leader in power train technology. o It is not the size of a firm’s resource base that is the primary  determinant of capability, but the firm’s ability to leverage its  resources. Can be leveraged in the following ways:  Concentrating/converging resources  Accumulating resources through mining experience and  borrowing from other companies Complementing/blending resources  Conserving resources by recycling. ∙ When adapting to radical change w/in an industry, or when exploiting an  entirely new business, are new firms at an advantage or disadvantage to  established firms? o Depends on whether the change or innovation is competence  enhancing or competence destroying.  o In TV manufacturing, most successful new entrants were producers of  radios – compatible with existing capabilities.  o In most new industries, the most successful firms tend to be startup  groups rather than established firms. Approaches to Capability Development ∙ 1. Acquiring Capabilities: Mergers and Acquisitions o If new capabilities can only be developed over long periods, then  acquiring a company that has already developed desired capability can shorten time to develop. o Must find a way to integrate. ∙ 2. Accessing Capabilities: Strategic Alliances o Cooperative relationship b/w firms involving the sharing of resources in pursuit of common goals. ∙ 3. Creating Capabilities o Organizations often discover that the organizational structure,  management systems, and culture that support existing capabilities  may be unsuitable for new capabilities. To resolve, companies may find it easier to develop new capabilities in new organizational units  geographically separated from the main company. ∙ Nature of Capabilities ∙ -Identifying capabilities is difficult ∙ -Requires efforts of various individuals to be integrated w/ various resources ∙ -These sequences of actions are an organizational process ∙ -This process becomes a capability when it is routinized ∙ -There is a hierarchy of capabilities ∙ -Broad capability: marketing ∙ -Narrow: market research, product launch, advertising, pricing,  distribution ∙  ∙     3 Ways to create profit w/ R&C ∙ -Establish Competitive Advantage ∙ -Sustain Competitive Advantage ∙ -Appropriate the Returns to Competitive Advantage ∙ ∙ Establish Competitive Advantage ∙ -Scarcity: is the resource/capability widely available in the industry? (E.g.,  operating systems/Microsoft)∙ -Relevance: is the r/c relevant to key success factors of the industry? ∙ ∙ Sustain Competitive Advantage ∙ -How long that advantage can be sustained? is it durable or imitable? ∙ -Durability: technological change is shortening the life spans of R’s & C’s ∙ -Brand is relatively more durable (e.g. coca cola) ∙ -Transferability: can we easily acquire a resource? (Immobility) ∙ -Geographic immobility (natural resources, large plants) ∙ -Imperfect information (do we know resource will work for us too?) ∙ -Complementarity of resources (loses value if you detach from home) ∙ -Capabilities are less mobile as they are combo of resources ∙ -Replicability: If I can’t acquire, can we build it? ∙ -Capabilities based on complex routines are less replicable (E.g.,  General Motors trying to imitate lean production system of Toyota) ∙ -Even when replication is possible it is costly and it takes time ∙ -Incumbency Advantages: Strong initial position in the industry &  Limited time makes everything less effective ∙ ∙ Appropriate the Returns to Competitive Advantage ∙ -Who owns the superior capability and who gains from superior capabilities? ∙ -Relying too much on individuals and their know-how (E.g., Gucci  chairman and creative director; company lost $1.2 billion market value in a  couple of days) ∙ -More closely the capability is identified w/ individuals; the more these  individuals have bargaining power (e.g., huge CEO bonuses even during  crisis) ∙ ∙ Developing Resources and Capabilities ∙ -Resources are easier to develop ∙ -Capabilities are different. Capabilities are not only a sum of resources (e.g.  resourceful sports teams w/ limited capabilities) ∙ Some basic issues: ∙ -Path dependency and role of early experience: a company’s capabilities  today are a result of their history ∙ -Wal-Mart efficiency due to limitations in the environment and  personality of its founder who was obsessed w/ cutting costs and eliminating  waste ∙ -Linkages between R’s & C’s ∙ -Requires organizational learning and appropriate org. culture ∙ -Are organizational capabilities rigid or dynamic? ∙ -Since it takes time to develop C’s, it is difficult to change them (e.g.,  Dell direct sales model) ∙ -Core capabilities become core rigidities (they inhibit firm’s ability to acquire  or develop new capabilities ∙ -Dynamic Capabilities: firm’s ability to integrate, build and reconfigure  internal and external competences to address rapidly changing environments ∙ -Success depends on the type of radical change: competency enhancing  (E.g., Radio manufacturers to TV) or destroying (smart phones) ∙ ∙ Approaches to capability development ∙ -Acquiring capabilities ∙ -Mergers, Acquisitions (e.g. Google maps, Microsoft – Skype) ∙ -Risks: expensive, managing other resources, culture clashes,  destruction of existing capabilities due to incompatibility ∙ -Alliances: A cooperative relationship for a common goal (e.g. HP and  Canon for printer technologies) ∙ -Managing alliances is difficult. Relational capability: trust, inter-firm  knowledge sharing, and mechanisms for coordination ∙ -Internal development: focus and sequencing Ch. 4 What is competitive advantage? -When 2 or more firms compete within the same market, one firm possesses a  competitive advantage over its rivals when it earns (or has the potential to earn) a  persistently higher rate of profit (Ex: Wal-Mart in discount retailing) External sources of change -To create competitive advantage, the change must have differential effects on  companies -Fuel efficiency created a competitive disadvantage for US car manufacturers -The more turbulent an industry environment, the greater the number of sources of  change, the greater the dispersion of profitability within the industry -External change creates opportunities for profit and opportunities for new  businesses (entrepreneurship) -Capabilities: -Ability to anticipate change in the external environment (information and  forecasting) -Speed: shorten cycle that allows information on emerging market  developments to be acted upon speedilyStrategic Innovation: creating customer value from novel products, experiences, or  modes of product delivery -Ex: SW Airlines point-to-point, no frills airline service using a single type  plane w/ flexible, non-union employees -Ex: Nike outsourced manufacturing and concentrating on design and  marketing -Strategic innovation may involve: -Creating new industries -Creating new customer segments -New sources of competitive advantage; novel approaches to creating  consumer value Sustaining competitive advantage -Once established, competitive advantage starts to erode by competition -Competitors can imitate or innovate -Isolating mechanisms to create barriers against competitors Types of isolating mechanisms -Identification: the firm must be able to identify that a rival possesses a competitive  advantage -Isolating mechanism (IM): mask you high performance from competitors, which can be difficult for public companies -Incentives: firms must believe that by investing in imitation, it too can earn  superior returns -Pre-emption: occupying existing and potential strategic niches to reduce the range  of investment opportunities open to challenger -Proliferation of product varieties by market leader (6 cereal brands  introduced 8- new brands in 20 years) -Large investments in production capacities -Patent proliferation (Xerox protected its copier w/ 2000 patents)-Diagnosis: the firm must be able to diagnose the features of its rivals strategy that  give rise to the competitive advantage -Complex capabilities are difficult to imitate -Casual ambiguity and uncertain imitability: multidimensional competitive  advantage -Resource acquisition: the firm must be able to acquire the resources and  capabilities necessary for imitating the strategy through transfer or replication

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