Assessing firm internal characteristics

Understanding how firms differ in their competitive advantages

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Why assess internal characteristics?

Firms in same industry using same strategies often vary in performance
Not due to industry or strategy Must be due to individual organizational differences: resource

Resources not equally distributed across firms

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Overview of internal analysis

Use the value chain to identify internal potential for creating value Explain competitiveness using the resourcebased view of the firm

S V Horner 2008

Internal analysis
The resource-based view
identifies key resources that are potential sources of capabilities Sustained competitiveness depends on capabilities that are valuable, rare, difficult to imitate, and non-substitutable

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Strategic capability
Strategic capability is the resources and competences of an organisation needed for it to survive and prosper. Resources:
Tangible: physical assets of an organisation such as plant, people and finance. Intangible: Non physical assets such as information, reputation, and knowledge.

Strategic capability
Competences are the skills and abilities by which resources are deployed effectively through an organisations activities and processes.
Two basic questions: What are the threshold resources required to support certain strategies? What are the threshold skills necessary for organize resources in order to satisfy the requirements of customers and support certain strategies?

Strategic capabilities and competitive advantage

Unique resources and core competences

Unique resources are those resources that critically underpin competitive advantage and that others cannot easily imitate or obtain. Core competences are the skills and abilities by which resources are deployed through an organisations activities and processes such to achieve competitive advantage in ways that other cannot imitate or obtain.

Strategic capability: the terminology

Diagnosing strategic capabilities

Analyzing resources Analyzing the Chain Value Usage of resources Control of resources

Obtaining comparisons: Historical analysis Industry norms Benchmarking

Product portfolio analysis Skills and competences analysis

Identifying key issues Analyse weakness and strenghts Defining core competences and resources

Cost efficiency
Managers often refer to the management of cost as as key strategic capability. Customer can benefit from cost efficiencies in terms of lower prices or more product features for the same price.

Sources of cost efficiency

The experience curve

Growth is not optional in may markets Unit cots should decline year on year as a result of cumulative experience First mover advantage can be important

Creating sustainable competitive advantage through resources and capabilities (VRIN framework)
Value. In order to build a competitive advantage organisations must have capabilities that are of value for its customers. Rarity. Competive advantage could also be based on rare competences: for example unique skills developed over time. However the following must me take in account:
Ease of transferability (who owns the competence and how easily transferable is it) Sustainability (it is dangerours to assume that competences will remain the same always) Core ridigities (dificult to change and therefore damaging to the organisation)

S V Horner 2008

Creating sustainable competitive advantage through resources and capabilities (VRIN framework)

Difficult to imitate
Physical uniqueness Path dependence: series of events occurring at various junctures in firms development Causal ambiguity: difficulty in precisely identifying cause-effect relationships of what a firm does and the product it produces Social complexity: interpersonal relations among the employees and managers of a firm, its culture, and its reputation among suppliers and customers

S V Horner 2008

Creating sustainable competitive advantage through resources and capabilities (VRIN framework)

Non-substitutable Limited availability of strategically equivalent substitutes:

Substitute a similar resource that leads to same strategy Different resources become substitutes for each other (e.g., Amazon and Barnes and Noble)

S V Horner 2008

Capabilities and skills of the organization and likely outcomes

Is the company organized in Are this order to exploit competences these difficult to capabilities? Competetive consequences imitate? Competive disadvantage Competitive Parity Competitive Advantage Yes Sustainable Competitive Advantage

Are this Skills valuable?

Are this competences rare?

Economic results Results below normal Normal results Results above normal Results above normal

No

--

--

No

Yes Yes

No Yes

--

No

Yes

Yes

Yes

Barney & Griffin, 1992 p. 220

17

Value chain
Organization as sequential process of activities that create value

S V Horner 2008

Value chain
Exists within larger context
Industry supply chain: suppliers, customers, alliance partners

Value chain primary activities

Contribute to physical creation of product or service Inbound logistics, operations, outbound logistics, marketing and sales, service

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Value chain
Support activities add value
1. By themselves or 2. Through important relationships with primary and other support activities Procurement, technology development, human resource management, general administration

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Inbound logistics
Receiving, storing, and distributing (within the firm) product inputs Materials handling, warehousing, inventory control, vehicle scheduling, returns to suppliers

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Operations
Transforming inputs into final form Machining, packaging, assembly, testing, printing, facility operations

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Outbound logistics
Collecting, storing, and distributing product or service to buyers Finished goods, warehousing, material handling, delivery vehicle operation, order processing, scheduling

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Marketing and sales

Purchases of products and services by end users, sales activities by firm members, and inducements to influence the purchases

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Service
Providing service to enhance or maintain product value Installation, repair, training, parts supply, product adjustment

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Procurement
All activities related to the arrangement for purchasing (not handling) inputs used in the firms value chain

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Technology development
Knowledge, techniques, processes, procedures, and methods used at various stages of the value chain

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Human resource management

Recruiting, hiring, training, development, and compensation of all types of personnel Supports both individual primary and support activities and entire value chain

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General administration
General management, planning, finance, accounting, legal and government affairs, quality management, information systems Typically supports entire value chain rather than individual activities

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Interrelationships of the value chain

Interrelationships exist among value chain activities within and across organizations Interrelationships with the firm Relationships among activities within the firm and with other organizations (e.g., customers and suppliers) that are part of the firms expanded value chain

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Value chain and service organizations

Service firms also have operations activities
Accounting firms: convert records of transactions (inputs) into financial records Travel agency: creates itinerary including transportation, accommodations, and activities customized to ones budget and travel dates

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The value network

The value network is the set of organisational links and relationships that are necessary to create a product or service. Organisations needs to be clear about what activities it ought to undertake itself and which it should not and, perhaps, should outsource.

The value network

Four key issues about the value network

1. Which activities are centrally important to an organisations strategic capability and which are less central? Where are the profit pools? Profit pools refers to the different levels of profit available at diferent parts of the value network. To make or buy decision for a particular activity or component is therefore critical. This is the outsourcing decision. Partnering. Who might be the best partners int the parts of the value network and what type of relationships are important to develop with each partner?

2.

3.

4.

Activity map
An activity map tries to show how different activities of an organisation are linked together. The aim of activity map is to:
Identify the critical success factors Which of these activities outperform competition

Activity map

Benchmarking
Benchmarking is a systematic process that allows to connect the definition of strategies with the analysis of the industry and competition. It is a method that allows you to: 1) Measure the results of best-in-class competitors with respect to the key success factors in the industry. 2) Determine how the best-in-class achieve those results. 3) Use this results as a basis for setting goals and strategies and deploy them in the company. A rigorous process of benchmarking will ensure that business strategy will provide a superior competitive position regards competition based on the key success factors.

SWOT
SWOT summarises the key issues from the business environment and the strategic capability of an organisation that are most likely to impact on strategy development. The aim is to identify the extent to which strenghts and weaknesses are relevant to, or capable to of dealing with the changes taking place in the business environment. A SWOT analysis should help focus discussion on future choices and the extent to which an organisation is capable of supporting theses stratategies.

SWOT Analysis framework

Strenghts
A firms strenghts are its resources and capabilities that can be used as a basis for developing a competitive advantage: Example of such strenghts include:
Patents Strong brand names Good reputation among customers Cost advantages from propietary know-how Exclusive access to high grade natural resources Favorable access to distribution networks

Weaknesses
The absecence of certain strenghts may be viewed as a weaknesses:
Lack of patents Weak brand name and reputation High cost structure Lack of access to channels of distribution

In some cases, a strenght for a company (large amount of manufacturing capacity) can act as the opposite (inflexible to adapt quickly to changes)

Opportunities
The external environment may reveal new opportunitties for profit and gowth:
Unfullfiled customer need Arrival of new technologies Loosening of regulations Removal of international trade barriers

Threats
Changes in the environment also may present threats to the firm:
Shifts in consumers tastes away from the firms product Emergence of substitute products New regulations Increased trade barriers

The SWOT/TOWS Matrix

S-O strategies pursue opportunities that are a good fit to the companys stregnths W-O strategies overcome weakness to pursue opportunities S-T strategies identify ways that the firm can use its strenghts to reduce its vulnerability to external threats W-T strategies establish a defensive plan to prevent the firms weaknesses from making it highly susceptible to external threats.