answer a questions
Learning Objectives
LO 4-1 Differentiate among a firm’s core competencies, resources, capabilities, and activities.
LO 4-2 Compare and contrast tangible and intangible resources.
LO 4-3 Evaluate the two critical assumptions behind the resource-based view.
LO 4-4 Apply the VRIO framework to assess the competitive implications of a firm’s resources.
LO 4-5 Evaluate different conditions that allow a firm to sustain a competitive advantage.
LO 4-6 Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.
LO 4-7 Apply a value chain analysis to understand which of the firm’s activities in the process of transforming inputs into outputs generate differentiation and which drive costs.
LO 4-8 Identify competitive advantage as residing in a network of distinct activities.
LO 4-9 Conduct a SWOT analysis to generate insights from external and internal analysis and derive strategic implications.
©McGraw-Hill Education.
Why care about BUS 498?
What makes a firm most respected in the future?
(Results of a CEO survey as cited in Hitt, Ireland, and Hoskisson, 2006)
Strong and well-thought out strategy
Maximizing customer loyalty and satisfaction
Business leadership
Quality products and services
Strong and consistent profits
©McGraw-Hill Education.
2
The material contained in this slide is not available in your text. But this material will be on the exam.
Why care about BUS 498?
What do recruiters look for in graduating MBAs?
TWSJ Sept 22 2004
Percentage of recruiters who said each attribute is "very important."
89% Communication and interpersonal skills
87% Ability to work well within a team
85% Personal ethics and integrity
84% Analytical and problem-solving skills
74% Success with past hires
73% Leadership potential
72% Fit with the corporate culture
68% Strategic thinking
64% Likelihood of recruiting "stars"
54% Well-rounded
50% Willingness of the school's students to relocate
©McGraw-Hill Education.
3
The material contained in this slide is not available in your text. But this material will be on the exam.
Where Does Competitive Advantage Come From? Exhibit 4.3
Exhibit 4.3
Any assets that a firm can draw on
Organizational/managerial skills to orchestrate diverse resources
Unique strengths embedded deep within a firm
Distinct and fine-grained business processes
Create, deploy, modify, reconfigure, upgrade, leverage
IKEA: Designing modern functional home furnishings at low cost
©McGraw-Hill Education.
Resources: Any assets that a firm can draw on when formulating and implementing a strategy. Examples: cash, buildings, machinery, or intellectual property.
Capabilities: Organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically. They find their expression in a company’s structure, routines, and culture.
Activities: Distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services. Examples include: order taking, the physical delivery of products, or invoicing customers.
Take Honda as an example of a company with a clearly defined core competency. Its life began with a small two-cycle motorbike engine. Through continuous learning over several decades, and often from lessons learned from failure, Honda built the core competency to design and manufacture small but powerful and highly reliable engines for which it now is famous. This core competency results from superior engineering know-how and skills carefully nurtured and honed over several decades. Honda’s business model is to find a place to put its engines. Today, Honda engines can be found everywhere: in cars, SUVs, vans, trucks, motorcycles, ATVs, boats, generators, snow blowers, lawn mowers and other yard equipment, and even small airplanes. Due to their superior performance, Honda engines have been the most popular in the Indy Racing League (IRL) since 2006. Not coincidentally, this was also the first year in its long history that the Indy 500 was run without a single engine problem.
Key point: core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. And second, in analyzing a company’s success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as superior products or services. While these are the outward manifestation of core competencies, what is even more important is to understand the invisible part of core competencies.
Examples of Core Competencies
IKEA: Designing modern functional home furnishings at low cost
Beats Electronics: Marketing: perception of coolness
Facebook: IT capabilities to provide reliable social network services globally on a large scale.
Netflix: Creating proprietary algorithms-based on individual customer preferences.
4
What is the Resource Based View (RBV)?
A model that sees certain types of resources (VRIO) as key to superior firm performance
Resource Heterogeneity:
A firm is a unique bundle of resources and capabilities
These bundles differ across firms
Resource Immobility:
Resources don’t move easily from firm to firm
Resources are difficult to replicate
Resource differences can last for a long time
Critical Assumptions
©McGraw-Hill Education.
Note that the resource-based view of the firm uses the term resource much more broadly than previously defined. In the resource-based view of the firm, a resource includes any assets as well as any capabilities and competencies that a firm can draw upon when formulating and implementing strategy.
Resource Heterogeneity: For example, Southwest Airlines (SWA) and Alaska Airlines both compete in the same strategic group (low-cost, point-to-point airlines). But they draw on different resource bundles. SWA’s employee productivity tends to be higher than that of Alaska Airlines, because the two companies differ along human and organizational resources. At SWA, job descriptions are informal and employees pitch in to “get the job done.” Pilots may help load luggage to ensure an on-time departure; flight attendants clean airplanes to help turn them around at the gate within 15 minutes from arrival to departure. This allows SWA to keep its planes flying for longer and lowers its cost structure, savings that SWA passes on to passengers in lower ticket prices.
Resource Immobility: Continental and Delta both attempted to copy SWA, with Continental Lite and Song airline offerings, respectively. Neither airline, however, was able to successfully imitate the resource bundles and firm capabilities that make SWA unique.
5
Exh: 4.4 Tangible and Intangible Resources
Jump to Appendix 3 long image description
Competitive advantage more likely from intangible resources.
©McGraw-Hill Education.
Example: Google’s headquarters provides examples of both tangible and intangible resources. The Googleplex is a piece of land with a futuristic building, and thus a tangible resource. The location of the company in the heart of Silicon Valley is an intangible resource that provides access to a valuable network of contacts and gives the company several benefits. It allows Google to tap into a large and computer-savvy work force and access graduates and knowledge spillovers from a large number of universities, which adds to Google’s technical and managerial capabilities.9 Another benefit stems from Silicon Valley’s designation as having the largest concentration of venture capital in the United States. This proximity benefits Google because venture capitalists tend to prefer local investments to ensure closer monitoring. Google received initial funding from the well-known venture capital firms Kleiner Perkins Caufield & Byers and Sequoia Capital, both located in Silicon Valley.
6
Exhibit 4.5 The VRIO Decision Tree
Increase economic value creation
(V – C).
Only one or a few firms possess it
Unable to develop/buy the resource at a reasonable price.
Firm has effective organizational structure and coordinating systems.
Direct imitation or substitution
©McGraw-Hill Education.
According to this model, a firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria. If the answer is “yes” four times to the attributes listed in the decision tree, only then is the resource in question a core competency that underpins a firm’s sustainable competitive advantage.
Example: Beats Electronics’ ability to design and market premium headphones that bestow a certain air of coolness upon wearers is a valuable resource. The profit margins for Beats designer headphones are astronomical: The production cost for its headphones is estimated to be no more than $15, while they retail for $150 to $450, with some special editions over $1,000. Thus, Beats’ competency in designing and marketing premium headphones is a valuable resource in the VRIO framework.
Beats Electronics’ ability and reach in product placement and celebrity endorsements that build its coolness factor are certainly rare. No other brand in the world, not even Apple or Nike, has such a large number of celebrities from music, movies, and sports using its product in public. Thus, this resource is not only valuable but also rare.
Beats’ core competency in establishing a brand that communicates coolness is built upon the intuition and feel for music and cultural trends of Dr. Dre, one of music’s savviest marketing minds. Although the sound quality of Beats headphones is good enough, they mainly sell as a fashion accessory for their coolness factor and brand image. Because its creator Dr. Dre relies on gut instinct in making decisions rather than market research, this resource is costly to imitate. Even if a firm wanted to copy Beats’ core competency—how would it go about it? The music and trend-making talent as well as the social capital of Dr. Dre and Jimmy Iovine, two of the best-connected people in the music industry, might be impossible to replicate.
7
Isolating Mechanisms
Barriers to imitation
Prevents rivals from competing away firm advantage
Better expectations of future resource value
Path dependence
Causal ambiguity
Social complexity
Intellectual property (IP) protection
©McGraw-Hill Education.
BETTER EXPECTATIONS OF FUTURE RESOURCE VALUE. Sometimes firms can acquire resources at a low cost, which lays the foundation for a competitive advantage later when expectations about the future of the resource turn out to be more accurate. Example: obtain real estate / land at a low cost.
PATH DEPENDENCE. Path dependence describes a process in which the options one faces in a current situation are limited by decisions made in the past. Arthur, W.B. (1989), “Competing technologies, increasing returns, and lock-in by historical events,” Example; 80% of U.S. carpets are made in Dalton, GA.
CAUSAL AMBIGUITY. Causal ambiguity describes a situation in which the cause and effect of a phenomenon are not readily apparent. Example: it is difficult to determine the exact root cause of Apple’s success
SOCIAL COMPLEXITY. Social complexity describes situations in which different social and business systems interact. Example: the culture of Zappo’s leads to their excellence in customer service.
INTELLECTUAL PROPERTY PROTECTION. Intellectual property (IP) protection is a critical intangible resource that can also help sustain a competitive advance. Examples: patents, designs, copyrights, trademarks, trade secrets.
8
Dynamic Capabilities
A firm’s ability to:
Adapt resources, capabilities, core competencies over time
Create, deploy, modify, reconfigure, upgrade, leverage
In a changing external environment (PESTEL: technological change, deregulation, globalization, demographic shifts)
The goal:
Create a strategic fit with the firm’s new environment
Gain and sustain competitive advantage in a changing env.
Avoid core rigidity (former core competency turned into a liability due to environment change)
©McGraw-Hill Education.
Apple’s dynamic capabilities allowed it to redefine the markets for mobile devices and computing, in particular in music, smartphones, and media content. For the portable music market through its iPod and iTunes store, Apple generated environmental change to which Sony and others had to respond. With its iPhone, Apple redefined the market for smartphones, again creating environmental change to which competitors such as Samsung, BlackBerry, Google (with its Motorola Mobility unit), or Microsoft (with its Nokia unit) must respond. Apple’s introduction of the iPad redefined the media and tablet computing market, forcing competitors such as Amazon and Microsoft to respond. With the introduction of the Apple Watch it is attempting to shape the market for computer wearables in its favor.
A lack of strategic fit with a changing environment created at least two problems for Procter & Gamble in recent years (see Strategy Highlight 4.2). First, following the deep recession of 2008–2009, U.S. consumers moved away from higher-priced brands, such as those offered by P&G, to lower-cost alternatives. Moreover, P&G’s direct rivals in branded goods, such as Colgate-Palmolive, Kimberly-Clark, and Unilever, were faster in cutting costs and prices in response to more frugal customers.
P&G also fumbled recent launches of reformulated products such as Tide Pods (detergent sealed in single-use pouches) and the Pantene line of shampoos and conditioners. The decline in U.S. demand hit P&G especially hard because the domestic market delivers about one-third of sales, but almost two-thirds of profits for the company. Second, by focusing on the U.S. market, P&G not only missed out on the booming growth years that the emerging economies experienced during the 2000s, but it also left these markets to its rivals. As a consequence, Colgate-Palmolive, Kimberly-Clark, and Unilever all outperformed P&G in recent years.
9
Exhibit 4.7 A Generic Value Chain (Internal)
Internal activities a firm engages in when transforming inputs into outputs
add value/cost indirectly
add value/cost directly
Transform inputs into outputs horizontally along the internal value chain.
Necessary to sustain primary activities
©McGraw-Hill Education.
Retail chain American Eagle Outfitters, for example, needs to identify suitable store locations, either build or rent stores, purchase goods and supplies, manage distribution and store inventories, operate stores both in the brick-and-mortar world and online, hire and motivate a sales force, create payment and IT systems or partner with vendors, engage in promotions, and ensure after-sales services including returns.
A maker of semiconductor chips such as Intel, on the other hand, needs to engage in R&D, design and engineer semiconductor chips and their production processes, purchase silicon and other ingredients, set up and staff chip fabrication plants, control quality and throughput, engage in marketing and sales, and provide after-sales customer support.
10
Strategic Activity Systems
A network of interconnected activities
Socially complex and causally ambiguous
Enhance likelihood of sustained competitive advantage
Characteristics:
Elements can be easily observed
How activities are managed is not easily observed
Difficult to imitate
Activity systems must evolve as external environment changes
Add new activities
Remove activities that are no longer relevant
Upgrade activities that have become stale
©McGraw-Hill Education.
The Vanguard Group’s Activity System - 1997
Exhibit 4.8
Source: Adapted from N. Siggelkow (2002), “Evolution toward fit,” Administrative Science Quarterly 47: 146.
©McGraw-Hill Education.
In 1997, The Vanguard Group had less than $500 million of assets under management. It pursued its mission of being the highest-value provider of investment products and services through its unique set of interconnected activities. The six larger ovals depict Vanguard’s strategic core activities: strict cost control, direct distribution, low expenses with savings passed on to clients, offering of a broad array of mutual funds, efficient investment management approach, and straightforward client communication and education. These six strategic themes were supported by clusters of tightly linked activities (smaller circles), further reinforcing the strategic activity network.
12
The Vanguard Group’s Activity System - 2017
Exhibit 4.9
Source: Adapted from N. Siggelkow (2002), “Evolution toward fit,” Administrative Science Quarterly 47: 146.
©McGraw-Hill Education.
The system evolved over time as Vanguard’s management added a new core activity—customer segmentation—to the six core activities already in place in 1997 (still valid in 2017). Vanguard’s managers put in place the customer-segmentation core activity, along with two new support activities, to address a new customer need that could not be met with its older configuration. Its 1997 activity system did not allow Vanguard to continue to provide quality service targeted at different customer segments at the lowest possible cost. The 2017 activity-system configuration allows Vanguard to customize its service offerings: It now separates its more traditional customers, who invest for the long term, from more active investors, who trade more often but are attracted to Vanguard funds by the firm’s high performance and low cost.
13
SWOT Matrix 3 x 3 (1)
| Opportunities - - - | Threats - - - | |
| Strengths - - - | How can the firm use internal strengths to take advantage of external opportunities? | How can the firm use internal strengths to reduce the likelihood and impact of external threats? |
| Weaknesses - - - | How can the firm overcome internal weaknesses that prevent the firm from taking advantage of external opportunities? | How can the firm overcome internal weaknesses that will make external threats a reality? |
External analysis: Covered in Chapter 3
Internal analysis: Covered in Chapter 4
©McGraw-Hill Education.
14
SWOT Matrix 3 x 3 (2)
Use the SWOT matrix to develop alternatives.
Note the specific combination of internal and external factors associated with each alternative
Evaluate the pros and cons of each strategic alternative.
Select one or more alternatives to implement.
Carefully explain decision rationale.
Including why other strategic alternatives were rejected
©McGraw-Hill Education.
15
My Strategy Exercise What Is My Competitive Advantage?
What are your strengths and weaknesses?
What are you doing to ensure your capabilities are dynamic?
Skill upgrades, behavior modifications, etc.
Are some of your strengths valuable, rare, and costly to imitate?
How could you persuade your boss that you could be a vital source of sustainable competitive advantage?
©McGraw-Hill Education.
16