Unit 3: Discussion 1 Week 3 MBA695

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Strategic Management

Jeff Dyer

Third Edition

Chapter 3

Internal Analysis: Strengths, Weaknesses, and Competitive Advantage

Professor’s Goals for this Lecture

There are many types of problems that can be solved for a company by doing a cost analysis. A cost analysis can be used to solve problems as diverse as marketing (e.g., how much to spend to acquire additional customers) or HR (how much labor costs go down per unit with increases in volume). The principle tools to be learned in this chapter are designed to help the student examine the relationship between a company’s size (measured in volumes produced or market share) and cost per unit. This is primarily reinforced by teaching students how to create a scale/experience curve (both done in the same way with “cost per unit” on the “Y” axis but the scale curve uses volume for a given year on the “X” axis whereas the experience curve uses cumulative volume on the “X” axis. The students will have the opportunity to examine the relationship between scale/experience in the following assignments:

- the homework assignment involving calculating an experience curve in semiconductors

- Fry’s Credit Card Mini-case (in lecture); considers the relationship between total number of subscribers (X axis) and cost per subscriber (Y axis)

- the Southwest Case (after lecture); considers the relationship between total passengers flown (or market share) and performance (profitability) in the industry

Technical innovations

Flowers and Trees—the first cartoon to use 3 color Technicolor technology, 1932

Snow white—the first full length feature in 1937

Fantasia—1940, the first film in stereophonic sound

The following are more technical innovations that Disney pioneered. Students will be familiar with Snow White and Fantasia (both from their own childhood viewing and the opening vignette), and so these slides can provide a quick quiz and test of student retention.

Huge innovation, huge risk

Disneyland

The Happiest Place on Earth

1957—Disneyland opens. Disneyland is not only a great technical innovation (lots of new technology from the imagineers in developing really cool rides and attractions).

Disneyland was also a huge business innovation, and a huge risk. First, to finance Disneyland, Walt began producing weekly TV programs, when it was not at all clear that TV would become a major medium of communication.

Second, in the 1950s theme parks were all local, and many were shabby and poorly run. Remember, the U.S. Interstate system is in the early days of its construction, having been funded only a year earlier, and jet air travel only began in 1954. It was not at all clear that a theme park could become a national draw and attraction.

It was a huge success, from the day that it opened. Walt made one huge mistake in setting up Disneyland, however, in that he only bought 160 Acres of land for the park. They avoided that mistake with their next purchase, buying more that 27,000 acres.

The Value Chain

Value Chain- A visual description of the steps required to turn raw materials into finished products and/or services. The value chain also describes key functions of

the firm linked to each stage and functions that span the productive activities of the firm.

The Resource-Based View

Resources- All assets, capabilities, organizational processes, firm attributes, information, knowledge, and so on, controlled by a firm that enable the firm to conceive of and implement strategies that improve its efficiency and effectiveness.

Assets- Tangible or intangible resources or factors of production that create economic value for the firm when employed.

Four categories of resources are important contributors to competitive advantage:

Physical resources, such as plant or equipment

2. Financial resources, such as free cash flow

3. Human resources, including employee and management skills and talents

4. Intangible resources, the intangible assets held by firms, such as brands and patents.

Physical Resources

Financial Resources

Human Resources

Intangible Resources

The Resource-Based View (continued)

Capabilities- The procedures, processes, and routines firms employ in their activities.

Operating Capabilities- Procedures, processes, or routines for delivering value to customers, employees, suppliers, or investors.

Dynamic Capabilities- Procedures, processes, and routines that continuously expand existing resources or improve operating capabilities.

Priorities- A firm’s values and rankings of what is most important.

CREATING A SUSTAINABLE COMPETITIVE ADVANTAGE: VRIO MODEL

Value- Worth or utility.

Rarity- To be uncommon, or not available to other competitors.

Inimitability- An attribute of a resource that describes the degree of difficulty a competitor would face in copying, imitating, or mimicking the value of that resource

Positive Network Externalities- When the value of a product increases with the number of users.

Virtuous Circle- When more sellers attract more buyers, who, in turn, attract more sellers.

Organized to Exploit- The degree to which the legal, administrative, and operating structure of the firm allows it to capture the rents generated by resources.

Competitive advantages arise when resources or capabilities possess two attributes: Value and rarity. Two other principles determine the durability, or sustainability, of competitive advantage: Inimitability, the characteristics that make a resource or capability difficult to imitate, and an organization’s ability to exploit profit returns generated by its unique and valuable resources. Together, these four characteristics—value, rarity, inimitability, and organization to exploit profits—are often abbreviated as VRIO.

Example: Inimitable Resources

Unique History—Coke

Path Dependence—Boeing

Complex Systems—Merck

Tacit Knowledge—Apple

Property Rights—Chevron

Coke’s historical advantage comes from WWII, when the US military subsidized bottling plants all over the world so that soldiers could have “a coke within arm’s reach”

Boeing’s path dependence has a military origin as well. During WWII, the British focused on building fighters and the US on bombers (like the B-17). Those bombers gave Boeing the technical know how to build commercial aircraft and a lead over the British in creating safe jet travel.

The complex regulatory approval process that Merck has to endure to bring drugs to market mean that the company needs to develop and maintain a set of very complex organizational systems and routines.

Apple’s design capabilities (think of the innovations that Steve Jobs came up with) represent tacit, difficult to transfer, knowledge and skill.

Property rights, mainly land ownership and drilling rights, provide companies like Chevron with a legally protected resource base.

Assessing Competitive Advantage with VRIO

Competitive Failure- When firms that can’t create value for their stakeholders don’t survive.

Competitive Parity- When a company survives but has no real competitive advantage over rivals.

Sustained Competitive Advantage- When firms combine the legal elements, intellectual property rights, administrative elements, and cultural elements,

allowing them to capture high profits that come from their valuable, rare, and inimitable resources, capabilities, or priorities.

VRIO

I’ll spend a few minutes here. The chart can easily apply to resources and capabilities. The important thing to reinforce is the last column—because this is the essence of the Diamond. Unless companies are organized to both create and exploit their resources and capabilities, their sources of competitive advantages will fade over time.

Disney’s competitive advantage

Create content that drives repeat business

Managers can easily forget resources

Growth and expansion will always threaten the core

It’s useful before moving on to summarize the key points of the Disney discussion. While these bullet points apply to Disney, the instructor can ask students if they can think of other companies where this has happened.

Today’s Activity Map?

Miramax				ESPN
Lucas Film	Pixar	Walt Disney	ESPN Zone	ESPN Deportes
Disneyland	Disney Cruise Line			710am ESPN
Walt Disney World Resorts			ABC	Disney Channel The History Channel

What would an activity map of the Disney company look like today? Is there anything at the Center? What does this imply for long term competitive advantage?

The launch of the Disney+ streaming service is a new activity. How do you think Disney analyzed this new service?

The Company Diamond

Capabilities

Priorities

Resources

Strengths & Weaknesses

(Activities)

The things we do to compete

The assets we employ

The processes we use

The values that guide us

I’m going to spend about 10 minutes here outlining and building out this slide. It’s useful to move from top to bottom. I use ESPN—one of Disney’s most successful units—to illustrate the different elements of the diamond. The purpose of this slide, and the arrows that connect all the different elements, is to help students see that competitive advantage is a complex, deliberate thing that executives construct. The text on the slide is helpful to remind students of the progression from easily observable activities, through assets and processes, and down to deep, abstract values.

For ESPN

Activities—they make movies and creative content, produce products (televise games), run theme parks, restaurants, etc.

Resources—The brands, the personalities, the contracts,

Capabilities—sports center (cutting edge, fun, engaging), seeking new venues, innovation

Values—”sports fans serving sports fans”. ESPN is pretty diligent about hiring sports fans to work for the company, and puts a lot of emphasis on finding new and creative ways to deliver sports content to their fan base.

Gathering Data for Company Diamond Analysis

Data to complete a diamond profile come from a number of sources. You can use three main types of data:

Archival data: Written or numeric information can be found in the library or on the Internet.

Interviews: Interviews can range from personal questions to impersonal Surveys.

Observation: Your own experiences, such as visits or use of products or services, are also valuable.

Archival Data

Interviews

Observations

Using the Diamond Model

Class Activity: Creating a Company Diamond

Capabilities

Priorities

Resources

Strengths & Weaknesses

(Activities)

The things we do to compete

The assets we employ

The processes we use

The values that guide us

This is where I’ll have the students spend about 20 minutes. The text provides a nice reminder of the elements of the Diamond. Again, students can either develop a diamond model for the company that they are using for a semester length project, one assigned by the instructor, or they can spend 20 minutes thinking about their own competitive advantages, and how they might build a sustainable advantage over the first few years of their careers.

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