Reflective Report

1

INTERNAL SOURCES OF

COMPETITIVE ADVANTAGE

MBA600 Week 2

2

COMMONWEALTH OF AUSTRALIA COPYRIGHT REGULATIONS 1969

WARNING THIS MATERIAL HAS BEEN REPRODUCED AND COMMUNICATED TO YOU BY OR ON BEHALF OF KAPLAN BUSINESS SCHOOL PURSUANT TO PART VB OF THE COPYRIGHT ACT 1968 (THE ACT).

THE MATERIAL IN THIS COMMUNICATION MAY BE SUBJECT TO COPYRIGHT UNDER THE ACT. ANY FURTHER REPRODUCTION OR COMMUNICATION OF THIS MATERIAL BY YOU MAY BE THE SUBJECT

OF COPYRIGHT PROTECTION UNDER THE ACT.

DO NOT REMOVE THIS NOTICE.

2

3

WEEK 2 FOCUSES ON TWO LEARNING OBJECTIVES

Critically assess a diverse range of theories accumulated throughout the Masters’ qualification and the connections that exist between each one.

Undertake independent research to solve complex business problems.

Other learning objectives

Acquire advanced knowledge and apply it in real workplace contexts to improve performance and competitive advantage.

Discuss and translate theory, skills and knowledge into effective management practice.

4

QUICK REVIEW OF KEY CONCEPTS What we learned in Week 1

5

WE LEARNED FROM LAST WEEK

Definition of competitive advantage

‘When two or more firms compete within the same market, one firm possesses a competitive advantage overs its rivals when it earns (or has the potential to earn) a persistently higher rate of profit.’ (Grant, 2016, p. 169)

6

DEVELOPING DYNAMIC

CAPABILITIES FOR CORPORATE

AGILITY

Developing dynamic capabilities for Corporate Agility

TRANSFORMING

Renewing process and maintaining relevance

to consumers (streamlining,

improving, changing an organisation’s

practices

SEIZING

Ability to benefit from opportunities

by designing innovative business

models; and securing access to capital and

resources

SENSING

Assessment of opportunities and

customer needs the exist outside the

organisation

https://cmr.berkeley.edu/blog/2016/8/dynamic-capabilities/

WE LEARNED FROM LAST WEEK

7 Strategy planning process

Internal to the firm External to the firm Operational within the firm

WE LEARNED FROM LAST WEEK

8

WHAT WE WILL LEARN THIS

WEEK

Internal Competitive Advantage and Dynamic Capabilities

Strategy planning process, step 1

9

INTERNAL COMPETITIVE ADVANTAGE

The focus of Week Two

10

SOURCES OF COMPETITIVE ADVANTAGE

Unique product and premium price Differentiation Advantage

Similar product at lower cost Cost Advantage

Resources and

Capabilities

Grant, Figure 7.5 Sources of Competitive Advantage, p. 178

11

STRATEGIES FOR A COST ADVANTAGE

Economies of scale From technology inputs From large output From specialisation

Economies of learning Experience curve, or ‘learning by doing’

Process technology and process design

Increase productivity

Product design Reduce operating costs via standardisation

Capacity utilisation Keeping machines running

Lower input costs Geographical location Ownership of sources of supply Bargaining power

Residual efficiency Reduction in overhead costs

The objective is to ‘beat’ the

competition with existing products

and services

12

STRATEGIES FOR A DIFFERENTIATION ADVANTAGE

Differences in quality

Differences in function features or design

Differences in availability Timing and location

Sales promotion activities

Customer loyalty or ignorance The objective is to develop products,

services, and reputation that are unique in the minds of consumers

13

INTERNAL COMPETITIVE ADVANTAGE

AND

DYNAMIC CAPABILITIES

Dynamic capabilities underpins competitive advantage

Core competencies are transformed from short-term competitive positions to longer-term competitive advantages A ‘competitive asset’ refers to inimitable resources and capabilities

What matters is corporate agility Recognising and shaping opportunities and threats Realising benefits of opportunities Maintaining competitiveness of a firm’s tangible and intangible assets

Teece, D. J., Pisano, G., & Shuen, A. (1998). Dynamic capabilities and strategic management. Strategic Management Journal, 18(7), 509-533.

14

DEVELOPING DYNAMIC CAPABILITIES FOR CORPORATE AGILITY

SEIZING TRANSFORMINGSENSING Renewing process and maintaining relevance

to consumers (streamlining,

improving, changing an organisation’s

practices

Ability to benefit from opportunities

by designing innovative business

models; and securing access to capital and

resources

Assessment of opportunities and

customer needs the exist outside the

organisation

https://cmr.berkeley.edu/blog/2016/8/dynamic-capabilities/

15

Resource matching Able to anticipate changes in the external environment

Speed (pace) Some firms are faster and more effective at exploiting change

Transforming processes Some firms have greater creative and innovative capability

RESOURCE-BASED VIEW OF COMPETITIVE ADVANTAGE

Dynamic Capabilities

Sensing external opportunities Changing customer demand Changing prices of inputs Technological change

Seizing internal capabilities Innovative business models Securing access to capital Forming strategic alliances

Read this! https://www.mckinsey.com/business-functions/operations/our-insights/matching-the-right-projects- with-the-right-resources

Creative destructionEntrepreneurship

16

WHAT COMPETITIVE ASSETS COULD BECOME

DYNAMIC CAPABILITIES? The McKinsey 7S Model

17

MCKINSEY 7S MODEL

OF STRATEGIC INTERNAL ASSETS

‘The McKinsey 7S Model is a framework for organizational effectiveness that postulates that seven internal factors of an organization must be aligned and reinforced in order to be successful.'

https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/enduring-ideas-the-7-s-framework https://www.investopedia.com/terms/m/mckinsey-7s-model.asp

SHARED VALUES

SKILLSSTRATEGY

SYSTEMSSTAFF

STYLE

STRUCTURE

18

MCKINSEY 7S MODEL OF STRATEGIC INTERNAL ASSETS

The leadership approach to managing the firm; and how well leaders influence performance, productivity and organisational culture.

Style

The talents and capabilities of human resources (staff and managers), which allow a firm to accomplish its work and goals

Skills

The daily procedures (routines), workflow, and decisions that comprise the standard operations in the firm.

Systems

Shared Values

The shared standards and norms that everyone in the firm believes is acceptable behaviour within the workplace

https://www.investopedia.com/terms/m/mckinsey-7s-model.asp

19

MCKINSEY 7S MODEL OF STRATEGIC INTERNAL ASSETS

https://www.investopedia.com/terms/m/mckinsey-7s-model.asp

The corporate hierarchy, management reporting lines, number of business units that effect operations and collaboration.

Structure

What motivates employees, where do there motivations reside, are they trained and prepared to accomplish tasks and goals, how large is the workforce.

Staff

The plan used in the firm to remain competitive in its industry and market. The plan specifies goals and objectives.

Strategy

20

WORKSHOP TIME

In Week 1, you recalled the resources and capabilities that create differences among competing firms

21

EVALUATE YOUR LIST OF DYNAMIC

CAPABILITIES

WORKSHOP

You have two objectives to accomplish the evaluation task (15 minutes)

1. Classify your list of capabilities from Week 1 according to the McKinsey 7S model

Carefully distinguish resources from capabilities

2. Justify why each capability meets the criteria of a dynamic capability

Explain how the capability meets the criteria of sensing, seizing, transforming

22

IS A DYNAMIC CAPABILITY A COMPETITIVE ASSET?

The Resource-based View and VRIO framework

23

IS A DYNAMIC CAPABILITY

A COMPETITIVE ASSET?

Resource-based View and the VRIO Framework A firm’s internal resources may provide a competitive advantage if they create causal ambiguity by four means VRIO relates to creating a competitive advantage based on asset specificity, which competitors cannot easily imitate

Is control of the resource or capability in the hands of relatively few competitors?

Can the firm cope with external competitor rivalry?

RARE Can a firm gain or exploit opportunities or mitigate risk with the resources?

Is the resource (product, service, process) valuable to customers?

VALUABLE INIMITABLE Is the resource difficult to substitute or replicate?

Do significant cost disadvantages exist for duplicating or developing the resource?

ORGANISATION Does the firm possess the people, processes, systems to exploit the resource or capability?

Can the firm cope with the internal pace of change?

https://www.business-to-you.com/vrio-from-firm-resources-to-competitive-advantage

24

RESOURCE- BASED VIEW AND

THE VRIO FRAMEWORK

Valuable Resources and Capabilities

Strategies for improving efficiency and effectiveness by exploiting opportunities and mitigating threats

Objective is to change industry profitability

Criteria to assess value: Can a firm gain or exploit opportunities or mitigate risk with the resources? Is the resource (product, service, process) valuable to customers?

https://www.business-to-you.com/vrio-from-firm-resources-to-competitive-advantage

25

RESOURCE- BASED VIEW AND

THE VRIO FRAMEWORK

Rare Resources and Capabilities

Inability of a firm to exploit resources in the same way as its competitors

Mechanisms include patents, copyrights, legal protections, scarcity

Criteria to assess rarity: Is control of the resource or capability in the hands of relatively few competitors? Can the firm cope with external competitor rivalry?

https://www.business-to-you.com/vrio-from-firm-resources-to-competitive-advantage

26

RESOURCE- BASED VIEW AND

THE VRIO FRAMEWORK

Inimitable Resources and Capabilities

Mechanisms include unique history (path dependency), causal ambiguity, social complexity (network, relationships, culture, reputation)

Criteria to assess inimitability: Is the resource difficult to substitute or replicate? Do significant cost disadvantages exist for duplicating or developing the resource?

https://www.business-to-you.com/vrio-from-firm-resources-to-competitive-advantage

27

RESOURCE- BASED VIEW AND

THE VRIO FRAMEWORK

Organisation Resources and Capabilities

Capability to gather and coordinate resources

Mechanisms include innovation, capital budgeting and project management

Criteria to assess organisation: Does the firm possess the people, processes, systems to exploit the resource or capability? Can the firm cope with the internal pace of change?

https://www.business-to-you.com/vrio-from-firm-resources-to-competitive-advantage

28

RESOURCE- BASED VIEW AND

THE VRIO FRAMEWORK

Valuable Strategies for improving efficiency and effectiveness by exploiting opportunities and mitigating threats Objective is to change industry profitability

Rare Firm’s inability to exploit resources the same way Patents, copyrights, legal protections, scarcity

Inimitable Copying reduced by unique history, causal ambiguity, social complexity (network, relationships, culture, reputation)

Organisation Capability to gather and coordinate resources Innovation, capital budgeting and project management

https://www.business-to-you.com/vrio-from-firm-resources-to-competitive-advantage

29

WORKSHOP TIME

Are the dynamic capabilities in your list strategically valuable?

30

DETERMINE STRATEGIC VALUE

WORKSHOP

Appraise if your list of dynamic capabilities can be imitated by competitors in the medium term, 1 to 3 years (15 minutes)

Use the VRIO framework to determine competitiveness Valuable

Rare

Inimitable

Organisation

31

ISOLATING MECHANISMS

Responses to prevent rivals from copying resources and capabilities, which would erode a firm’s competitive

advantage

32

ISOLATING MECHANISMS

DEFINITION

Isolating mechanisms are the barriers that prevent a competitor from eroding the superior profitability of a firm

The objective is to prevent competitive imitation Hence, the link with VRIO and the Resource-based View

Inimitability is the objective of isolating mechanisms Copying is the most direct form of competition from rivals Examples: patents, copyrights, talent management, leadership and culture, history, decision-making, economies of scale

33

ISOLATING MECHANISMS

SOCIAL COMPLEXITY

Inimitability may arise from social complexity Organisational culture, reputation among customers and suppliers, trustworthiness

34

ISOLATING MECHANISMS

HISTORY Inimitability may arise from history

‘Luck’ or being ‘in the right place at the right time’ Capabilities may take a long time to develop, making short-term development costly for competitors

35

ISOLATING MECHANISMS

CAUSAL AMBIGUITY

Inimitability may arise from causal ambiguity Situations when the causes of a firm’s competitive advantage are not apparent to competitors Causally ambiguous management skills are based on tacit knowledge, social complexity, and resource specificity (history)

36

ISOLATING MECHANISMS

LOW TRANSFERABILITY

Inimitability may arise from low transferability Acquiring resources and capabilities may have high transaction costs (e.g. search, purchase, implementation) Some skills cannot be bought, sold or exchanged For example, teamwork and decision-making skills may be difficult to replicate in a rival firm

37

WORKSHOP TIME

It is easy to identify what a rival does differently; harder to identify the critical differences that create competitive advantage

What competitive advantages differentiate rival firms in your industry?

38

INDEPENDENT RESEARCH

WORKSHOP

You have two objectives to accomplish in the research task (60 minutes)

1. Research competitors in your chosen industry Select the 2 top competitors: the biggest (market share); the boldest (aggressive marketer)

Download Financial Statements and other research articles

2. Assess the internal competitive advantages Determine their competitive advantage: low-cost or differentiation

Apply your work done in this lecture and identify key (1 or 2) that enable internal competitive advantages

What key isolating mechanisms are evident in the Financial Statements

39

S e e k h e l p w h e n yo u n e e d i t !

Thank you