Strategic Audit Report

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Strategic Management Week 2 – Chapter 3

Tools of Strategic Analysis: Evaluating Internal Capabilities

Ch. 3 Learning Objectives

• Describe the Critical Assumption of the Resource-Based View and how it contrasts with the SCP.

• Describe four types of resources and capabilities. • Understand the resources and capabilities that are likely to be

rare and costly to imitate or substitute. • Apply value-chain analysis to identify a firm's valuable

resources and capabilities and their linkages. • Apply the VRIO framework to identify the competitive

implications of a firm's resources and capabilities. • Describe how a firm could capitalize on its resources and how

imitation affects competitive dynamics.

Internal Environment Analysis

Where Are We in the SM Process?

Mission Objectives

External Analysis

Internal Analysis

Strategic Choice

Strategy Implementation

Competitive Advantage

The Key Steps in a Strategic Audit of a Company

• Understand its goal and strategy Strategy Analysis • Analyze its external environment Industry/External Analysis • Evaluate its resources Resource/Internal Analysis • Assess its performance? Performance Analysis • Make Strategic Recommendations:

– Use the Issues identified in the 5 parts of the analysis above. – Identify several strategic options that the company can follow – Evaluate these options (pros and cons/how likely to address the issues

raised and risks) – Make your recommendations with any warnings to the management.

Ethics and Strategy

• Externalities – What are they? – Examples?

Internal Analysis

• SWot • What strengths exist in the organization?

– Why? – How can they be exploited?

• What weaknesses exist in the organization? – Why? – How can they be softened/eliminated?

• How do the strengths/weaknesses collectively and individually compare to competitors? – What strategize should be deployed to maximize competitive

advantage?

The Resource-Based View

• What are some resource types and why are they important in the RBV? – Tangible and intangible – Financial, Physical, Human, Organizational – They are used to conceive of and implement strategies

• What are capabilities and why are they important? – A subset of resources that enable a firm to take full

advantage of other resources

Assumptions of the RBV

• Resource Heterogeneity (Organizationally Idiosyncratic Bundles) – Different firms may have different resources – The role of ‘bundling’ resources and capabilities – How spread are capabilities in a firm’s HR

• Resource Immobility (Endurable Bundles) – Some resources are costly to acquire or develop – Some resources are difficult to transfer (sticky)

RBV

• Resources are used to help firms achieve competitive advantage and superior economic performance

• Resource bundles drive CA and performance

Resource Categories

• Financial (cash, retained earnings)

• Physical (plant & equipment, geographic location)

• Human (skills & abilities of individuals)

• Organizational (reporting structures, relationships)

Capabilities

• Two types: Ordinary & Dynamic • What is an “ordinary” capability?

– “The capacity [i.e., ability] to perform a particular activity in a reliable and at least minimally satisfactory manner.” – Winter, 2003

• What is an “dynamic” capability? – “The capacity of an organization to purposefully

create, extend, or modify its resource base” -Helfat & Winter, 2011

Dynamic Capabilities

• SSR framework (Teece, 2007) – Sensing – Seizing – Reconfiguration

What is valuable in an organization?

• First, decompose the important resources by looking at the value chain – What is a value chain?

• The activities that must be accomplished to bring a product/service from raw materials to the point that it can be sold to a final customer

– Each step requires application & integration of different resources/ capabilities

– Firms w/i the same industry may not participate in the same steps of the value chain

BE BETTER THAN COMPETITORS (1) In individual elements of value chain

(2) In coordinating elements of value chain

(3) In selecting elements of value chain (make vs. buy)

X X

VRIO • How Valuable? • Rarity • Imitability (Imperfect imitability may suffice)

– Historical Conditions - Competitors face a cost disadvantage in imitating the resource due to 1st mover advtg./path dependence

– Causal Ambiguity – Can others understand the resourceàCA link? – Social Complexity – complexity of social relationships entailed in

resources – Patents

• Organizational Exploitation – A firm’s structure and control mechanism (formal and informal) must

be aligned so as to give people ability and incentive to exploit the firm’s resources

– Are resources complementary?

Patents

• Patents – What effect do they have on society? – Is an idea/process/product patentable?

• Not prohibited, Novel, Non-obvious, Useful criteria – Do they effectively prevent diffusion of knowledge

to competitors? – When are patents less enforceable? – Alternatives to patents?

Forms of imitation

• Direct duplication • Substitution

Four Important Questions

• Is a resource exploited/exploitable to generate a positive net revenue?

• Is a resource rare enough that perfect competition has not set in?

• Do competitors face a cost disadvantage in imitating the resource?

• Is a resource complementary to others and appropriate for organizational structure and control mechanisms?

Distinctive Competence

• What if a resource is valuable and rare, but not costly to imitate – It’s still useful, but can’t be relied upon as a source

of sustained CA – Will it remain rare?

‘Natural’ Means of Imitation Prevention

Isolating Mechanisms: • Time compression diseconomies • Learning-by-doing • Tacit knowledge and team embodied skills • Other first-mover advantages • Uncertain imitability • Organizational inertia • Luck and history

Source: Richard Rumelt

No -- -- -- Competitive Below Weakness disadvantage Normal

Yes No -- -- Competitive Normal Strength parity

Yes Yes No -- Temporary Normal Strength competitive + distinctive advantage competence

Yes Yes Yes Yes Sustained Above Strength competitive + sustainable advantage distinctive

competence

Adapted from: Barney, Jay (1996). Gaining and sustaining competitive advantage. Addison-Wesley Publishing Company.

The VRIO Framework

Southwest Airlines Example

• The describes the two clearest aspects of the company that help it succeed: – Operational choices

• Single aircraft • Using smaller airports • Point-to-point flights

– Its approach to managing people • Nurturing rather than straining relationships • Commitment/loyalty

– Is each VRIO?

Ordinary Resource Not a source of CA

Must be exploited to avoid disadvantage

Distinctive Competence Source of CA

Sustainable Distinctive Competence Source of sustainable CA

Easy to Imitate: Cash

Commodities

Can be Imitated (but may not be): Capacity Pre-emption Economies of Scale

Difficult to Imitate: Brand Loyalty

Favorable cost position Employee Satisfaction

Reputation for Fairness

Cannot be imitated? Patents

Unique location Unique assets (e.g. Mineral

rights)

Source: Collis and Montgomery (1996). Corporate Strategy: Resources and the Scope of the Firm.

Imitability of Resources

RBV & Competitive Advantage

• CA is derived from several (VRIO) resources & capabilities – Not all of them are directly controlled by

management • èResponsibility creating, nurturing, & exploiting

VRIO resources must be distributed throughout an organization to achieve and sustain CA.

– Textbook’s example: “My job is to keep this facility clean in order to help the firm make and sell the best cars in the world”

Competitive Parity & Competitive Advantage

• Benchmarking against and learning from competitors is useful

• Can a firm gain competitive advantage by doing what its competition does? – If resources are VRIO, how similar are two

competitors?

Difficult to Implement Strategies

• Pursuing a particular strategy is often very expensive (esp. a radically new strategy)

• Resources are inherently scarce • So how do we decide if it’s worth the cost/risk

(for example is a $500M strategy too expensive)? – Use relative cost, rather than absolute cost – Is cost of strategy implementation < the value of

the strategy?

Socially Complex Resources

• Employee empowerment, organizational culture, and teamwork can be a source of CA – What does this mean for their VRIO assessment? – What is special about the items listed?

The Role of the Organization

• How does an organization support its valuable, rare, and inimitable resources? – Organizational structure – Control systems – Compensation policies

• OK… what about them? – Every firm has them (though the type differs) – Should they change within an org.? If so when?

• When there is conflict between resources & a firm’s organization

Strategic Audits

• Internal Analysis: – What are the key resources and capabilities for your

company and are there resources/capabilities it needs to acquire/develop? In what part of the supply chain are resources/capabilities deployed?

– Analyze whether the key resources are VRIO and the consequences (See Table 3.3)

– What strengths and weakness exist due to the internal environment?

– How does the internal environment influence the company’s strategy?