MGMT project

Essential summary

The internal environment comprises of those conditions internal to the organization, including the organization’s strategic resources, abilities, and management capabilities.

The resource-based view of strategy (RBV) is based on the view that competitive advantage and superior performance are based on the internal management of strategic resources.

The VRIO framework – value, rarity, inimitability, and organiza- tional support – is a mnemonic that identifies four key criteria for assessing which capabilities are strategic.

Core competences are organization-specific abilities that an organi- zation’s people have which enable them to sustain competitive advan- tage and superior performance.

Dynamic capabilities allow an organization to renew and re-create its strategic capabilities, including its core competencies, to meet the needs of a changing environment.

Organizational learning is broadly of two kinds – incremental, based on the organization’s experience of routine working and exist- ing knowledge, which is called exploitive learning; and innovatory, based on unfamiliar working and new knowledge, which is called exploratory learning.

The internal environment4

An organization’s internal environment consists of the conditions inside an organization, including its strategic resources, abilities, and management capabilities. An organization’s competitive advantage primarily depends upon its managerial and organizational processes. All organizations are dif- ferent, and this difference can be recognized by management and used to

C o p y r i g h t 2 0 2 0 . R o u t l e d g e .

A l l r i g h t s r e s e r v e d . M a y n o t b e r e p r o d u c e d i n a n y f o r m w i t h o u t p e r m i s s i o n f r o m t h e p u b l i s h e r , e x c e p t f a i r u s e s p e r m i t t e d u n d e r U . S . o r a p p l i c a b l e c o p y r i g h t l a w .

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30 The internal environment

drive the strategic management process from the inside out. As a general point, while being in the right industry matters, it is also necessary to be good at what you do.

The resource-based view of strategy The resource-based view of strategy (RBV) is a view of strategic manage- ment as the management of strategic resources. These are internal strategic assets, such as core competencies and how employees work in ways that are unique to a particular organization; as such they provide a competitive advantage that is difficult for rivals to understand and imitate. Edith Penrose (1959) suggested in her book The Theory of the Growth of the Firm that ‘resources’ should be defined in terms of their value in supporting strategy rather than as narrow economic resources defined by their market value. Strategic resources may have little general market value, but according to the RBV, firm-specific resources matter most to competitive difference.

The VRIO framework Jay Barney (1997) offers the VRIO framework as a means to identify stra- tegic resources; he suggests that above-average profits are likely if an orga- nization’s attributes are

1 Valuable – when they enable an organization to implement strategy that improves its effectiveness and efficiency;

2 Rare – few, if any, competing organizations have these valuable attributes; 3 Inimitable – the attributes are too difficult to emulate because they have

a unique history and development, their nature is ambiguous or socially complex; and

4 Organizable – an organization can manage and exploit the competitive potential of the first three.

Strategic resources that meet the VRIO criteria can be enhanced in combina- tions of different ways – by the recruitment of people with certain aptitudes and knowledge, patents and proprietary technologies, physical assets like buildings and other facilities, location, social and business networks, alli- ances, and so on. The importance of intangible resources, such as corporate image, brands, and customer service, is also fundamental to establish how people will perceive the difference between organizations and the products and services they offer. Intangibility is quintessentially a holistically sensed quality. All organizations are to some extent unique bundles of attributes, and it is how these are used and managed that determines differences in organizational performance. The key thing is to strategically manage the

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The internal environment 31

integration of resources so the intangibility of the whole creates an image that puts the organization apart from its rivals. Central to this is how manag- ers and other employees manage and do their work.

Core competencies Core competencies are the organization-specific competencies people have which are shared and used in common in ways that give the organization its competitive advantage. They have the following advantages:

1 They are hard for rivals to understand how they work, and they are dif- ficult to copy.

2 They are relevant to a range of markets and industries. 3 They provide a shared understanding of an organization’s purpose, and

top-down objectives can be better understood and easily implemented. 4 They promote cross-functional working for teams and project manage-

ment generally. 5 They facilitate a common language of objectives which are managed in

a similar way across the organization. 6 They promote a common set of learning-based tools and working prin-

ciples for solving problems. 7 They facilitate bottom-up management for decision making.

A core competency is not simply an ability to be good or even to excel at a job if rivals are able to copy the competency. Core competencies produce a different way of working and a competitive difference that rivals cannot emulate. An organization’s core competencies are characterized as bundles or patterns of skills, knowledge, and supporting resources which give the organization its idiosyncratic pattern of competencies that are core to its strategic purpose. These are typically reinforced and strengthened over time so that they follow a path or trajectory.

The weakness is that once trajectories are formed they become entrenched and are hard to change when the need arises. A strategic lock-in occurs when core competencies are inflexible and difficult to change quickly. The ability of an organization to manage its core competencies over time is referred to in strategic management as a strategic dynamic capability.

Dynamic capabilities David Teece, Gary Pisano and Amy Shuen (1997), in a seminal journal paper, define a dynamic capability as an organization’s ability to integrate, build, and reconfigure core competencies to meet change. A more general definition is an organization’s ability to renew and re-create its strategic

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32 The internal environment

capabilities (including core competencies) to meet the needs of a changing environment. From the perspective of strategic management this is a senior- level strategic management process, but lower-level capabilities will also be strategic in the sense of their being cross-functional processes, such as product development, alliance and acquisition capabilities, resource alloca- tion, and knowledge transfer routines.

Teece, Pisano, and Shuen identify the Toyota Production System as an example of a dynamic capability. All automakers now have similar lean pro- duction systems to that of Toyota, which suggests it is no longer a uniquely distinctive capability and cannot be a strategic resource in that sense. How- ever, dynamic capabilities are often similar across different organizations, and the real competitive differences are in the detail of their application – factors such as timing, cost, and learning effects – which can produce robust differences in performance.

In particular, it is in the way that dynamic capabilities cluster cross- functional activities including management philosophies and business methodologies that makes dynamic capabilities competitively unique. Lean activities including total quality management (TQM), business excellence, benchmarking, and organizational learning are closely intertwined as comple- mentary activities that together add value that exceeds the sum of their parts. An organization’s dynamic capability, if it involves a complex integration of these methodologies, is likely to produce a stable pattern of collective activity through which the organization systematically generates and modifies operat- ing routines in pursuit of improvement that really counts strategically.

Lean working

Lean working (or lean production as it is known in manufacturing) is a man- agement system for ensuring any non-value-creating activity is removed. The driving principle is to link the management of an organization’s core business processes to strategic objectives to continuously improve customer value. Many assume that lean is an operational tool used only to save waste and costs, but it is much more than this since lean is applied to the organiza- tion’s critical business or core areas that are important both to a customer value proposition and also competitive strategy. Senior managers identify and specify these areas to give them priority for monitoring and reviewing to ensure the organization remains fit for purpose.

Total quality management (TQM)

TQM is an organization-wide philosophy and set of management principles for improving continually the quality of a product/service to meet customer

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The internal environment 33

needs. The ‘total’ principle is that customer quality is only as good as the weakest link in the quality chain (see Figure 4.1).

Every part of the production and delivery chain must be good enough to give the next work process exactly what it wants for it to produce exactly what is needed by the following process and so on. Discipline is needed throughout the supply chain to ensure that parts and services are delivered exactly when and where needed. The quality chain can be envisaged and applied along the whole supply chain to include external organizations.

If teams have responsibility to control their work to meet their immediate customer’s requirements, they are likely to see their work not as a static and standalone process but as a dynamic activity which changes with the needs of the organization’s strategy. The guiding principle is that every process is managed according to the Deming (or PDCA) Cycle (Deming, 1986):

1 Plan – what has to be done 2 Do – carry out the work to plan and monitor 3 Check – progress of work and review 4 Act – if required take corrective action or amend plan, the cycle starts over

In a TQM-conditioned environment, PDCA is used for any business pro- cess, including strategic management. It forms the basic mechanism for

Figure 4.1 The quality chain

The Quality Chain: Each process is a customer of the preceding one, and a supplier to the following process

external customer

external supplier

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each diamond is a process

��e�all �uality i� �nly a� ���� a� the weakest link in the chain…….

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34 The internal environment

organizational learning. PDCA drives continuous improvement (sometimes called kaizen) in lean working. As a purely operations-based approach, TQM is largely only about taking corrective action to improve a business process. However, when business processes are linked to the achievement of strategic priorities, an external dimension is brought to make TQM strategi- cally sensitive. This happens with kaizen in lean working when organiza- tions use hoshin kanri (policy deployment) to deploy strategic priorities in the daily management of processes.

Business excellence (audit) models

Excellence models are used to audit good management practice in the general core areas of a business or organization; a common name is self- assessment, and the main reason is to identify and deploy good practice and organization-wide learning. Organizations design their own frameworks, but most of these are based on three models: the Malcolm Baldrige National Quality Award, the EFQM Excellence Award, and the Deming Prize. The areas for assessment are similar and cover leadership, people, partnerships and resources, and processes. The components that, according to Baldrige, should be in place for strategic planning are noted in chapter 1.

Benchmarking

Benchmarking is a comparison of an organization’s practices with those of other organizations in order to identify ideas for improvement and the adop- tion of useful practices and (sometimes) to compare relative standards of performance. There are two main types. The first is competitive benchmark- ing, where the benchmarks are normally expressed as measured reference goals for aggregate performance, such as the output of a production line. The other is process benchmarking, where teams may visit another organi- zation, often in an unrelated industry, to study analogous business processes.

From the resource-based view of strategy, the replication of best practice may be illusive since the managerial practices that are most central to com- petitive advantage are likely to be specific to an individual organization. It is possible that the more benchmarking organizations do, the more they copy each other and come to resemble one another. Porter (1996), in particular, thinks of benchmarking as operational effectiveness – it will reduce costs, but because every competitor will copy, it will not lead to a distinctive com- petitive advantage on which long-term success depends.

On the other hand, good practice should be learnt if it is consistent with an organization’s purpose. Imitation can improve the way an organization performs. To make strategy work and to improve finding best practices,

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adapting them, and continuously improving them lead to new ideas about products and services. Learning then becomes the norm, where everyone is searching for a better way.

Organizational learning Central to the resource-based view and the strategic management of core competencies is organizational learning. Chris Argyris and Donald Schon (1981) distinguish three different kinds: single loop, double loop, and deutero-learning. Single-looped learning involves identifying and correct- ing errors in existing ways of working: there is a single feedback loop that checks performance against existing plans. The second involves a double feedback loop, which not only connects errors to present plans but also involves questioning the assumptions of the plans and the measures defin- ing effective performance: double loops look beyond the present ways of doing things. Deutero-learning involves monitoring and reviewing how learning is used to manage work, an essential prerequisite for organiza- tional adaptation.

These three types of learning correspond to three different forms of review: single feedback is most associated with routine daily management in operations; double feedback is mostly associated with periodic reviews of strategy; and deutero-learning is important for business audits of how an organization learns and manages its core processes (see chapter 10).

James March (1991), writing from the resource-based view of strategy, makes a distinction between explorative and exploitive learning. Explora- tion covers unfamiliar sources of knowledge, search, and discovery, while exploitation is concerned with existing knowledge. In other words, explor- ative learning is the pursuit of new knowledge of things that might come to be known, while exploitive learning is the development of things already known. It is generally thought that an organization should be ambidextrous and use structures and processes that favour explorative learning for major innovation and exploitive learning for incremental improvement.

Some observers suggest that organizations will do better to use exploratory learning if their industry environments are unstable and changeable, while the use of exploitative learning is preferable for stable conditions. For instance, for organizations in mature stages of their industry life cycle, innovation may be stimulated by pressures to reduce costs, improve quality, and increase productivity rather than stimulated by strategic change. William Abernathy (1978) pointed to a productivity dilemma – a possible trade-off between the possible gains in productivity against possible losses in innovative capabil- ity. The dynamism of globalization up to the financial crisis of 2008 may have favoured explorative innovation rather than exploitative improvement

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approaches. If so, slower growth in developed economies since then may have swung the pendulum the other way.

References Abernathy, W. J. (1978), The Productivity Dilemma: Roadblock to Innovation in the

Automobile Industry, London: Johns Hopkins University Press. Argyris, C., & Schon, D. (1981), Organizational Learning, Reading, MA: Addison-

Wesley. Barney, J. B. (1997), Gaining and Sustaining Competitive Advantage, Harlow, England:

Addison-Wesley Publishing. Deming, W. E. (1986), Out of the Crisis: Quality, Productivity and Competitive

Position, Cambridge: Cambridge University Press. March, J. G. (1991), Exploration and exploitation in organizational learning, Orga-

nization Science, 21, 71–87. Penrose, E. T. (1959), The Theory of the Growth of the Firm, Oxford: Basil Black-

well. Porter, M. E. (1996), What is strategy? Harvard Business Review, November-

December, 61–78. Teece, D. C., Pisano, G., & Shuen, A. (1997), Dynamic capabilities and strategic

management, Strategic Management Journal, 18, 509–533.

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