Global business management

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MGT704 Global Business Management

Week 2: Resource-based and market-based considerations

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Outline

Understanding resources and capabilities

Resources, capabilities, and the value chain

From SWOT to VRIO

Debates and extensions

Outline (cont’d)

Defining industry competition

The five forces framework

Three generic strategies

Debates and extensions

The savvy strategist

Understanding Resources and Capabilities

Tangible

Resources and capabilities that are observable and easily quantified

Broadly organized into three categories

Financial

Physical

Technological

Intangible

Resources and capabilities not easily observed or difficult (or impossible) to quantify

Examples include

Human

Innovation

Reputation

Resources, Capabilities, and the Value Chain

Value Chain

Goods and services produced through a chain of vertical activities that add value

Components of the Value Chain

Primary activities

Are directly associated with the development, production, and distribution of goods and services

Support activities

Assist in the accomplishment of primary activities

Figure 3.1: The Value Chain

Note Dotted lines represent firm boundaries.

Figure 3.2: A Decision Model in Value Chain Analysis

Table 3.2: The VRIO Framework: Is a Resource or Capability…

VALUABLE?

RARE?

COSTLY TO

IMITATE?

EXPLOITED BY

ORGANIZATION

COMPETITIVE IMPLICATIONS

FIRM PERFORMANCE

Competitive disadvantage

Below average

Yes

Competitive parity

Average

Yes

Temporary competitive advantage

Above average

Yes

Sustained competitive advantage

Consistently above average

Sources Adapted from (1) J. Barney, 2002, Gaining and Sustaining Competitive Advantage, 2nd ed. (p. 173), Upper Saddle River, NJ: Prentice Hall; (2) R. Hoskisson, M. Hitt, & R. D. Ireland, 2004, Competing for Advantage (p. 118), Cincinnati: Cengage Learning.

From SWOT to VRIO

Four fundamental questions of VRIO

Value: Do the resources and capabilities add value?

Necessary for a competitive advantage

Rarity: How rare are the valuable resources and capabilities?

Valuable, but competitive parity, not advantage

Valuable and rare can lead to temporary advantage

If everyone has it, you can’t make money from it

The VRIO Framework: Imitability

Easier to imitate tangible resources/capabilities than intangible ones

Why is imitation so difficult?

Causal ambiguity or the difficulty of identifying the causal determinants of successful firm performance

Hard to understand what a firm does inside its boundaries

Events earlier in time affect future events

Difficult to identify causal determinants of performance

The VRIO Framework: Imitability (continued)

Valuable, rare, but imitable resources/capabilities = temporary advantage

Only valuable, rare, and hard-to-imitate resources/capabilities = sustained competitive advantage

The VRIO Framework: Organization

The Question of Organization

How is a firm organized to develop and leverage the full potential of its resources and capabilities?

Using complementary assets effectively

Managing social complexity effectively

Invisible relationships can add value – embedded capabilities make imitation more difficult

Figure 3.5: Strategic Sweet Spot

Source D. Collis & M. Rukstad, 2008, Can you say what your strategy is? (p. 89), Harvard Business Review, April: 82–90.

Debates and Extensions

Firm- versus Industry-Specific Determinants of Performance: Both views are complementary to each other

Static Resources versus Dynamic Capabilities

Offshoring versus non-Offshoring

Domestic Resources versus International Capabilities

Table 3.3: Dynamic Capabilities in Slow- and Fast-Moving Industries

Sources Adapted from (1) K. Eisenhardt & J. Martin, 2000, Dynamic capabilities: What are they? Strategic Management Journal, 21: 1105–1121; (2) G. Pisano, 1994, Knowledge, integration, and the locus of learning, Strategic Management Journal, 15: 85–100.

SLOW-MOVING INDUSTRIES

FAST-MOVING (HIGH-VELOCITY) INDUSTRIES

Market environment

Stable industry structure, defined boundaries,

clear business models, identifiable players,

linear and predictable change

Ambiguous industry structure, blurred boundaries,

fluid business models, ambiguous and shifting

players, nonlinear and unpredictable change

Attributes of

dynamic capabilities

Complex, detailed, analytic routines that

rely extensively on existing knowledge

(“learning before doing”)

Simple, experiential routines that rely on newly

created knowledge specific to the situation

(“learning by doing”)

Focus

Leverage existing resources and capabilities

Develop new resources and capabilities

Execution

Linear

Iterative

Organization

A tightly bundled collection of resources

with relative stability

A loosely bundled collection of resources that are

frequently added, recombined, and dropped

Outcome

Predictable

Unpredictable

Strategic goal

Sustainable competitive advantage

(hopefully for the long term)

A series of short-term (temporal)

competitive advantages

Offshoring vs. Non-Offshoring

Offshoring (international outsourcing) is an increasing movement

Outsourcing of high-end services such as IT and BPO is controversial because of the relatively recent rise of the Internet—long-term benefits are still unknown

Proponents argue that outsourcing saves firms enormous costs and allows them to focus more on their core business

Offshoring vs. Non-Offshoring

Critics argue on three points

Strategic: If everything is outsourced, what is left for the US firm?

Economic: Do developed economies actually gain?

Political: Are we both exploiting cheap labor as well as willingly putting our own security at risk?

Defining Industry Competition

Industry

A group of firms producing products (goods and/or services) that are similar to each other

Theories of industry competition

Perfect competition (rarely observed)

Industrial organization (IO) economics model

Industry structure determines strategy and firm performance (SCP model)

IO economists and policymakers concerned with minimization of firm’s above-average profits

Strategists in profit-maximizing firms use the IO model to try to earn excess profits

Five Forces Framework

The Five Forces Framework

“Translated” and extended from the SCP model in 1980 by Michael Porter

A key proposition

The focal firm’s performance critically depends on the degree of competitiveness of the five forces within an industry

The stronger and more competitive these forces are, the less likely the focal firm is able to earn above-average return, and vice versa

Figure 2.1: The Five Forces Framework

Table 2.1: Threats of the Five Forces

FIVE FORCES

Threats indicative of strong competitive forces that can depress industry profitability

Rivalry among competitors

A large number of competing firms

High-price, low-frequency purchases

Capacity is added in large increments

Industry slow growth or decline

High exit costs

Rivals are similar in size, influence, and product offerings

Threat of

potential entry

Little scale-based low-cost advantages (economies of scale)

Inadequate product proliferation

Insufficient product differentiation

Little fear of retaliation

No government policy banning or discouraging entry

Little non-scale-based advantages

Table 2.1: Threats of the Five Forces (continued)

FIVE FORCES

Threats indicative of strong competitive forces that can depress industry profitability

Bargaining power of buyers

A small number of buyers

Buyers purchase standard, undifferentiated products from focal firm

Buyers are willing and able to vertically integrate backward

Substitutes are superior to existing products in quality and function

Switching costs to use substitutes are low

Products provide little cost savings or quality-of-life enhancement

Threat of

substitutes

Suppliers provide unique, differentiated products

A small number of suppliers

Focal firm is not an important customer of suppliers

Bargaining power of suppliers

Suppliers are willing and able to vertically integrate forward

Five Forces Framework: Lessons from the Five Forces Framework

Not all industries are equal in terms of their potential profitability

The task for strategists is to assess the opportunities (O) and threats (T) underlying each competitive force affecting an industry, and then estimate the likely profit potential of the industry

The challenge is to stake out a position that is strong and defensible relative to the five forces

Table 2.3: Three Generic Competitive Strategies

PRODUCT DIFFERENTIATION

MARKET SEGMENTATION

KEY FUNCTIONAL AREAS

Cost Leadership

Low (mainly by price)

Low (mass market)

Manufacturing, services, and

logistics

Differentiation

High (mainly by uniqueness)

High (many market segments)

R&D, marketing, and sales

Focus

Extremely high

Low (one of a few segments)

R&D, marketing, and sales

Three Generic Strategies: Cost Leadership

Cost Leadership Strategy

Firm‘s theory about how to compete successfully centers on low costs and low prices

Offer better value to customers

Target average customers for mass market – little differentiation

Key functional areas are manufacturing, services, and logistics

High-volume, low-margin approach

Defense against five forces

Relentless drive to cut costs might compromise value that customers desire

Three Generic Strategies: Differentiation

Differentiation Strategy

Deliver products that customers perceive to be valuable and different

Target customers in smaller, well-defined segments who are willing to pay premium prices

Low volume, high margin approach

Must have unique attributes (actual or perceived) – quality, sophistication, prestige, or luxury

Challenge – identify attributes that are valued by customers in each market segment

Three Generic Strategies: Differentiation (continued)

Key functional areas are research and development (source of innovation), marketing/sales, and after-sale services

Defense against five forces

Drawbacks

Difficult to sustain differentiation in the long run

Relentless efforts of competitors to duplicate differentiation

Three Generic Strategies: Focus Strategy

Focus Strategy

Serving the needs of a particular segment or niche of an industry such as a geographical market, type of customer, or product line

A specialized differentiator has a smaller, narrower, and sharper focus than a large differentiator

A specialized cost leader deals with a narrower segment compared with the traditional cost leader

Focusing may be successful when a firm possesses intimate knowledge about a particular segment

Three Generic Strategies: Lessons from the Three Generic Strategies

The essence of the three strategic choices

Whether to perform activities differently or to perform different activities relative to competitors

There are two fundamental strategic dimensions: Cost and differentiation

The key is to choose one dimension and execute on it consistently

According to Porter, firms that are “stuck in the middle” either have no strategy or are drifting strategically

However, this point is debatable

Debates and Extensions

Clear versus blurred boundaries of industry

Threats versus opportunities

Five forces versus a sixth force (complementors)

Stuck in the middle versus all-rounder

Industry rivalry versus strategic groups

Integrating versus outsourcing

Industry-specific versus firm-specific and institution-specific determinants of performance

Figure 2.4: Three Strategic Groups in the Global Automobile Industry

Table 2.5: Strategic Groups and Ownership Types in the Chinese Electronics Industry

STRATEGIC GROUP

DEFENDER

ANALYZER

PROSPECTOR

Ownership type

State ownership

Foreign ownership

Private ownership

Customer base

Stable

Mixed

Changing

Growth strategy

Cautious

Mixed

Aggressive

Managers

Older, more conservative

Mixed

Younger, more aggressive

Source Adapted from m. W. Pong, J. Tan, & T. Tong, 2004, Ownership types and strategic groups in an emerging economy (p. 1110), Journal of Management Studies, 41 (7); 1105-1129.

The Savvy Strategist

Developing resources/capabilities that are valuable, rare, hard-to-imitate, and embedded in organizational structures and systems can help firms achieve successful performance

Lessons from the VRIO framework

Task for strategists – build firm strengths by identifying, developing, and leveraging resources/capabilities

Imitation is not likely to be a successful strategy

Sustained competitive advantage will not last forever

Firms should try to develop “strategic foresight”

The Savvy Strategist (continued)

Four fundamental questions: Resource-Based Views

Why do firms differ? Resource heterogeneity

How do firms behave? Take advantage of strengths and overcome weaknesses

What determines the scope of the firm? How a firm performs relative to rivals

What determines the international success and failure of firms? Firm-specific resources/capabilities and a bit of luck

The Savvy Strategist (continued)

For strategic practice, the industry-based view provides

A systematic foundation for industry analysis and competitor analysis, to which a more detailed examination, introduced in later chapters, can be added

Awareness that additional forces (some discussed in Debates and Extensions section) influence competitive dynamics

Realization that industry is not destiny