Strategic Analysis

Strategic Management

Module 4 Resources and

Capabilities (Strategic Capabilities)

Dr Xueli (Charlie) Huang

School of Management

Reviewing Modules 1-3: Where are we now in our roadmap of

strategic management?

• Module 1 Introducing strategy –Key points: strategy, level of strategy (corporate, business, and functional), and strategic

management.

• Modules 2 & 3 The environment – part of STRATEGIC

POSITION –The PESTEL framework

–The Porter’s 5-forces model

–The concept of strategic group

–Need to understand why (objectives) for using these analytical tools, how (process) to

use them, and make conclusions and understand the implications of your conclusions

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What the firm might do

What the firm can do

Modules 2 & 3 The Environment

The Macro-env analysis

Five Forces Analysis

Strategic group

Market and competitor

Module 4

Strategic capabilities

Sustainable

Competitive

Advantage

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Opening story: What underpins Dyson’s competitive advantage?

• Dyson Ltd (Formerly Dyson Appliances) was created in 1987 by James Dyson - a British inventor, industrial designer and founder of the Dyson company

– A small (one-person) family business in 1987

• Its revenue and profit reached US$5.67 billion and $1.42 billion in 2018 respectively, selling

–bladeless hand dryers, lighting, hair dryers,

–bagless vacuum cleaners

–air purifiers, and even washing machines

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Dyson’s main products

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What underpins Dyson’s competitive advantage?

• The Dyson’s story (2’05”)

–https://www.youtube.com/watch?v=3DHAnmTCS5Q

• They are:

–Industry design, technological and product innovations, and

entrepreneurship (risk taking and stay close to the market)

• However, Dyson scrapped a project to build electric cars in

Oct 2019, and sent 523 UK employees home.

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Questions

• On what fundamental basis has Dyson been competing?

• What underlines Dyson’s competitive advantage?

• How we can identify, evaluate and manage organisation's

strategic capabilities?

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Learning Objectives

After studying this module, you should be able to

– Understand the classification of an organisation’s resources and

competences.

–Identify an organisation’s strategic capabilities using the criteria of value,

rarity, inimitability and organisational support (VRIO).

–Diagnose strategic capability by means of value chain analysis, activity

systems mapping, and benchmarking.

– Manage strategic capabilities for organisations

– Understand resource-base view (RBV) – another dominant strategic

perspective.

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What are an organisation’s resources

and competences?

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Resources and competences

• Resources are the assets that organisations have or can call upon (e.g.

from partners or suppliers), that is, ‘what we have’, including:

–Tangible (e.g., physical, financial, HR)

–Intangible (e.g., patent, technological know-how, brand name, goodwill)

–Knowledge-based resources (e.g., experience, business process, management)

• Competences are the ways those assets are used or deployed

effectively, that is, what we do well’, including

– Skills and ability

– Dynamic capability: How quick to learn and adapt to changes

LO1

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Resources Competences

Distinctive capabilities Required to achieve

competitive advantage

Threshold capabilities Required to be able to

compete in a market

Threshold

Resources

Threshold

Competences

Distinctive

Resources Distinctive

Competences

Redundant capabilities Those don’t generate

valued to customers

The classification of capabilities: redundant, threshold and distinctive capabilities

Redundant

Resources

Redundant

Competences

RMIT University©2018

What are Threshold Capabilities?

• Threshold capabilities are those needed for an organisation to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market – ‘qualifiers’.

• For example

– IT infrastructure for banks

– Website for e-tailers

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What are Strategic Capabilities?

• Strategic capability refers to the resources and competences of an organisation needed for it to achieve competitive advantage – “winners”. –They help an organization achieve its long-term survival and competitive advantage

• For example

– Apple: Design, Mobile technology, Powerful brandname

– Samsung: Display technology

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Where strategic capabilities reside?

• Each operational activity or process –E.g., marketing, production, R&D

–Singapore Airlines: Excellent customer service

–McDonald’s: fast customer service

–Apple: product innovation

–Dell: Distribution

–Honda: engine technologies

• Linkages of operational activities and processes –The combined effect of all these activities and processes

–For example: R&D and Marketing for Nike; 3M: culture

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Diagnosing an organisation’s strategic capabilities

• The four key criteria by which capabilities can be assessed in terms of providing a basis for achieving sustainable competitive

advantage are:

• Value,

• Rarity,

• Inimitability and

• Organisational support

VRIO

LO2

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Criteria for identifying strategic capabilities - VRIO

• Value by customers (from a customer’s perspective) –delivering value for money

• Rare (from a competitor’s perspective) –Those resources or competence possessed by one or a few organizations only.

• Inimitability (or robustness) of competence

– due to: complexity, causal ambiguity, culture and history, and change

• Supported by the organisation

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Criteria used for identifying strategic capabilities –

Summary

Valuable Rare Inimitable Supported by

organisation

Competitive

Consequences

Performance

Implications

No No No No Competitive

Disadvantage

Below

Average

Returns

Yes No No Yes/no Competitive

Parity

Average

Returns

Yes Yes No Yes/no Temporary

Competitive

Advantage

Aver/Above

Average

Returns

Yes Yes Yes Yes Sustainable

Competitive

Advantage

Above

Average

Returns

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RC

TC

SC

TC

or

SC?

Diagnosing strategic capabilities-

Valuable?

• Valuable?

– It is the most important criterion of VRIO

• Analytical techniques for diagnosing if an organisation's

strategic capability is valuable include:

– The value chain and value network

– Activity systems mapping

– Benchmarking

LO3

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Diagnosing competitive strategic capability - Valuable

• The value chain –The concept of Value: Value = Benefits - sacrifice

–Value chain can be used to diagnose which strategic capability is valuable to customers

–The concept of value chain can be used to help understand a firm’s cost position and the value each activity delivers.

–It helps in identifying an (or a cluster of ) organization's capabilities in terms of what is valuable.

• What activities are most valuable to organization? –This depends on what industry an organization is operating

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The value chain within an organisation

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The roots of competitive advantages

Product/service features

Value chain activities and processes

Strategic capabilities

Resources Capabilities

Strategic capability:

The roots of competitive advantages

Insourcing or outsourcing

What customers value:

Critical success factors

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CFS

Value chain

analysis

Diagnosing strategic capabilities – valuable?:

Activity systems mapping

• Activity systems mapping aims to link an organization's activities and processes to its industry’s critical success factors (CSFs), then identify those resources and competences that are employed to undertake them within the organization.

• CSFs are those product or service features that are particularly valued by a group of customers.

– What are features of a product? This can be examined using the concept of total product.

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Diagnosing strategic capabilities – valuable?:

Activity systems mapping (cont’d)

• Analyzing the features of products and/or services offered –The concept of the total product – layers of products

–Levels of product feature –Threshold features (survival features)

–Critically successful features

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The Concept of the Total Product

Core

benefit

or

service

Installation

Packaging

Delivery

and

credit

Warranty

StylingQuality

FeaturesBrand

name After-

sale

service

Augmented product

Actual product

Core product

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SUCCESS

Critical success factors

Brand Innovation

Good

service

Range Reliable

delivery

Solving

buyers’

problems

Flexibility

Main benefits to

customers – or “Higher

order strategic themes”

Rapid response

Good

personal

relations

with

buyers

Accepting

returned

goods Fast turnround

of urgent orders

Staff discretion

and ‘rule bending’ Low plant

utilisation 24 hr despatch

Stock levels

Use of

subcontractors

for transport

Distribution and

logistics systems

Resources

and competences

Diagnosing strategic capability – Activity

systems mapping

Activity mapping: Linking CSF to a firm’s strategic capability (e.g., its, activities processes, and resources) Activities and

processes

It is built on the basis of solid understanding of customers, competitors and the organization

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Diagnosing the value of strategic capability: Valuable? -

Benchmarking

• Benchmarking

–Horizontal benchmarking

–Best-in-class benchmarking (e.g. BA benchmarked its refuelling operations against

Formula 1)

–Industry/sector benchmarking

–Vertical benchmarking

– Historic comparison to identify any significant changes in relation to previous years

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Diagnosing competitive strategic capability – the other

3 criteria

• Rare?

–Competitor analysis. It is often based on the management knowledge

• Criteria of inimitability (robustness)

– complexity

– causal ambiguity

– culture and history (path dependence)

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Criteria for the inimitability of resources

and capabilities

O – Organisational support

• The organisation must be suitably organised to support the

valuable, rare and inimitable capabilities that it has. This

includes appropriate processes and systems.

– Organisational structure

– Systems (e.g., IT, control, infrastructure)

– Process

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From a resource/competence to a strategic capability

Managing strategic capabilities

• Developing strategic capabilities

–Internal capability development: –Leveraging capabilities – identifying capabilities in one part of the organisation and transferring them to other parts (sharing best practice).

–Stretching capabilities - building new products or services out of existing capabilities.

–External capability development – adding capabilities through mergers, acquisitions or alliances.

LO4

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Managing strategic capabilities (cont’d)

• Protect strategic capability – strategic capabilities need to be protected from imitation or outflowing.

• Ceasing activities – non-core activities can be stopped, outsourced or reduced in cost.

• Managing the capabilities of people – training, development and organisation learning.

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Resource-based view (RBV)

• The resource-based view (RBV) of strategy asserts that the

competitive advantage and superior performance of an

organisation is explained by the distinctiveness of its capabilities.

– Its main proposition:

–An organization's performance is largely determined by its

resources and capability (skills and capacity) that are valuable,

rare, costly to imitate, and supported by the organistion.

LO5

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Resource-based view (RBV) (cont’d)

• A firm can be regarded as a bundle of resource

• Two basic assumptions –Resource heterogeneity

–Competing firms possess different bundle of resources.

–Resource immobility –These resource differences may persist

• Strategic implications –Resource-picking ability

–Capability development

–Strategic leverage

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Module summary (1/3)

• Strategic capabilities comprise both resources and

competences.

• Sustainability of competitive advantage is likely to

depend on an organisation’s capabilities being of at

least threshold value in a market but also being

valuable, relatively rare, inimitable and supported by

organisations

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Module summary (2/3)

•Ways of diagnosing organisational capabilities include: – Analysing an organisation’s value chain as a basis for understanding how value to a customer is created and can be developed.

–Activity mapping as a means of identifying more detailed activities which underpin strategic capabilities.

–Benchmarking as a means of understanding the relative performance of organisations.

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Module summary (3/3)

• Managing strategic capabilities

–understanding, developing, protecting, and leveraging

• RBV

–Main proposition: the competitive advantage and superior performance of

an organisation is explained by the distinctiveness of its capabilities

–Two key assumptions: resource heterogeneity and immobility

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Next Week

• Module 5 Stakeholder Management and Governance

• Form your group of four within the same tutorial for

Assignment 2

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