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MGO403 Strategic Management

Internal Analysis: VRIO and value chain

Dr. Yong Li

Topics

• Quiz 1 (10 minutes) • Announcements • Internal analysis

• Industry vs. firm effects • Identify a firm’s resources, capabilities and value chain activities • Apply the VRIO framework to assess resources and capabilities as sources of

competitive advantage • Apply a value chain analysis to understand which of the firm’s activities in the

process of transforming inputs into outputs generate differentiation and which drive costs.

Resources, capabilities, activities, and Links to Competitive Advantage and Superior Firm Performance

The VRIO Decision Tree to Determine the Strategic Importance of Resources and Capabilities…

Two Critical Resource Dimensions • Firm Resource Heterogeneity

– A firm can be viewed as a bundle of resources and capabilities – The bundle differs across firms

• Firm Resource Immobility – Resources tend to be “sticky” and do not move easily from firm to firm

A Resource/capability is Valuable If…

• It enables the firm to exploit an opportunity. • It enables the firm to offset a threat. • It enables a firm to increase its economic value creation

(V – C). – There is demand for the resource.

• Example? • Beats Electronics:

• Design and marketing of premium headphones • Production = ~$15 • Retail = $150 - $450

• Coolness factor translates to some cool profit!

A Resource/capability is Rare If…

• Only one or a few firms possess it • A resource that is valuable but not rare can lead

to competitive parity at best.

• Example: Beats Electronics:

– Vast celebrity endorsement – No other brand in the world, not even Apple or Nike,

has such a large number of celebrities from music, movies, and sports using its product in public.

A Resource/capability Is Costly to Imitate/Substitute If…

• Firms that do not possess the resource are unable to develop or buy the resource at a reasonable price.

• Example: Beats Electronics: – Dr. Dre relies on entrepreneurial judgment in making

decisions rather than market research. – The social capital of Dr. Dre and Jimmy Iovine might be

impossible to replicate.

• valuable, rare, and costly to imitate → internal strength (a core competency)

Barriers to imitation

• Unique Historical Conditions Firm developed in an unusual way that supported the development of certain competencies (e.g. Honda’s development of gas engines vs. GM’s EV efforts)

• Causal Ambiguity Cannot detect how a firm uses its competencies as a foundation for competitive advantage. cause and effect unclear.

• Social Complexity Different social and business systems interact

• Intellectual property (IP) protection (e.g., patents) Usually last for 20 years (proprietary vs. generic drugs)

405cc

Related products: ground tillers, marine engines, generators, pumps, chainsaws

Goldwing touring

motor cycle

1975 1980 1985 1990 1995

Acura Car d iv is ion

2006

Indy 500

The Tiffany Setting

• Core competency - Elegant jewelry design and craftsmanship delivered through a superior customer experience.

• Vigorously protects its trademarks, including its Tiffany Blue Box

The firm Is Organized to Capture Value If…

• It has an effective organizational structure.

• It has coordinating systems.

• Example: Xerox Palo Alto Research Center (PARC): – Developed the first Word-processing application Graphical User Interface (GUI),

Ethernet, Mouse, Personal Computer – These innovations did not fit within the Xerox focus. – Management was busy pursuing innovations in the photocopier business --- not

organized to capture the gains!

• Competitive Advantage More Likely from • tangible resources or • intangible resources?

Knowledge and Competitive Advantage

• An organization’s knowledge or expertise can lead to sustainable advantage if: ➢The knowledge is tacit rather than articulable;

❖ Tacit Knowledge: “We know more than we can tell.” ❖ Tacit Skills: Riding a bike, swimming, “learning by doing,” which is • critical for maintaining a manufacturing base

➢The knowledge is not observable in use; ➢The knowledge is (socially) complex, rather than simple.

The Rise and Fall of Groupon (A VRIO VIEW) • A daily-deal website, offering group coupons • Grew quickly

– 260 million subscribers, 500,000 merchants – $6 billion buyout offer (Google 2011), was declined – IPO price $20 on 11/4/2011

• Why?

Core Rigidity

• A former core competency • Turned into a liability • Result of an environment change • No longer fits in the external environment

• Turns a resource from an asset to a liability

Dynamic Capabilities

• A firm’s ability to: • Adapt resources over time

• Create, deploy, modify, reconfigure, upgrade, leverage • In consideration of the external environment

• The goal: • Develop resources, capabilities, and competencies • Create a strategic fit with the firm’s environment • Change in a dynamic fashion

Key Questions for Managers:

• How do we assemble bundles of Resource & Capabilities in order to build core competencies and create value?

• Does anyone else posses the same resources or capabilities? • Will our competitors be able to imitate our Core Competencies? • Are substitutes available for our Core Competencies? • Will environmental changes make our core competences obsolete?

Cautions and Reminders

• Never assume that core competencies will continue to provide a source of competitive advantage

• All core competencies have the potential to become core rigidities — former core competencies can now create inertia and stifle innovation

• Determining what the firm can do through continuous and effective analyses of its internal resources and capabilities will increase the likelihood of long-term competitive success

5–19

The Value Chain

• Internal activities a firm engages in when transforming inputs into outputs

• Through primary and support activities • Each activity adds incremental value

• Raw materials  components  products • Each activity adds incremental costs

A Generic Value Chain

Primary Activities

• Firm activities that add value directly • Transform inputs into outputs as the firm moves a product or service

horizontally along the internal value chain. • Supply Chain Management

Activities involved managing suppliers, collecting, storing, and physically distributing the parts and supplies (inventory, materials handling, and order processing)

• Operations Activities necessary to convert the inputs into final product form (machining, packaging, assembly, and equipment maintenance)

• Marketing and Sales Activities completed to provide means through which customers can purchase products and to induce them to do so (advertising and promotional campaigns, selection of distribution channels, and development of the sales force)

• After Sales-Service Activities designed to enhance or maintain a product’s value (installation, repair, training, and adjustment)

Support Activities

• Firm activities that add value indirectly • Necessary to sustain primary activities

• Research and development (R&D) • Activities completed to improve a firm’s product and the processes used to manufacture

it (development of process equipment, basic research and product design, and servicing procedures)

• Human resources • Activities involved with recruiting, hiring, training, developing, and compensating all

personnel • Firm infrastructure

• Activities that are required to support the work of the entire value chain (general management, planning, finance, accounting, legal support, and governmental relations)

• Information systems

Value Chain Analysis (Value Chain as a collection of resources and capabilities)

Step 1. Disaggregate the firm into separate activities

Step 2. Identify the key resources and capabilities associated with each activity; Assess linkages across activities

Step 3. Appraise resources and capabilities (involves judgment) a. strategic importance: How important is it to our strategy? b. relative strength: Does the firm have the resources and capabilities to perform a

particular activity in a manner superior to competitors? Need cost/benefit info to do well

Step 4. Determine what incremental or radical changes are needed to improve performance

Develop strategic implications of internal analysis

•Should not drain resources •Deploy to greater effect?

•Should not drain resources •Outsourcing

•Leverage to fullest extent

•Upgrade existing R&C •Develop new R&C •Outsourcing?

Inconsequential weaknesses

Superfluous strengths

Key strengths

Key weaknesses

Deficient

Parity

Superior R

el at

iv e

St re

ng th

Critically importantNot important Strategic Importance

(VRIO)

• The key to a successful resource-based strategy is to identify, invest in, and leverage a set of valuable resources and capabilities (i.e., core competencies or key strengths)

• E.g., Disney has leveraged its brand image built on animated characters (e.g., Mikey Mouse) across movies, theme parks, and merchandizing

Outsourcing

• The purchase of a value-creating activity from an external supplier • Few organizations possess the resources and capabilities required to

achieve competitive superiority in all primary and support activities. • By performing fewer activities:

• A firm can concentrate on those areas in which it can create value • Specialty suppliers can perform outsourced capabilities more efficiently

Outsourcing Decisions

5–28

A firm may outsource all or only part of one

or more primary and/or support

activities

Outsourced activity Operations

M arketing and Sales

Firm Infrastructure

Logistics

Service

Outbound Logistics

Human Resource Management

Research and Development

Primary Activities

Information systems

Outsourcing

• BENEFITS

Improve business focus: outside experts handle various operational details

Provide access to world-class capabilities without ownership

Sharing development risks

CAUTIONS • Outsource only to firms that

really perform the activity well. • Don’t Undercut Yourself: Do

not* outsource activities in which the firm itself can create/capture value, can neutralize threats, or activities that are needed to complete ongoing organizational tasks.

• Future Use: Do not* outsource activities that help develop new capabilities.

Strategic Coherence • Combining activities that complement and reinforce one another.

These activities dovetail together to help achieve the overall objectives of the firm.

• Such strategies, which may be regarded as systems of activities are often more successful because they are more difficult to imitate. Thus, they can lead to a sustainable competitive advantage.

• Strategic coherence may not be a sufficient condition for attaining a competitive advantage, but it is often a necessary one.

Southwest Airline’s Activity System

Limited passenger amenities

Short-haul, point-to-point

routes between midsize cities

and secondary airports

High aircraft

utilization

Frequent, reliable

departures

Lean, highly productive ground and gate crews

Very low ticket prices

No meals

No seat assignments

No baggage transfers

No connections with other

airlines

15-minute gate

turnarounds

Limited use of travel agents

Automatic ticketing machines

Standardized fleet of 737

aircraft

Flexible union

contracts

High level of employee

stock ownership

“Southwest, the low-fare

airline”

High compensation of employees

Strategic Coherence: The Logic of How The Business Fits Together

➢ Low Price ➢ Short Routes

• No Frills • Point-to-Point • One Aircraft -- Boeing 737 • High number of Aircraft per Route

• No Meals • Flexible/ Lower Staffing

➢ Premium Price ➢ Short, Long, & Int’l ➢ Variety

• Hub & Spoke System • Multiple Aircraft • Low number of Aircraft per

Route • Meals & Service • Higher Staffing

Strategic Coherence: Fit and Balance • A fit among corporate, business, and functional strategy; • A fit between strategy formulation and implementation; • A balance of commitment and flexibility; • A balance among stakeholders; • A balance of competition and cooperation; • A balance of hiding and diffusing information; • A balance of centralization and decentralization; • A balance between stability and change.

Strategic Coherence • A sustainable competitive advantage often requires trade-offs.

These tradeoffs arise for at least three reasons:

➢ Inconsistencies in image or reputation.

➢Tradeoffs arising from the activities themselves.

➢Limits on internal coordination and control

• General management at its core is strategy:

➢Defining and communicating the company’s unique position; ➢Making tradeoffs; and ➢Forging a dynamic fit among activities (i.e., strategic coherence).

Internal Analysis for Beats by Dr. Dre

Resource/ Capability

Valuable Rare Costly to Imitate Organized to capture value

Competitive Consequence

Marketing savvy of co- founders

Design and marketing of premium headphones Production = ~$15 Retail=$150 - $450

Coolness factor translates to some cool profit

Product placement

Vast celebrity endorsement

Dr. Dre relies on entrepreneurial judgment in making decisions rather than market research. social capital of Dr. Dre and Jimmy Iovine might be difficult to replicate.

Yes Competitive advantage (>60% share in premium phone market; acquired by Apple for $3b)

Will Beats have a sustainable competitive advantage? Briefly explain, why or why not?

Talents of Beats’ co-founders (Jimmy Iovine & Dr. Dre): have creative talent, a successful track record, deep and far-reaching networks. Meet VRIO. Can sustain CA. However, acquisition by Apple puts this into question: if Beats Electronics’ core competencies are intangibles, such as marketing savvy, they may not remain as valuable under Apple’s ownership

Innovation in Action: Apple

• Record sales in midst of 2008 global recession • Attributed to capabilities in innovation across all product lines

• Laptops • iPhone • iPod

• Potential negatives going forward • Challenges for Tim Cook to match up to Steve Jobs brand image? • Top management talent lured away by other firms

Resource/ Capability

Valuable Rare Costly to Imitate Organized Competiti ve Conseque nce

Apple R&D and Innovation

Design & develop own operating system, hardware, application software, & services to provide its customers new products/solutions with superior ease-of- use, seamless integration, and innovative industrial design.

Awarded 563 patents in 2010, double 2016. Unibody design, multi- touch tech, airplay remotes

YES

iPod top selling MP3, iPhone top selling smart phone, Mac computer

Hardware updated/refreshed approx once a year

YES

R&D expenditure was $1,333 Mn, $1,109 Mn and $782 Mn in 2009, 2008 and 2007, respectively

R&D only $4.1B over last 4 years. Microsoft 31B, Cisco 19B. Apple R&D very efficient per $

YES

Ability to develop new products and get 1st mover advantage with iPhone and iPad, avoid untested tech (ex. 3g vs 4g) proprietary technology and platform such as iOS and Itunes store

YES

Sustain-able Advantage

YES

Apple – Sustainable Competitive Advantage

The Resource Based View (VRIO) (Internal Analysis for Tesla)

Resource/ Capability

Valuable Rare Costly to Imitate Organized to capture value

Competitive Consequence

Name: _________________________________ MGO403 Time: ____________

Does Tesla have a sustainable competitive advantage? Briefly explain, why or why not?

___________________________________________

Learning Objectives

• Differentiate among a firm’s core competencies, resources, capabilities, and activities. • Compare and contrast tangible and intangible resources. • Apply the VRIO framework to assess the competitive implications of a firm’s resources and

capabilities. • Apply a value chain analysis to understand which of the firm’s activities in the process of

transforming inputs into outputs generate differentiation and which drive costs. • Identify competitive advantage as residing in a network of distinct activities. • Conduct a SWOT analysis to generate insights from external and internal analysis and derive

strategic implications.

Next Class

• Read Chapter 6 – Business Strategy • HW3: Re-Read case “Tesla”

Using the Resource based view (Internal Analysis) template… - Identify and assess Tesla’s resources and capabilities. - Does Tesla have a sustainable competitive advantage? • Due 9/18 • Hand in hard copy at start of class (typed)