The Internal Environment:Understanding how a Firm’s Resources and Capabilities

Lead to a Competitive Advantage

Agenda

Resource-based View of StrategyResources and Capabilities

SWOT AnalysisValue Chain and Cost Analysis

CompanyMission

andObjectives

ExternalEnvironment

MacroIndustry

Operating

Internal Environment

ResourcesCurrent Strategy

Costs

StrategicOptions

andChoice

Desired? Possible?

Resource-based View of Strategy

Views the firm as a unique bundle of heterogeneous resources and capabilities

Strategy is concerned with matching a firm’s resources and capabilities to theopportunities that arise in the external environment (or creating opportunities).

The key to profitability is not doing the same as other firms, but exploitingdifferences between firms.

Resource-based View of Strategy

Resources are tangible, intangible and human. Examples include:

Financial PhysicalTechnologyReputationCultureSpecialized skills and knowledgeCommunication patternsEmployee motivation

Different Types of Resources

Tangible Assets/Resources: Coca-Cola’s Formula

Intangible Assets/Resources: Nike’s Brand Name, Jack Welch as GE’s former CEO, Reputation

Organizational Capabilities: Dell Computer’s Customer Service,Wal-Mart’s purchasing and inbound logistics, 3M’s innovation process

How can one identify the key resources upon which a strategy can be built?

Competitive Advantage comes from:

Scarcity of the Resource

Relevance of the Resource (Key Success Factors)

Resources and KSFs

P& G’s

Brand Management ProgramIndustry KSFs

• Price Competitiveness• Market Share• Brand Equity• Access to Distribution

Channels• Product

Differentiation

                                                                                                                                                                                                                                                                                       

Sustainable Advantage is based on the following:

Rare

Not easily imitated (physical uniqueness, path dependency, causal ambiguity, economic deterrence)

Not easily substitutable

Transferability

Firm-specific resources whose ownership cannot be easily transferred

Durability(How quickly will this resource depreciate? (Investments in Technology)

Competitive Superiority(Requires some disaggregation)

Appropriability(Who captures the value that the resource creates? Physician/Hospital Relationships)

Financial Capital: Retained Earnings, Capital from Entrepreneurs, equity holders

Physical Capital (examples): Computer hardware and software technology, automated warehouses, robots used in production, Geographic Location (Wal-Mart/operations in rural markets generate higher returns than more competitive urban markets)

Human Capital (examples): training, experience, judgment, relationships (DuPont invests heavily in training their engineering staffs to be more assertive and open to new technologies)

Organizational Capital (examples): formal reporting structures, formal and informal planning systems, culture and reputation (Merck uses its management reputation to gain access to managerial labor markets, distribution networks and customer groups.)

Durability? Transferability? Replicability?

Resource-Based View and SWOT Analysis

Strengths: something the company either possesses or is good atdoing (e.g., assets, skills, knowledge, partnerships)

Weaknesses: an area of current or potential vulnerability1. The Question of Value

2. The Question of Rarity

3. The Question of Imitability

4. The Question of Organization

SW Questions

The Question of Value: Does a resource enable a firm to exploit and environmental opportunity or neutralize an environmental threat?

The Question of Rarity: Is a resource currently controlled by only a small number of competing firms?

The Question of Imitability: Do firms without a resource face a cost disadvantage in obtaining or developing it?

The Question of Organization: Are a firm’s other policies and procedures organized to support the exploitation of its valuable, rare and costly to imitate resources?

What is value?

What is meant by value-adding activities?

Do all of the activities of a firm create value?

Value Chain: Cost Analysis

PurchasedSuppliesInboundLogistics

OperationsDistribution

and OutboundLogistics

Salesand

MarketingService Margin

Technology: Product R&D, Systems Development, Design

Human Resource Management and Development

General Administration: Planning, Finance, MIS, Legal

Perform proprietaryresearch and gather

proprietary information

Create uniqueproducts

and services

Build a network of local officesto establish

a localpresence

Use professionalbrokers paid

by commissionto deliver

personal serviceand advice to

clients

Back office functions: clear trades, track account balances, distributeinformation and research reports, install and operate administrativeand systems support for brokers.

Value Chain of Full Service Brokerages

Create Web pageand navigation

software;install servers

Provideclients

access totrading

informationand

accountbalances viathe Internet

Technical support and customer service personnel, automated record keeping

Value Chain of Discount Brokerages

Competitive Strategies

Agenda:

Generic StrategiesLow cost leadershipDifferentiationBest CostFocus

Grand StrategiesConcentrationMarket DevelopmentProduct Development

Generic Strategies

Low Cost Leadership

Differentiation

Best Cost

Focus

Low Cost Leadership

The firm attempts to be the low cost provider of a product or service.

Sources of Cost Advantage:

Economies of Scale (OPERATIONS)

Economies of Learning (learning curve effects/improved coordination/familiarity with technology, etc) (OPERATIONS/R&D)

Production Techniques (Efficient utilization of materials/increasedprecision/automation) (OPERATIONS/AIS)

Low Cost Leadership

Sources of Cost Advantage:

Product Design (Designs economize on materials/design for automation) (OPERATIONS/R&D/ENGINEERING)

Input Costs (Location advantages/ownership of inputs/exercisingbargaining power/supplier cooperation) (PROCUREMENT/INTERNATIONALIZATION/VERTICAL INTEGRATION(C-L STRATEGY)

Capacity Utilization (OPERATIONS)

Managerial or Organizational efficiency (operational effectiveness)(ALL FUNCTIONAL AREAS)

1. Selects relatively inexpensive sites2. Builds only basic facilities(no restaurant, no bar)3. Relies on standard architectural designs 4. Uses inexpensive materials andlow-cost construction techniques5. Simple room furnishings and decorations

Low CostStrategy

CompetitiveAdvantage

External EnvironmentMotel 6

Sources of Advantage

Differentiation Strategy

When the firm attempts to provide something unique that is valuable to buyers beyond simply offering a low price.

Firms pursue differentiation based on demand or supply:

Demand involves understanding customers and their needs and preferences.

Supply involves being aware of the resources, capabilities, skillsand knowledge that a firm can leverage to create uniqueness.

Drivers of Uniqueness/Sources of Advantage

Product features and product performance

Complementary service (delivery, credit, repair)

Intensity of marketing activities (advertising spending, signaling)

Reputation

Technology embedded in design and manufacture

Quality of purchased inputs

Drivers of Uniqueness/Sources of Advantage continued..

Location (e.g., retail stores)

Degree of vertical integration

Skill and experience of employees

Procedures influencing the conduct of each value-adding activity(e.g., rigor of quality control, service procedures, frequency ofvisits to a customer)

Proper segmentation

1. Prime Location with Scenic Views2. Custom Architectural Designs3. Fine Restaurants 4. Elegantly appointed lobbies and bar lounges.5. Swimming pools, exercise facilities6. Upscale Room Accommodations7. Multiple Guest Services8. Large Well Trained Staff

DifferentiationStrategy

CompetitiveAdvantage

External Environment

Sources of Advantage

Combines advantages based on both low cost and differentiation.

The firm is able to offer what customers perceive as valuable while at the same time being cost efficient.

Best Cost

1. Luxurious, yet comforting atmosphere (D)2. Well-chosen yet limited menu of services (LC)3. High quality dining (D)4. Restaurants are profit centers (LC)5. Each property has unique “personality”(D)6. Low building costs (LC)7. Low costs of capital (LC)

Best Cost Strategy

CompetitiveAdvantage

External EnvironmentKimpton Hotels

Sources of Advantage

Focus Strategy: the firm focuses on a narrower segment of the industry.

How would a firm select an appropriate segment?

Can a firm pursue a just a “focus” strategy?

Examples: Papa Joe’s Grocery, Oink Oink, Inc. (roasted pig ears)

Concentrated Growth

Increasing the use of present products in present markets

1. Increasing the rate at which present customers use the product/service (Hospitals creating wellness programs)

2. Attracting competitors’ customers

3. Attracting nonusers of the product (Profiling and contacting potential

cosmetic surgery patients)

Drs. Rodan & Fields have their own private practices, specializing in dermatologic surgery, cosmetic surgery and acne treatments. Seeing over 1,000 patients a month, Drs. Rodan and Fields developed Proactiv Solution to help relieve the endless frustration and suffering of their patients.

                       

Market Development

1. Opening additional geographic markets

2. Attracting other market segments

Selling present products in new markets

Product Development

Developing new products for present markets

1. Developing new product features

2. Combining quality variations

3. Brand Extension