Slide of strategic management w5

Learning Objectives• Explain the nature of ‘competitive advantage’ • Discuss the concept of the value chain and its links to competitive advantage • Describe the role of an organisation'

Learning Objectives

• Explain the nature of ‘competitive advantage’

• Discuss the concept of the value chain and its links to competitive advantage

• Describe the role of an organisation's resources

and capabilities as a basis of competitive advantage

• Identify the resources and capabilities of an

organisation

• Evaluate the potential for an organisation's resources and capabilities to sustain competitive advantage

The Nature of Competitive Advantage

• Competitive advantage is a characteristic, feature or opportunity that an organisation possesses that will make it more attractive than its competitors

• For any company, the creation and sustainability

of competitive advantage is a main consideration when they formulate their strategy

• Competitive advantage is displayed by superior performance and value created for the

organisation’s customers

The Nature of Competitive Advantage

• The notion of value is central to competitive

advantage of any organisation

• Value creation is defined in many different

ways

• Value refers to a product’s performance

characteristics and attributes for which

customers are willing to pay

The Nature of Competitive Advantage

• The ability of organisations to develop a

competitive advantage depends on their ability to position their business system in the business

environment

• Business system comprises resources (inputs),

activities (throughputs) and product/service offerings (outputs) intended to create value for customers

Product/Service Offerings

• To achieve an attractive fit with customers’ needs

an organisation must know its target segment of the market

• The decision regarding the target customer is an important one

• Organisations divide customers into groups

according to the differences in customers’ needs

• This is referred to as market segmentation.

Product/Service Offerings

• Market segments can be defined on the basis of buying criteria employed and/or buyer behaviour exhibited

• Market segmentation should allow an

organisation’s strategists to gather a better insight into customers and lead to new opportunities for developing product/service offerings that are

tailored to the needs of target customers

• Competitive advantage can be achieved only if a company is able to satisfy its chosen market

segment

Product/Service Offerings

• Positioning is achieved by alignment of the three elements of the business system: product/service offering, value chain and the resources base

• Positioning is concerned with the decisions

‘where to compete’ and ‘how to compete.’

• The choice of certain product/market

combinations in which a company wants to

participate is referred to as the choice of

competitive scope

Value Chain Analysis

• Value chain analysis enables organisations to understand which activities create value and

which do not

• The value chain is a template used by an

organisation to identify its cost position, and the means that might be used to facilitate

implementation of a chosen business level

strategy

• A competitive advantage can be created if the company’s value chain creates additional value without incurring significant extra costs

The resource-based model assumes that:

• Each organisation is a collection of unique resources and capabilities that provides the basis for its strategy and is the primary source of returns

• Differences in firms’ performance are due primarily to their unique resources and capabilities rather than

structural characteristics of the industry.

• The central question of the RBV is ‘why do some

companies in the same industry outperform

others?’

Resource-Based View

Resource-Based View (Cont.)

• The resource based model proposes that:

• Resources are inputs into a firm’s production process

• A capability is the capacity for set of

resources to perform a task

• Capabilities evolve and must be managed

dynamically

Resource-Based Model (Cont.)

Components of Internal Analysis

Role of Resources and Capabilities

Fig 5.2

The Resources of the Company

Fig 5.5

The Resources of the Company

• Resources and capabilities of an organisation are two different and distinct categories

• Resources are the productive assets owned by

Organisational Capabilities

• Resources are not productive on their own

• To perform a task, a team of resources must work together

• Organisational capability refers to an

organisation’s capacity to deploy resources for

a desired result

Classifying capabilities

• Two approaches for classifying capabilities are:

• A functional analysis identifies organisational

capabilities in relation to each of the principal

functional areas of the company

• A value chain analysis separates the activities of the

company into a sequential chain

Value Chain Analysis

Fig 5.1

Competencies and Capabilities

• Competence is the product of learning and experience that represents real proficiency in performing an

internal activity

• Organisations deliberately develop their competencies over time by making efforts to do something

• Competencies represent the combination of skills,

resources and technologies, as opposed to a single

specific skill or resource

Competencies and Capabilities

• In general, every organisation has a collection

of capabilities, some of them stronger and

more competitive than the others

• Competitive capability is a competence that is appreciated by customers and distinguishes the organisation from its rivals

Competencies and Capabilities

• Core competencies are activities that an organisation performs better than its other internal activities and that are the most critical to competitiveness and

profitability

• Core competencies may reside, for example, in the company’s people, technology, ability to build

networks and systems which enable electronic

commerce, or skills in manufacturing innovative

products

Competencies and Capabilities

• Distinctive competence refers to an activity an organisation does well relative to its rivals

• Generally, a core competence becomes a basis for competitive advantage only when

it is a distinctive competence

The VRIO Framework

• According to Barney, a firm resource must have four attributes including:

• it must be valuable

• it must be rare among a firm’s current and

potential competition,

• it must be imperfectly imitable,

• it must be able to be exploited by a firm’s

organisational processes

The VRIO Framework

Table 5.3

Evaluating Resources and Capabilities

Fig 5.6

Establishing a Competitive Advantage

• For a resource or capability to establish a

competitive advantage, two conditions must be

present:

available within the industry, then it may be

essential to compete but it will not be a sufficient basis for competitive advantage

relevant to the KSFs in the market

Sustaining a Competitive Advantage

• It is important to assess the ability to establish competitive advantage but also for how long that advantage can be sustained

• This depends upon whether they have the

following characteristics:

• durability

• transferability

• replicability