The case analysis process of strategic management (1)

By studying the firm’s internal capabilities & resources, firms identify what they can do over time Unique resources, capabilities, and competencies sustainable competitive advantage..

Competitive Advantage

• Sustainability of a competitive

advantage is a function of:

– the rate of core-competence obsolescence

due to environmental changes, e.g.,

G en er al

E nv

ir on

m en t

Industry Environment

Competitor Environment

By studying the external environment, firms

identify what they might

choose to do

(Structure>Conduct>Performance)

Opportunities and threats

By studying the firm’s (internal) capabilities & resources, firms

identify what they can

do (over time)

Unique resources,

capabilities, and competencies

(sustainable competitive advantage)

(Resources, Capabilities)

• How do we effectively manage current core competencies while simultaneously

developing new ones? (exploit/explore)

• How do we assemble bundles of resources, capabilities and core competencies to

create value for customers?

• How do we learn to change rapidly?

Resources, Capabilities, and Core

Competencies

• Uncertainty regarding current/future

characteristics of the general and industry

environments

• Complexity - the interrelationship among

factors that shape a firm’s environment(s), and

top management perceptions of these

environments

people making and affected by resource

allocation decisions

Identifying Core Competencies

Identify sustainable competitive advantages Competitiveness

Four Criteria

of Sustainable Advantage

• Valuable

• Rare

• Imitation/Substitutes = costly

Value Chain Analysis

• In/Outsource

• decisions

•Tangible

•Intangible

Resources are what a

firm draws upon to

create value its

assets– and valuable

financial capital, talented managers, etc

markets for resources are often imperfect

resources are not intrinsically valuable

Capabilities describe the firm’s ability to

create, deploy, modify, reconfigure, and

leverage resources Valuable capabilities

permit resources to be combined in unique

ways to create core competencies

markets for capabilities are imperfect

are resources and capabilities that are a source

of competitive advantage over rivals

make a firm distinctive

McKinsey and Co recommends isolating 3-4 competencies when framing strategic actions

Consider Amazon (culture, transaction scale

economies, bundling, virtualization)

Four Criteria

of Sustainable Advantage

of Sustainable Advantage

• Valuable

• Rare

• Imitation/Substitution = Costly

• Organized

Costly to imitate: capabilities that other firms

cannot develop easily, usually due to

• Unique historical conditions - e.g., founder, culture

• Causal ambiguity - capabilities hidden

• Social complexity - capabilities distributed

• Time diseconomies

Four Criteria

of Sustainable Advantage

• Trust-based working relationships between

managers and nonmanagerial personnel

N

Capability

• integration of resources

bst

Costly?

Organized

?CompetitiveConsequences

PerformanceImplications

No No No No

Competitive Disadvantage

Below Average Returns

Yes No No

Yes/

No

Competitive Parity Average Returns

Yes Yes No

Yes/

No

Temporary petitive Advantage

Com-Above Average to Average Returns

Yes Yes Yes Yes

Sustainable petitive Advantage

Com-Above Average Returns

• Profit determined by :

– The amount of value customers place on

firm’s goods or services (V)

– Firm’s cost of production (C)

• Consumer surplus occurs when price

charged by a firm on a good or service is less than value placed on it by a customer

• Value creation = V-C

Porter’s Value Chain

Firm Infrastructure Human Resource Management Technology Development

cs Ma rke tin

g and Sa

Source MIT Sloan School – “Architectures and roadmaps for communications and media”

Technology Industry

Technology Industry

Assembling, Manufacturing and Sales

Assembling, Manufacturing and Sales

Distribution Center

Country Market A

Country Market B

Where will you design, assemble,

Where will you design, assemble,

inventory, market, and manage?

M arg in

Technological Development Procurement

• Improve Business Focus

– lets company focus on broader business

issues by having outside experts handle

various operational details

• Provide Access to World-Class

Capabilities

– the specialized resources of outsourcing

providers makes world-class capabilities

available to firms in a wide range of

applications

• Accelerate Business Re-Engineering

Benefits

– achieves re-engineering benefits more

quickly by having outsiders who have

already achieved world-class

standards take over process

• Share Risks

– reduces investment requirements and

makes firm more flexible, dynamic and

better able to adapt to changing

opportunities

• Free Resources for Other Purposes

– permits firm to redirect efforts from

non-core activities toward those that serve

customers more effectively

• Greatest Value

in terms of performing the primary or support activity being outsourced

• Evaluating Resources and Capabilities

create and capture value

• Environmental Threats and Ongoing Tasks

are used to neutralize environmental threats or

complete necessary ongoing organizational tasks

• Nonstrategic Team of Resources

– do not outsource capabilities that are critical

to their success, even though the capabilities are not actual sources of competitive

advantage

• Firm’s Knowledge Base

– do not outsource activities that stimulate the development of new capabilities and

competencies

Cautions and Reminders

• Never take for granted that core

competencies will continue to provide a source of competitive advantage

• All core competencies have the

potential to become core rigidities

• Core rigidities are former core

competencies that now generate inertia and stifle innovation