Week 4 strategic position strategic capability

Outcomes covered in this sessionFollowing this session students should be able to understand: • What is meant by strategic capability & how it contributes to the competitive advantage of

3BM020 Organisational Strategy and

Decision Making

Session 4Glyn Littlewood

Strategic Position & Strategic capability

Outcomes covered in this session

Following this session students should be

able to understand:

• What is meant by strategic capability & how it

contributes to the competitive advantage of

organisations

• The strategic importance of resources,

competences & dynamic capabilities

• The development of options based on the

distinctive capabilities & the core competencies

of the organisation

In the news: Tesco Clubcard

Strategic Capability - Outline

•In previous weeks we discussed how the

external environment can create strategic

opportunities and threats

• However, some organisations competing in

the same environment as competitors gain

superior performance

Resource based view (RBV) of strategy:

The competitive advantage and superior performance of an organisation is based upon the distinctiveness of its capabilities

Strategic Capability - applied

Saloon cars compete within the same market, but…

•BMW (see case study last week) has done well

•Ford and Chrysler have struggled to adapt to environmental changes

•Rover (UK) has gone out of business

What were/are BMW’s strategic capabilities?

Resources & Competences

• Strategic capabilities are the capabilities of

an organisation that contribute to its

long-term survival or competitive advantage.

– Resources are the assets that

organisations have or can call upon (e.g from partners or suppliers), that is ‘what

we have’

– Competences are the ways those assets are used or deployed effectively, that is

‘what we do well’

Strategic Capability - Outline

Some businesses achieve extraordinary profits

compared with others in the same industry

Their resources or competences permit:

•production at lower cost

or

•generation of superior product or service at standard cost

Fit and Stretch

Internal strategic capability

– Strengths and weaknesses

• Matching strategic capabilities to

A traditional view of resources

• Traditional economic categories of resources:

– Labour

– Capital

– Land (to a lesser degree)

• For Wernerfelt (1984:172) a resource is ‘anything which

could be thought of as a strength or weakness of a given firm’.

• Tangible resources are physical assets of an

organisation such as plant, labour, and finance.

• Intangible resources are non-physical assets such as

information, reputation, and knowledge.

Resource-based view (RBV) of Strategy

• developed to answer the question: Why do

some firms achieve better economic

performance than others?

• used to help firms achieve competitive

advantage and superior economic performance

• assumes that a firm’s resources and capabilities are the primary drivers of competitive advantage and economic performance

• Intellectual capital

– Patents, brands, business systems, customer

databases, “goodwill”

– How they are managed

– Cooperation between people

– Adaptability

– Innovation

– Customer and supplier relationships

– Learning

Components of strategic capabilities

Johnson, Whittington, Scholes, Exploring Strategy, 9 th edition (2011) Pearson Education

Resource-based view of Strategy

• It Is sometimes also called ‘the capabilities view’.

• Competitive advantage derives from the

distinctiveness of an organisation’s capabilities

– Some businesses achieve extraordinary profits

compared with others in the same industry– Their resources or competences permit

• production at lower costor

• generation of superior product or service atstandard cost

Threshold Capabilities

• Threshold capabilities: those essential to

compete in a given market, those necessary

to achieve parity with competitors iin the

market – ‘qualifiers’

– Required to be “in the game”

• Threshold levels change over time

– changes in Critical Success Factors

– new entrants

– competitor activity

Dynamic Capabilities

Dynamic capabilities are the means by which an organisation has the ability to renew and

recreate its strategic capabilities to meet the

needs of changing environments

Such capabilities are distinct from ordinary

capabilities that may be necessary to operate

efficiently now but that may not be sufficient to sustain superior performance in the future

– Organisational capability to change, innovate,

be flexible, adapt and learn

Threshold Capabilities (2)

• Distinctive capabilities are those that are

required to achieve competitive advantage Distinctive or unique capabilities that are of value to customers and which competitors find difficult to imitate – ‘winners’

• Possible redundancy of capabilities

– Can be difficult to dispose of

– Competences required to manage the resources

Threshold & Distinctive Capabilities

Redundant capabilities

• Capabilities, however effective in the past, can become less relevant as industries evolve and change.

inhibit change and become a weakness.

Unique Resources

• Unique resources: tangible and intangible

Critically underpin competitive advantage and cannot be imitated or obtained by others

Core Competences

Core competences are the linked set of skills, activities and resources that together are

difficult to imitate and obtain and:

• deliver customer value

• differentiate a business from its competitors

• potentially, can be extended and developed

as markets change or new opportunities arise

1 G Hamel and C.K Prahalad, ‘The core competence of the corporation’,

Harvard Business Review, vol 68, no 3 (1990), pp 79–91.

Cost Efficiency

• Customers benefit from cost efficiency via

– Lower prices

– More product features for the same price

• Cost management can create competitive advantage

… but …

• Cost management may become a threshold capability:

– Customers do not buy at any price – need appropriate value at acceptable price

– Competitive rivalry requires continual cost reduction

Sources of Cost Efficiency

The Experience Curve

Company A has unit costs here

Company B has unit costs here

Strategic Capabilities and Competitive Advantage

The VRIO Framework

• Resources/capabilities with the potential to

provide an organisation with superior

performance must meet four criteria:

– Valuable – the resource helps the organisation

improve its value-added

– Rare – few, if any, organisations possess this

resource

– Inimitable – the resource cannot easily be copied or substituted

– Organised – the organisation must be able/organised

to take advantage of the resource

(Barney 1995, 2002)

Criteria for the inimitability of strategic

capabilities

Johns, G Whittington, R & Scholes, K Exploring Strategy 9 th edition 2011 Prentice Hall

Strategic capabilities and competitive advantage

The four key criteria by which capabilities can

be assessed in terms of providing a basis for

achieving sustainable competitive advantage

1 Jay Barney: ‘Firm resources and sustained competitive advantage’,

Journal of Management, vol 17 (1991), no 1, pp 99–120.

VRIN 1

Capabilities for Sustainable Competitive Advantage (1)

Capabilities for Sustainable Competitive Advantage (2)

• Value

– Ability to deliver what the customer values

• Rarity

– Unique resources, rare competences

• Who owns the competence and how easily transferable is it?

• Preferred access to customers/suppliers

• Situation dependent/non-transferable

• Sunk costs

Capabilities for Sustainable Competitive Advantage (3)

Capabilities for Sustainable Competitive Advantage (4)

• At product/service level by other products or services

• At competence level by a different approach

Capabilities for Sustainable Competitive Advantage (5)

I – Inimitability

Inimitable capabilities are those that competitors

• Competitive advantage can be built on unique resources (a key individual or IT system) but

these may not be sustainable (key people leave

or others acquire the same systems).

• Sustainable advantage is more often found in competences (the way resources are managed,

competences are linked together and integrated.

Capabilities for Sustainable Competitive Advantage (6)

Capabilities for Sustainable Competitive

Advantage – Robustness (6)

Take Aways

• Strategic capability deals with adequacy

and suitability of resources and

competences required for success

• Goal is to establish core competences that lead to competitive advantage

• Cost efficiency is vital

• In dynamic conditions, dynamic

capabilities are important

Additional reading slides

– is the collective and shared experience

accumulated through systems, routines and

activities of sharing across the organisation

Organisational Knowledge (2)

process

• Explicit knowledge – codified and objective,

transmitted in formal systematic ways

• Tacit knowledge – personal, context-specific, hard to formalise and communicate

• IT facilitation of knowledge sharing is of limited benefit

• The more formal and systematic the system, the

greater the danger of imitation

The Value Chain

Source: M.E Porter, Competitive Advantage: Creating and Sustaining Superior Performance, Free Press, 1985 Used with

permission of The Free Press, a division of Simon & Schuster, Inc © 1985, 1988 by Michael E Porter All rights reserved.

Value Chain and Value Network

• To diagnose strategic capability

• To understand how value is created or lost

in terms of the activities undertaken

The value chain describes the activities within

and around an organisation which together

create a product or service

The value chain describes the activities within

and around an organisation which together

create a product or service

Value Chain Analysis

• Identifies clusters of activities providing

particular benefit to customers

• Highlights activities which are less efficient and which might be de-emphasised or

Value Chain Analysis

• The value chain links the value of the

activities of an organisation with its main

functional parts

• It then attempts to make an assessment of the contribution that each part makes to the overall added value of the business

Value Chain Analysis

Michael Porter suggested that it could be

applied to strategic analysis by linking two

areas together:

1 The added value that each part of the

organisation contributes to the whole

organisation; and

2 The contribution to the competitive

advantage of the whole organisation that each of these parts might then make

Comments on value chain analysis

Weaknesses in the practical application of

value added include the following:

• A lack of precision in identifying areas of

resource advantage

• An inability to value clearly major assets

like specialist knowledge and company leadership

• Summarises analysis of

– Business environment: opportunities & threats

– Strategic capabilities: strengths & weaknesses

• Used for comparison with competitors

• Focuses on future choices and capability of

organisation to support them

• Problems of SWOT analysis

– Can generate long lists: need to focus on key issues – Danger of over-generalisation: not a substitute for rigorous strategic analysis

Stretching and Adding Capabilities

• Extending best practices

• Adding and changing activities

Building Dynamic Capabilities

• Promote a learning organisation

– Recognise intuition of people

– Accept conflicting ideas

– Experimentation as the norm

• Add activities to support learning, e.g “venturing”

business units

• Manage organisational knowledge

– Need right culture and structure

• Develop spiral of interaction between tacit and explicit knowledge

• Question core rigidities

Strategic Capability – Key Points (1)

• Competitive advantage derives from strategic

capabilities

• Strategic capability comprises tangible and

intangible resources deployed via competences

• Continual improvement of cost efficiency is vital

• For sustainable competitive advantage strategic

capabilities must be valuable, rare, robust or

non-substitutable

Strategic Capability – Key Points (2)

• Dynamic capabilities are needed in a changing

environment

• Value chain/value network/activity mapping to

understand cost and value creation

• Benchmarking establishes relative performance

and challenges assumptions

• Management of strategic capabilities involves

stretching capabilities and building dynamic

capabilities

Identifying the resources that deliver

Strategic Competitive Advantage

Four key questions related to

strategic resources & capabilities

1 What are the

capabilities important in strategy?

Three broad categories:

Because they deliver value added

4 How can

we improve competitive advantage?

Identify the resources and capabilities of the

organisation

• Profit maximising, industry-based theories: SCA and

value added derive from an analysis of the industry

• Market structure - the number of firms and the degree of

rivalry - forms the basis of competitive development

• Market conduct - how firms behave towards each other -

will then influence strategy

• Market performance - the strategies chosen in the

context of the above two factors - then represents the

development of strategy

• Represented by Prof Michael Porter: Five-Forces

Analysis and Generic Strategies analysis

• But such theories do not explain why two companies in the same industry achieve widely differing results

Identify the resources and capabilities of the

organisation

• Resource-based view (RBV) of strategy development

represents revised view of strategy development.

• Focuses on the individual resources of the organisation,

rather than strategies common to all companies in an

industry.

• Basic argument: important to understand the competitive

forces in an industry, but organisations should seek their

individual solutions within this context.

• Competitive advantage: derives from the exploitation of the relevant resources of the individual organisation

when compared to others in the industry.

• Keypoint: RBV represents newer insight

The VRIO Framework

• Resources/capabilities with the potential to

provide an organisation with superior

performance must meet four criteria:

– Valuable – the resource helps the organisation

improve its value-added

– Rare – few, if any, organisations possess this

resource

– Inimitable – the resource cannot easily be copied or substituted

– Organised – the organisation must be able/organised

to take advantage of the resource

(Barney 1995, 2002)

Applying the VRIO Framework

If a firm’s resources are: The firm can expect:

Not Valuable Competitive Disadvantage

(at least temporarily)

Performance Implications

disadvantage

Under industry average

parity

Industry average

Yes Yes No - Short term

competitive advantage

Over industry average

Yes Yes Yes Yes Long term

competitive advantage

Over industry average

Sustainable competitive advantage

• Advantages over competitors that cannot easily be imitated

• Sustainable over time by being deeply embedded in the organisation

Intensity of competition in an industry

Measured by:

• Degree of concentration of companies in the industry

• Range of aggressive strategies of

competitors in the market place

Degree of concentration often summarised in

the concentration ratio:

‘The percentage of industry value added or

turnover controlled by the largest four, five

or eight firms in an industry’