Class Plan 3 “The early bird may get the worm, but the second mouse gets the cheese”

Anonymous

Questions for the next case Brief discussion of the Apollo case Review of 5-forces, including exercise Move

on to Chapter 3 on Internal Analysis + extra information on VRIO approach

Exercises & video on Internal Analysis

Questions for the Nokia case

1) Have Nokia’s mission and vision (or their implementation) been partially responsible for their faltering performance?

2) Using the 5-forces model, what industry threats should Nokia have identified in their strategic pursuits?

3) What can Nokia do to continue to compete globally and domestically?

Porter’s Five Forces Model (Fig 2.2 p45 adapted)

Rivalry among established

firms

Risk of entry by potential competitors

Bargaining power of suppliers

Bargaining power of buyers

Threat of substitute products Special role of

complements

Product Lifecycle

Time

Demand Embryonic

Growth Shakeout Mature Declining

Macro-environmental Forces [Environmental Scanning]

Macroeconomics: growth rate of the economy, interest rates, currency exchange rates, inflation rates

Technological: “creative destruction”, shifting barriers to entry

Social: lifestyles, trends and attitudesDemographics: composition of the population,

factors such as income distribution, education, labour mobility, gender

Political & Legal : deregulation and free trade Global: falling barriers to trade, new economic

development

More on 5-forces model

Strategic Groups Def.: subsections of industry with the same basic strategy in-group

Implications: closest competitors are in the same group groups, to some extent, face different 5+-forces exit & entry barriers exist between groups

Limitations of 5+-Forces & Strategic Groups models Static picture with limited attention to innovation. Industries

evolve “unfrozen and reshaped” by technology : punctuated equilibrium hyper-competitive industries with no equilibrium

downplays individual company differences studies show that industry only accounts for 10%-20% of

variance in firms’ profit rates

Internal Analysis

The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization.

Strengths lead to superior performance. Weaknesses lead to inferior performance.

Internal Analysis includes an assessment of: Quantity and quality of a company’s

resources and capabilities Ways of building unique skills and company-

specific or distinctive competencies

The Theory Behind Internal Analysis

The Resource-Based View

• developed to answer the question: Why do some firms achieve better economic performancethan others?

• assumes that a firm’s resources and capabilitiesare the primary drivers of competitive advantageand economic performance

• used to help firms achieve competitive advantageand superior economic performance

The Resource-Based View

Resources and Capabilities

Resources:

• tangible and intangible assets of a firm» tangible: factories, products intangible: reputation

• used to conceive of and implement strategies

Capabilities:

• a subset of resources that enable a firm totake full advantage of other resources» marketing skill, cooperative relationships

The VRIO Approach

Value: Do a firm’s resources & capabilities in each section of the Value Chain enable the firm to respond to environmental threats or opportunities?

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

(In)Imitability: Do firms without a resource face cost disadvantages in obtaining or developing it?

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

The VRIO Framework

• a resource or bundle of resources is subjected toeach question to determine the competitiveimplication of the resource

Applying the Tool

• each question is considered in a comparativesense (competitive environment)

• For further application information, see Conner, Tom (2002) “The resource-based view of strategy and its value to practising managers” , Strategic Change 11, 307-316)

Applying the VRIO Framework

The Question of Value

• in theory: Does the resource enable the firmto exploit an external opportunity or neutralizean external threat?

• the practical: Does the resource result in anincrease in revenues, a decrease in costs, orsome combination of the two? (Levi’s reputationallows it to charge a premium for its Docker’s pants)

Applying the VRIO Framework

The Question of Rarity

• a resource must be rare enough that perfect competition has not set in

• if a resource is not rare, then perfect competitiondynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)

• thus, there may be other firms that possess theresource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-loweringdrugs, but the drugs are still scarce—look at prices)

Applying the VRIO Framework

Valuable and Rare

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

Not Valuable Competitive Disadvantage

Valuable, but Not Rare Competitive Parity

Valuable and RareCompetitive Advantage

(at least temporarily)

Applying the VRIO Framework

The Question of Inimitability

• the temporary competitive advantage of valuableand rare resources can be sustained only if competitors face a cost disadvantage in imitatingthe resource

» intangible resources are usually morecostly to imitate than tangible resources(Harley-Davidson’s styles may be easilyimitated, but its reputation cannot)

Applying the VRIO Framework

The Question of Inimitability

• if there are high costs of imitation, then the firmmay enjoy a period of sustained competitiveadvantage

» a sustained competitive advantage will lastonly until a duplicate or substitute emerges

if a firm has a competitive advantage, otherswill attempt to imitate it (Razor scooterswere a big hit and others quickly imitated them)

Applying the VRIO Framework

Value, Rarity, & Inimitability

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

Valuable, Rare, butnot Costly to Imitate

TemporaryCompetitive Advantage

Valuable, Rare, and Costly to Imitate

SustainedCompetitive Advantage

(if Organized appropriately)

Applying the VRIO Framework

The Question of Organization• a firm’s structure and control mechanisms

must be aligned so as to give people abilityand incentive to exploit the firm’s resources

• examples: formal and informal reporting structures,management controls, compensation policies,relationships, etc.

• these structure and control mechanisms complementother firm resources—taken together, they can help a firm achieve sustained competitive advantage

The VRIO Framework

Valuable? Rare?Costly toImitate? Organization?

CompetitiveImplications

No

Yes

Yes

Yes

Yes

Yes Yes Yes

No

No

No Disadvantage

Parity

TemporaryAdvantage

SustainedAdvantage

EconomicImplications

BelowNormal

Normal

AboveNormal

AboveNormal

Generic Value Chain

A Typical Value Chain (Oil-based refined products)

Exploring for crude oil

Drilling for crude oil

Pumping crude oil

Shipping crude oil

Buying crude oil

Refining crude oil

Sending refined products to distributors

Shipping refined products

Selling refined products to final customers

Value Chain Approach

Analyze each of the functions that lead to production of the final product or service

How well do they each perform?- quantitative & qualitative tools needed here

How effectively do the different functions interact?

Are the supporting functions adequate?

The Building Blocks Approach (Figure 3.6, p 95)

Efficiency: What is the usual measure of efficiency?

Quality: Excellence and reliability

Innovation: Importance of both process and product innovation, role of innovation in becoming unique

Customer responsiveness: Includes response time, customization, and after sales service and support

Applying the Building Blocks Approach

Itemize instance of significant operational and managerial achievements and/or deficiencies under each of the categories.

Use these noted observations to guide your recommendations.

Why companies fail

Inertia Companies find it difficult to change their

strategies and structures

Prior Strategic Commitments Limit a company’s ability to imitate and

cause competitive disadvantage

The Icarus Paradox A company can become so specialized and inner directed

based on past success that it loses sight of market realities

Categories of rising and falling companies: • Craftsmen • Builders • Pioneers • Salespeople

Avoiding Failure

1. Focus on the Building Blocks of Competitive Advantage Develop distinctive competencies and superior performance in:

Efficiency Quality Innovation Responsiveness to Customers

2. Institute Continuous Improvement and LearningRecognize the importance of continuous learning within the organization

3. Track Best Practices and Use BenchmarkingMeasure against the products and practices of the most efficient global competitors

4. Overcome InertiaOvercome the internal forces that are barriers to change

Questions for Starbucks’ Video

1) List Starbucks’ major capabilitiesand discuss the strategic implications of these capabilities.

2) How is Starbucks’ utilizing their resources and capabilities to develop their brand overseas?

3) Describe Starbucks’ people-to-people business philosophy. How has this resource/capability contributed to Starbucks’ strategic success?

Questions

1) What is the role of luck in gaining possession of a particular resource or capability? Can a firm manage luck? Give 3 examples of resources or capabilities that specific organizations gained through luck.

2) Some firms’ products are so well known that the entire category of products offered in the industry (including rivals’ products) is often referred to by the leading firm’s brand name (which is called an eponym). Identify three such products, and for each case discuss whether their brand recognition gives the leading firm a competitive advantage. Why or why not?