Technology & Strategy

GEST-D-484

Manuel Hensmans

1

Last week

• Lessons from the past for company• Sources, types/patterns, standards, timing

• Emphasise more in case-study

2

This class

• Part III: Setting the strategic direction

– Importance strategic capability

– Analyse internal resources and competences• Apply VRIN framework

– Quiz!

– If we have the time…

• Fit external position and internal capability

– 5 steps

3

Google: customer-led vs

resources and competences• Customer-led mission?

- ―to organize the world's information and

make it universally accessible and useful‖

- ―Don’t be evil‖

- Do all products map on this mission?

- Original search engine, Google Book Search /

Maps / Scholar

- Yet: sales advertising space, GoogleDocs,

Gmail, Android, Chrome,…

4

Customer-led in fast changing

environment?

• Why has Google been playing catch up

with display/banner ads?

– Although it owns the biggest information

database of all internet players

• Mission vs resources & competences!• Founders’ distrust of cookies

• CEO Schmidt less coy about exploiting resources

& competencies indiscriminately

5

When are internal resources and

competences most important?

• When the external environment is subject to rapid

change, internal resources and competences offer a

more secure basis for strategy than market focus.

• In such cases, internal resources and competences are

the primary sources of profitability

6

Resources and competences

• Resources are the assets that organisations

have or can call upon (e.g. from partners or

suppliers),that is, ‘what we have’

– tangible and intangible assets of a firm

• tangible: factories, products

• intangible: reputation

Four Categories of Resources

• Financial (cash, retained earnings)

• Physical (plant & equipment, geographic location)

• Human-intellectual (skills & abilities, patents…)

• Organizational (culture and reputation;

collective experience through

systems, routines & activities)

8

Company Valuation

ratio

Country Company Valuation

ratio

Country

Yahoo! Japan 72.0 Japan Coca-Cola 7.8 US

Colgate-Palmolive 20.8 US Diageo 7.4 UK

Glaxo Smith Kline 13.4 UK 3M 7.3 US

Anheuser-Busch 12.6 US Nokia 6.7 Finland

eBay 11.2 US Sanofi-Aventis 6.3 France

SAP 10.8 Germany AstraZeneca 5.9 UK

Yahoo! 10.7 US Johnson & Johnson 5.7 US

Dell Computer 10.0 US Boeing 5.7 US

Sumitomo Mitsui Financial 8.8 Japan Eli Lily 5.6 US

Procter & Gamble 8.4 US Cisco Systems 5.5 US

Qualcomm 8.3 US Roche Holding 5.5 Switz.

Schlumberger 8.2 US L’Oreal 5.3 France

Unilever 8.1 Neth/UK Altria 5.2 US

PepsiCo 8.0 US Novartis 5.1 Switz.9

CHECK MARKET TO BOOK VALUE

FOR YOUR COMPANY!

Firms with the Highest Ratios of Market

value to Book Value (December 2006)

Resources and competences

• Competences are the ways those assets are

used or deployed effectively, that is, what we

do well’.

– E.g. product design skill, cooperative relationships

Resources and Competences

Firm Assets:

Machinery

Collective Product Design Skill

Recruiting Skill

Engineering Skill of Individuals

Mineral Deposits

Are these resources

or competences?

?

?

?

?

?

11

Google: resources?

• User base. With about 60% of the world’s internet

searches, the Google.com website is the world’s 2nd

most visited website gives it a massive potential for

market access. Similarly its dominance of online

advertising (>30% of US online adverting revenue) gives

it a powerful position in the entire advertising sector.

• Financial resources. With its cash reserves, huge cash

flow from advertising and massive capacity for raising

debt and equity capital as a result of it huge market

capitalization, Google is well able to broaden its product

range through acquisition.

12

Google: resources?

• Human resources. Google is committed to hiring the

best and brightest. Its technical staff—software

engineers in particular—are considered among the best

in the industry.

• Culture. The Google vibrant, entrepreneurial culture

combines informality with a huge emphasis on

innovation, creativity, and initiative

13

Google: competences?

• Software development. Google’s search engine was

based upon the technical brilliance of its founders in

creating new search algorithms. Google continues to

build depth and breadth to its software engineering

capability.

• Product design. The dominance of the Google search

engine over its early rival can be attributed primarily to its

ease of use. Google continues to develop products that

are easy to use even by the users with few computer

skills.

• Entrepreneurship and innovation. As a result of its

culture, systems and people, Google shows a

tremendous capacity to generate new product ideas and

new business initiatives. 14

Bundles of resources and competences

make up strategic capabilities

Threshold and distinctive

capabilities

• Threshold capabilities are those needed for

an organisation to meet the necessary

requirements to compete in a given market

and achieve parity with competitors in that

market – ‘qualifiers’.

• Distinctive capabilities are those that

critically underpin competitive advantage and

that others cannot imitate or obtain –

‘winners’.

Threshold and distinctive

capabilities

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 are:

• value

• rarity

• inimitability

• non-substitutability

VRIN framework

Criteria for the sustainability of

strategic capabilities

• in theory: Does the resource or competence

provide customer value?

• the practical: Does the resource result in an

increase in revenues, a decrease in costs, or

some combination of the two?

• distinctive or threshold?

20

Applying VRIN

V – Value of strategic capabilities

21

Exploring for crude oil

Drilling for crude oil

Pumping for crude oil

Shipping crude oil

Buying crude oil

Refining crude oil

Selling refined products to distributors

Selling refined products

to final customers

Shipping refined products

Substantial financial resources

Access to land

Scientific & technical knowledge

(human-intellectual)

Organizational commitment to risk-

taking and exploration

Uses of the value chain

• A generic description of activities –understanding the discrete activities and how they both contribute to consumer benefit and how they add to cost.

• Identifying particular strengths or weaknesses

• Analysing the competitive position of the organisation using the VRIN criteria – thus identifying sources of sustainable advantage.

• Looking for ways to enhance value or decrease cost in value activities (e.g. outsourcing)

Value chain

24

25

R – Rarity

• Rare capabilities are those possessed uniquely

by one organisation or by a few others only.

– E.g. a company may have patented products, have

supremely talented people or a powerful brand

• Rarity could be temporary

– E.g. patents expire, key individuals can leave or brands

can be de-valued by adverse publicity

Applying VRIN

I – Inimitability

Inimitable capabilities are those that competitors find difficult to imitate or obtain.

• 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,

developed and deployed) and the way competences are linked together and integrated.

Applying VRIN

Inimitability Criteria

Inimitability

strategic

capability

Social

Complexity History

Causal

ambiguity

28

Social Complexity (Monsanto & government lobbying)

• the social relationships entailed in

resources may be so complex that

managers cannot really manage them

or replicate them

The Question of Inimitability

29

Applying VRIN

Unique Historical Conditions

• first mover advantagese.g. Caterpillar

• path dependence

e.g. Qwerty standard for typewriters

The Question of Inimitability

30

Applying VRIN

The Question of Inimitability

Causal Ambiguity (Apple, Steve Jobs & product design)

• causal links between strategic capability

and competitive advantage understood?

• bundles of resources and competences fog

these causal links

31

Applying VRIN

Patents

• patents may be a two-edged sword

• offer a period of protection if the firm is

able to defend its patent rights

• required disclosure may actually decrease

the cost of imitation, and the timing

The Question of Inimitability

32

Applying VRIN

Non-substitutability

• Product or service substitution• E.g. e-mail systems vs postal systems

• No matter how VRI postal services were!

• Competence substitution

– Over-reliance on particular competences

• E.g. Kodak & chemical vs digital processes

• But Rolex vs Casio ?

33

Case Dyson

• Analyse the strategic capabilities of Dyson

in terms of threshold & distinctive

resources and competences

• Can of any of these capabilities be

imitated by competitors?

• Effect of Sir Dyson leaving company?

34

Dyson: threshold resources?

• engineering design equipment

• product supplies

• manufacturing space

• offices and facilities

• appropriate personnel

• sufficient customers (installed base)

35

Dyson: threshold competences

• general mgmt skills including distribution & marketing

• engineering design skills

• cost control through manufacturing in low-cost locations

• quality assurance and control

• the ability to attract customers sufficiently inspired by

design to pay premium prices across different markets

36

Dyson: distinctive resources

• James Dyson himself

• the Dyson brand and strategy of high-end products in an

otherwise staid market

• an HQ building and related laboratories designed to

foster innovation

• product portfolio and associated patents

• high R&D budget possibly through being privately owned

• history company used extensively in PR & advertising

• ownership of the manufacturing facilities and hence

control over the working conditions of the employees

versus other companies that contract out their

manufacturing and can be accused of supporting poor

labour conditions37

Dyson: distinctive competences

• inspirational leadership around the value of engineering

• design engineering skills that transform ideas into viable

products

• competence to make engineering aesthetically attractive

• seamless value chain despite design and manufacturing

being in different locations

• being one step ahead of competitors attracting early

adopter customers and subsequent followers including

premium pricing

• never being boring; always being surprising

38

Q2: Can Dyson’s capabilities be

imitated? • Focus on truly distinctive!

– Apply VRIN

• V: Many valuable capabilities (even threshold)

• R: Not products themselves

– Competitors have imitated products

– But: innovative culture, hands-on mgt style

• I: linked activities within Dyson / path-dependence

– What explains Dyson’s price premium?

• N: none in sight, but innovative culture could help

to protect in the future

39

Q3: departure Sir Dyson?

• Compare to Apple & Steve Jobs!

– Hands-on mgt style without Dyson?

– Aura of company that commands price

premium without Dyson?

– Ultimate source competitive advantage

• Bring exclusivity to market

– customers willing to pay more to be different and ahead

of the crowd even regarding an object as mundane as a

vacuum cleaner

40

Core Competencies

• Core Competences

– A set of integrated and harmonized abilities that distinguish the firm in the marketplace and that are hard to imitate or obtain

– Result of collective learning in the organisation,

especially how to co-ordinate diverse production skills

and integrate multiple streams of technologies.

• Competence that several business units draw on – Market focus << core competency in tech innovation

Most important distinctive competences!

1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006

Honda

Technical

Research

Institute

founded

1st motorcycle:

98cc, 2-cycle

Dream D

4 cycle

engine

405cc

motor

cycle

Power products:

ground tillers, marine

engines, generators,

pumps, chainsaws

snowblowers

First product:

Model A

clip-on engine

for bicycles

The 50cc

Supercub

N360 mini

car1000cc

Goldwing

touring

motor cycle

Acura Car

division

Competes in

Isle of Man TT

motorcycle

races

4-cylinder

750cc

motorcycle

Portable

generator

Enters Formula 1

Gran Prix racing

Honda

Civic Enters Indy

car racing

1st gasoline-powered

car to meet US Low

Emission Vehicle Standard

Civic GS

(natural

gas

powered)

Civic Hybrid

(dual gasoline/

electric)

Home co-

generation

system

Begins production of

diesel engines

Honda

wins

Indy

Champ

ionship

42

The evolution of Honda Motor Company

Precision

MechanicsFine

Optics

Micro-

Electronics

35mm SLR camera

Compact fashion camera

EOS autofocus camera

Digital camera

Video still camera

Video security systems

Camcorders

Plain-paper copier

Color copier

Color laser copier

Laser copier

Basic fax

Laser fax

Scanners

Mask aligners

Excimer laser aligners

Stepper aligners

Inkjet printer

Laser printer

Color video printer

Digital commercial

printer

Calculator

Notebook computer

Binoculars

43

Canon: Products and Core

Technical Capabilities

Group assignment

• List threshold & distinctive capabilities of

your company

• Do any of the most distinctive capabilities

qualify as core competences?

44

Quiz

• You get 10 minutes!

45