MA in Management – Strategic Analysis Module
Analysing the Capabilities of the Organisation
A.
INTRODUCTION TO SESSION
Whilst it is clear that the external environment in which an organisation operates will have a
significant impact upon its performance, this is hardly the whole story. Even a superficial
glance across a range of organisation’s involved in the same area of activity will reveal
differences in performance, whatever the measure used. It is clear that what organisations
do, as well as how well they do it, will have a significant impact upon their success or failure.
In recent years, the study of strategy as focused increasingly upon the capabilities of the
organisation to use the resources available to it in order to build success. As a result, a
range of frameworks and techniques has been developed in order to understand and
analyse the strategic capabilities of organisations. These frameworks and techniques are
explored below.
Your Objectives
By the end of this session you should be able to:

Understand how the resources and competences available to or created by an
organisation can contribute to strategic capability.

Undertake a resource audit of an organisation.

Use value chain analysis to outline the activities an organisation performs and the ways
in which it links them together in order to create competences.

Understand the potential sources of cost efficiency and value added that could underpin
and sustain the strategic capabilities of the organisation.

Use relevant frameworks to identify and analyse the core competences and strategic
capabilities of an organisation.
B.
THE NEED FOR CAPABILITIES ANALYSIS
Organisations have different strengths and weaknesses, which means that they have
different abilities to deal with the threats and opportunities presented by the external
environment. In an increasingly unpredictable world it is also important to understand how
well equipped an organisation is to cope with the changes that this implies.
Internal analysis of an organisation aims to identify and understand the strategic
capabilities it possesses that will lead it to deal successfully with the challenges it faces,
currently and into the future, by meeting the needs and requirements of its customers and
users, better than other providers.
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As this is a relatively new area of academic investigation, the terminology used by different
authors tends to vary, so it is important to be on your guard as you read articles and books
about the subject.
The overall approach taken here is to see strategic capability as resulting from the
resources the organisation owns or to which it can gain access, the way in which it performs
and links together activities to create competences that use these resources, so creating
products and services valued by users.
In “Exploring Corporate Strategy”, Gerry Johnson and Kevin Scholes split these resources
and competences between those that are similar to those possessed by other providers and
those that are better or difficult to imitate. This is shown in Figure 4:1.
Same as competitors
or
easy to imitate
Better than competitors
or
difficult to imitate
Resources
Necessary
Resources
Unique
Resources
Competences
Threshold
Competences
Core
Competences
Figure 4:1 – A Typology of Resources and Competences
Necessary resources and threshold competences are needed by organisations simply to
compete in an industry or provide a service. However, as success depends upon performing
better than your competitors, sustainable competitive advantage is the result of
possessing unique resources and /or core competences that set an organisation apart
from others and allow it to deliver a superior product or service to users.
Given the stress upon the difficulty of imitation, core competences are seen as particularly
valuable as they are based on how the organisation works and tend by their nature to be
hidden and unique. Mahen Tampoe defined core competence as ‘a technical or
management subsystem which integrates diverse technologies, processes, resources and
know-how to deliver products and services which confer sustainable and unique competitive
advantage and added value to an organisation’.
The focus of capability analysis is upon the identification of those factors that will allow an
organisation to outperform its competitors. This is achieved by:

Assessing the resources of the organisation through a resource audit.

Identifying the key activities and linkages between activities across the organisation
through value chain analysis.

Understanding the bases of competitive advantage that underpin potential unique
resources and core competences.

Identifying and analysing the core competences and strategic capabilities of the
organisation.
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C.
AUDITING THE RESOURCES OF THE
ORGANISATION
The resources available to the organisation can be critical to strategic success. If an
organisation does not have the quantity of resources necessary, or they are not of sufficient
quality, then it is unlikely that the organisation’s strategy will be realised. Further, as argued
above, necessary resources are also available to competitors so offer no more than the
opportunity to participate, whilst unique resources may contribute to competitive
advantage.
The resources of the organisation go beyond a simplistic list of the factors of production,
land, labour and capital, to include the skills possessed within the organisation and
resources created by previous activities. In auditing the resources of an organisation it is
also important to consider not only those resources it owns but also those to which it has
access. In broad terms, resources can be split into four types:

Physical - the buildings, machinery, facilities and equipment used by the organisation.
Any audit of these resources also needs to consider factors like their age, condition,
technological sophistication, capacity and location.

Human - the people involved within the organisation. Any audit needs to extend beyond
a headcount to consider factors like education levels, skills mix, skill levels, age profiles
and adaptability.

Financial – not just available cash, but the ability of the organisation to raise capital,
management of working capital (stocks, debtors and creditors) and external financial
standing.

Intangible – these include patents, brand names and reputation. They are often more
difficult to identify or copy, but as a result potentially more valuable in creating
competitive advantage. Consequently, it is worth looking in more detail at this area.
Intangible resources like brand names and reputation are frequently the most important
assets that an organisation can possess because, by their very nature they are often difficult
to identify and particularly difficult to copy by a competitor.
Work by Richard Hall, here at the University of Durham, has identified a range of intangible
resources that can be important to the organisation. In his classification, he draws a
distinction between intangible assets, the things that “belong” to the company, and
intangible resources, that are the “doing” abilities of the organisation and the people within
it. Whilst this is an example of how language can vary in this area, it is a helpful distinction
because it highlights the range of resources that need to be considered and how they exist
or are created. The “capabilities” mentioned within the framework also imply a more limited
definition than overall “strategic capability”, though “cultural capabilities” could be considered
as crossing the divide between resources and competences outlined above.
Despite these variations, Hall’s framework is helpful within a resource audit because it
encourages consideration of all potential intangible resources and indicates ways in which
these potentially vital contributors to competitive advantage can be protected into the future.
His classification is outlined in Figure 4:2.
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Intangible Assets which are legally Intangible Assets which are not legally
protected
protected






Trade Marks
Patents
Copyright
Registered Designs
Contracts and licences
Trade Secrets



Information in the public domain
Reputation
Organisational and personal networks
These are the result of
Regulatory Capabilities
These are the result of
Positional Capabilities
Intangible Resources Functional skills
Intangible Resources Cultural capabilities




Employee know-how

Supplier know-how

Distributor know-how

Servicer’s know-how e.g. advertising 
agencies

These can be looked upon as
Functional Capabilities
Perception of quality standards
Perception of customer service
Ability to manage change
Ability to innovate
Team-working ability
These can be looked upon as
Cultural Capabilities
Figure 4:2 - Intangible Assets and Resources
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SAA 1
Using the frameworks outlined above, identify and classify the resources likely to be
available to an institution like the University of Durham.
Main Resources
Physical
Human
Financial
Intangible
- Intangible assets (legally protected)
- Intangible assets (not legally protected)
- Intangible resources (functional skills)
- Intangible resources (cultural capabilities)
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Necessary or Unique?
D.
IDENTIFYING COMPETENCES – THE
IMPORTANCE OF ACTIVITIES AND LINKAGES
Whilst the resources available to an organisation are important, the ways in which these
resources are utilised by the organisation are also critical to strategic success. Michael
Porter outlined the concept of the value system and the value chain as a means of
understanding how an organisation could create competitive advantage through the
activities it performs and the linkages between activities.
The value chain is a way of describing an organisation in terms of all the activities it
performs using the resources available to it in order to create products and services valued
by its customers or users.
An organisation’s value chain is embedded in a broader value system that provides inputs
into the organisation and helps transfer outputs to the ultimate consumer. Figure 4:3
illustrates the value system for an industry, showing how an organisation’s value chain is
connected by a series of linkages to its suppliers, distribution channels, eventually reaching
the final customer.
Figure 4.5 The value system
Supplier
value chains
Channel
value chains
Customer
value chains
Organisation's
value chain
Source: Adapted from M. E. Porter, Competitive Advantage, Free Press, 1985.
Used with permission of The Free Press, a division of Macmillan, Inc Copyright 1985 Michael E. Porter
Figure 4:3 – The Value System
Suppliers have value chains that create and deliver the purchased inputs used in an
organisation’s chain. Suppliers not only deliver a product but also can influence an
organisation’s performance in many other ways e.g. through quality control, meeting delivery
dates and price. In addition, many products pass through distribution channels on their way
to the buyer. The value chains of these channel organisations perform additional activities
that affect the buyer (e.g. a dealer network in the case of automobiles), as well as influence
the organisation’s own activities.
Gaining and sustaining competitive advantage depends on understanding an
organisation’s value chain activities and the linkages between these activities. But it also
depends upon understanding the relationships between the organisation and the value
chains of its suppliers and buyers. Finally, the organisation needs to understand how it fits
into the overall value system and this involves consideration of competitive scope.
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Competitive Scope
The value chains of organisations in an industry differ. The difference reflects their histories,
strategies, and success at implementation. An organisation’s value chain may differ in
scope from that of its rivals, representing a potential source of competitive advantage.
Competitive scope describes the range over which an organisation competes. There are at
least four dimensions to this range:
•
Segment scope - the range of products or services produced to serve different groups
of buyers.
•
Vertical scope - the extent to which activities are performed in-house instead of by other
organisations. This involves considering the extent of vertical integration.
•
Geographical scope - the range of regions, countries or groups of countries across
which an organisation chooses to compete with a co-ordinated strategy.
•
Industry scope - the range of related industries in which the organisation competes with
a co-ordinated strategy in order to gain scope economies.
A broad scope can allow a firm to exploit the benefits of performing more activities
internally. It may also allow the firm to exploit interrelationships between the value chains
that serve different segments, geographic areas or related industries. A firm may exploit the
benefit of broader scope internally or it may form alliances with other firms to do so.
Alliances with other firms are agreements that fall short of outright merger, such as joint
ventures, licenses, and supply agreements. They involve co-ordinating or sharing value
chains with partners, so broadening scope of the firm. For example, a shared sales force
may sell the products of two organisations or there may be joint production.
A narrow scope allows the tailoring of the value chain to serve a particular target segment
or geographic area of industry to achieve lower cost or to serve the target in a unique way
(e.g. niche marketing). The success of a narrow scope rests on differences among product
varieties, buyers, or geographic regions within an industry and the differences in resources
and competences of the organisation that allows it to perform better than its rivals in this
area.
Illustration
CHANGING TIMES AT MARKS AND SPENCER
With a history extending back into the Victorian era, the name of Marks and Spencer had
been synonymous with product quality and customer service on most UK High streets for
more than three decades. Yet, from late 1998 the company suffered from a series of
boardroom problems and uncomplimentary stories in the press, along with declining
performance.
Unlike most of its competitors in both clothing and food retailing, Marks and Spencer sold
products only under its own St. Michael brand. Customers valued the high standard of
product quality of the clothing, food and household products on offer and were prepared to
pay a small premium compared to similar competitor ranges. The wide range of products
available, the service provided by store staff and accessibility of the stores, along with the
“no questions asked” returned goods policy meant that a broad cross-section of the UK
public rated Marks and Spencer’s customer service highly.
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In addition to the decisions taken about the scope of their operations, Marks and Spencer’s
approach was the result of a complex set of activities and relationships which, in part, is
captured by the value chain illustrated below:
[see J & S pp 455-456]
Marks and Spencer’s Value Chain in the mid-1990s.
Source: G Johnson & K Scholes, Exploring Corporate Strategy, Prentice Hall, 1999
Marks and Spencer’s strategic capabilities extended beyond their own retail value chain to
the management of relationships with their suppliers. Their cultivation of, mainly UK-based,
suppliers to ensure adequate performance in terms of quality and delivery was built up over
many years. Sometimes higher margins were imposed on suppliers to ensure that quality
and delivery were up to standard.
However, this record of success came to an end as problems started to emerge late in 1998.
The six-monthly results up to September revealed the first decline in operating profits in over
30 years. The struggle to replace their Chairman and Chief Executive, Sir Richard
Greenbury, also generated stories that moved from the business pages to the front pages of
the national press. Problems with previous acquisitions made in Canada and the USA,
coupled with continued poor retailing results in the UK, meant that the picture turned from
bad to worse during 1999 and 2000.
Despite major changes in senior personnel, including the appointment of a Belgian
Chairman in Luc Vandevelde, the cutting of long term links with suppliers like William Baird,
the introduction of “concept” stores in some of their main locations and a major advertising
campaign, the poor performance continued into 2001. Many analysts claimed that Marks
and Spencer’s clothing ranges lay at the heart of the problem. The tastes of British
consumers had changed during the late 1990s, with preferences moving towards cheaper
clothing sold by the new discount stores like Matalan, or moving towards “designer” labels at
the other end of the scale. Marks and Spencer was no longer seen as providing the prices,
styles or quality demanded by shoppers. The question being asked by these analysts was
could Marks and Spencer change even further to meet these new competitive conditions?
E.
VALUE CHAIN ANALYSIS
The value chain provides a systematic basis for analysing the activities an organisation
performs and the linkages between these activities. Through these activities the
organisation creates value. The organisation gains competitive advantage through
reducing costs or increasing value more efficiently or more effectively than its rivals do.
Value chain analysis involves disaggregating the organisation into the specific activities it
performs in creating the products or services valued by customers or users. The linkages
between activities within and external to the organisation’s value chain also need to be
identified. Once both these tasks have been undertaken, attention can be focused upon
those activities and linkages that are critical to the creation of core competences.
Analysing Value Chain Activities
Every organisation is a collection of activities that are performed to design, produce, market,
deliver and support its products and services. All these activities can be represented
generically though the value chain depicted in Figure 4:4. The particular structure of an
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organisation’s value chain and the way it performs individual activities are a reflection of its
history, its strategy, its approach to implementing its strategy and the underlying economics
of the activities themselves.
Figure 4.4 The value chain
Firm infrastructure
Margin
Human resource management
Support
activities
Technology development
Procurement
Inbound Operations Outbound
logistics
logistics
Marketing
and sales
Service
Margin
Primary activities
Source: M.E Porter, Competitive Advantage, Free Press, 1985. Used with permission ofThe Free Press, a division of Macmillan, Inc. Copyright 1985 Michael E. Porter.
Figure 4:4 – The Value Chain
Value activities can be divided into two broad types:
•
Primary Activities - the activities involved in the physical creation of the product and its
sale and transfer to the buyer as well as after sale assistance. The five primary activities
are divided into inbound logistics, operations, outbound logistics, marketing and sales,
and service.
•
Support Activities - primary activities are supported by purchased inputs, technology,
human resources and various organisation-wide functions. The dotted lines in Figure 4:4
reflect the fact that procurement, technology development and human resource
management can be associated with specific primary activities as well as support the
entire chain. Firm infrastructure in particular supports the entire chain.

Primary Activities
According to Porter each primary activity is divisible into a number of distinct activities:
•
Inbound Logistics - including receiving, storing and disseminating inputs to the product
or service. Materials handling, warehousing, inventory control, vehicle scheduling and
returns to suppliers are all part of inbound logistics.
•
Operations - operations transform inputs into the final product form. In a manufacturing
company they could include machining, packaging, assembly, maintenance and testing.
In a service organisation like an architect’s practice, operations activities would focus
upon the creation of plans for a new building and include site surveying, project
evaluation and the generation of plans and specifications using CAD packages.
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•
Outbound Logistics - collecting, storing and physically distributing products and
services to buyers are included here. This could involve warehousing of the final
product, materials handling, delivery vehicle operation, and order processing. In a
service business like hairdressing, operations and outbound logistics activities are
intrinsically merged in the creation of a new hairstyle for the customer sitting in the salon.
•
Marketing and Sales – activities like advertising, promotion, sales force management,
producing quotations, managing distribution channels and pricing are included in
marketing and sales.
•
Services - providing service to enhance or maintain the value of the product or service
after sale. This might include installation, repair, training, parts supply, and product
adjustment.
Support Activities
Support activities can be divided into four categories. As with primary activities, each
support category is divisible into a number of distinct activities:
•
Procurement - refers to the activity of purchasing inputs to be used within the
organisation’s value chain. It can be divided into selecting new suppliers, purchasing
inputs and monitoring of supplier performance. Purchased inputs include raw materials,
supplies and other consumable items, as well as assets such as machinery, laboratory
equipment, office equipment, and buildings. Purchased inputs are present in both
primary and support activities and tend to be spread throughout an organisation. Whilst
the purchasing department may buy raw materials, plant managers may be responsible
for new machinery, office managers for temporary secretarial support and the chief
executive would be responsible for engaging strategy consultants.
•
Technology Development - is concerned with investment in the updating and
improvement of both the organisation’s products and its processes. It may include
component design, features design, field-testing, and process engineering. Every
activity is likely to use technology, either in the form of technical know-how or
procedures, or in the form of process equipment. Technology tends to be associated
with operations but this is too narrow a view; information technology is a key element of
logistics, sales, procurement and human resources in many companies. Technology
development is not solely linked to end products or services; communications technology
will be applied throughout the organisation via e-mail systems and Intranets.
•
Human Resource Management - includes recruiting, hiring, training, development and
compensation of all types of personnel. Human resource management supports both
individual primary and support activities (e.g. staff recruitment throughout an
organisation) and the entire value chain (e.g. labour negotiations). Human resource
management affects competitive advantage in any firm, by determining the skills and
motivation of employees and the cost of hiring and training. In some industries it holds
the key to competitive advantage.
•
Firm Infrastructure - consists of a number of activities including general management,
planning, finance, accounting, legal, government affairs and quality management.
Infrastructure, unlike other support activities, usually supports the entire chain and not
individual activities. Depending on whether a firm is diversified or not, firm infrastructure
may be self-contained or divided between a business unit and the parent corporation.
Firm infrastructure is sometimes viewed only as “overhead”, but it can be a powerful
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source of competitive advantage. In utility companies such as telecommunications or
gas, for example, negotiating and maintaining ongoing relations with regulatory bodies
can be among the most important activities for sustaining competitive advantage.
Direct, Indirect and Quality Assurance Activities
Sometimes, organisations concentrate on direct value chain activities and neglect indirect
ones such as quality assurance and after-sales service. Every organisation has direct,
indirect and quality assurance value activities. All three types are present in both primary
activities and support activities. For example, in the technology development activity, actual
laboratory teams are direct activities, while research administration is an indirect activity.
What is the distinction between direct, indirect and quality assurance activities?
•
Direct Activities - are directly involved in creating value for the buyer, such as
assembly, parts machining, sales force operation, advertising, product design and
recruiting.
•
Indirect Activities - make it possible to perform direct activities on a continuing basis,
such as maintenance, scheduling, operation of facilities, sales force administration,
research administration and vendor record keeping.
•
Quality Assurance Activities - ensure the quality of other activities, such as monitoring,
inspecting, testing, reviewing, checking, adjusting and re-working.
The role of indirect and quality assurance activities is often not well understood. In many
industries, indirect activities represent a large and rapidly growing proportion of cost and can
play a significant role in the differentiation of the product or service. Similarly, quality
assurance activities apply across the value chain and to ignore them can lead to problems.
The Relative Importance of Value Chain Activities
Companies rarely create core competences as a result of one value chain activity. Indeed,
were the company to rely on such an activity it would be at risk of losing its competitive
advantage as its competitors would find it relatively easy to replicate the activity within their
own value chains. The key is to identify those activities that seem to contribute most to the
creation of value within the product or service.
Originally, value chain analysis emerged from the move to introduce activity-based costing
systems in large organisations, often at the suggestion of management consultants. Whilst
few of these costing systems have survived, the value chain concept has proved more
durable and detailed analysis is often still possible in practice, as Alan Shepherd’s article,
“Understanding and using value chain analysis”, indicates.
Even without access to great detail, such as when undertaking a case study analysis, critical
activities can be identified by asking which activities contribute most to the distinctive nature
of the products or services created by the organisation? This is likely to focus attention on
those activities performed differently to competitors or those activities different to those of
competitors.
The importance of particular activities will also vary according to the industry in which the
organisation is located. For a distributor, inbound and outbound logistics are the most
critical. For a restaurant or retailer, outbound logistics may be largely non-existent and
operations are the vital category. In a bank, marketing and sales activities, coupled with
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technology development may well be vital in the development of successful financial
“products”. In any organisation, however, all the categories of primary and support activities
will be present to some degree and play some role in creating threshold and core
competences.
The following illustration highlights how one company attempted to create core competences
through a combination of activities.
Illustration
CREATING CORE COMPETENCES AT BRASSERIES KRONENBOURG
In the mid-1990s, Brasseries Kronenbourg was the main company within Kronenbourg SA,
the beer division of the French food and packaging group, Danone. Along with Heineken
and Carlsberg, Kronenbourg SA was one of the three largest brewers in Europe.
Brasseries Kronenbourg, formed from the merger of Kronenbourg and Kanterbraü in the
1970s, aimed to become one of the most productive brewers in the world. Production
facilities, along with human resources, finance and administration functions, were combined
by the mid-1980s. There then followed a restructuring programme that reduced staffing by
570 jobs, mainly through voluntary redundancies. At the same time a major investment
programme created larger, more efficient breweries capable of serving larger geographical
areas, up to 1,000km2 for mass market brands. The distribution system in France was also
developed through the acquisition of 60 warehouses via its subsidiary, Elidis.
By merging the sales forces of Kronenbourg and Kanterbräu, the company brought together
a unified product range of 28 brands. As product image and brand name are critical in this
market, the company made key investments in this area. The company strengthened its
links with its customers, particularly the retail chains, by introducing a merchandising system
called “Pluton”, that improved the presentation of beers, adapting it to each retail chain,
region and season. Kronenbourg also developed and launched a series of beers, to meet
the needs of emerging customer segments, including: Tourtel Brune (1989); Tourtel Ambrée
(1990) and Tourtel 100% malt (1994). Working with the packaging division of Danone Group
it also developed new packaging for its products, winning awards for one bottle and
developing a label that changed colour once the bottle was at the right temperature for its
Kronenbourg 1664 brand. From 1993, the Loi Evin restricted beer advertising, so the
company concentrated on the promotion of its products in cafés and the sponsorship of the
Paris Saint Germain and Strasbourg football teams.
As well as developing in its home market, Kronenbourg also sought to develop its
international presence through a range of acquisitions and licensing agreements. For
example it entered into a production agreement with Courage in the UK, as well as entering
into agreement with local breweries in Italy, Belgium, Spain and Greece. Its strategy was to
develop Kronenbourg 1664 and Tourtel as international brands brewed in each local market
alongside the strongest brands of its partner.
Source: based on R Calori & P Monin, “Brasseries Kronenbourg” in G Johnson & K Scholes,
Exploring Corporate Strategy, Prentice Hall, 1999.
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SAA 2
Use the value chain framework below to plot the main activities undertaken by Brasseries
Kronenbourg in the illustration, Creating Core Competences at Brasseries Kronenbourg.
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Identifying Value Chain Linkages
A key aspect of organisations is the interdependence or linkages between their various
activities. Whilst value activities can be viewed as the building blocks of core competences,
linkages are vital to the overall building process in two ways:
•
Co-ordination of linked activities such as procurement and assembly can reduce the
need for resource inputs. For example, Just-in-Time manufacturing methods reduce
total inventory requirements within assembly operations.
•
Integration of activities can create the opportunity to lower the total cost of the linked
activities or increases the value added. In copier manufacturing, for example, the quality
of purchased parts is linked to the adjustment of copiers after assembly. Canon found it
could virtually eliminate the need for adjustment in its personal copier line by purchasing
higher precision parts.
Managing the linkages across the value system is therefore a key management task. Three
kinds of linkages can be considered:
•
Linkages within the value chain.
It is easy to see that the value chain is a set of interdependent activities. The efficiency
with which one activity is performed determines the cost of other linked activities and the
cost of the product or service as a whole. Some of the most common linkages are those
between:
•
•
•
•
Operations and maintenance.
Quality assurance and other activities (e.g. inspection and after-sales service).
Activities which must be co-ordinated (e.g. inbound logistics and operations).
Activities that are alternative ways of achieving the same results (e.g. advertising and
direct sales).
Identifying linkages requires us to ask the question:
“What are all the other activities elsewhere in the organisation that have or might have
an impact on the cost or effectiveness of performing this activity?”
When activities in the value chain are linked, changing the way one of them is performed
can reduce the total cost of both. Deliberately raising costs of one activity may not only
lower the cost of another but may also lower the total cost. For example, using better
quality sub-assemblies may reduce total manufacturing costs if final assembly is made
easier.
Similarly, linking together activities may create opportunities to add value to the products
and services offered by an organisation. For example, the creation of “One-Stop Shops”
for business advice services can allow a more tailored package of support to be created
for clients.
•
Linkages between the business units of the same organisation.
Within the same company different kinds of businesses might concentrate on different
products or markets and thus need to be managed differently. Many organisations are
made up of separate business units, each with its own value chain.
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However, there may be opportunities to link particular activities to the advantage of the
business units concerned. For example, a major clothing retailer might have several
different store concepts appealing to different types of customer, but all can share the
same logistics and distribution system so reducing costs.
•
Linkages between the value chains of different organisations.
Vertical linkages reflect interdependencies between a company’s activities and the value
chains of suppliers and distributors and can be a key source of competitive advantage.
The delivery of chocolate in liquid form instead of moulded bars can reduce a
confectioner’s processing costs for example. Often linkages with suppliers provide
opportunities for cost reduction on both sides. The delivery of liquid chocolate can
reduce the supplier’s cost as well, since it eliminates the cost of moulding bars and
packaging them.
A similar analysis applies to linkages with distributors. For example, the location of a
channel’s warehouse and its material handling technology can influence a company’s
logistical and packaging costs. Similarly, sales or promotional activities by distributors
may reduce a company’s sales cost or increase opportunities to add value to the product
through increased service support.
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SAA 3
Refer back to your analysis of value chain activities at Brasseries Kronenbourg conducted in
SAA 2. Identify any linkages that exist between the activities and between this value chain
and those of other parts of the Danone Group and other organisations.
Linkages between value chain activities within Brasseries Kronenbourg
Linkages between Brasseries Kronenbourg and other parts of Danone
Linkages between Brasseries Kronenbourg and other organisations
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Adapting the Value Chain
Whilst the value chain is a very useful tool for strategic analysis, the generic framework
needs to be adapted to suit the different conditions of individual organisations. Certainly, it is
easier to apply the framework to a manufacturing company than a service-based
organisation, where inbound and outbound logistics are often integrated into operations
activities.
A number of changes have also been suggested to the generic framework. Information
technology is now an integral part of the activities of almost all organisations irrespective of
the products and services they provide and thus a key activity across their value chains.
Even stripping away much of the hype about e-commerce, IT and communications
technology are transforming the ways in which organisations operate, whether a car
manufacturer with electronic procurement systems or a university providing distance learning
courses via CD-ROM and an Intranet.
It has also been argued that people management and knowledge management are integral
to the value chain, particularly in knowledge-based businesses. Increasing academic
attention upon core competence has led to suggestions for further revisions to the
framework. In their book, “Strategic Management”, Hugh Macmillan and Mahen Tampoe
propose a revised value chain to reflect many of these points. Their revision of the value
chain is displayed in Figure 4:5.
F.
THE BASES OF COMPETITIVE ADVANTAGE
As was argued above, the underlying assumption of strategic capability analysis is that
sustainable competitive advantage results from an organisation having access to unique
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resources and core competences. These factors are important because they allow the
organisation to lower costs or increase revenues more than its competitors.
Together, the unique resources and the activities and linkages that create core competences
contribute to competitive advantage by allowing the organisation to exploit sources of cost
efficiency or value added not available to other organisations or difficult for them to imitate.
Therefore, it is important to understand and recognise these potential bases of competitive
advantage.
Economies of Scale
When unit costs fall as the scale of output increases, the phenomenon is described as
economies of scale. When such economies of scale exist, large volumes of output can be
produced at lower unit costs (average costs) of production than small volumes of output.
This can provide an organisation with an advantage over its competitors, as is shown in
Figure 4:6.
In Figure 4:6, the curve marked AC is an average cost curve for the industry as a whole,
illustrating economies and diseconomies of scale for organisations with different output
capacities. Note that beyond a certain volume of output, average costs may rise due to the
problems of managing large operations - these are diseconomies of scale.
The curves AC1 and AC2 represent the costs of output of separate organisations with
different capacity levels. Even if the organisation with a smaller capacity operates at
maximum efficiency, at the lowest point on the curve AC1, it is unable to match the lower
costs achievable by the organisation with capacity that is exploiting economies of scale.
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The essential point about economies of scale is that there are some costs that do not
increase as output is increased (e.g. in manufacturing once plant and machinery are set up).
Output can be increased (up to a point) without further additions, and hence average costs
of production may fall.
Economies of scale arise for a number of reasons. Large-scale output levels often allow
firms to utilise more efficient, capital-intensive methods, for example, computer-controlled
assembly lines, flexible manufacturing systems (FMS) and robotics. Methods of production
that involve very high set-up, or fixed costs are uneconomic for small-scale production but
large-scale production enables them to be spread over more units of output.
Scale economies can be attained anywhere in the value chain, where there are costs which
do not increase proportionally with output. These are often referred to as “indivisibilities” (an
example is overheads) and can occur in any of the functional areas. For example, the film
footage used for Coca-Cola advertisements is produced in one location, and then dubbed in
several languages for distribution all over the world.
Economies of scale do not exist in all industries. Where they do exist, however, they tend to
result in an increase in concentration - that is, an increase in the market share of the largest
firms, as has been the case in steel manufacturing, bulk chemicals and automobiles.
Economies of Scope
In addition to economies of scale from producing a single product, there is also the
possibility that cost savings can result from the simultaneous production of several different
products in a single enterprise. Such costs savings are referred to as economies of scope.
They occur when the joint costs of two or more products or services are less than the costs
of producing them separately.
Scope economies are important strategically because they enable a diversified firm to share
investments and costs over a diversified product range. Competitors not possessing such
diversity cannot do this, and so a cost advantage may be established.
Sharing can occur in markets, products or segments. A diversified firm can share
equipment, brand names, cash, distribution outlets and expertise, information and
organisational strengths across different markets or products. Similarly, external relations
with customers, governments, distributors, financial institutions can be shared.
The Experience Curve
The experience curve relates the cost per unit output to the cumulative volume of output
since the production process was first started. Costs per unit tend to decline as the
cumulative volume of output rises. As the production process is repeated, the organisation
learns from experience, and is able to adjust production processes in accordance with this
acquired knowledge, so reducing costs. This is usually amplified by the economies of
scale available to these organisations.
Some analysts argue that certain industries show considerable experience effects where
only the largest of competitors, with the greatest market shares and associated volumes of
output, can survive. Any new competitor starts with no experience gained from production,
putting it at a considerable cost disadvantage to the more experienced competitors.
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Empirical studies of these industries indicate that unit costs tend to decline at a relatively
stable percentage each time cumulative volume is doubled. Figure 4:7 shows an example of
an experience curve, where costs decline by 85% every time cumulative volume doubles.
Figure 4:7 – The Experience Curve
Whilst experience effects can provide a considerable source of advantage in some
industries, not all industries exhibit the phenomenon. Further, if the technology shifts rapidly,
then existing advantages may be lost and new entrants can restructure the industry. This
certainly happened with consumer electronics in the 1970s and 1980s where Japanese
companies overtook the existing players.
Creating Value Added through Differentiation
Reducing costs are important to most organisations but for many, competitive advantage is
based on adding value to their products and services for which customers are willing to pay
more. This is best achieved if the customer perceives the product or service to be different
from others on offer - this is achieved through differentiation.
As with cost efficiency, the creation of value added depends upon the resources available
to the organisation and the activities and linkages within the value chain. There are many
ways of differentiating the products and services of an organisation, with the most difficult
to imitate involving all aspects of the value chain rather than just one activity.
The illustration used earlier Changing Times at Marks & Spencer showed how the company
had built its reputation upon consistent product quality and high levels of customer
service. The analysis of their value chain during the mid-1990s depicts the complexity of
activities involved in achieving this differentiation. Whilst this value chain would be difficult to
imitate, perhaps the recent problems experienced by the company are a result of failing to
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understand changing customer requirements and new competitors creating different value
chains more attuned to these shopping trends.
Other sources of differentiation might include design quality, brand names, up-to-the-minute
fashions, short delivery times, after-sales service, individual customisation of the product,
added features or services, engineering quality, the list goes on. The key is that all these
potential sources of advantage need to be viewed from the perspective of the customer or
user - it is that which they value that matters.
SAA 4
Refer back to the illustration Creating Core Competences at Brasseries Kronenbourg and
your analyses in SAA 2 and SAA 3. Identify examples of the potential bases of competitive
advantage that might underpin Brasseries Kronenbourg’s core competences.
Economies of Scale
Economies of Scope
Experience Effects
Value Added through Differentiation
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G. IDENTIFYING CORE COMPETENCES AND
STRATEGIC CAPABILITIES
The definition of core competences discussed above highlighted that they are hidden,
unique and extend across the organisation. Consequently, overall strategic capabilities built
on unique resources and core competences are difficult to identify. Whilst the analyses
outlined above can dissect the resources and activities of the organisation, offering great
insight into how it goes about its business, there is still a risk that the central message
remains opaque, obscured by the mass of detail. A further range of frameworks and
techniques have been developed that can help make things more visible.
Activity Mapping
In his article “What is Strategy?”, the ubiquitous Michael Porter illustrated how an activitysystem map can highlight the core competences of an organisation, linking it them to a
cluster of other activities that support these higher-order themes. An example of the activitysystem map for the Swedish furniture retailer Ikea is shown in Figure 4:8.
High-traffic
store layout
Self-transport
by customers
Explanatory
catalogues,
informative
displays and
labels
Limited
customer
service
Self-selection
by customers
Most
items in
inventory
Limited sales
staffing
Ease of
transport and
assembly
Ample
inventory
on site
Self-assembly
by customers
Increased
likelihood of
future
purchase
“Knock-down”
kit packaging
Wide variety
with ease of
manufacturing
More
impulse
buying
Suburban
locations
with ample
parking
Modular
furniture
design
Year-round
stocking
Low
manufacturing cost
In-house
design focused
on cost of
manufacture
100%
sourcing from
long-term
suppliers
Source: M E Porter, “What is Strategy?”, Harvard Business Review Nov-Dec 1996
Figure 4:8 – An Activity-System Map for Ikea
Whilst Porter goes into little detail on how to construct the map, it can still be useful in
displaying the relationship between core competences and other activities once identified
using other approaches. Porter argues that they can also help focus attention upon how well
each activity contributes to core competences, by helping to identify weaknesses, gaps and
redundant activities.
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Steps to Identify Core Competences
In “Exploring Corporate Strategy”, Gerry Johnson and Kevan Scholes outline a series of
steps and questions that can help identify core competences:

Identify successful business units within corporations – this is important in multibusiness organisations that may be operating in many different markets.

Identify the bases of perceived value from the perspective of customers – these are
labelled the primary reasons for success. It is important here to identify those reasons
where the organisation performs better than its competitors.

Unpack the bases for success by asking managers why the business is successful in
creating each of the primary reasons. These are the secondary reasons for success
and are likely to include activities where the organisation is no better than its competitors
but others where they again have an advantage.

Unpack the secondary reasons for success by asking what operational activities
contribute to these successes. Although difficult, this stage can reveal extensive
explanations of why things work well in practice – sometimes by people breaking the
rules or exploiting slack in the system.

Look for patterns of explanation by linking factors within and between the levels. This
can be achieved graphically, as shown below in Figure 4:9. Note that only two primary
reasons for success, good service and reliable delivery, are explored in detail. In
practice, all the primary reasons would be explored.
Source: G Johnson & K Scholes, Exploring Corporate Strategy, Prentice Hall, 1999
Figure 4:9 – Identifying Core Competences in a Consumer Goods Business
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Core Competence Analysis
In “Getting to know your organisation’s competences”, Mahen Tampoe highlights an
approach based on the composition of goods and services. His definition of core
competence was outlined earlier, though the model in his article suggests an interpretation
that is closer to the more encompassing definition of strategic capability. First he
highlights a model showing how core competence uses the resources available to the
organisation to create the goods and services bought by the customer. This is outlined in
Figure 4:10.
Product or service (as chosen by the customer)
Different products, parts,
sub-assemblies
Rules or processbased provision, of
knowledge and
functionality
Knowledge-based,
person-specific
professional service
Core Competence
Basic technologies, bodies of knowledge, corporate or individual learning,
relationship culture, strategic assets, parts, processes, raw materials, supply
chain management
Source: based on M Tampoe, “Getting to know your organisation’s core competences”, in V Ambrosini et al.,
Exploring Techniques of Analysis and Evaluation in Strategic Management, Prentice Hall, 1998
Figure 4:10 – A Core Competence Model of the Composition of Goods and Services
Tampoe argues that this bottom-up model can be used to identify the core competences of
an organisation, but that a top-down approach is often of more use as an analytical method.
This means starting with the final product or service and then breaking it down, through a
series of stages, to arrive at the organisation’s core competences. This approach is
highlighted in Figure 4:11.
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T h e p r o d u c t o r s e r v ic e b o u g h t b y t h e c u s t o m e r
T e c h nic a l s u b s y s te m s
D is as s e m b le
in t o c o r e
p ro d u c t s , s u b a s s e m b lie s
A dm in is tr a tiv e /
in s t itu t ion a l s u b s y s te m s
Ide n tif y
k n ow led g e
em b ed de d
in r u les o r
pr o ce s s e s
Ide n tif y
k n ow led g e
in
ind ivi d u a ls
an d g ro u ps
D ist r ibu t io n ,
m ar k e tin g ,
w a r e h o u s in g ,
sa le s ,
fin a nc e,
e t c. ,
p ro ce s s es
B as ic te c h no lo gie s , bo d ie s o f k no w le d ge , c or po ra te
s t ra te gic a s s et s , p a rts , p r oc es s e s , ra w m ate r ial s
o r in d iv id ua l
S tr a te g ic a s s e t s
P a te n ts ,
tr a d e m a r k s ,
c op y r ig h t ,
lic e n c e s ,
w a y le av e s
lea r n in g,
re la tio ns hip
Raw
m a t e ria ls ,
u n iq u e
s u p p ly
c u ltu r e,
C O R E C O M P E T E N C E o r E N A B L IN G C U L T U R E
Source: based on M Tampoe, “Getting to know your organisation’s core competences”, in V Ambrosini et al.,
Exploring Techniques of Analysis and Evaluation in Strategic Management, Prentice Hall, 1998
Figure 4:11 – A Framework for Unravelling Core Competence
In his article, Tampoe suggests that this breakdown can be achieved using the following
steps:

Analyse the revenue stream to identify products and services that make a significant
contribution to the organisation’s success.

Taking each product and service:
 Disassemble them to identify core products and services, then disassemble these
to identify the basic technologies, people skills, processes and strategic assets
used.
 Dissect services to identify core processes or unique talents that confer unique
value to the service.
 Relate products or services to the technical, administrative or institutional subsystems of the organisation.
 Analyse the sub-systems to find basic technologies, people skills, processes
and strategic assets that combine to create the market strength of the core
products or services. This is a core competence.

Test core competences by asking:
 Do they provide potential access to a wide variety of markets?
 Do they make a significant contribution to the perceived customer benefits of the
end products and services?
 Are they difficult for competitors to imitate?
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H.
SUMMARY
We have focused upon the ways in which an organisation can create strategic capability
based on the resources available to it and the competences it possesses to make use of
these resources. The importance of unique resources and core competences that are
better than those of competitors and difficult to imitate in the creation of sustainable
competitive advantage was stressed.
The resources available to the organisation can take various forms, but can generally be
classified into physical, human, financial and intangible resources. Frequently, the most
important resources of the organisation are the intangible assets and resources that, by
their very nature, are difficult to copy by competitors.
To understand how an organisation uses the resources available to it, the concept of the
value chain and the value system was introduced. The value chain shows how the
organisation can be understood as a series of activities and linkages that create value in
the goods and services it produces. The value chain is also embedded in a larger value
system that opens up a series of decisions about the scope of the organisation.
In value chain analysis, the activities within organisation are divided into the primary
activities (inbound logistics; operations; outbound logistics; marketing and sales; service)
and support activities (firm infrastructure; human resource management; technology
development; procurement). The linkages between value chain activities and linkages
with other value chains, both within the wider organisation and with other organisations,
can also be identified and assessed.
We then saw how the bases of competitive advantage can contribute to the organisation’s
ability to lower cost or add revenue better than its competitors. These bases include
economies of scale, economies of scope, experience curve effects and differentiation.
Finally, a range of frameworks to help assess core competences and strategic capabilities
were identified. These include activity mapping, Johnson and Scholes’ steps to identify
core competences and Tampoe’s core competence analysis.
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