Chapter 3
Examining the Internal Context
of Strategy
OBJECTIVES
1
Explain the internal context of strategy
2
Identify a firm’s resources and capabilities and explain
their role in its performance
3
Define dynamic capabilities and explain their role in both
strategic change and a firm’s performance
4
Explain how value-chain activities are related to firm
performance and competitive advantage
5
Explain the role of managers with respect to resources,
capabilities, and value-chain activities
1
COMPARATIVE INDUSTRY REFORMANCE
ROA
Global Auto
Semiconducto
r
ROS
Grocery Store
How do
such differences in
profitability
materialize?
2
TWO THEORIES FOR HOW AND WHY SOME FIRMS PERFORM BETTER THAN
OTHERS
A firm’s resources and capabilities determine performance
A firm’s activities determine
performance
Success issues from fundamental
differences in what firms
own and what they can do
Success is driven by a firm’s
value chain activities:
How it configures these
activities to add more value
than competitors
3
RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS
Resources
Managers
Strategy
Competitive
advantage/
disadvantage
Performance
Management
strategic decision
making
Capabilities
4
RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING
BLOCKS OF STRATEGY
Strategy
The inputs that firms use to create goods
and services
• Undifferentiated or firms-specific
• Tangible or intangible
• Easy to acquire or difficult
A firm’s skill in using its resources
to create goods and services.
The combination of procedures
and expertise that the firm relies
on to engage in distinct activities
in the process of producing goods and
services
5
EXAMPLES OF CAPABILITIES
Company
Capability
Result
Logistics -- distributing vast amounts of
goods quickly and efficiently to remote
locations
200,000-percent return to shareholders during first 30 years
since IPO1
An extraordinarily frugal system for
delivering the lowest cost structure in the
mutual fund industry, using both technological leadership and economies of scale
25,000-percent return to share-holders
during the 30-plus year tenure of CEO
John Connelly.2
As for ongoing expenses, shareholders in Vanguard equity funds pay,
on average, just $30 per $10,000, vs. a
$159 industry average. With bond
funds, the
bite is just $17 per $10,000
Generating new ideas then turning those ideas
into new, profitable products
30 percent of revenue from products
introduced within the past four years
1: Stalk, Evans, and Shulman, 1992
2: Makadok, 2003
6
THE VRINE MODEL
Test
Competitive implication
Performance implication
Valuable?
Does the resource or capability allow the
firm to meet a market demand or protect
the firm from market uncertainties?
If so, it satisfies the value require-ment.
Valuable resources are needed just to
compete in the indus-try, but value by
itself does not convey an advantage
Valuable resources and capabilities
convey the potential to achieve “normal
profits” (i.e., profits which cover the cost
of all inputs including the cost of capital)
Rare?
Assuming the resource or capability is
valuable, is it scarce relative to demand?
Or, is it widely possessed by most
competitors?
Valuable resources which are also rare
convey a competitive advantage, but its relative permanence
is not assured. The advantage is likely
only temporary
A temporary competitive advantage
conveys the potential to achieve above
normal profits, at least until the
competitive advantage is nullified by other
firms
Inimitable
and nonsubstitutable?
Assuming a valuable and rare resource,
how difficult is it for com-petitors to either
imitate the resource or capability or
substitute for it with other resources and
capabilities that accomplish similar
benefits?
Valuable resources and capabilities
which are difficult to imitate or substitute
provide the potential for sustained
competitive advantage
A sustained competitive advantage
conveys the potential to achieve above
normal profits for extended periods of time
(until competitors eventually find ways to
imitate or substitute or the environment
changes in ways that nullify the value of
the resources)
Exploitable?
For each step of the preceding steps
Resources and capabilities that
Firms which control unexploited VRINE
of the VRINE test, can the firm actually
satisfy the VRINE requirements but
resources and capabilities generally
exploit the resources and capabilities that it which the firm is unable to exploit
suffer from lower levels of financial
owns or controls?
actually result in significant opportuperformance and depressed market
nity costs (other firms would likely
valuations relative to what they would
pay large sums to purchase the
otherwise enjoy (though not as depressed
VRINE resources and capabilities).
as firms lacking resources and
Alternatively, exploitability unlocks
capabilities which do satisfy VRINE)
the potential competitive and perfor-mance
implications of the resource
or capability
7
THE VRINE MODEL: VALUE
Example
Union Pacific Railroad’s rail system is a tangible
resource that allows UP to compete with other
carriers in the long-haul transportation of a variety
of goods
Definition
Value: A resource or
capability is valuable if it
allows a firm to take
advantage of opportunities or
to fend off threats in its
environment
• Maintain an extensive network of rail-line property and
equipment on the U.S. Gulf cost
• Operates in the western two-third of the United States
serving 23 states, linking every major West Coast and
Gulf Coast port, and reaching east through major
gateways in Chicago, St.Louis, Memphis, and New
Orleans
• Also operates in key north-south corridors
• The only U.S. railroad serving all six gateways to Mexico
• Interchanges traffic with Canadian rail systems
8
THE VRINE MODEL: RARITY
Example
When McDonald’s signs an agreement to build a
restaurant inside a Wal-Mart store, it has an
intangible advantage over Burger King that is
valuable and rare
Definition
A useful resource or
capability that is scarce
relative to demand.
Valuable resources that are
available to most
competitors (i.e., that are
not rare) simply allow firms
to achieve parity
9
THE VRINE MODEL: INIMITABILITY AND NON-SUBSTITUTABILITY
Example
Barnes & Noble’s large store network gave it access
to customers and purchasing power
that was inimitable …
Definition
• A resource or capability is inimitable if
competitors cannot acquire the
valuable and rare resource quickly, or
face a disadvantage in doing so
• It is non-substitutable if
a competitor cannot achieve the same
benefit using different combinations of
resources and capabilities
… but Amazon.com
found a substitute
10
TANGIBLE AND INTANGIBLE ADVANTAGES
Intangible
Tangible
+
=
Location selection
+
Rural real-estate
=
Wal-Mart
Brand
+
High traffic
real-estate
=
McDonald’s
11
THE VRINE MODEL: EXPLOITABLITY
Example
Definition
A resource of capability that
the organization has the
capability to exploit (i.e.,
the capability to generate
value from)
Novell: “I walk down Novell hallways and marvel
at the incredible potential for innovation here, but
Novell has had a difficult time in the past turning
innovation into product in the market place”
- CEO Eric Schmidt
Xerox: Xerox invented the laser printer, Ethernet,
graphical-interface software and computer mouse
but could not capitalize on these
12
HOW WOULD YOU DO THAT?
Valuable?
Do patents on Zoloft ®
provide value?
Rare?
Do Pfizer's patents provide
“rarity”?
Inimitable and
non-substitutable?
Can competitors imitate?
Can they substitute?
Exploitable?
Can Pfizer exploit?
Pfizer’s
Zoloft ®
13
STOCK AND FLOW OF CAPABILITIES
Capability
Flow
Stock
14
DYNAMIC CAPABILITIES
Start-up plans
Mail Boxes Etc. franchise
People
Brand
Value
Location
Processes
Dynamic capability:
how we integrate reconfigure, acquire, or divest
resources for competitive
advantage?
Mail boxes, etc.,
has developed the
ability to combine
resources better
than the
competition
15
VALUE CHAIN: INTERNET STARTUP EXAMPLE
Firm
Infrastructure
Support
Activities
Financing, legal support, accounting
Human
Resources
Recruiting, training, incentive system, employee feedback
Technology
Development
Inventory
system
Site
software
Procurement
CDs
Shipping
Computers
Telecom lines
Inbound
shipment of
top titles
Server
operations
Warehousing
Billing
Collections
Inbound
Logistics
Operations
Pick & pack
procedures
Shipping
services
Picking and
shipment of top
titles from
warehouse
Shipment of other
titles from thirdparty distributors
Site look & feel
Return
Customer research procedures
Media
Pricing
Promotions
Advertising
Returned items
Customer
feedback
Product
information and
reviews
Affiliations with
other websites
Outbound
Logistics
Marketing
& Sales
After-Sales
Service
Primary Activities
16
USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE
Identical
Differentiated
Find a different
way to perform
activities
Longer-lasting
advantage
Find a better way to
perform the same
activities
Shorter-term
advantage
(competitors
catch up)
17
TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU
Selected difference between Southwest and large Airlines
Southwest
Major Airlines
Technology
and design
• Single aircraft
• Multiple types of
Operations
• Short segment flights
• Smaller markets and secondary
aircrafts
airports in major markets
•
•
•
•
Marketing
No baggage transfers to others airlines
No meals
Single class of service
No seat assignments
• Limited use of travel agents
• Word of mouth
• Hub and spoke
system
• Meals
• Seat assignments
• Multiple classes of
service
• Baggage transfer to
other airlines
Southwest
made choices so
that competitors
did not copy because copying
would require
them to
abandon
activities
essential to their
strategies
• Extensive use of
travel agents
18
RESULTS OF TRADE OFF PROTECTION
Airline
2004 Revenue
($000,000)
2004 Cost of Available
Seat Miles (CASM)
AirTran
279
8.42
Alaska
656
10.03
4,541
9.72
579
7.81
Continental
2,397
9.49
Delta
3,641
10.23
334
6.03
Northwest
2,753
10.31
Southwest
1,655
7.77
United
3,988
10.16
US Air
1,660
11.34
American
AmericaWest
JetBlue
19
INNOVATION AND INTEGRATION OF THE VALUE CHAIN
Area of innovation
IKEA Transferred assembly and delivery to
the consumer
Dell
Choose an entirely direct distribution model
(rather than through retailers) and
outsourced component manufacturing
20
STRATEGIC LEADERSHIP
“Companies that overlook the role of leadership in
the early phases of strategic planning often find
themselves scrambling when it’s time to execute.
No matter how thorough the plan, with-out the right
leaders it is unlikely to succeed”
– McKinsey & Company
21
SENIOR VS. MIDDLE MANAGERS
Senior
Decide how to use other
resources and capabilities,
configure their firm’s value-chain
activities, and set the context
which determines how front-line
and middle managers can add
value
Middle
Are better positioned than senior
managers to contribute to
competitive advantage and firm
success in four areas
• Entrepreneurship
• Communications
• Psychoanalyst
• Tightrope walker
Source: Quy Nguyen Huy
22
SUMMARY
1
Explain the internal context of strategy
2
Identify a firm’s resources and capabilities and explain their role in its
performance
3
Define dynamic capabilities and explain their role in both strategic
change and a firm’s performance
4
Understand how value-chain activities are related to firm performance
and competitive advantage
5
Explain the role of managers with respect to resources, capabilities, and
value-chain activities
23
BLANK SLIDE
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