SDV - Chapter 4, Resources and capabilities

'micro-foundations'

peoples behaviour in the organisation. This puts the focus on behaviour and the significance of beliefs, social relationships and organisational processes in capability management.

Resources vs. capabilities

Resources: the assets that an organisation has or can call upon (tangible and intangible) - 'what we have (nouns)' Capabilities: (competences): the ways these resources are used of deployed (intangible) - 'what we do well (verbs)'

Approaches to manage resources and capabilities

• Internal capability development o Building and recombining: requires innovation and entrepreneurial skills, managers can build systems and a culture that promote capability innovation. o Leveraging capabilities: o Stretching capabilities: • External capability development: can be entered by acquisition or entering alliances or joint ventures. • Ceasing activities: outsource or reduce cost in activities which do not create value for the consumers. • Awareness development:

Summary

• To be able to compete at all in a market an organisation needs threshold resources and capabilities, but to achieve sustained competitive advantage they also need to be unique and distinctive. • To be distinctive and provide for sustainable competitive advantage, resources and capabilities need to fulfil the VRIO criteria of being Valuable, Rare, Inimitable and supported by the Organisation. • Ways of diagnosing organizational resources and capabilities o VRIO as a tool to evaluate if they contribute to a competitive advantage o Value Chain & Value system to analyse how value is created and can be developed for customers o Activity systems mapping identifying more detailed activity o SWOT - drawing together o Benchmarking - to understand the relative performance of organisations • Adapt and change resources and capabilities based on dynamic capabilities

Internal analysis Critical questions

1. What do we want to know? 2. Why do we want to know it? 3. How will we find the answer to these questions?

Core Competency (CC)

A linked set of skills, activities and resources: ¥ A business function or operational activity that a company does well; ¥ Differentiate it from the other competitors in its industry; ¥ Delivers customer value; ¥ A resource or capability that gives a firm competitive advantage; ¥ Potentially, can be extended and developed as markets change or new opportunities arise. They are the resources and capabilities that allow the company to achieve profitability; A firm would devise its strategy so as to exploit the resources and capabilities that comprise its core competencies.

Benchmarking

Benchmarking is a means of understanding how an organisation compares with others - typically competitors. Two approaches to benchmarking: ¥ Industry/sector benchmarking - comparing performance against other organisations in the same industry / sector against a set of performance indicators; ¥ Best-in-class benchmarking - comparing an organisation's performance or capabilities against 'best-in-class' performance - wherever that is found even in a very different industry. It may help challenge managers mind set in improving performance that will result from changes in resources or capabilities. The importance in the impact that these comparisons might have on reviewing resources and capabilities underlying performance. There are two potential limitations: • Surface comparison: does not identify the reasons of performance • Simply achieving competitive parity: organisations can meet threshold level and competitive parity; but need to develop its own distinctive resources and capabilities

Inimitability

Capabilities that competitors find difficult and costly to imitate, to obtain or to substitute. ¥ Competitive advantage can be built on unique resources (a key individual or IT system) but these may not always 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. These linkages can make capabilities particularly difficult to imitate, there are three primary reasons why this may be so. ¥ Complexity ¥ Internal linkages - please check activity systems ¥ External linkages - Organisations can make it difficult for others to imitate or obtain their bases of competitive advantage by developing activities together with customers or partners so they become dependent on them. ¥ Casual Ambiguity (Ongedwongen dubbelzinnigheid): Competitors find it difficult to discern (onderscheiden) the causes and effects underpinning an organisation's advantage. ¥ Characteristic ambiguity; tactic knowledge a or deeply rooted organisational culture ¥ Linkages ambiguity; linkages that create distinctiveness, intelligence networks to understand the market. Linkages that deliver customer value. ¥ Culture & History: resources and capabilities that involve complex social interactions and interpersonal relationships. Path dependency: this history is specific to the organisation and cannot be imitated.

Sustainable Competitive Advantage (SCA)

Company resources or capabilities (..) that are difficult to duplicate or exceed and provide a superior or favourable long term position over competitors.

Resource based view (RBV)

Does the company have strong or unique skills / abilities / resources? It suggests that the resources possessed by a firm are the primary determinants of its performance and these may contribute to a sustainable competitive advantage

VRIO analysis

Helps to evaluate if, how and to what extent and organisation or company has resources and capabilities that are VRIO. For managers it is most important to distinguish between sustained or temporary competitive advantage vs competitive parity or competitive disadvantage. It is difficult to discern a competitive advantage, it is helpful to divide in subparts.

Value of resources & capabilities

Strategic capabilities are of value when they: ¥ Taking advantage of opportunities and neutralising threats; this point is an important complementarity with the external environment of an organisation. Using a resource and capability that do not exploit opportunities or neutralise threats does not create value and even risk decreasing revenues and increasing cost. ¥ Provide value to customers; Managers may seek to build on resources and capabilities that they see as valuable but which do not meet customers' critical success factors. Having resources and capabilities that are different from those of other organisations is not, of itself, a basis of competitive advantage. ¥ Are provided at a cost that still allows an organisation to make an acceptable return. Managers should consider carefully which of their organisation's activities are especially important in providing such value and which are of less value. Value chain analysis and activity systems mapping can help here.

Competitive Advantage (CA)

The ability gained through resources and capabilities (..) to perform at a higher level than others in the same industry or market

Organisational knowledge:

The competitive advantage is gained through the way they manage and develop organisational knowledge. It has to do with the capabilities they employ to utilize and develop information technology. The distinction between explicit and tacit knowledge explains why this is important to obtain competitive advantage: • Explicit (objective) knowledge - is informal systematic ways of communication. It can take the form of codified information resource that can be used in systems. • Tacit knowledge - is more personal, context specific and hard to formalize and communicate (ex. The relationship within a team) It can be very difficult to codify the knowledge that truly bestows competitive advantage.

Organisational support

The organisation must be suitably organised to support the valuable, rare and inimitable capabilities that it has. This includes appropriate organisational processes and systems. In order to fully take advantage of the resources and capabilities and organisation structure, formal and informal management control systems need to support and facilitates their exploitation. Supporting capabilities are labelled complimentary capabilities, as by themselves, they are not enough to provide competitive advantage.

Activity systems

The way in which resources are deployed through the organisation actually takes form in the activities pursued by that organisation; so it is important to identify what these activities are, why are they valuable to customers, how the various activities fit together and how they are different from competitors. The starting point is to identify the 'higher order strategic themes'. These are the ways in which the organisation meets the critical success factors determining them in the industry.

Threshold and distinctive resources and capabilities

Those needed by a company to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market; they can be thought of as 'qualifiers' to be able to compete at all, while distinctive resources and capabilities are 'winners' required to triumph over competitors. Distinctive resources and capabilities are required to achieve competitive advantage. These are dependent on an organisation having a distinctiveness or uniqueness that are of value for customers and difficult to imitate. This can be because of: Distinctive resources - a long established brand for example, something others can not simply imitate or obtain Distinctive capabilities - ways of doing things that is unique for an organisation and effectively utilised so as to be valuable for customers Without these a company would not survive over time. NOTE: Threshold levels (might) change as Critical Success Factors (see Industry analysis) change!

information to benchmark

What the company says it is doing: ¥ Annual reports ¥ 10k* Reports, financial analyst's reports ¥ Interviews with managers / analysts ¥ Stakeholder analysis Ð Stock price developments Ð Employee satisfaction survey's Ð Consumer review & ratings Ð Etc. What the company is actually doing: ¥ Capital investments, hiring activity, R&D projects, strategic partnerships or mergers & acquisitions etc.

10-K

also called 10-KSB, is an annual report that publicly traded companies in the USA are required to file with the SEC within 60 days of the fiscal year end.

market-based view (MBV),

alternatively known as the market positioning view, emphasizes the role of market conditions in developing strategy for the firm.

Dynamic capabilities

an organisation's ability to renew and recreate its resources and capabilities to meet the needs of changing environments. There is a danger that competitive resources and capabilities overtime are imitated or not relevant anymore. If resources and capabilities are to be effective over time they need to change; they cannot be static. Dynamic capabilities are directed towards that strategic change.

Value chain

describes the categories of activities within an organisation which, together, create a product or service. • The value chain invites the strategist to think in terms of a set of activities how customer value is created. • The value chain can be used to understand the strategic position of an organisation and analyse resources and capabilities in tree ways o Generic description of activities o Analyse the competitive position by the VRIO anlysis o Cost and value of activities

VRIO definition

i. Valuable ii. Rare iii. Inimitable iv. Supported by the organisation

SWOT

resources and capabilities and the Opportunities and Threats explored in analysis of the environment. There are two dangers in SWOT: • Listing - prioritisation if issues matters. Focus on S&W which matter relatively to competition, leave out general or broad factors, and draw concrete conclusions. • A summary not a substitute -

Value system

the set of inter-organisational links and relationships that are necessary to create a product or service. There are questions that arise here that build on a understanding of the value chain itself: • Maker or buy / outsourcing decision • What are the activities and cost/price structures of the value system? • Where are the profit pools? Profit pools refer to the different levels of profit available at different parts of the value system. • Partnering

Distinctiveness through Core Competency

¥ Core Competencies can comprise of a bundle rather than single skills / technologies - making these more likely to be unique / distinctive; ¥ Makes an additional contribution to the perceived customer benefits of the product / service => Competitive Advantage (CA); And ¥ Ideally are difficult for competitors to imitate => Sustainable CA (SCA).

MD&A

¥ Is a preface to the financial statements in which the company's management discusses the recent year (or quarter), providing a background on the company and any significant events that may have occurred; ¥ May also discuss the coming year and outline goals, new projects, and future plans; ¥ Should discuss any important risks that the firm faces or issues that may affect the firm's liquidity or resources; ¥ Required is also the disclose any off-balance sheet transactions, which are transactions or arrangements that can have a material impact on the firm's future performance, yet do not appear on the balance sheet.

Rarity

¥ Rare capabilities are those possessed uniquely by one organisation or only by a few others (e.g. a company may have patented products, have supremely talented people or a powerful brand.) Here competitive advantage is longer lasting. ¥ Rarity could be temporary (e.g. patents expire, key individuals can leave or brands can be de-valued by adverse publicity.) It may be necessary to consider other bases of sustainability in competitive advantage.

Financial performance

• Profitability • Solvency • Liquidity

Three generic types of dynamic capabilities

• Sensing: R&D • Seizing: after its sensed it must be seized and addressed to products and services. • Reconfiguring (remodel): To seize an opportunity the organisation may need to remodel organisations capabilities.

Four types of Financial Statements:

¥ Balance sheet ¥ Income statement ¥ Cash Flow statement ¥ Statement of Stockholders' Equity

How to identify CCs?

¥ Industry recognition (awards, etc.) ¥ Performance benchmarking ¥ Strategic partnerships (e.g. R&D projects) ¥ Industry expert opinion ¥ Company literature / website ¥ (Reasonable) Inference ¥ Market research