Strategic Management Chapter 4

SWOT Analysis

A framework that allows managers to synthesize insights obtained from an internal and external analysis to derive strategic implications Internal Analysis Strengths Weaknesses External Analysis Opportunities Threats

The Dynamic Capabilities Perspective

A model that emphasizes a firm's ability to: Modify and leverage its resource base Gain and sustain competitive advantage in a constantly changing environment

A Word of Caution

A strength can also be a weakness. An opportunity can also be a threat. Example: Google is located in Silicon Valley. Strength: near Universities Weakness: high cost of living

Isolating Mechanisms

Barriers to imitation Protect resources, capabilities, or competencies that underlie a firm's competitive advantage. How: Better expectations of future resource value Path dependence Causal ambiguity Social complexity Intellectual property (IP) protection

The Value Chain Analysis

Break down the activities that are performed within the firm Analyze the relative costs with respect to the competitors and identify cost drivers, such as variety, volume, etc. Analyze how activities contribute to willingness to pay Make consistent choices (look at value chain) Also draw supplier's / buyer's value chain - opportunities for joint cost savings?

Resource heterogeneity

Bundles of resources and capabilities differ across firms Southwest Airlines & Alaska Airlines have different resources SWA - Higher employee productivity Informal organization, pilots help load luggage

Primary Activities

Firm activities that add value directly Transform inputs into outputs as the firm moves a product or service horizontally along the internal value chain. Examples: Supply chain management Operations Distribution Marketing and sales After-sales service

Support Activities

Firm activities that add value indirectly Necessary to sustain primary activities Research and development (R&D) Information systems Human resources Accounting and finance Firm infrastructure including processes, policies, and procedures

A Resource is Costly to Imitate If....

Firms that do not possess the resource are unable to develop or buy the resource at a reasonable price. Example: Beats Electronics: Dr. Dre relies on gut instinct in making decisions rather than market research. The social capital of Dr. Dre and Jimmy Lovine might be impossible to replicate.

Porter's Value Chain

Identify activities that raise willingness to pay and where you can lower costs

What is the value chain?

Internal activities a firm engages in when transforming inputs into outputs Each activity adds incremental value Primary activities directly add value Support activities add value indirectly Example: Beats Electronics: Headphones designed by Dr. Dre Packaging: premium unboxing experience Superb displays in Apple stores

A Resource is Valuable If...

It enables the firm to exploit an opportunity. It enables the firm to offset a threat. It enables a firm to increase its economic value creation (V - C). Example: Beats Electronics: -Design and marketing of premium headphones --Production = ~$15 --Retail = $150 - $450

A Resource Is Organized to Capture Value If...

It has an effective organizational structure It has coordinating systems Example: Xerox Palo Alto Research Center: Developed the first word-processing application Graphical User Interface (GUI), Ethernet, Mouse, Personal Computer These innovations did not fit within the Xerox focus. Management was busy pursuing innovations in the photocopier business.

resource analysis

Key to using a resource analysis for strategy formulation is understanding the relationships between resources, capabilities, competitive advantage, and profitability. Understand mechanisms through which competitive advantage can be sustained over time Manage and invest in resource/capability development and maintenance (innovate, diversify, build internally, acquire carefully)

Strategic Implications

Look inward and outward at the same time, i.e. resource must provide value to customer Sometimes the valuable resource is a combination of skills, none of which is superior by itself - idea of a bundle of resources Value of a resource is eroded by time and competition - a need to continuously invest in resource development (innovate, build internally, diversify, acquire) Pay attention to competitors, e.g. bidding wars for resources (SABMiller and Anheuser-Busch for China's Haerbin Brewery, Verizon and Qwest for MCI)

How to identify a firm's valuable capabilities and resources?

Not all resources and capabilities are a source of competitive advantage Barney's VRIO Framework Does a resource/capability qualify as source of competitive advantage? Porter's Value Chain Where within the firm are valuable capabilities/ resources located?

A Resource is Rare If...

Only one or a few firms possess it Example: Beats Electronics Product Placement Vast Celebrity Endorsement

Sources of Inimitability

Physical uniqueness, e.g. location (real estate) Path dependency - unique historical conditions, e.g. Caterpillar, Coke Strong initial position makes subsequent resource accumulation easier - asset mass efficiencies Attempting to accumulate a resource rapidly "crash program" is less productive than investments over time - time compression diseconomies Causal ambiguity - difficult to disentangle what the valuable resource is or how to recreate it, e.g. SWA Social Complexity: complex web of social interactions, e.g. apparel industry in NYC

Deliberate & Emergent Strategy Making

Pure deliberate strategy: intended = realized strategy 3 conditions are necessary: -Precisely articulated intentions at a very concrete level of detail -Intentions are common to all actors in the organization and shared -No external forces (market, technological, political, etc.) interfere with strategy implementation Perfectly emergent: Consistency in action over time in the absence of intention

Two Critical Assumptions of the RBV

Resource Heterogeneity -A firm is bundle of resources and capabilities that differ across firms Resource Immobility -A firm has resources that tend to be "sticky" and that do not move easily from firm to firm

Resource Stocks and Flows

Resource stocks The firm's current level of intangible resources Resource flows The firm's level of investments to maintain or build a resource

Resource immobility

Resources tend to be "sticky" & don't move easily Southwest Airlines sustained advantage Several decades superior performance Competitors have unsuccessfully imitated SWA model

Resources, Capabilities and Activities Help Deliver Core Competencies

Resources: -Any assets that a firm can draw on Capabilities: -Organizational and managerial skills Activities: -Distinct and fine-grained business processes

How to generate Additional Insights

SWOT analysis combines external and internal analysis: External analysis: Covered in Chapter 3 Internal analysis: Covered in Chapter 4 Purpose: Leverage internal strengths to exploit external opportunities Mitigate internal weaknesses and external threats

Example Google Headquarters

Tangible Resource -Googleplex: land + futuristic building Intangible Resource -Location: heart of Silicon Valley --Large & computer savvy workforce --Largest concentration of venture capitalists in the U.S.

What Are Core Competencies?

Unique strengths Embedded deep within a firm Allow a firm to differentiate its products and services from those of its rivals Results in: -Creating higher value for the customer or -Offering products and services at lower cost

Barney's VRIN Framework

Valuable: the resource must be valued by customers Does it produce something that customers are willing to pay for? Rare: how many other firms have the resource? Inimitability: it cannot be replicated by competitors Is the resource hard to copy / acquire? Non-Substitutability: no other resource is functionally equivalent * all 4 characteristics must be present for sustainable competitive advantage

Dynamic capabilities

a firm's ability to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a changing environment

capabilities

bundles of resources that enable us to perform certain productive activities

tangible

easiest to value; Often a necessary but not sufficient condition for competitive advantage

competitive advantage

firm's unique resources/capabilities

intangible

reputations, patents, accumulated knowledge, brand name Often plays a critical role in competitive advantage

organizational capabilites

structure, systems, processes to deploy resources. Is the firm organized to exploit the full competitive potential of its resources and capabilities?

human resources

the employees - their skills, knowledge and commitment

Links to Competitive Advantage and Superior Firm Performance

Core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. In analyzing a company's success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as superior products or services. While these are the outward manifestation of core competencies, what is even more important is to understand the invisible part of core competencies.

Dynamic Capabilities

A firm's ability to: Create, deploy, modify, reconfigure, upgrade, and leverage its resources over time Helps prevent a core rigidity A former core competency that turned into a liability as the environment changed

What is the Resource Based View (RBV)?

A model that sees certain types of resources (VRIO) as key to superior firm performance -Valuable -Rare -Costly to Imitate -Organized to Capture Value Resources fall into two categories: -Tangible -Intangible

The Final Step...

Evaluate the pros and cons of each strategic alternative. Select one or more alternatives to implement. Carefully explain decision rationale. Including why other strategic alternatives were rejected

Strategic SWOT Questions

How can the firm use strengths to take advantage of opportunities? How can the firm use strengths to reduce the likelihood and impact of threats? How can the firm overcome weaknesses that prevent the firm from taking advantage of opportunities? How can the firm overcome weaknesses that will make threats a reality?

Examples of Core Competencies

IKEA -Superior in designing modern functional home furnishings at low cost Beats Electronics -Superior marketing: perception of coolness Facebook -Superior algorithms to offer targeted online ads General Electric -Superior expertise in industrial engineering, designing and implementing efficient management processes, and developing and training leaders

Threats to Sustainability of the Firm's Competitive Advantage

Imitation Substitution Hold-up Threats from within (e.g. complacency, inability to embrace change and adapt, inertia, etc.) -Unable to realize the threat to the firm's competitive advantage -Unwilling to respond to the threat to the firm's competitive advantage -Unable to move the organization to successfully respond to the threat to the firm's competitive advantage