Examining the Internal Context of Strategy

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Examining the Internal Context of Strategy
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COMPARATIVE INDUSTRY REFORMANCE
ROA
Global Auto
ROS

• Semiconductor

Grocery Store
How dosuch differences in profitability
materialize?
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TWO THEORIES FOR HOW AND WHY SOME FIRMS PERFORM
BETTER THAN OTHERS
A firms resources and capabi-lities determine
performance
A firms activities determine performance
Success issues from fundamental differences in
what firms own and what they can do
Success is driven by a firmsvalue chain
activitiesHow it configures these activities
to add more valuethan competitors
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RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS

Resources
Managers
Competitive advantage/disadvantage
Strategy
Performance
Management strategic decision making
Capabilities
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RESOURCES AND CAPABILITIES FUNDAMENTAL BUILDING
BLOCKS OF STRATEGY

• The inputs that firms use to create goods and
  services
• Undifferentiated or firms- specific
• Tangible or intangible
• Easy to acquire or difficult

A firms 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
Resources
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EXAMPLES OF CAPABILITIES
Capability
Result
Company
Logistics -- distributing vast amounts of goods
quickly and efficiently to remote locations
200,000-percent return to share-holders during
first 30 years since IPO1
An extraordinarily frugal system for delivering
the lowest cost structure in the mutual fund
industry, using both techno-logical 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, share-holders 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
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THE VRINE MODEL
Performance implication
Test
Competitive implication
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THE VRINE MODEL VALUE
Example
Union Pacific Railroads 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

• 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
  

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
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THE VRINE MODEL RARITY
Example
When McDonalds 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
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THE VRINE MODEL INIMITABILITY AND
NON-SUBSTITUTABILITY
Example
Barnes Nobles large store network gave it
access to customers and purchasing power that
was inimitable
but Amazon.comfound a substitute
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TANGIBLE AND INTANGIBLE ADVANTAGES
Intangible
Tangible



Location selection
Rural real-estate

Wal-Mart
High traffic real-estate


Brand
McDonalds
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THE VRINE MODEL EXPLOITABLITY
Example
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
Definition
A resource of capability that the organization
has the capability to exploit (i.e., the
capability to generate value from)
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HOW WOULD YOU DO THAT?
Do patents on Zoloft provide value?
Valuable?
Do Pfizer's patents provide rarity?
Rare?
PfizersZoloft
Inimitable andnon-substitutable?
Can competitors imitate? Can they substitute?
Exploitable?
Can Pfizer exploit?
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STOCK AND FLOW OF CAPABILITIES
Flow
Stock
Capability
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DYNAMIC CAPABILITIES
Mail Boxes Etc. franchise
Start-up plans
People
Brand
Value
Location
Processes
Dynamic capability how we integrate
recon-figure, acquire, or divest resources for
competitiveadvantage?
Mail boxes, etc., has developed the ability to
combine resources better than the competition
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VALUE CHAIN INTERNET STARTUP EXAMPLE
Firm Infrastructure
Financing, legal support, accounting
Recruiting, training, incentive system, employee
feedback
Support Activities
HumanResources
Technology Development
Procurement
Inbound shipment of top titles

• Server operations
• Billing
• Collections

• Picking and shipment of top titles from warehouse
• Shipment of other titles from third- party
  distributors

• Pricing
• Promotions
• Advertising
• Product information and reviews
• Affiliations with other websites

• Returned items
• Customer feedback

Warehousing
Inbound Logistics
Operations
Outbound Logistics
Marketing Sales
After-Sales Service
Primary Activities
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USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE
Identical
Differentiated
Find a different way to perform activities
Longer-lasting advantage
Shorter-term advantage (competitors catch up)
Find a better way to perform the same activities
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TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO
COPY YOU
Selected difference between Southwest and large
Airlines
Southwest made choices so that competitors did
not copy - because copying would require them to
abandon activities essential to their strategies
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RESULTS OF TRADE OFF PROTECTION
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INNOVATION AND INTEGRATION OF THE VALUE CHAIN
   
Assemble
Source
Deliver
Transferred assembly and delivery to the consumer
IKEA
Choose an entirely direct distribution model
(rather than through retailers) and outsourced
component manufacturing
Dell
Area of innovation
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STRATEGIC LEADERSHIP
Companies that overlook the role of leadership
in the early phases of strategic planning often
find themselves scrambling when its time to
execute. No matter how thorough the plan,
with-out the right leaders it is unlikely to
succeed McKinsey Company
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SENIOR VS. MIDDLE MANAGERS
Decide how to use other resources and
capabilities, configure their firms value-chain
activities, and set the context which determines
how front-line and middle managers can add value
Senior

• Are better positioned than senior managers to
  contribute to competitive advantage and firm
  success in four areas
• Entrepreneurship
• Communications
• Psychoanalyst
• Tightrope walker

Middle
Source Quy Nguyen Huy
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SUMMARY
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Explain the internal context of strategy
Identify a firms resources and capabilities and
explain their role in its performance
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Define dynamic capabilities and explain their
role in both strategic change and a firms
performance
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Understand how value-chain activities are related
to firm performance and competitive advantage
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Explain the role of managers with respect to
resources, capabilities, and value-chain
activities
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