Introduction to Firm-Specific Resources; Generic Strategies

1
Introduction to Firm-Specific Resources Generic
Strategies

• BM499 Strategic Management
• David J. Bryce

September 17, 2002
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Discussion

• 1. Firm Specific Resources and Capabilities
• 2. Generic Strategies

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Definition

• Competitive Advantage
• Ability to earn above normal economic returns
• Sustainable Competitive Advantage
• Ability to sustainably earn above normal
  economic returns

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A Firms (potentially) Strategic Assets

• Resources
• Tangible (physical assets)
• Intangible (knowledge, goodwill, patents,
  team-embodied skills, etc.)
• Competences and Capabilities
• The know-how that permits an organization to
  perform its primary and major taskscombining and
  mobilizing resources to meet specific ends
• Dynamic Capabilities
• The firms ability to integrate, build, and
  reconfigure internal and external competences to
  address rapidly changing enviornments

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Making Assets Strategic

• To confer sustainable competitive advantage, at
  least some of a firms assets must possess all
  of the following characteristics
• Valuable
• Rare
• Inimitable
• non-Substitutable

Discussion adapted from Barney (1991, 1997)
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Making Assets Strategic (cont.)

• Valuable
• Some consumers prefer the product or service to a
  competitors at least some of the time
• Results in increased revenue, decreased costs, or
  both
• Rare
• Not widely available for purchase on the open
  market or the cost of purchase is equal to the
  NPV of expected returns
• Possessed by one or a few firms only

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Making Assets Strategic (cont.)

• Inimitable
• Firms cannot replicate the resource, capability,
  or competence perfectly this happens for three
  primary reasons
• 1. Causal ambiguity
• The cause of the advantage may not be easily
  recognizableothers may attempt to imitate the
  wrong thingeven managers within the firm may not
  understand the precise cause of the advantage

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Making Assets Strategic (cont.)

• Inimitable
• 2. Lock out
• The imitator may be locked out of specific
  relationships, resources, or assets (this
  relates to the rareness characteristic) or
  denied access through patent protection
• 3. Complexity
• Replicating a competence that has been developed
  over years may require replicating the entire
  developmental path the sheer number of events
  makes such attempts doomed to certain failure,
  even in the absence of causal ambiguity

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Making Assets Strategic (cont.)

• non-Substitutable
• A close replacement for a firms product,
  service, or asset does not exist

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VRIS Analysis
Competitive Implication
Economic Implication
Valuable
Rare
Inimitable
Substitutable
Below Normal
No
Disadvantage
Yes
No
Parity
Normal
Temporary Advantage
Above Normal
Yes
Yes
No
Sustainable Advantage
Above Normal
Yes
Yes
Yes
No
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Identifying Core Competencies

• Core competence An integrating theme for the
  business of a diversified firm (examples?)
• A core competence provides potential access to a
  wide variety of markets
• A core competence should make a significant
  contribution to the perceived customer benefits
  of the end product
• A core competence should possess as many
  characteristics of VRIS as possible

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NEC

• Observed in 1970s the coming convergence of
  computing and communications (CC)
• Identified trends -
• From large mainframes to distributed computing
• From simple ICs (integrated circuits) to VLSI
  (very large scale integration (of circuitry on a
  silicon chip))
• From communications on mechanical switch networks
  to ISDN (integrated services digital network)
• Reasoned that those with the right competencies
  would become a force in all three areas
• Entered into myriad alliances with semiconductor
  firms for technology access and systematically
  built core competence

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How Does the View Help?

• Creates unique, integrated systems that reinforce
  fit among the firms diverse production and
  technology skillsa systemic advantage
  competitors are hardpressed to copy
• Helps decide what not to do with an
  underperforming business divestiture may be a
  bad idea
• Because competences are built over time through a
  complex learning and integration process, it both
  urges and guides consistent thematic investments
• This prepares firms for emergent market
  opportunities when they arise

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Challenges to the View?

• How to define competence?
• What if you name the wrong competence?
• Hard to be so intentional in planning causal
  arrow often flows from products to competencies
  not vice versa

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Generic Strategies
STRATEGIC ADVANTAGE
Uniqueness Perceived by the Customer
Low Cost Position
OVERALL COST LEADERSHIP
DIFFERENTIATION
Industry wide
STRATEGIC TARGET
Particular Segment only
FOCUS
Source Michael Porter, Competitive Strategy,
1980
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Common Pitfalls in Cost Leadership

• Misunderstanding of actual costs
• False perception of cost drivers
• Focus on manufacturing
• Failure to exploit linkages
• Ignoring competitor behavior

Source P. Ghemawat, Strategy and the Business
Landscape, 1999
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Common Pitfalls in Differentiation

• Creating differentiation that buyers do not value
• Over-fulfilling buyer needs
• Failing to understand costs of differentiation
• Failing to recognize buyer segments
• Creating differentiation that competitors can
  emulate quickly or cheaply

Source P. Ghemawat, Strategy and the Business
Landscape, 1999
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Common Pitfalls in Focus

• Picking the wrong segment (no one was in there
  for a reason)
• Picking a segment that cannot meet growth goals
• Failing to understand what adds value in a
  segment
• Failing to create a truly targeted offering for
  the segment
• Assuming that segment will pay a price premium
  for a targeted offering

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Mixing low cost and differentiation
Price

Cost
Industry average competitor
Successful differentiated competitor
Competitor with dual advantage
Successful low-cost competitor
Price per unit
Cost per unit
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Being Stuck in the Middle
Price

Cost
Industry average competitor
Successful differentiated competitor
Competitor stuck in the middle
Successful low-cost competitor
Price per unit
Cost per unit
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Innovation as a Generic Strategy

• Innovation attempts to upset the current
  structure of competition by
• Significantly increasing the level of customer
  value
• Significantly reducing costs of production or
  marketing
• Innovation means seeking out new customer or user
  groups
• Innovation requires building new business models
  and critical mass

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Generic Strategies for Building Competitive
Advantage
Generic Strategies
Focus or Innovation (Change the Rules of the
Game)
Cost
Differentiation

• Harley Davidson
• Toyota

• Southwest Airlines
• Wal-Mart

• IKEA
• Amazon.com