Class Plan 3

1
Class Plan 3 The early bird may get the worm,
but the second mouse gets the cheese
Anonymous

• Questions for the next case
• Brief discussion of the Apollo case
• Review of 5-forces, including exercise Move on to
  Chapter 3 on Internal Analysis extra
  information on VRIO approach
• Exercises video on Internal Analysis

2
Questions for the Nokia case

1. Have Nokias mission and vision (or their
   implementation) been partially responsible for
   their faltering performance?
2. Using the 5-forces model, what industry threats
   should Nokia have identified in their strategic
   pursuits?
3. What can Nokia do to continue to compete globally
   and domestically?

3
Porters Five Forces Model (Fig 2.2 p45 adapted)
4
Product Lifecycle
5
Macro-environmental Forces Environmental
Scanning

• Macroeconomics growth rate of the economy,
  interest rates, currency exchange rates,
  inflation rates
• Technological creative destruction, shifting
  barriers to entry
• Social lifestyles, trends and attitudes
• Demographics composition of the population,
  factors such as income distribution, education,
  labour mobility, gender
• Political Legal deregulation and free trade
• Global falling barriers to trade, new economic
  development

6
More on 5-forces model

• Strategic Groups Def. subsections of industry
  with the same basic strategy in-group
• Implications
• closest competitors are in the same group
• groups, to some extent, face different 5-forces
• exit entry barriers exist between groups
• Limitations of 5-Forces Strategic Groups
  models
• Static picture with limited attention to
  innovation. Industries evolve unfrozen and
  reshaped by technology punctuated equilibrium
  hyper-competitive industries with no equilibrium
• downplays individual company differences
• studies show that industry only accounts for
  10-20 of variance in firms profit rates

7
Internal Analysis

• The purpose of internal analysis is to pinpoint
  the strengths and weaknesses of the organization.
• Strengths lead to superior performance.
  Weaknesses lead to inferior performance.
• Internal Analysis includes an assessment of
• Quantity and quality of a companys
  resources and capabilities
• Ways of building unique skills and
  company-specific or distinctive competencies

8
The Theory Behind Internal Analysis
The Resource-Based View
developed to answer the question Why do some
firms achieve better economic performance than
others?
used to help firms achieve competitive
advantage and superior economic performance
assumes that a firms resources and
capabilities are the primary drivers of
competitive advantage and economic performance
9
The Resource-Based View
Resources and Capabilities
Resources
tangible and intangible assets of a firm
tangible factories, products intangible
reputation
used to conceive of and implement strategies
Capabilities
a subset of resources that enable a firm
to take full advantage of other
resources marketing skill, cooperative
relationships
10
The VRIO Approach

• Value Do a firms resources capabilities in
  each section of the Value Chain enable the firm
  to respond to environmental threats or
  opportunities?
• Rarity Is a resource currently controlled by
  only a small number of firms?
• (In)Imitability Do firms without a resource face
  cost disadvantages in obtaining or developing it?
• Organization Are a firms other policies and
  procedures organized to support the exploitation
  of its valuable rare and costly to imitate
  resources?

11
The VRIO Framework
Applying the Tool
a resource or bundle of resources is subjected
to each question to determine the
competitive implication of the resource

• each question is considered in a comparative
• sense (competitive environment)
• For further application information, see
• Conner, Tom (2002) The resource-based view of
  strategy
• and its value to practising managers ,
• Strategic Change 11, 307-316)

12
Applying the VRIO Framework
The Question of Value
in theory Does the resource enable the
firm to exploit an external opportunity or
neutralize an external threat?
the practical Does the resource result in
an increase in revenues, a decrease in costs,
or some combination of the two? (Levis
reputation allows it to charge a premium for its
Dockers pants)
13
Applying the VRIO Framework
The Question of Rarity
if a resource is not rare, then perfect
competition dynamics are likely to be observed
(i.e., no competitive advantage, no above normal
profits)
a resource must be rare enough that perfect
competition has not set in
thus, there may be other firms that possess
the resource, but still few enough that there is
scarcity (several pharmaceuticals sell
cholesterol-lowering drugs, but the drugs are
still scarcelook at prices)
14
Applying the VRIO Framework
Valuable and Rare
If a firms resources are
The firm can expect
Not Valuable
Competitive Disadvantage
Valuable, but Not Rare
Competitive Parity
Competitive Advantage (at least temporarily)
Valuable and Rare
15
Applying the VRIO Framework
The Question of Inimitability
the temporary competitive advantage of
valuable and rare resources can be sustained
only if competitors face a cost disadvantage in
imitating the resource
intangible resources are usually more costly
to imitate than tangible resources (Harley-Davids
ons styles may be easily imitated, but its
reputation cannot)
16
Applying the VRIO Framework
The Question of Inimitability
if there are high costs of imitation, then the
firm may enjoy a period of sustained
competitive advantage
a sustained competitive advantage will
last only until a duplicate or substitute emerges

• if a firm has a competitive advantage, others
• will attempt to imitate it (Razor scooters
• were a big hit and others quickly imitated them)

17
Applying the VRIO Framework
Value, Rarity, Inimitability
If a firms resources are
The firm can expect
Valuable, Rare, but not Costly to Imitate
Temporary Competitive Advantage
Sustained Competitive Advantage (if Organized
appropriately)
Valuable, Rare, and Costly to Imitate
18
Applying the VRIO Framework
The Question of Organization
a firms structure and control mechanisms must
be aligned so as to give people ability and
incentive to exploit the firms resources
examples formal and informal reporting
structures, management controls, compensation
policies, relationships, etc.
these structure and control mechanisms
complement other firm resourcestaken together,
they can help a firm achieve sustained
competitive advantage
19
The VRIO Framework
Costly to Imitate?
Organization?
Competitive Implications
Economic Implications
Valuable?
Rare?
Below Normal
No
No
Disadvantage
Parity
Normal
Yes
No
Temporary Advantage
Above Normal
Yes
Yes
No
Sustained Advantage
Above Normal
Yes
Yes
Yes
Yes
20
Generic Value Chain
21
A Typical Value Chain (Oil-based refined products)
Exploring for crude oil Drilling for crude
oil Pumping crude oil Shipping crude
oil Buying crude oil Refining crude
oil Sending refined products to
distributors Shipping refined products Selling
refined products to final customers
22
Value Chain Approach

• Analyze each of the functions that lead to
  production of the final product or service
• How well do they each perform?
• - quantitative qualitative tools needed here
• How effectively do the different functions
  interact?
• Are the supporting functions adequate?

23
The Building Blocks Approach (Figure 3.6, p 95)

• Efficiency What is the usual measure of
  efficiency?
• Quality Excellence and reliability
• Innovation Importance of both process and
  product innovation, role of innovation in
  becoming unique
• Customer responsiveness Includes response time,
  customization, and after sales service and support

24
Applying the Building Blocks Approach

• Itemize instance of significant operational and
  managerial achievements and/or deficiencies under
  each of the categories.
• Use these noted observations to guide your
  recommendations.

25
Why companies fail

• Inertia
• Companies find it difficult to change their
  strategies and structures
• Prior Strategic Commitments
• Limit a companys ability to imitate and
  cause competitive
  disadvantage
• The Icarus Paradox
• A company can become so specialized and inner
  directed based on past success that it loses
  sight of market realities
• Categories of rising and falling companies
• Craftsmen Builders Pioneers
  Salespeople

26
Avoiding Failure

• Focus on the Building Blocks of Competitive
  Advantage
• Develop distinctive competencies and superior
  performance in
• Efficiency ? Quality
• Innovation ? Responsiveness to Customers
• Institute Continuous Improvement and Learning
• Recognize the importance of continuous learning
  within the organization
• Track Best Practices and Use Benchmarking
• Measure against the products and practices of
  the most efficient global competitors
• Overcome Inertia
• Overcome the internal forces that are barriers
  to change

27
Questions for Starbucks Video

• 1) List Starbucks major capabilities
• and discuss the strategic implications of these
  capabilities.
• 2) How is Starbucks utilizing their resources
  and capabilities to develop their brand overseas?
• 3) Describe Starbucks people-to-people business
  philosophy. How has this resource/capability
  contributed to Starbucks strategic success?

28
Questions

• 1) What is the role of luck in gaining
  possession of a particular resource or
  capability? Can a firm manage luck? Give 3
  examples of resources or capabilities that
  specific organizations gained through luck.
• 2) Some firms products are so well known that
  the entire category of products offered in the
  industry (including rivals products) is often
  referred to by the leading firms brand name
  (which is called an eponym). Identify three such
  products, and for each case discuss whether
  their brand recognition gives the leading firm a
  competitive advantage. Why or why not?