Chapter 3 Examining the Internal Environment: Resources, Capabilities, and Activities

1. Chapter 3Examining the Internal Environment: Resources, Capabilities, and Activities

2. OBJECTIVES 1 Explain the internal context of strategy Identify a firm’sresources and capabilities and explain their role in its performance 2 Define dynamic capabilities and explain their role in both strategic change and a firm’s performance 3 Explain how value‑chain activities are related to firm performance and competitive advantage 4 Explain the role of managers with respect to resources, capabilities, and value‑chain activities 5

3. COMPARATIVE INDUSTRY PERFORMANCE ROA Global Auto ROS • Semiconductor Grocery Store How dosuch differences in profitability materialize?

4. TWO THEORIES How and why some firms perform better than others A firm’s resources and capabilities determine performance A firm’s activities determine performance Success is driven by a firm’s value chain activities: how it configures these activities to add more valuethan competitors Success follows from fundamental differences in what firms own and what they can do

5. RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS :The Resource-based View of the Firm Resources Managers Competitive advantage/disadvantage Strategy Performance Management strategic decision making Capabilities

6. RESOURCES AND CAPABILITIES: Fundamental Building Blocks of Strategy • The inputs that firms use to create goods and services • Undifferentiated or firm-specific • Tangible or intangible • Easy or difficult to acquire Strategy Capabilities (competencies) Resources A firm’s 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

7. Valuable? Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties? IYES - satisfies the value requirement. Valuable resources are needed just to compete in the industry, but value by itself does not confer advantage. Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits that cover the cost of all inputs including the cost of capital). Rare? Is this resource scarce relative to demand? Or, is it widely possessed by most competitors? YES - Valuable resources that are also rare convey a competitive advantage, but relative permanence is not assured. Advantage is likely only temporary. A temporary competitive advantage conveys the potential to achieve above- normal profits, at least until the competitive advantage is nullified by other firms. Inimitable and non-substitut-able? How difficult is it for competitors to a) imitate the resource or capability ,or b) substitute for it with other resources and capabilities that provide similar benefits? Valuable and rare resources and capabilities that are also difficult to imitate or substitute provide potential for sustained competitive advantage. A sustained competitive advantage conveys the potential to achieve above- normal profits for extended periods of time (until competitors eventually find ways to imitate or substitute, or the environment changes in ways that nullify the value of the resources). Exploit-able? For each of the preceding steps of the VRINE test, can the firm actually exploit the resources and capabilities that it owns or controls? Resources and capabilities that satisfy the VRIN requirements but which the firm is unable to exploit actually result in significant opportunity costs. Alternatively, exploitability unlocks the potential competitive and performance implications of the resource or capability. Firms that control unexploited VRINE resources and capabilities suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy . THE VRINE MODEL Test Competitive implication Performance implication

8. THE VRINE MODEL: VALUE Example Union Pacific Railroad’s 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 • Maintains an extensive network of rail-line property and equipment on the U.S. Gulf cost • Operates in the western two-thirds 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

9. THE VRINE MODEL: RARITY Example When McDonald’s signs an agreement to build a restaurant inside a Wal-Mart store, it has an intangible advantage over Burger King that is both 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

10. Definition • A resource or capability is inimitable if competitors cannot acquire the valuable and rare resource quickly, or face a disadvantage in doing so • It is non-substitutable if a competitor cannot achieve the same benefit using different combinations of resources and capabilities THE VRINE MODEL: INIMITABILITY AND NON-SUBSTITUTABILITY Example Barnes & Noble’s large store network gave it wide access to customers and purchasing power that was inimitable … … but Amazon.comfound a substitute

11. 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 user-interface, and computer mouse but could not capitalize on these Definition A resource or capability that the organization has the capability to exploit (i.e., the capability to generate value from)

12. STOCKS AND FLOWS OF CAPABILITIES Capability Flow Stock

13. Inventory system Site software Pick & pack procedures Site look & feel Return procedures Customer research Merchandise Shipping Computers Telecom lines Shipping services Media VALUE CHAIN: INTERNET RETAIL EXAMPLE Firm Infrastructure Financing, legal support, accounting Recruiting, training, incentive system, performance management Support Activities HumanResources Technology Development Procurement Inbound shipment of top items Server operations Billing Collections Picking and shipment of top items from warehouse Shipment of other items 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

14. 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

15. Southwest Major Airlines Technologyand design • Single aircraft • Multiple types of aircrafts Operations • Short segment flights • Smaller markets and secondaryairports in major markets • No baggage transfers to other airlines • No meals • Single class of service • No seat assignments • Hub and spoke system • Meals • Seat assignments • Multiple classes of service • Baggage transfer to other airlines Marketing • Limited use of travel agents • Word of mouth • Extensive use of travel agents TRADEOFF PROTECTION:YOUR RIVALS CHOOSE NOT TO COPY YOU Selected differences between Southwest, when new, and large airlines Southwest made choices so that competitors did not copy it - because copying would require them to abandon activities that were essential to their strategies

16. INNOVATION AND INTEGRATION OF THE VALUE CHAIN Area of innovation Assemble Source Deliver IKEA Transferred assembly and delivery to the consumer Dell Chose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing

17. STRATEGIC LEADERSHIP Companies that overlook the role of leadership in the early phases of strategic planning often find themselves scrambling when it’s time to execute. No matter how thorough the plan, without the right leaders, it is unlikely to succeed – McKinsey & Company

18. SENIOR VS. MIDDLE MANAGERS Decide how to use other resources and capabilities, configure their firm’s value-chain activities, and set the context that 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, 2001

19. SUMMARY 1 Explain the internal context of strategy Identify a firm’s resources and capabilities and explain their role in its performance 2 Define dynamic capabilities and explain their role in both strategic change and a firm’s performance 3 Understand how value‑chain activities are related to firm performance and competitive advantage 4 Explain the role of managers with respect to resources, capabilities, and value‑chain activities 5