Strategic Management Lecture 2: Strategic Capabilities and Internal Environment Module Leader: Dr Samuel Adomako 1 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Learning outcomes • Tools to assist in internal analysis • Identify organisational resources and capabilities and how these relate to the strategies of organisations. • Analyse how resources and capabilities might provide sustainable competitive advantage on the basis of their Value, Rarity, Inimitability and Organisational support (VRIO). • Diagnose resources and capabilities by means of benchmarking, VRIO analysis, value chain analysis, and SWOT analysis. 2 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Analysing an organisation’s resources and capabilities Options Environment Purpose Options Resources Options This session Choice Implement Five key questions related to strategic resources and capabilities ..Because they deliver value added 1. What are the resources and capabilities of an organisation? 2. Why do we have them at all? Three broad categories: •Tangible resources •Intangible resources •Organisational capabilities 3. Why are resources and capabilities important in strategy? …Because they deliver competitive advantage 5. What other company resources are also important? 4. How can we improve competitive advantage? Resources and capabilities: the key issues 5 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Foundations of resources and capabilities The resources and capabilities of an organisation contribute to its long-term survival and potentially to competitive advantage. • Resources are the assets that organisations have or can call upon (e.g. from partners or suppliers), that is ‘what we have’. • Capabilities (sometimes referred to as competences) are the ways those assets are used or deployed, that is ‘what we do well’ . 6 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Resources and capabilities 7 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Resource-based strategy The resource-based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation are explained by the distinctiveness of its capabilities. It is sometimes also called the ‘capabilities view’. 8 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Redundant capabilities • Capabilities, however effective in the past, can become less relevant as industries evolve and change. • Such ‘capabilities’ can become ‘rigidities’ that inhibit change and become a weakness. 9 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Resources and capabilities • https://www.youtube.com/watch?v=s0_37_yASao 10 16 April 2020 POWERPOINT PRESENTATION TEMPLATE BLUE How do we analyse an organisation’s strategic resources and capabilities? Strategic Management tools: The VRIO and Value Chain Lecture 2: Strategic Capabilities and Internal Environment Strategic capabilities and competitive advantage The four key criteria by which capabilities can be assessed in terms of providing a basis for achieving sustainable competitive advantage are: • value • rarity VRIO1 • inimitability and • organisational support 1Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17, no. 1 (1991), pp. 99–120. 12 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment VRIO 13 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment VRIO analysis A VRIO analysis helps to evaluate if, how and to what extent an organisation or company has resources and capabilities that are : (i) valuable; (ii) rare; (iii) inimitable; (iv) supported by the organisation. 14 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment VRIO V – Value of resources and capabilities Strategic capabilities are of value when they: • take advantage of opportunities and neutralise threats; • provide value to customers; • are provided at a cost that still allows an organisation to make an acceptable return 15 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment VRIO R – Rarity • Rare capabilities are those possessed uniquely by one organisation or only by a few others. (e.g. a company may have patented products, have supremely talented people or a powerful brand.) • Rarity could be temporary. (e.g. Patents expire, key individuals can leave or brands can be de-valued by adverse publicity.) 16 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment VRIO I – Inimitability Inimitable capabilities are those that competitors find difficult and costly to imitate, to obtain or to substitute. • Competitive advantage can be built on unique resources (a key individual or IT system) but these may not always be sustainable (key people leave or others acquire the same systems). • Sustainable advantage is more often found in (the way resources are managed, competences developed and deployed) and the way competences are linked together and integrated. 17 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Criteria for the inimitability of resources and capabilities 18 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment VRIO O – Organisational support The organisation must be suitably organised to support the valuable, rare and inimitable capabilities that it has. This includes appropriate processes and systems. 19 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment The VRIO Framework: Performance Implications Valuable? 20 Rare? Inimitable? Organised? Competitive impact No – – – Competitive disadvantage Yes No – – Competitive parity Yes Yes No – Short term competitive advantage Yes Yes Yes Yes Long term competitive advantage 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment VRIO Example 21 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Example: Amazon Resources/capabilities Valuable Rare Inimitable Organized Implication Brand image/equity Yes Yes Yes Yes Competitive advantage Customer base Yes Yes No Yes Temporary advantage Global presence Yes Yes No Yes Temporary advantage Customer loyalty Yes Yes No Yes Temporary advantage Technology Yes Yes No Yes Temporary advantage Product range Yes Yes Yes Yes Competitive advantage 22 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment The value chain • The value chain describes the categories of activities within an organisation, which, together, create a product or service. • The value chain consists of five primary activities (which are directly concerned with the creation or delivery of a product or service) and four support activities (which help to improve the effectiveness or efficiency of primary activities). • Competitive advantage can be analysed in any of these activities. 23 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment The value chain Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved. 24 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Value Chain – Ryanair 25 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Value chain video 26 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Benchmarking Benchmarking is a means of understanding how an organisation compares with others – typically competitors. Two approaches to benchmarking: • Industry/sector benchmarking – comparing performance against other organisations in the same industry/sector against a set of performance indicators. • Best-in-class benchmarking – comparing an organisation’s performance or capabilities against ‘best-in-class’ performance – wherever that is found even in a very dif
ferent industry. (e.g. BA benchmarked its refuelling operations against Formula 1). 27 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Benchmarking – Performance Metrics • Financial Ratios: – Gross Profit Margin – Net Profit Margin – Return on capital employed (ROCE) – Liquid or Quick Ratio (the ability to convert assets into cash quickly and cheaply) – Gearing (ratio of a company’s debt to equity) 28 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Summary of Internal analysis INTERNAL ANALYSIS=STRENGTHS and WEAKNESSES https://www.youtube.com/watch?v=mR9eICQJLXA 29 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Summary • To be distinctive and provide for sustainable competitive advantage, resources and capabilities need to fulfil the VRIO criteria of being Valuable, Rare, Inimitable and supported by the Organisation. Ways of diagnosing organisational resources and capabilities include: • VRIO analysis of resources and capabilities to evaluate if they contribute to competitive advantage. • Analysing an organisation’s value chain and value system to understand how value to a customer is created and can be developed. 30 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment References 31 • BARNEY, J. (1991) Firm Resources and Sustained Competitive Advantage. Journal of Management, 17, 99-120. • Johnson et al (2014) Chapters 3 and 4 • Prahalad, C. and G. Hamel (1990). “The Core Competence of the Corporation.” Harvard Business Review 68: 79-91. • Porter, M. (1985). Competitive Strategy. Competitive Advantage: Creating and Sustaining Superior Performance. New York, Free Press, Simon and Schuster Adult Publishing Group. • TEECE, D. (2007) Explicating Dynamic Capabilities: The Nature and Microfoundations of (Sustainable) Enterprise Performance. Strategic Management Journal, 28, 1319-1350. • Thompson, A., Peteraf, M., Gamble, A., Strickland, A. and Sutton, C. (2013) Crafting and Executing Strategy: the quest for competitive advantage, European Edition, McGraw-Hill, UK 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Next Lecture • How do we analyse external environment of an organization? 32 16 April 2020 Lecture 2: Strategic Capabilities and Internal Environment Strategic Management Lecture 3: Analysing the External Environment Module Leader: Dr Samuel Adomako 1 16 April 2020 Analysing the main elements of the environment Options Environment This session Purpose Options Resources Options Choice Implement Slide 2.3 Layers of the business environment Slide 2.4 Environmental analyses • Macro-environment -PESTEL • Industry and sector analysis -Porter’s Five Forces Framework The PESTEL framework PESTEL analysis highlights six environmental factors in particular: political, economic, social, technological, ecological and legal. Organisations need to consider: • The market environment (e.g. suppliers, customers and competitors). • The non-market environment (e.g. NGOs, Government, media and campaign groups). PESTEL analysis • Consider the general environment surrounding many businesses under six main headings: – – – – – – Political (e.g.,Brexit, stability). Economic (e.g., currency inflation, interest rates, taxation level) Sociological (cultural norms, attitudes to product, consumer preferences, age and gender distribution) Technological (internet, Blockchain, nano-technology) Ecological (Sustainability, waste management rules and regulations, green practices, climate change) Legal (e.g., Legislative issues, such as consumer protection laws, health and safety laws, licensing regulations) PESTEL helps to provide a list of potentially important issues influencing strategy. It is important to assess the impact of each factor. Using the PESTEL framework • Apply selectively – identify specific factors which impact on the environment, market and organisation in question. • Identify factors which are important currently but also consider which will become more important in the future. • Use data to support the points and analyse trends using up-to-date information. • Identify opportunities and threats – the main point of the exercise. 7 16 April 2020 PESTEL opportunities and threats for the oil industry Short Video on PESTLE 9 16 April 2020 Quick Test on PESTEL • Based on what we’ve discussed – you are a consultant advising Ryanair about Political risks in its environment. Which is the most relevant list in order of importance with 1. being the most important and 4. being the least important ….. 1. 2. 3. 4. Tensions between US And N Korea Increased political instability in OPEC countries BREXIT The US government eliminates travel tax on its flights from Europe. Key issues for macro environmental analysis …. • Are you interpreting signals as opportunities or risks ? • Are they real signals or just noise? • Timing – “the future is not a far-off point: it arrives in daily doses that must be noticed and understood” (Vijay Govindarajan, 2016) • How can you prepare your organization for non linear changes and chance events? – Identifying – Low risk testing – Invest in what you can control but understand, respect and hedge against what you can’t. Industry Analysis 12 16 April 2020 Industries, markets and sectors An industry is a group of firms producing products and services that are essentially the same. For example, the automobile industry and the airline industry. A market is a group of customers for specific products or services that are essentially the same (e.g. the market for luxury cars in Germany). A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the health sector). 13 16 April 2020 What is your competitive group? • Define your industry – By sector – By scope – is it global / regional / international / national / more local ?? Industry and sector environments: the key topics Competitive forces: The five forces framework Porter’s Five Forces Framework helps identify the attractiveness of an industry in terms of five competitive forces: • The threat of entry. • The threat of substitutes. • The bargaining power of buyers. • The bargaining power of suppliers and. • The extent of rivalry between competitors. The five forces constitute an industry’s ‘structure’. 16 16 April 2020 The five forces framework Source: Adapted from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter, copyright © 1980, 1998 by The Free Press. All rights reserved. Rivalry between existing competitors Competitive rivals are organisations with similar products and services aimed at the same customer group and are direct competitors in the same industry/market (distinct from substitutes). The degree of rivalry depends on: • Competitor concentration and balance. • Industry growth rate. • High fixed costs. • High exit barriers. • Low differentiation 18 16 April 2020 The threat of entry Barriers to entry are the factors that need to be overcome by new entrants if they are to compete. The threat of entry is low when the barriers to entry are high and vice versa. The main barriers to entry are: • Economies of scale/Experience/Network effects. • Access to supply and distribution channels. • Differentiation and market penetration costs. • Legislation or government restrictions (e.g. licensing). • Expected retaliation • Incumbency advantages 19 16 April 2020 The threat of substitutes Substitutes are products or services that offer a similar benefit to an industry’s products or services, but have a different nature i.e. they are from outside the industry. Customers will switch to alternatives (and thus the threat increases) if: • The price/performance ratio of the substitute is superior (e.g. aluminium is more expensive than steel but it is more cost efficient for car parts) • The substitute benefits from an innovation that improves customer satisfaction (e.g. high speed trains can be quicker than airlines from city centre to city centr
e on short haul routes). • Extra-industry effects. Substitutes come from outside the incumbents’ industry which forces managers to look outside their own industry to consider more distant threats and constraints 20 16 April 2020 The bargaining power of buyers Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers. If buyers are powerful, then they can demand cheap prices or product/service improvements to reduce profits. Buyer power is likely to be high when: • Buyers are concentrated. • Buyers have low switching costs. • Buyers can supply their own inputs (backward vertical integration). • Low buyer profits (under pressure to improve profits) and the purchased inputs have a low impact on quality (can cut costs without loss of quality). 21 16 April 2020 The bargaining power of suppliers Suppliers are those who supply what organisations need to produce the product or service. Powerful suppliers can reduce an organisation’s profits. Supplier power is likely to be high when: • The suppliers are concentrated (few of them). • Suppliers provide a specialist or rare input. • Switching costs are high (it is disruptive or expensive to change suppliers). • Suppliers can integrate forwards (e.g. low-cost airlines have cut out the use of travel agents). 22 16 April 2020 Implications of five forces analysis • Which industries/markets to enter or leave? – it helps identify the attractiveness of industries. • What influence can be exerted? Identifies strategies that can influence the impact of the five forces. E.g. building barriers to entry by becoming more vertically integrated. • The forces may have a different impact on different organisations. E.g. large firms can deal with barriers to entry more easily than small firms. 23 16 April 2020 Michael Porter on 5 forces in Industry analysis 24 16 April 2020 Issues in five forces analysis • Defining the ‘right’ industry. Applying the model at the most appropriate level – not necessarily the whole industry. E.g. the European low-cost airline industry rather than airlines globally. • Converging industries – particularly in the high tech arenas – where industries overlap (e.g. digital industries – mobile phones/cameras/mp3 players). • Complementary organisations – which enhance the attractiveness of a business to customers or suppliers. Microsoft Windows and McAfee computer security systems are complementors. This can almost be considered as a sixth force. 25 16 April 2020 Steps in an industry analysis There are several important steps in an industry analysis before and after analysing the five forces: 1. Define the industry clearly. 2. Identify the actors of each of the five forces and any different groups within them and the basis for this. 3. Determine the underlying factors of, and the total strength of, each force. 4. Assess the overall industry structure and attractiveness. 5. Assess recent and expected future changes for each force. 6. Determine how to position your business in relation to each of the five forces. 26 16 April 2020 Industry types Growth and life-cycle analysis • Theory suggests that businesses go through various phases of development • Strategies will change with each phase Maturity …

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