1. Strategic Management BUSM 3200
These Lecture Slides summarize the key points covered in the respective chapters in your
recommended text; these slides do NOT substitute, at all, the required reading of the assigned
chapter from the text. These slides also may contain additional supplementary material extracted
from other texts and sources outside your text book.
BUSM 3200- Strategic Management (Jan 2013) GDS 3-1
2. Learning outcomes for Chapter Three
Identify what comprises strategic capabilities in terms of
organisational resources and competences and how these
relate to the strategies of organisations.
Analyse how strategic capabilities might provide
sustainable competitive advantage on the basis of their
value, rarity, inimitability and non-substitutability (VRIN).
Diagnose strategic capability by means of benchmarking,
value chain analysis, activity mapping and SWOT analysis.
Consider how managers can develop strategic capabilities
for their organisations.
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3. Note:
This lecture focuses on INTERNAL Analysis of a
business
It gives you the concepts to assess the capabilities
and constraints of a company – simply put it
enables you to study its ‘strengths and
weaknesses’
Taken together with the material from Lecture
Two (external environment), you can then
proceed to complete the overall SWOT analysis of
the company.
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5. Resource-based strategy
The resource-based view (RBV) of strategy
asserts that the competitive advantage and
superior performance of an organisation is
explained by the distinctiveness of its
capabilities.
Proponents of the RBV contend that organizational
performance will primarily be determined by internal
resources that can be grouped into three all-encompassing
categories: physical resources, human resources, and
organizational resources.
(think of the functional divisions such as marketing, finance, HR and operations;
where does the key strengths of the company lie in? )
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6. Resources and competences
Resources are the assets that organisations have
or can call upon (e.g. from partners or
suppliers),that is, ‘what we have’ .
Competences are the ways those assets are used
or deployed effectively, that is, what we do
well’.
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7. Components of strategic capabilities
Table 3.1 Components of strategic capabilities
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8. 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.
(Consider the case of Nokia: a leader in the past but
now reduced to being a lost follower in the mobile
phone market)
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9. Dynamic capabilities
Dynamic capability is the ability of an
organisation to renew and recreate its strategic
capabilities to meet the needs of changing
environments.
Three types of capabilities:
• Sensing opportunities and threats
• Seizing new opportunities
• Reconfiguring the capabilities of the
organization
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10. Threshold and distinctive capabilities (1)
Threshold capabilities are those needed for an
organisation to meet the necessary requirements
to compete in a given market and achieve parity
with competitors in that market – ‘qualifiers’.
Distinctive capabilities are those that critically
underpin competitive advantage and that others
cannot imitate or obtain – ‘winners’.
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11. Threshold and distinctive capabilities
Table 3.2 Threshold and distinctive capabilities
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12. Core competences
Core competences1 are the linked set of skills,
activities and resources that, together:
deliver customer value
differentiate a business from its competitors
potentially, can be extended and developed as
markets change or new opportunities arise.
1G. Hamel and C.K. Prahalad, ‘The core competence of the corporation’, Harvard
Business Review, vol. 68, no. 3 (1990),
pp. 79–91.
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13. Core competences
Core competences are distinguished from competences
in several ways:
• they are only possessed by those companies
whose performance is superior to the industry
average;
• they are unique to the company;
• they are more complex;
• they are difficult to emulate (copy);
• they relate to fulfilling customer needs;
• they add greater value than 'general' competences;
• they are often based on distinctive relationships
with customers, distributors and suppliers;
• they are based upon superior organisational skills
and knowledge.
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14. 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,
VRIN
inimitability and
non-substitutability
Source: Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17 (1991), no.
1, pp. 99–120 .
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15. VRIN (1)
V – Value of strategic capabilities
Strategic capabilities are of value when they:
take advantage of opportunities and neutralise
threats,
provide value to customers
provide potential competitive advantage
at a cost that allows an organisation to realise
acceptable levels of return
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16. VRIN (2)
R – Rarity
Rare capabilities are those possessed uniquely
by one organisation or by a few others only. (E.g.
a company may have patented products, have
supremely talented people or a powerful brand.)
Rarity could be temporary.
(Eg: Patents expire, key individuals can leave or
brands can be de-valued by adverse publicity.)
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17. VRIN (3)
I – Inimitability
Inimitable capabilities are those that competitors
find difficult to imitate or obtain.
Competitive advantage can be built on unique
resources (a key individual or IT system) but these
may not be sustainable (key people leave or
others acquire the same systems).
Sustainable advantage is more often found in
competences (the way resources are managed,
developed and deployed) and the way
competences are linked together and integrated.
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18. Criteria for the inimitability of strategic
capabilities
Read the explanation of
Figure 3.2 Criteria for the inimitability of strategic capabilities these four components on
pages 92-93 of the text.
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19. VRIN (4)
N - Non-substitutability
Competitive advantage may not be sustainable
if there is a threat of substitution.
Product or service substitution from a different
industry/market. For example, postal services
partly substituted by e-mail.
Competence substitution. For example, a skill
substituted by expert systems or IT solutions
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20. Summary of the VRIN Factors:
Figure 3.3 VRIN
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21. Organisational knowledge
Organisational knowledge is the collective
intelligence, specific to an organisation,
accumulated through both formal systems and
the shared experience of people in that
organisation.
Some of this knowledge is ‘Tacit’ knowledge that
is, more personal, context-specific and hard to
formalise and communicate – so it is difficult to
imitate, for example, the knowledge and
relationships in a top R&D team.
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22. Diagnosing Strategic Capabilities
Several techniques and frameworks are used to
assess a company’s strategic capabilities:
1. Benchmarking
2. Value Chain and Value Networks
3. Activity Systems
4. SWOT Analysis
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23. 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 different industry. (E.g. BA
benchmarked its refuelling operations against
Formula 1).
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24. The value chain
The value chain describes the categories of
activities within an organisation which,
together, create a product or service.
The value chain invites the strategist to think of
an organisation in terms of sets of activities –
sources of competitive advantage can be
analysed in any or all of these activities.
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27. Read up in detail
The description of EACH of the activities of the
Value Chain on page 968.
Understand the difference between primary and
support activities
Importance of VC:
Used to do an internal analysis of business operations
Discover where the capabilities lie. Those inefficient
functions should be ‘outsourced’
To analyze the value chains of other related organizations
and identify areas of integration. Develop better linkages
in order to create efficiencies
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28. Uses of the value chain
A generic description of activities – understanding
the discrete activities and how they both
contribute to consumer benefit and how they add
to cost.
Identifying activities where the organisation has
particular strengths or weaknesses
Analysing the competitive position of the
organisation using the VRIN criteria – thus
identifying sources of sustainable advantage.
Looking for ways to enhance value or decrease
cost in value activities (e.g. outsourcing)
See page 99 of text
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29. The value network
The value network comprises the set of inter-
organisational links and relationships that are
necessary to create a product or service.
Competitive advantage can be derived from
linkages within the value network.
(implication in strategic analysis: we don’t only
look at our own company VC but also the
linkages between the other organizations that
do business with our firm – suppliers and
distributors)
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31. Uses of the value network
Understanding cost/price structures across the
value network – analysing the best area of focus
and the best business model .
Identifying ‘profit pools’ within the value network
and seek to exploit these.
The ‘make or buy’ decision: deciding which
activities to do ‘in-house’ and which to outsource.
Partnering and relationships – deciding who to
work with and the nature of these relationships.
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39. Mapping activity systems (1)
Identify ‘higher order strategic themes’ that is,
how the organisation meets the critical success
factors in the market.
Identify the clusters of activities that underpin
these themes and how they fit together.
Map this in terms of how activity systems are
interrelated.
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40. Mapping activity systems (2)
Illustration 3.5 Activity systems at Geelmuyden.Kiese
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41. Using activity system maps
A means of identifying strategic capabilities in
terms of linkages of activities
Internal and external links are identified (e.g. in
terms of the needs of customers).
Therefore helps identify bases of competitive
advantage.
And sustainable advantage for example, in
terms of bases of inimitability.
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42. SWOT analysis
SWOT summarises the strengths, weaknesses,
opportunities and threats likely to impact on
strategy development.
INTERNAL STRENGTHS WEAKNESSES
ANAYSIS
EXTERNAL OPPORTUNITIES THREATS
ANALYSIS
Derived from PESTEL and
Industry Analyses
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46. Remember:
SWOT Listing is NOT SWOT Analysis
“So What?” Implications
What do the SWO and T factors mean? Which are
more critical? And what should the company do
about such factors?
Just like the external variables (refer to my
Lecture Two), we can also quantify the internal
variables
External we used EFE and CPM Matrices
For Internal Factors we can use the IFE (internal factor
evaluation) matrix
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47. SWOT analysis: Illustration 3.6 (page 107)
In this illustration from the text, the SWOT analysis is more complex. Here the company
matches the different S&W factors against the external O and T factors. Notice how
contextual the points are (all specific to the pharmaceutical industry). This is how a good
SWOT analysis should be.
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48. SWOT analysis: Illustration 3.6 (page 107)
This continuation version of the SWOT analysis shows a second stage analysis
where the firm compares its performance to those of its direct competitors.
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49. Uses of SWOT analysis
Key environmental impacts are identified using
the analytical tools explained in Chapter 2.
Major strengths and weaknesses are identified
using the analytic tools explained in Chapter 3.
Scoring (e.g. + 5 to - 5) can be used to assess the
interrelationship between environmental impacts
and the strengths and weaknesses.
SWOT can be used to examine strengths,
weaknesses, opportunities and threats in relation
to competitors.
SWOT can be used to generate strategic options–
using a TOWS matrix.
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50. The TOWS matrix
This model is an extension of the SWOT analysis.
What is done here is to consider possible strategies
Figure 3.6 The TOWS matrix arising from the fit between internal and external
factors
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51. Sample of a TOWS matrix
Try to Google more samples of TOWs matrices
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52. Dangers in a SWOT analysis
Long lists with no attempt at prioritisation.
Over generalisation – sweeping statements
often based on biased and unsupported
opinions.
SWOT is used as a substitute for analysis –
it should result from detailed analysis using
the frameworks in Chapters 2 and 3.
SWOT is not used to guide strategy – it is
seen as an end in itself.
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53. Managing Strategic Capability
Internal capability development:
Leveraging capabilities – identifying
capabilities in one part of the
organisation and transferring them to
other parts (sharing best practice).
Stretching capabilities - building new
products or services out of existing
capabilities.
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54. Managing activities for capability
development
External capability development – adding
capabilities through mergers, acquisitions or
alliances.
Ceasing activities – non-core activities can be
stopped, outsourced or reduced in cost.
Monitor outputs and benefits – to understand
sources of consumer benefit and enhance
anything that contributes to this.
Managing the capabilities of people – training,
development and organisation learning.
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55. Managing people for capability development
Targeted training and development
Staffing policies
Organizational learning
Developing people’s awareness of their
importance of the roles they play in the
organization
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56. The Process of Performing an
Internal Audit
One area not covered in the text is the “auditing” or
The internal audit
internal assessment of the key business functions in the
organization
Requires gathering and assimilating
information about the firm’s management,
marketing, finance/accounting,
production/operations, research and
development (R&D), and management
information systems operations
Provides more opportunity for participants to
understand how their jobs, departments, and
divisions fit into the whole organization
3-56
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57. Marketing Audit Checklist
of Questions
1. Are markets segmented effectively?
2. Is the organization positioned well among
competitors?
3. Has the firm’s market share been increasing?
4. Are present channels of distribution reliable and
cost effective?
5. Does the firm have an effective sales
organization?
6. Does the firm conduct market research?
3-57
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58. Marketing Audit Checklist
of Questions
7. Are product quality and customer service good?
8. Are the firm’s products and services priced
appropriately?
9. Does the firm have an effective promotion,
advertising, and publicity strategy?
10. Are marketing, planning, and budgeting effective?
11. Do the firm’s marketing managers have adequate
experience and training?
12. Is the firm’s Internet presence excellent as
compared to rivals?
3-58
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59. Finance/Accounting Audit
Checklist
1. Where is the firm financially strong and weak
as indicated by financial ratio analyses?
2. Can the firm raise needed short-term capital?
3. Can the firm raise needed long-term capital
through debt and/or equity?
4. Does the firm have sufficient working capital?
5. Are capital budgeting procedures effective?
3-59
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60. Finance/Accounting Audit
Checklist
7. Are dividend payout policies
reasonable?
8. Does the firm have good relations with
its investors and stockholders?
9. Are the firm’s financial managers
experienced and well trained?
10.Is the firm’s debt situation excellent?
3-60
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63. Production/Operations
Audit Checklist
1. Are supplies of raw materials, parts, and
subassemblies reliable and reasonable?
2. Are facilities, equipment, machinery, and offices in
good condition?
3. Are inventory-control policies and procedures
effective?
4. Are quality-control policies and procedures effective?
5. Are facilities, resources, and markets strategically
located?
6. Does the firm have technological competencies?
3-63
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64. Integrating Strategy and Culture
Organizational culture significantly affects
business decisions and thus must be
evaluated during an internal strategic-
management audit.
If strategies can capitalize on cultural
strengths, such as a strong work ethic or
highly ethical beliefs, then management
often can swiftly and easily implement
changes.
We cover the topic of Corporate
Culture in Lecture 4 (Chapter 5)
3-64
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65. Chapter summary (1)
• Strategic capabilities comprise both resources and
competences.
• The concept of dynamic capabilities highlights that
strategic capabilities need to change as the market
and environmental context of an organisation
changes.
• Sustainability of competitive advantage is likely to
depend on an organisation’s capabilities being of at
least threshold value in a market but also being
valuable, relatively rare, intimable and non-
substitutable.
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66. Chapter summary (2)
Ways of diagnosing organisational capabilities include:
Benchmarking as a means of understanding the
relative performance of organisations.
Analysing an organisation’s value chain and
value network as a basis for understanding how value
to a customer is created and can be developed.
Activity mapping as a means of identifying more
detailed activities which underpin strategic
capabilities.
SWOT analysis as a way of drawing together an
understanding of strengths, weaknesses,
opportunities and threats an organisation faces.
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67. PRACTICE ESSAY QUESTIONS
IMPORTANT NOTE: →
These questions are provided for your reference only – they are only
INDICATIVE of the standard of questions you might expect in the final exam.
DO NOT use these questions to “spot”
The RMIT examiner will post advice on the exam on the Learning Hub closer
to the exam; you are required to pay attention to that advise
The questions here show the range of topics that could be tested from this
lecture; they are NOT exhaustive
To score a high grade it is important to LINK the theory to applications and
examples. Where from?
You have been assigned specific cases to read from the text. Each case
study will show you the kinds of strategic decisions the case company
needs to make. You can draw from these examples.
You have selected a case company for your project; you may use
examples from there.
You are supposed to read widely from the business press about local,
regional and international companies strategies. You can use examples
from there as well.
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68. Sample Exam Question
According to the resource based view of the firm,
there are four attributes resources a firm needs to
have if they are going to provide it with a
sustainable competitive advantage.
Explain how these can give a firm a sustainable
competitive advantage. Give an example of each
to support your answer.
Hint: VRIN
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69. Sample Exam Question
Describe the four criteria for an
organization’s core competence. Explain
how core competences can be identified
and leveraged to develop strategies. Give
examples to support your argument.
VRIN
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70. Sample Exam Question
Examine the advantages and disadvantages for a
firm to rely on the Value Chain to achieve
sustainable competitive advantage with a cost
leadership strategy. Use examples from the ___ case
to illustrate your answer.
Note: this question is not about discussing the Value
Chain by itself. It requires you to LINK the VC model to
discussion on one of the Business Strategies (cost
leadership). We cover the topic of business strategies
in a later lecture.
In the meantime take note of how exam questions
require you to analyze and write across the different
topics.
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