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Internal analysis


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Internal analysis

  1. 1. I. Competitive Advantage The Business System The Issue of Competitive Advantage How can a company be successful? Business System The configuration of resources, activities and product/service offering intended to create value for the customers Product offering (Output) The firm supplies goods or performs services for clients in the market place Resource Base (Input) All means at the disposal of the organization for the performance of value-adding activities Activity System (Throughput) An integrated set of value creation processes leading to the supply of product and/ or service offerings
  2. 2. Competitive Advantage Components of a Business System
  3. 3. Internal Analysis. <ul><li>The resource-based view (RBV) defines a firm in terms of what it is capable of doing ; by its resources and capabilities (Barney, 1991). </li></ul><ul><li>RBV advances on industry analysis which by the 1990s was considered to be too static and focused on the external environment. </li></ul>
  4. 4. Resources and capabilities <ul><li>Resources and capabilities are intimately related: </li></ul><ul><ul><li>Resources support capabilities; </li></ul></ul><ul><ul><li>Capabilities exploit resources. </li></ul></ul><ul><li>The violinist creates music via applying his/her skills (capability) on the instrument (resource). </li></ul><ul><li>Without musical skills a product (music) will not be produced. Conversely a skilled violinist will find it difficult to produce any product without resources (violin). </li></ul>
  5. 5. Resources and capabilities <ul><li>Resources: </li></ul><ul><ul><li>Defined as assets, tangible and intangible endowments which are exploited to create value for the firm’s customers. These could include plant and equipment (physical resources), employees (human resources), brands and patents (intangible resources) </li></ul></ul><ul><li>Capabilities: </li></ul><ul><ul><li>Refers to the way the firm (its employees) utilises and coordinates the exploitation of resources. Capabilities are skills and processes. Capabilities often overlap business functions such as marketing, sales and engineering. </li></ul></ul>
  6. 6. Resources, capabilities and product characteristics <ul><li>Resources are not products. Resources are exploited to make or deliver products to customers. </li></ul><ul><ul><li>For example IKEA furniture is a cost-efficient retailer. One resource that supports the sufficiency is IKEA stores combining a shop and a warehouse. </li></ul></ul><ul><li>The manufacturer Dunlop confused ‘product characteristics’ of rubber with manufacturing resources and diversified into all things rubber such as condoms, mattresses, sporting goods. </li></ul><ul><ul><li>This did not succeed as a rubber was not the capability and Dunlop quickly accumulated losses. </li></ul></ul>
  7. 7. Resources, capabilities and product characteristics <ul><li>Capabilities are not product characteristics. IKEA has a strong design capability combining contemporary design with the use of low-cost materials (which can be flat-packed). </li></ul><ul><li>IKEA’s contemporary design capabilities contribute to its distinctive competence in ‘efficiency’ alongside other key resources and capabilities (such as customer orientated-culture and supply chain management skills). </li></ul><ul><li>Exercise : Identify Belo’s Resources and Capabilities. </li></ul>
  8. 8. The value chain <ul><li>RBV does not view the firm as a simple set of resources and capabilities. </li></ul><ul><li>It looks at the complex inter-relationships between all the resources and capabilities giving the firm its uniqueness. </li></ul><ul><li>Porters (1985) value chain is a visual representation of all the activities in the process of creation and delivery of product or service. </li></ul>
  9. 9. The Value Chain
  10. 10. Analysing the linkages between the activities <ul><li>The overall performance of the organisation may be dependent on how well activities in the value chain are linked together. </li></ul><ul><li>This can help prioritise which resources, capabilities and linkages require high-performance. </li></ul><ul><ul><li>Dell computers relies on rapid and efficient linkages between sales, manufacturing, inbound logistics, procurement and outbound logistics. Low costs are achieved through minimising inventories, efficient manufacturing on-demand, efficient IT systems (infrastructure) etc.. </li></ul></ul><ul><li>The efficient operation of the network of linkages between activities in the value chain constitutes a firm capability….incorporating tacit knowledge. </li></ul>
  11. 11. Analysing resources and capabilities <ul><li>The VRIE framework </li></ul><ul><li>The importance of a resource capability to company performance can be assessed by using four criteria: </li></ul><ul><ul><li>Value </li></ul></ul><ul><ul><li>Rareness </li></ul></ul><ul><ul><li>Imitability </li></ul></ul><ul><ul><li>Exploitation </li></ul></ul>
  12. 12. Resources, capabilities and the creation of value Capabilities Resources Better than Competitors? Rare? Difficult to imitate? Strategic capabilities Competitive advantage Customer value
  13. 13. Analysing resources and capabilities <ul><li>Value </li></ul><ul><ul><li>How much does the resource contribute to the products or service offered as perceived by customers. </li></ul></ul><ul><ul><ul><li>E.g. Apple has strong capabilities in product design and engineering but outsourced manufacturing as assembly arguably adds no value.?? </li></ul></ul></ul><ul><li>Rareness </li></ul><ul><ul><li>Does everyone have this resource/capability? </li></ul></ul><ul><ul><ul><li>E.g. all businesses have connection to a telephone network so it is hardly a source of advantage. </li></ul></ul></ul><ul><ul><ul><li>Argyle’s rare pink diamonds are sought after by jewellers and sell at a premium price. </li></ul></ul></ul>
  14. 14. Analysing resources and capabilities <ul><li>Imitability </li></ul><ul><ul><li>How costly or difficult is it for competitors to imitate? </li></ul></ul><ul><ul><ul><li>E.g. the Coca-Cola brand. It is very costly for competitors to achieve similar levels of brand awareness. </li></ul></ul></ul><ul><ul><li>Another source of costly imitability lies in what researchers call “ social complexity ” (Barney, 1991). </li></ul></ul><ul><ul><li>If the capability is linked to the history and culture of a company and involves a lot of tacit knowledge it is hard to imitate e.g. 3M and its innovativeness. </li></ul></ul>
  15. 15. Analysing resources and capabilities <ul><li>Exploitation </li></ul><ul><ul><li>Is the firm organised to extract the maximum value from a particular resource/capability? </li></ul></ul><ul><ul><ul><li>Xerox developed an outstanding R&D capability at its Palo Alto Research Centre (PARC). </li></ul></ul></ul><ul><ul><li>The PARC was indirectly responsible for conceiving the personal computer, windows-like operating systems, Ethernet networking protocols etc </li></ul></ul><ul><ul><ul><li>However Xerox failed to exploit these innovations because it thought of itself as a “copier company”. </li></ul></ul></ul>
  16. 16. Combining external/internal perspectives: process perspectives: <ul><li>Industry analysis and RBV can provide a static analysis of current position </li></ul><ul><ul><li>It may not adequately address future competition and development of future resources and capabilities </li></ul></ul><ul><li>Internal systems and processes (& culture etc) influence development of strategy </li></ul><ul><li>‘ Learning organisations’ are better able to develop dynamic capabilities </li></ul><ul><ul><li>(see-Teece , Pisano & Schuen, 1997 Unit Outline Reading list) </li></ul></ul>
  17. 17. Dynamic capabilities : managing knowledge, learning and innovation <ul><li>Moves from examining current capabilities to how future capabilities are developed. </li></ul><ul><li>Competitive advantage depends on the ability to build capabilities </li></ul><ul><li>Knowledge management an important aspect of building capabilities </li></ul><ul><ul><li>Turns existing information into decisions about future capabilities </li></ul></ul><ul><ul><li>Using knowledge increases its value </li></ul></ul><ul><ul><li>Organisations must develop the ability to manage ‘knowledge workers’ </li></ul></ul>
  18. 18. Dynamic capabilities : managing knowledge, learning and innovation <ul><li>Innovation is another underlying dynamic capability </li></ul><ul><li>The ability to build and sustain innovation depends on five major classes of activities: </li></ul><ul><ul><ul><li>integrating problem solving across different cognitive and functional barriers </li></ul></ul></ul><ul><ul><ul><li>implementing new methodologies and processes </li></ul></ul></ul><ul><ul><ul><li>experimenting and prototyping </li></ul></ul></ul><ul><ul><ul><li>importing and absorbing technical knowledge from outside </li></ul></ul></ul><ul><ul><ul><li>learning from the market </li></ul></ul></ul>
  19. 19. Process From Fuchs et al. see your reading list in Unit Outline A multi-perspective approach