Slide 3.Johnson, Whittington and Scholes, Exploring Strat.docx

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Johnson, Whittington and Scholes, Exploring Strategy, 9th
Edition, © Pearson Education Limited 2011
Exploring Business Strategy
(247SAM)
Lecture 4: Strategic capabilities
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Where we are now?
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Intended learning outcomes for this weekIdentify 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 organised support (VRIO). Diagnose

strategic capability by means of VRIO analysis, benchmarking,
value chain analysis, activity mapping and SWOT analysis.
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Strategic capabilities: the key issues
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Resource-based view (1)
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.
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Resource-based view (2)
A collective contributions by:
Penrose (1959), The Theory of the Growth of the Firm.
Rumelt (1984), Wernerfelt (1984),
Barney (1991),
Teece et al. (1997),
etc. etc.
Slide 3.*
Components of strategic capabilities
Table 3.1 Components of strategic capabilities
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Components of strategic capabilitiesResources 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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Dynamic capabilities
Dynamic capability is the ability of an organisation to
renew and recreate its strategic capabilities to meet the needs of
changing environments.
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Threshold and distinctive capabilitiesThreshold 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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Resources and Competences
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VRIO strategic capabilities
VValue: Do capabilities exist that are valued by customers and
enable the organisation to respond to environmental
opportunities or threats?RRarity: Do capabilities exist that no
(or few) competitors possess?IImitability: Are capabilities
difficult and costly for competitors to obtain and
imitate?OOrganisational support: Is the organisation
appropriately organised to exploit the capabilities?
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Imitability of strategic capabilities
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The VRIO framework:
VRIO Strategic capabilities → sustained competitive advantage
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An example of VRIO capabilities: Organisational knowledge
Organisational knowledge is organisation-specific, collective
intelligence, accumulated through formal systems and people
shared experience 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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Diagnosing strategic capabilitiesBenchmarkingThe value chain
and value systemActivity systems (self-guided study)SWOT
Benchmarking as a means of understanding the relative
performance of organisations.Analysing an organisation’s value
chain and value system 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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Benchmarking
Benchmarking is a means of understanding how an organisation
compares with others – typically competitors.
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.
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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The value chainThe 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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The value chain
Figure 3.4 The value chain within an organisation
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
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Uses of the value chainA 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 weaknessesAnalysing 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)
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The value systemThe value system 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.
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The value system
Figure 3.5 The value network
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

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Uses of the value systemUnderstanding 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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SWOT analysis
SWOT summarises the strengths, weaknesses, opportunities and
threats likely to impact on strategy development.
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Uses of SWOT analysisSWOT can be used to examine strengths,
weaknesses, opportunities and threats in relation to
competitors.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.
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Dangers in a SWOT analysisLong 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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Further readingChapter 3 of Core TextBarney J.B. (1991) ‘Firm

Resources and Sustained Competitive Advantage’. Journal of
Management, 17 (1): 99-120.Rumelt R.P. (1984) ‘Toward a
Strategic Theory of the Firm’, In R. Lamb (ed.) Competitive
Strategic Management. Prentice Hall, Englewood Cliffs, NJ:
556-570.Teece D. J., Pisano G. and Shuen A. (1997) ‘Dynamic
Capabilities and Strategic Management’. Strategic Management
Journal, 18(7): 509-533.Wernerfelt B. (1984) ‘A Resource-
based View of the Firm’. Strategic Management Journal, vol.5
No.2, 171-180.
Slide 2.*
(247SAM)
Lecture 3: Analysis of
Industrial Environment
(competitive environment)
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Recap the last lecture:
Macro-environment analysis for strategic position and change

P
E
S
T
E
L
Key drives
(Current position)
Impact 1
Impact 2
Impact 3
Scenario 1
Scenario 1
Scenario 1
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Case study: scenarios for the global fashion industry, 2025 Five
steps of the Scenario analysis:S1: Scenario scope?S2: Key
drivers for change in the next 15 years from 2010 on?S3:
Scenario stories?S4: Impact of alternative scenario on Levi
Strauss & Co.?S5: Early warning system?

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(247SAM)
Industrial Environment
(competitive environment)
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Learning objectives for this weekUse Porter’s five forces
analysis to define the attractiveness of industries and
markets;Analyse strategic and competitive positions in terms of
strategic groups, market segments and ‘Blue Oceans’.
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Concepts: Industry-Sector-Market
An industry is a group of firms producing products and services
that are essentially the same. For example, automobile industry
and airline industry.

A sector is a broad industry group (or a group of markets)
especially in the public sector (e.g. the health sector)
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).
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Porter’s (1980) Five Forces frameworkTheoretical underpinning
for the framework: There are five competitive forces which
determine the nature of competition within an industry;To
analyse and understand the nature and extent of competition
within an industry;To assist managers in developing competitive
strategy for organisations.
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Porter’s 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.

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Slide 2.*
Division of Simon & Schuster Adult Publishing Group, from
Competitive Strategy: Techniques for Analyzing Industries and
Competitors by Michael E. Porter. Copyright © 1980, 1998 by
The Free Press. All rights reserved
The five forces framework
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The Threat of Entry
This is often analysed via ‘Barriers to Entry’. 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/high fixed costs
Experience and learning
Access to supply and distribution channels (Defence industry)
Differentiation and market penetration costs
Government restrictions (e.g. licensing)

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The Threat of Substitutes
Substitutes are products or services that offer a similar benefit
to an industry’s products or services, but by a different process.
Customers will switch to alternatives (and thus the threat
increases) if:
The price/performance ratio of the substitute is superior
customer satisfaction improves
Customers will switch to alternatives (and thus the threat
increases) if:The price/performance ratio of the substitute is
superior
(e.g. aluminium maybe more expensive than steel but it is
more cost efficient for some car parts)customer satisfaction
improves
(e.g. high speed trains can be quicker than airlines)
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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
Note: a concentration of buyers: fewer buyers with large
volumes of purchases, implying bigger bargaining power; large
number of buyers acting independently of each other and buying
small quantities, implying smaller bargaining power
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Ultimate vs strategic consumer?
Are ultimate consumers the strategic customers?
A strategic customer is the person(s) at whom the strategy is
primarily addressed because they have the most influence over
which goods or services are purchased.
Examples of strategic consumers:
For a food manufacturer it is the multiple retailers (e.g. Tesco)
that are the strategic customers but not the ultimate consumer.
For a pharmaceutical manufacturer it is the health authorities
and hospitals but not the final patient.
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The five forces framework (5)
The bargaining power of suppliers
Suppliers are those who supply what organisations need to
produce the product or service. Powerful suppliers can eat into
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).
*
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The five forces framework (6)
Rivalry between 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.
The degree of rivalry is increased when :
Competitors are of roughly equal size
Competitors are aggressive in seeking leadership
The market is mature or declining
There are high fixed costs
The exit barriers are high

There is a low level of differentiation
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Implications of five forces analysis
Identifies the attractiveness of industries.
Identifies strategies to influence the impact of the forces.
Note that the forces may have a different impact on different
organisations.
Identifies the attractiveness of industries.
(e.g., to decide industries/markets to enter or leave)Identifies
strategies to influence the impact of the forces.
(e.g., to build barriers to entry by becoming more vertically
integrated)Note that 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)
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Issues in five forces analysis
Apply at the most appropriate level – not necessarily the whole
industry at the global level.
Note the convergence of industries – particularly in the high

tech sectors
Note the importance of complementary products and services
Apply at the most appropriate level – not necessarily the whole
industry at the global level.
(e.g. the European low cost airline industry rather than airlines
globally)Note the convergence of industries – particularly in the
high tech sectors
(e.g. digital industries - mobile phones/cameras/mp3
players).Note the importance of complementary products and
services
(e.g. Microsoft windows and McAfee computer security systems
are complements). This can almost be considered as a sixth
force.
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Slide 2.*
Four types of industry structure based on the Five ForcesTypes
Rivals Attributes Monopolistic industriesOne No competitive
rivalry.
(e.g. Google)Oligopolistic industriesA fewLimited rivalry
(e.g. Airbus and Boing)Hypercompetitive industriesMany small
rivalsconstant competitive and disequilibrium
(e.g. Nokia/Samsung/Apple)Perfectly competitive
industriesMany many small rivalsLow barriers to entry
Many equal rivals
(e.g. Minicab in large cities)

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Is industry structure static? No change over time?
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Slide 2.*
The dynamics of industry structure
More often than not industry structure is dynamic
The key drives, e.g. PESTEL, are likely to change industry
structure
Scenario analyses can be used to understand possible impacts
Structural changes of Industry and sectors can be analysed in
terms of the industry life cycle and comparative five forces
radar plots over time.
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The industry life cycle
Source: Johnson et al. (2014: 53)

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Comparative industry structure analysis
Source: Johnson et al. (2014: 53)
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Industry-level strategy so far!Assuming that all companies
within an industry follows a same strategy?
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Slide 2.*
Competitive position-Strategic Groups
Company strategies differ within an industry or sector and
companies can be disaggregated into ‘strategic groups’.
Strategic groups are organisations within an industry or sector
with similar strategic characteristics, following similar
strategies or competing on similar bases.
Mapping strategic groups to identify key dimensions for
variation in profitability between top and low performers within
the industry/sector…an example followed

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Slide 2.*
Mapping strategic groups
(e.g. a two-dimension chart)
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Competitive position-Market segments
A market segment is a group of customers who have similar
needs that are different from customer needs in other parts of
the market.
Small market segments: ‘niches’
Dominance of a market niche can be very valuable as
dominance of an industry does
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Slide 2.*
Competitive advantage-Blue ocean

‘Blue Oceans’ are new market spaces where competition is
minimised. ‘Red Oceans’ are where industries are already well
defined and rivalry is intense.
Blue Ocean strategies are likely to be better opportunities than
Red Ocean strategies with many rivals.
Blue Ocean thinking encourages entrepreneurs and managers to
be different by finding or creating market spaces that are not
currently being served.
A ‘strategy canvas’ compares competitors according to their
performance on key success factors in order to develop
strategies based on creating new market spaces.
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Slide 2.*
Strategy canvas and blue ocean
(e.g. strategy canvas for electrical components companies)
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Guide for Seminars of this week
Activity: Group 1 to present
All members present
For around 20 minutes
Theme: Environmental analysis of Advertising Industry
Slides/ presentation contents: (1) group members and work

allocation; (2) context of the case; (3) PESTEL and Five forces
model.
Seminar procedure:
Group presentation (20mins);
Peer questions and discussion (15mins);
Feedback from peers and seminar tutors on the group
presentation, the contents, slide present and format (20 mins);
Self-reflection (10mins): three good things you have learned;
three things to avoid or to improve for group presentation and
for case studies.
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Further reading and Pre-readingFurther reading:
Core text: Fundamentals of Strategy, 3rd Ed, Chapter 2
Porter, M.E. (1979) “How competitive forces shape strategy”,
Harvard business review, March, April 1979
Porter, M.E. (1980) Competitive strategy, Free Press, New
York, 1980Prepare for next lecture:
Chapters 3.1 to 3.4 on strategic capabilities.
Slide 2.*

(247SAM)
Macro-Environment
Slide 2.*
Recap the last lecture
What is strategy in business?
Strategy is defined as ‘The long-term direction of an
organisation’.
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Three-horizons of Glastonbury Festival
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Strategy statement?
The statement is a summary of an organisation’s
strategyMissionGoals, overriding purpose of an
organisationVisionGoals , future state of an
organisationObjectivesPrecise statement of organisational goal

over some period of timeScopeAn organisational domain:
customer, location, extent of internal activitiesAdvantage
competences over competitors
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Strategy statement of Glastonbury Festival
E.g. ‘to develop the sustainable and international Festival
Group, focused on hippy revellers and wider attenders, with
competitive advantages in terms of the diversity,
internationalisation and the strength of our relationships with
key stakeholder’.MissionOrganising music events and festivals
to socialise hippy revellers and wider audience
VisionSustaining social and fun experience to music fans and
wider attenders at the international levelScopeEntertainment/
Festival market/international entertainment festivalAdvantage
Long history, hippy revellers, wider attenders, sponsor support

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(247SAM)
Micro-Environment
Slide 2.*
Learning outcomes for this weekTo analyse the broad macro-
environment of organisations in terms of political, economic,
social, technological, environmental and legal factors
(PESTEL);To identify key drives for changes in this macro-
environment, and To construct alternative scenarios with regard
to the environment changes.
Slide 2.*
Strategy ? EnvironmentWhy do we need analyse organisational
environment in strategic management (2mins)?

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“Strategic Management” starts from…
Understanding the strategic position :
Which includes understanding and making sense of:
External environment
Expectations/influence of stakeholders and purpose
Internal resources & capability
Culture
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Slide 2.*
Live case: Yahoo No more?Verizon Acquisition Of Yahoo
Delayed until Q2Bloomberg data on 24/01/17
https://www.bloomberg.com/news/articles/2017-01-23/yahoo-
says-sale-to-verizon-delayed-until-second-quarter
Yahoo no more: As Verizon takes over the company's core
internet businessVerizon announced its purchase of Yahoo for
$4.83 billion in July 2016.
“The acquisition of Yahoo will put Verizon in a highly
competitive position as a top global mobile media company, and
help accelerate our revenue stream in digital advertising," said
Lowell McAdam, Verizon chairman and CEO, in a press release
at the time.

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“Adapting an organisation to its environment is an essential
aspect of strategic management”
(Rosen, 1995, p12)
How?
Analyse and understand the environment in which it operates.
1. Macro environment (External)
2. Meso/Competitive environment (External)
3. Micro environment of the firm itself (Internal)
Slide 2.*
(JSW, 2005, PG 64)
Layers of the business environment
Identifying Opportunities and Threats
Internal Analysis – Identifying strengths and weaknesses as
well as culture, mission and vision
Strategic Group analysis
Life Cycle Model
5 forces and Game theory
PESTEL and Stakeholders
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Very difficult to edit this picture. Idea would be to animate the
slide (see slide show), first to show the basic ovals, then bring
in the annotation. These lecture notes serve as revision sheets

for students so it’s good to include some of the detail.
Slide 2.*
To assess the nature of the macro environment depends on…
Is it stable?
emphasis may be on maintaining and improving existing
strategy
Why?
Future is more predictable and subject to the industry
Is it turbulent?
emphasis may be on trying to detect change as early as possible
Why?
Future is more uncertain
Slide 2.*
Analysing Macro-environment: PESTEL
JSW (2005), PG 68,
Exhibit 2.2
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Slide 2.*

PESTEL
Political:
Highlight the role of national and other political forces, e.g.
Taxation policy
Government stability
Government policy on fair trade, labour rights and health
campaigners
Economic:
Macroeconomic factors, e.g.,
Exchange rate
Interest rates
Inflation
Unemployment
Disposable income
Slide 2.*
Technological:
It refers to technological changes and influences, e.g.,
The internet, nano tech, or the rise of new materials
New discoveries/ development
Speed of technology
PESTEL
Sociocultural:
It includes changing cultures and demographics, e.g.,
Aging population
Social mobility
Lifestyle changes
Attitudes to work and leisure
Levels of education
Slide 2.*

Legal:
Legislative and regulatory constraints or changes, e.g.
Environmental protection laws
Legal change re M&A
Regulations/liberalisation regarding trade and foreign
investment
PESTEL
Environmental :
Ecological stands for ‘green’ environmental issues, e.g.,
Pollution
Waste
Climate change
Mobile recycling
Slide 2.*
Rethinking: Why use PESTEL?An audit of influences of an
organisational environment Helps identify forces that are
driving structural changeWith the purpose of using this
information to guide strategic decision-making. If the
organisation is able to audit its current environment and assess
potential changes, it will be better placed than its competitors to
respond to changes.
Slide 2.*
Be aware of limitations and improper use of PESTEL!Too much

informationOnly a list of information does not make senseOpen
to interpretationBased on past dataAvoid descriptive and
subjective –need to backup with evidence
Slide 2.*
Any question so far?
Slide 2.*
What can you read from the following reports of business news?
*
Slide 2.*
Why is the automotive industry developing the electric car ?
Slide 2.*
Automotive industry: The Key Industry DriversResearch and
development to decarbonise cars, vehicles and the fuels they use
is the single most important driver for the sector. Global
harmonisation and economies of scale are also key driversthe
global car manufacturing industry has reached over capacity in

traditional vehicles in existing markets
The French car manufacturers are seen as forerunners in the
electric vehicle sector in Europe
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The market for premium cars in China has increased at a rate of
36 %
Chinese middle class to upgrade to premium cars
Consider the different markets
Slide 2.*
Slide 2.*
Slide 2.*
It tells…Changes?

Key drivers for the changes?
Slide 2.*
It tells…
The environmental factors likely to have a high impact on the
success or failure of strategy.
Typically key drivers vary by industry or sector.
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Slide 2.*
Building ScenariosHigh levels of uncertainty = impossible to
build a single view of how environmental influences might
affect an organisation’s strategiesScenarios offer plausible
alternative views of how the business environment might
develop in the futureScenarios typically build on PESTEL
analyses and key drives for change
Slide 2.*
Scenario analysis

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Five-step scenario analysis
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Slide 2.*
Example: scenarios for the global fashion industry, 2025 Self-
guide study: P.40 Core book:S1: Scenario scope?S2: Key
drivers for change in the next 15 years from 2010 on?S3:
Scenario stories?S4: Impact of alternative scenario on Levi
Strauss & Co.?S5: Early warning system?
*
Slide 2.*
Summary of today
How to analyse an organisation’s position in the broad
environment -external (macro) environment. PESTEL
framework
Identify key drivers in this macro-environment and
Use these key drivers to construct alternative scenarios with
regard to environmental change
*
*

*
Further ReadingRead chapter 2 for next lecture:
Sections 2.3 to 2.5 on industrial environments.Read the case
study for next seminar this week:
‘Global forces and the advertising industry’ (Group 1 to present
in Week 3)

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