SM Lecture Three : Strategic Capabilities

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

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.


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.


Strategic capabilities: the key issues

Figure 3.1 Strategic capabilities: the key issues


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? )


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’.


Components of strategic capabilities

Table 3.1 Components of strategic capabilities


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)


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


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’.


Threshold and distinctive capabilities

Table 3.2 Threshold and distinctive capabilities


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.


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.


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 .

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


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.)


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.


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.


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


Summary of the VRIN Factors:

Figure 3.3 VRIN


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.


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


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).

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.


The Concept of a Company Value Chain

♦ The Value Chain
● Identifies the primary internal activities that create
customer value and the related support activities.
● Permits a deep look at the firm’s cost structure and
ability to offer low prices.
● Reveals the emphasis that a firm places on
activities that enhance differentiation and support
higher prices.
Using the VC model, the form can analyze its INTERNAL
OPERATIONS and identify specific areas of efficiencies and
core competences.

Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 4–25 3-25

The Value Chain (Porter)

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


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


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


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)

The value network

Figure 3.5 The value network
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


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.


Strategic Options for Remedying a Disadvantage
in Costs or Effectiveness

♦ There are three places in the total value
chain system for a company to look for
ways to improve its efficiency and
effectiveness:
● The firm’s own activity segments
● The suppliers’ part of the overall value chain
● The distribution channel portion of the chain.


Representative Value Chain System for an Entire Industry

Some additional slides on how VC analysis is applied to
study the linkages between the firm and its allied
partners such as suppliers and distributors


Options for Improving the Efficiency and
Effectiveness of Internal Value Chain Activities

♦ Implement best practices throughout the company, particularly for
high-cost activities.
♦ Redesign products to eliminate high-cost components or facilitate
speedier and more economical assembly or manufacture.
♦ Relocate high-cost activities to areas where they can be
performed more cheaply.
♦ Outsource activities that can be performed by contractors more
cheaply than in-house.
♦ Shift to lower-cost technologies and/or invest in productivity-
enhancing, cost-saving technological improvements.
♦ Stop performing activities that add little or no customer value.

3-34
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. 4–34

Ways to Improve the Efficiency and Effectiveness
of Supplier-Related Value Chain Activities

♦ Pressure suppliers for lower prices.
♦ Switch to lower-priced substitute inputs.
♦ Collaborate closely with suppliers to identify mutual cost-saving
opportunities.
♦ Work with suppliers to enhance the firm’s differentiation.
♦ Select and retain suppliers who meet higher-quality standards.
♦ Coordinate with suppliers to enhance design or other features
desired by customers.
♦ Provide incentives to suppliers to meet higher-quality standards,
and assist suppliers in their efforts to improve.


Ways to Improve the Effectiveness of the Customer
Value Proposition and Enhance Differentiation

♦ Implement best practices throughout the company, particularly
for high-cost activities.
♦ Adopt best practices and technologies that spur innovation,
improve design, and enhance creativity.
♦ Implement the best practices in providing customer service.
♦ Reallocate resources to devote more to activities that will have
the biggest impact on the value delivered to the customer and
that address buyers’ most important purchase criteria.
♦ For intermediate buyers, gain an understanding of how the
activities the firm performs impact the buyer’s value chain.
♦ Adopt best practices for signaling the value of the product and
for enhancing customer perceptions.


Translating Company Performance of Value Chain Activities
into Competitive Advantage
Differentiation Advantage

Later in our lecture on Business Strategy (Chapter 6) we will show
how the VC is linked to the strategy of Differentiation (Porter)


Translating Company Performance of Value Chain Activities
into Competitive Advantage (cont’d)
Cost-Based Advantage

Later in our lecture on Business Strategy (Chapter 6) we will show
how the VC is linked to the strategy of Cost Leadership (Porter)


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.


Mapping activity systems (2)

Illustration 3.5 Activity systems at Geelmuyden.Kiese


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.


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


IS THE COMPANY ABLE TO SEIZE MARKET
OPPORTUNITIES AND NULLIFY EXTERNAL
THREATS? THE SWOT ANALYSIS

♦ SWOT Analysis
● Is a powerful tool for sizing up a firm’s:
 Internal strengths (the basis for strategy)
 Internal weaknesses (deficient capabilities)
 Market opportunities (strategic objectives)
 External threats (strategic defenses)


What Do the SWOT Listings Reveal?

♦ SWOT Analysis Involves:
● Drawing conclusions from the SWOT
listings about the firm’s overall situation.
● Translating these conclusions into
strategic actions by the firm that:
 Match its strategy to its internal
strengths and to market opportunities.
 Correct important weaknesses, and
defend it against external threats.


The Steps Involved in SWOT Analysis: Identify the Four
Components of SWOT, Draw Conclusions, Translate Implications
into Strategic Actions


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 


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.


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.


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.

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


Sample of a TOWS matrix

Try to Google more samples of TOWs matrices


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.


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.


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.


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


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
BUSM 3200- 4-56

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
BUSM 3200- 4-57

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?
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BUSM 3200- 4-58

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
BUSM 3200- 4-59

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?

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BUSM 3200- 4-60

How Calculated
Key Financial
Ratios

3-61

Key Financial
Ratios (cont’d)

3-62

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?

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BUSM 3200- 4-63

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)
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BUSM 3200- 4-64

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.


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.


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.


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

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

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.


SM Lecture Three : Strategic Capabilities

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