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Chapter 3 Examining the Internal Environment: Resources, Capabilities, and Activities. OBJECTIVES . 1. Explain the internal context of strategy. Identify a firm’s resources and capabilities and explain their role in its performance. 2.
Explain the internal context of strategy
Identify a firm’s resources and capabilities and explain their role in its performance
Define dynamic capabilities and explain their role in both strategic change and a firm’s performance
Explain how value‑chain activities are related to firm performance and competitive advantage
Explain the role of managers with respect to resources, capabilities, and value‑chain activities
How dosuch differences in profitability materialize?
Management strategic decision making
A firm’s skill in using its resources to create goods and services. The combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services
Logistics -- distributing vast amounts of goods quickly and efficiently to remote locations
200,000-percent return to share-holders during first 30 years since IPO1
An extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both techno-logical leadership and economies of scale
25,000-percent return to share-holders during the 30-plus year tenure of CEO John Connelly.2 As for ongoing expenses, share-holders in Vanguard equity funds pay, on average, just $30 per $10,000, vs. a $159 industry average. With bond funds, the bite is just $17 per $10,000
Generating new ideas then turning those ideas into new, profitable products
30 percent of revenue from products introduced within the past four years
1: Stalk, Evans, and Shulman, 1992
2: Makadok, 2003
Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties?
If so, it satisfies the value requirement. Valuable resources are needed just to compete in the industry, but value by itself does not convey an advantage
Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits which cover the cost of all inputs including the cost of capital)
Assuming the resource or capability is valuable, is it scarce relative to demand? Or, is it widely possessed by most competitors?
Valuable resources which are also rare convey a competitive advantage, but its relative permanence is not assured.
The advantage is likely only temporary.
A temporary competitive advantage conveys the potential to achieve above normal profits, at least until the competitive advantage is nullified by other firms
Inimitable and non-substitut-able?
Assuming a valuable and rare resource, how difficult is it for competitors to either imitate the resource or capability or substitute for it with other resources and capabilities that accomplish similar benefits?
Valuable resources and capabilities which are difficult to imitate or substitute provide the potential for sustained competitive advantage
A sustained competitive advantage conveys the potential to achieve above normal profits for extended periods of time (until competitors eventually find ways to imitate or substitute or the environment changes in ways that nullify the value of the resources)
For each step of the preceding steps of the VRINE test, can the firm actually exploit the resources and capabilities that it owns or controls?
Resources and capabilities that satisfy the VRINE requirements but which the firm is unable to exploit actually result in significant opportu-nity costs (other firms would likely pay large sums to purchase the VRINE resources and capabilities). Alternatively, exploitability unlocks the potential competitive and perfor-
mance implications of the resource or capability
Firms which control unexploited VRINE resources and capabilities generally suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy (though not as depressed as firms lacking resources and capabilities which do satisfy VRINE)THE VRINE MODEL
High traffic real-estate
Pick & pack procedures
Site look & feel
MediaVALUE CHAIN: INTERNET STARTUP EXAMPLE
Financing, legal support, accounting
Recruiting, training, incentive system, employee feedback
Inbound shipment of top titles
Picking and shipment of top titles from warehouse
Shipment of other titles from third- party distributors
Product information and reviews
Affiliations with other websites
Find a different way to perform activities
Shorter-term advantage (competitors catch up)
Find a better way to perform the same activities
Area of innovation
Transferred assembly and delivery to the consumer
Choose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing
Selected difference between Southwest and large Airlines
Southwest made choices so that competitors did not copy - because copying would require them to abandon activities essential to their strategies
Onshore/Offshore Coordination Demands
Connectivity and Telecom
Single Domestic vs. Multiple Cross-Border
Transition and Knowledge Transfer
Virtual Decentralized Teams
Multiple Personnel, Long Trips
“Companies that overlook the role of leadership in the early phases of strategic planning often find themselves scrambling when it’s time to execute. No matter how thorough the plan, without the right leaders it is unlikely to succeed”
– McKinsey & Company