INTERNAL ANALYSIS: RESOURCES AND CAPABILITIES

1. Dr. Payne (5) INTERNAL ANALYSIS: RESOURCES AND CAPABILITIES

2. The Links between Resources, Capabilities and Competitive Advantage INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE STRATEGY ORGANIZATIONAL CAPABILITIES • RESOURCES • TANGIBLE INTANGIBLE HUMAN • Financial • Physical • Skills/know-how • Capacity for communication & collaboration • Motivation • Technology • Reputation • Culture

3. SWOT Analysis • S W O T represents the first letter in • Strengths • Weaknesses • Opportunities • Threats • Strategy-making must be well-matched to both: • A firm’s resource strengths and weaknesses • A firm’s best market opportunities and externalthreats to its well-being Use Value Chain Analysis and Resource Analysis Build from Industry and Competitive Analysis

4. Criteria to Judge Organizational Strengths and Weaknesses Past Performance Trends Comparison Against Competitors Are organizational resources and capabilities strengths or weaknesses? Personal Opinions of Strategic Decision Makers or Consultants Specific Goals or Targets

5. Identifying Resource Strengthsand Competitive Capabilities • A strength is something a firm does well or a characteristic that enhances its competitiveness • Valuable competencies or know-how • Valuable physical assets • Valuable human assets • Valuable organizational assets • Valuable intangible assets • Important competitive capabilities • An attribute that places a company in a position of market advantage • Alliances or cooperative ventures

6. Tangible Resources

7. Intangible Resources Human • Experience and capabilities of employees • Trust • Managerial skills • Firm-specific practices and procedures Innovation and creativity • Technical and scientific skills • Innovation capacities • Brand name • Reputation with customers for quality and reliability • Reputation with suppliers for fairness, non-zero sum relationships Reputation

8. Identifying Resource Weaknessesand Competitive Deficiencies • A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage • Resource weaknesses relate to: • Deficiencies in know-how or expertise or competencies • Lack of important physical, organizational, or intangible assets • Missing capabilities in key areas

9. Example Strengths Example Weaknesses Example Opportunities Example Threats • Powerful strategy • Strong financial condition • Strong brand name image/reputation • Widely recognized market leader • Proprietary technology • Cost advantages • Strong advertising • Product innovation skills • Good customer service • Better product quality • Alliances or JVs • No clear strategic direction • Obsolete facilities • Weak balance sheet; excess debt • Higher overall costs than rivals • Missing some key skills/competencies • Subpar profits • Internal operating problems • Falling behind in R&D • Too narrow product line • Weak marketing skills • New customer groups emerging in market • New geographic areas emerging in market • Demand for new products in industry • Buyer or supplier firms are weak and potentially open to vertical integration options. • Openings to take MS from rivals • Some rival available and attractive sale targets • New technologies available for exploitation • Social media growth • Entry of potent new competitors • Emergence of strong substitutes • Slowing market growth • Adverse shifts in exchange rates & trade policies • Costly new regulations • Seasonal cycle of activties • Growing leverage of customers or suppliers • Shift in buyer needs for product • Demographic changes SWOT Analysis -- What to Look For

10. Organization Capabilities • Firm competences or skills the firm employs to transfer inputs to outputs • Capacity to combine tangible and intangible resources, using organizational processes to attain desired end Examples: • Outstanding customer service • Excellent product development capabilities • Innovativeness of products and services • Ability to hire, motivate, and retain human capital

11. Competencies vs. Core Competencies vs. Distinctive Competencies • A competence is an internal activity that a company performs better than other internal activities. • A core competence is a well-performed internal activity that is central,not peripheral, to a company’s strategy, competitiveness, and profitability. • A distinctive competence is a competitively valuable activity that a company performs better than its rivals.

12. Types of Core Competencies • Skills in manufacturing a high quality product • System to fill customer orders accurately and swiftly • Fast development of new products • Better after-sale service capability • Superior know-how in selecting good retail locations • Innovativeness in developing popular product features • Merchandising and product display skills • Expertise in an important technology • Expertise in integrating multiple technologies to create whole families of new products

13. A Distinctive Competence -- ACompetitively Superior Resource • A distinctive competence is a competitively significant activity that a company performs better than its competitors • A distinctive competence represents a competitively superior resource strength • A distinctive competence • Represents a competitivelyvaluable capability that rivals do not have • Has potential for being a cornerstone of strategy • Can provide a competitive edge in the marketplace

14. Is the resource or capability . . . Implications Valuable • Neutralize threats and exploit opportunities Rare • Not many firms possess • Physically unique • Path dependency (how accumulated over time) • Causal ambiguity (difficult to disentangle what it is or how it could be recreated) • Social complexity (trust, interpersonal relationships, culture, reputation) Difficult to imitate Difficult to substitute • No equivalent strategic resources or capabilities Assessing Sustainability of Resources and Capabilities: Four Criteria

15. Is a Resource… Valuable Rare Difficult to Imitate Without Substitutes Implications for Competitiveness No No No No Competitive disadvantage Yes No No No Competitive parity Yes Yes No No Temporary competitive advantage Yes Yes Yes Yes Sustainable competitive advantage Criteria for Sustainable Competitive Advantage and Strategic Implications

16. Why Rival CompaniesHave Different Costs • Companies do not have the same costs because of differences in • Prices paid for raw materials, component parts, energy, and other supplier resources • Basic technology and age of plant & equipment • Economies of scale and experience curve effects • Wage rates and productivity levels • Marketing, promotion, and administration costs • Inbound and outbound shipping costs • Forward channel distribution costs

17. Identifies the separate activities and business processes performed to design, produce, market, deliver, and support a product / service Consists of two types of activities Primary activities Support activities The Value Chain Concept

18. The Value Chain General administration Human resource management Margin Technology development Procurement Support Activities Inbound logistics Outbound logistics Marketing and sales Service Operations Margin Primary Activities Value Chain

19. Inbound Logistics Soundness of material and inventory handling Efficiency of warehousing activities Operations Productivity of equipment Production processes Outbound Logistics Efficiency of finished goods delivery Marketing and Sales Effective market research Innovative sales promotion Service Customer feedback mechanisms Customer education and training Primary activities of theVALUE CHAIN • Production control systems • Layout & work-flow design • Sales force • Image, brand loyalty • Warranty, guarantee, repair

20. Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Factors to Consider in Assessing a Firm’s Primary Activities PROFIT MARGIN

21. Infrastructure Physical: Size, location, age, flexibility of facilities and equipment Financial: Risk, cost and use of funds, ability to raise capital Technology Development Research and development Interaction with other departments Technology transfer Encourage innovation Procurement Obtain raw materials acceptable quality lowest cost Supplier relationships Human Resources Knowledge: Types, levels of knowledge possessed by employees throughout the firm Skills: Various categories of skills and abilities developed over time Support activities of theVALUE CHAIN

22. Factors to Consider in Support Activities • Effective planning systems to attain overall goals and objectives • Ability of top management to anticipate and act on key environmental trends and events • Ability to obtain low cost funds for capital expenditures and working capital • Excellent relationships with diverse stakeholder groups • Ability to coordinate and integrate activities across the “value system” • Highly visible to inculcate organizational culture, reputation, and values • Effective recruiting, development, and retention mechanisms for employees • Quality relations with trade unions • Quality work environment to maximize overall employee performance and minimize absenteeism • Reward and incentive programs to motivate all employees • Effective research and development activities for process and product initiatives • Positive collaborative relationships between R&D and other departments • State-of-the art facilities and equipment • Culture to enhance creativity and innovation • Excellent professional qualifications of personnel • Ability to meet critical deadlines • Procurement of raw material inputs to optimize quality, speed and minimize the associated costs • Development of collaborative “win-win” relationships with suppliers • Effective procedures to purchase advertising and media services • Analysis and selection of alternate sources of inputs to minimize dependence on one supplier • Ability to make proper lease versus buy decisions General Administration PROFITMARGIN Human Resource Management Technology Development Procurement

23. A company’s cost competitiveness depends on how well it manages its value chain relative to competitors Three areas contribute to cost differences 1.Suppliers’ activities 2.The company’s owninternalactivities 3.Forwardchannel activities Activities, Costs, & Margins of Suppliers Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Buyer/User Value Chains What Determines Whether a Company Is Cost Competitive?

24. Timber Farming, Logging, Pulp Mills Papermaking, Printing & Publishing Coke Coke Coke VC Activities in Related Integration PULP & PAPER INDUSTRY HOME APPLIANCE INDUSTRY Parts & Components Manufacture, Assembly, Wholesale Distribution, Retail Sales SOFT DRINK INDUSTRY Processing of Basic Ingredients, Syrup Manufacture, Bottling and Can Filling, Wholesale Distribution, Retailing

25. Negotiate more favorable prices with suppliers Work with suppliers to help them achieve lower costs Integrate backward Use lower-priced substitute inputs Do a better job of managing linkages between suppliers’ value chains and firm’s own chain Make up difference by initiating cost savings in other areas of value chain Correcting Supplier-Related Cost Disadvantages: The Options

26. Push for more favorable terms with distributors and other forward channel allies Work closely with forward channel allies and customers to identify win-win opportunities to reduce costs Change to a more economical distribution strategy Make up difference by initiating cost savings earlier in value chain Correcting Forward Channel Cost Disadvantages: The Options

27. Reengineer how the high-cost activities or business processes are performed Eliminate some cost-producing activities altogether by revamping value chain system Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed cheaper by outside vendors/suppliers Invest in cost-saving technology Simplify product design Make up difference by achieving savings in backward or forward portions of value chain system Correcting Internal Cost Disadvantages: The Options

28. Margin Margin Service Technological Development Marketing & Sales Human Resource Mgmt. Support Activities Outbound Logistics Firm Infrastructure Procurement Operations Inbound Logistics Primary Activities Outsourcing Outsourcing is the purchase of some or all of a value-creating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently

29. Improve Business Focus Lets company focus on broader business issues by having outside experts handle various operational details Provide Access to World-Class Capabilities The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications Share Risks Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Free Resources for Other Purposes Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively Strategic Rationales for Outsourcing