1 Sustainability of a Competitive Advantage Sustainability of a competitive advantage is a function of: –the rate of core-competence obsolescence due to environmental changes, e.g., technological shifts –the availability of substitutes for the core competence –the imitability of the core competence, e.g., diffusion of an innovation –whether the firm is properly organized to capture value

2 External and Internal Analyses General Environment General Environment General Environment Sociocultural Global Technological Political/Legal Demographic Economic Industry Environment Competitor Environment By studying the external environment, firms identify what they might choose to do (Structure>Conduct>Performance) Opportunities and threats

3 External and Internal Analyses By studying the firm’s (internal) capabilities & resources, firms identify what they can do (over time) Unique resources, capabilities, and competencies (sustainable competitive advantage)

4 Internal Analysis (Resources, Capabilities) How do we effectively manage current core competencies while simultaneously developing new ones? (exploit/explore) How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?

5 What affects decisions about Resources, Capabilities, and Core Competencies Uncertainty regarding current/future characteristics of the general and industry environments Complexity - the interrelationship among factors that shape a firm’s environment(s), and top management perceptions of these environments Intraorganizational Conflicts among people making and affected by resource allocation decisions

6 Components of Internal Analysis Identifying Core Competencies Resources TangibleTangible IntangibleIntangible Capabilities CoreCompetencies Identifysustainablecompetitiveadvantages StrategicCompetitiveness Four Criteria of Sustainable Advantage ValuableValuable RareRare Imitation/Substitutes = costlyImitation/Substitutes = costly Organized properlyOrganized properly ValueChainAnalysis In/OutsourceIn/Outsource decisions decisions

7 Discovering Core Competencies Resources Tangible Intangible Resources are what a firm draws upon to create value -- its assets– and valuable resources are embedded and difficult to trade in markets Resources are inputs into a firm’s production process... IP, capital equipment, skills, brands, organizational routines, access to financial capital, talented managers, etc.

8 Discovering Core Competencies Resources Tangible Intangible Tangible Financial Physical Labor Intangible Technological Innovation Reputation Organizational activity systems Knowledge markets for resources are often imperfect resources are not intrinsically valuable

9 Discovering Core Competencies Capabilities Capabilities describe the firm’s ability to create, deploy, modify, reconfigure, and leverage resources. Valuable capabilities permit resources to be combined in unique ways to create core competencies markets for capabilities are imperfect

10 Discovering Core Competencies CoreCompetencies are resources and capabilities that are a source of competitive advantage over rivals make a firm distinctive McKinsey and Co. recommends isolating 3-4 competencies when framing strategic actions Consider Amazon (culture, transaction scale economies, bundling, virtualization)

11 Four Criteria of Sustainable Advantage ValuableValuable RareRare Imitation/Substitution = CostlyImitation/Substitution = Costly OrganizedOrganized Discovering Core Competencies Valuable: Capabilities that help a firm neutralize threats or exploit opportunities Rare: Capabilities that are not possessed by many others

12 Four Criteria of Sustainable Advantage ValuableValuable RareRare Imitation/Substitution = CostlyImitation/Substitution = Costly OrganizedOrganized Discovering Core Competencies Costly to imitate: capabilities that other firms cannot develop easily, usually due to Unique historical conditions - e.g., founder, culture Causal ambiguity - capabilities hidden Social complexity - capabilities distributed Time diseconomies

13 Four Criteria of Sustainable Advantage ValuableValuable RareRare Imitation/Substitution = CostlyImitation/Substitution = Costly OrganizedOrganized Discovering Core Competencies Nonsubstitutable: capabilities that do not have strategic equivalents Invisible to competitors Firm-specific knowledge Trust-based working relationships between managers and nonmanagerial personnel

14 Core Competence as a Strategic Capability Resources Inputs to a firm’s production process Capability Capability that is not strategic Core Competence Capability that is strategic Affected by Does it satisfy the criteria of sustainable competitive advantage? Y N Capability integration of resources

15 Performance Implications Valuable? Rare? Imitate/Subst. Costly? Organized? Competitive Consequences Performance Implications No Competitive Disadvantage Below Average Returns YesNo Yes/ No Competitive Parity Average Returns Yes No Yes/ No Temporary Com- petitive Advantage Above Average to Average Returns Yes Sustainable Com- petitive Advantage Above Average Returns

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17 Value creation Profit determined by : –The amount of value customers place on firm’s goods or services (V) –Firm’s cost of production (C) Consumer surplus occurs when price charged by a firm on a good or service is less than value placed on it by a customer Value creation = V-C

18 Value creation

19 Porter’s Value Chain Firm Infrastructure Human Resource Management Technology Development Procurement Support Activities Inbound Logistics Primary Activities Operations Outbound Logistics Marketing and Sales Service Upstream value activities Downstream value activities

20 Value Chain activities in Bio/Pharm

21 Source MIT Sloan School – “Architectures and roadmaps for communications and media” Value Chain in Communications Technology Industry

22 Global Value Chain Management Assembling, Manufacturing and Sales Assembling, Manufacturing and Sales Distribution Center Country Market A Country Market B Supplier A Supplier B Supplier N Supplier X Supplier Y Supplier Z Where will you design, assemble, inventory, market, and manage?

23 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 Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm InfrastructureHuman Resource Mgmt.Technological Development Procurement

24 Strategic Rationales for Outsourcing 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

25 Strategic Rationales for Outsourcing Accelerate Business Re-Engineering Benefits –achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards-- take over process Share Risks –reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

26 Strategic Rationales for Outsourcing Free Resources for Other Purposes –permits firm to redirect efforts from non- core activities toward those that serve customers more effectively

27 Outsourcing Issues Greatest Value –outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced Evaluating Resources and Capabilities –don’t outsource activities in which the firm itself can create and capture value Environmental Threats and Ongoing Tasks –do not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing organizational tasks

28 Outsourcing Issues Nonstrategic Team of Resources –do not outsource capabilities that are critical to their success, even though the capabilities are not actual sources of competitive advantage Firm’s Knowledge Base –do not outsource activities that stimulate the development of new capabilities and competencies

29 Core Competencies: Cautions and Reminders Never take for granted that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become core rigidities Core rigidities are former core competencies that now generate inertia and stifle innovation