SM0374 Strategic Management and Leadership Lecture 7: Strategic Capabilities 3

The strategy model 2 Context ProcessContent

Analysing the Organisation 3

Strategic Capability 1: – The definition of strategic capabilities in terms of organisational resources and competences – How managers can develop strategic capabilities for their organisations. Strategic Capability 2: – Analysing how strategic capabilities might provide sustainable competitive advantage on the basis of their value, rarity, inimitability and non- substitutability (VRIN). – Diagnosing strategic capability Strategic Capability 3: – Value Chain Analysis Strategic Capability 4: – Dynamic Capabilities (Dr Gregory Ludwig) Topics to be covered 4

Each activity adds value as perceived by the customer Each activity incurs a cost to the company Total value added minus total costs = profit margin Adding Value 5 Receive raw materials Manufacture products Distribute products Market and sell products Suppliers Customers Market research R & D

Marketing mostly online Customer places order online, individual specification No retail outlets = low cost Dell Computers Market and sell computer Customer

Order transmitted to factory Assembly uses standard components Low skill = low cost Dell Computers Market and sell computer Assemble computer Customer

Computer delivered to customer by third parties (couriers, postal service…) Use their capabilities = higher efficiency Dell Computers Market and sell computer Assemble computer Transport computer to customer Customer

After sales service online, or by telephone Return to service centre if needed Keeps Dell’s costs down Dell Computers Market and sell computer Assemble computer Transport computer to customer After-sales service Customer

Dell uses standard components – huge economies of scale = low cost Components delivered JIT to ensure no delays in assembly No stock of components or finished goods = low cost Dell Computers Market and sell computer Assemble computer Transport computer to customer After-sales service Customer Receive components Suppliers

The “special” activity – an information system to take online orders, transmit order to factory, arrange despatch, bill customer, order supplies so they arrive JIT and stores data that assists after-sales service Dell Computers Market and sell computer Assemble computer Transport computer to customer After-sales service Customer Receive components Suppliers Information management

The value chain embodies Dell’s business model – Lowest industry costs so cheap prices – But customer can choose an individual specification from a range of options – Semi-customised product at low price = a winning combination In 2006 Dell was the largest PC vendor in the world with 32% of the US market Dell Computers

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. Value Chain Analysis 13

The Generic Value Chain Porter (1985) 14

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 (competencies) or weaknesses – Note that distinctive competencies may well be located within the support activities and therefore less visible 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. by outsourcing non-core activities) Using the Value Chain 15

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. Compare to Supply Chain Management The Value Network 16

The Value Network Porter (1985) 17

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. Using the Value Network 18

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. Activity Mapping 19

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, inimitability. Using Activity Maps 20

Cost Leadership Rapid DeliveryCustomisation An example of an Activity Map 21 Information management Supplier interface Low cost assembly Online retailing

Dell’s growth slowed significantly after 2006: – Almost all of Dell’s strategic capabilities were imitable – so competitive advantage not sustainable – The lack of retail outlets put the company at a competitive disadvantage in the growing retail market – Few sources of innovation within the company – Compare to Apple Corporation! But Dell still has some strategic capabilities: – Low cost operations due to huge economies of scale – A well-known brand name Dell Computers

Strategic capabilities comprise both resources and competences. Organisational capabilities may be diagnosed by: – 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. 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, inimitable and non- substitutable. The concept of dynamic capabilities highlights that strategic capabilities need to change as the market and environmental context of an organisation changes. Strategic Capabilities - Summary 23

Next Lecture: Strategic Capabilities 4 Dynamic Capabilities

Porter ME (1985) Competitive Advantage: Creating and Sustaining Superior Performance The Free Press Reference List 25