The Internal Environment: Understanding how a Firm’s Resources and Capabilities Lead to a Competitive Advantage Agenda Resource-based View of Strategy Resources and Capabilities SWOT Analysis Value Chain and Cost Analysis

Company Mission and Objectives External Environment Macro Industry Operating Internal Environment Resources Current Strategy Costs Strategic Options and Choice Desired?Possible?

Resource-based View of Strategy Views the firm as a unique bundle of heterogeneous resources and capabilities Strategy is concerned with matching a firm’s resources and capabilities to the opportunities that arise in the external environment (or creating opportunities). The key to profitability is not doing the same as other firms, but exploiting differences between firms.

Resource-based View of Strategy Resources are tangible, intangible and human. Examples include: Financial Physical Technology Reputation Culture Specialized skills and knowledge Communication patterns Employee motivation

Different Types of Resources Tangible Assets/Resources: Coca-Cola’s Formula Intangible Assets/Resources: Nike’s Brand Name, Jack Welch as GE’s former CEO, Reputation Organizational Capabilities: Dell Computer’s Customer Service, Wal-Mart’s purchasing and inbound logistics, 3M’s innovation process

How can one identify the key resources upon which a strategy can be built?

Competitive Advantage comes from: Scarcity of the Resource Relevance of the Resource (Key Success Factors)

Resources and KSFs P& G’s Brand Management Program Industry KSFs Price Competitiveness Market Share Brand Equity Access to Distribution Channels Product Differentiation

Sustainable Advantage is based on the following: Rare Not easily imitated (physical uniqueness, path dependency, causal ambiguity, economic deterrence) Not easily substitutable Transferability Firm-specific resources whose ownership cannot be easily transferred Durability (How quickly will this resource depreciate? (Investments in Technology) Competitive Superiority (Requires some disaggregation) Appropriability (Who captures the value that the resource creates? Physician/Hospital Relationships)

Financial Capital: Retained Earnings, Capital from Entrepreneurs, equity holders Physical Capital (examples): Computer hardware and software technology, automated warehouses, robots used in production, Geographic Location (Wal-Mart/operations in rural markets generate higher returns than more competitive urban markets) Human Capital (examples): training, experience, judgment, relationships (DuPont invests heavily in training their engineering staffs to be more assertive and open to new technologies) Organizational Capital (examples): formal reporting structures, formal and informal planning systems, culture and reputation (Merck uses its management reputation to gain access to managerial labor markets, distribution networks and customer groups.) Durability? Transferability? Replicability?

Resource-Based View and SWOT Analysis Strengths: something the company either possesses or is good at doing (e.g., assets, skills, knowledge, partnerships) Weaknesses: an area of current or potential vulnerability 1.The Question of Value 2.The Question of Rarity 3.The Question of Imitability 4.The Question of Organization

SW Questions The Question of Value: Does a resource enable a firm to exploit and environmental opportunity or neutralize an environmental threat? The Question of Rarity: Is a resource currently controlled by only a small number of competing firms? The Question of Imitability: Do firms without a resource face a cost disadvantage in obtaining or developing it? The Question of Organization: Are a firm’s other policies and procedures organized to support the exploitation of its valuable, rare and costly to imitate resources?

What is value? What is meant by value-adding activities? Do all of the activities of a firm create value?

Value Chain: Cost Analysis Purchased Supplies Inbound Logistics Operations Distribution and Outbound Logistics Sales and Marketing Service Margin Technology: Product R&D, Systems Development, Design Human Resource Management and Development General Administration: Planning, Finance, MIS, Legal

Perform proprietary research and gather proprietary information Create unique products and services Build a network of local offices to establish a local presence Use professional brokers paid by commission to deliver personal service and advice to clients Back office functions: clear trades, track account balances, distribute information and research reports, install and operate administrative and systems support for brokers. Value Chain of Full Service Brokerages

Create Web page and navigation software; install servers Provide clients access to trading information and account balances via the Internet Technical support and customer service personnel, automated record keeping Value Chain of Discount Brokerages

Competitive Strategies Agenda: Generic Strategies Low cost leadership Differentiation Best Cost Focus Grand Strategies Concentration Market Development Product Development

Generic Strategies Low Cost Leadership Differentiation Best Cost Focus

Low Cost Leadership The firm attempts to be the low cost provider of a product or service. Sources of Cost Advantage: Economies of Scale (OPERATIONS) Economies of Learning (learning curve effects/improved coordination/ familiarity with technology, etc) (OPERATIONS/R&D) Production Techniques (Efficient utilization of materials/increased precision/automation) (OPERATIONS/AIS)

Low Cost Leadership Sources of Cost Advantage: Product Design (Designs economize on materials/design for automation) (OPERATIONS/R&D/ENGINEERING) Input Costs (Location advantages/ownership of inputs/exercising bargaining power/supplier cooperation) (PROCUREMENT/ INTERNATIONALIZATION/VERTICAL INTEGRATION(C-L STRATEGY) Capacity Utilization (OPERATIONS) Managerial or Organizational efficiency (operational effectiveness) (ALL FUNCTIONAL AREAS)

1. Selects relatively inexpensive sites 2. Builds only basic facilities (no restaurant, no bar) 3. Relies on standard architectural designs 4. Uses inexpensive materials and low-cost construction techniques 5. Simple room furnishings and decorations Low Cost Strategy Competitive Advantage External Environment Motel 6 Sources of Advantage

Differentiation Strategy When the firm attempts to provide something unique that is valuable to buyers beyond simply offering a low price. Firms pursue differentiation based on demand or supply: Demand involves understanding customers and their needs and preferences. Supply involves being aware of the resources, capabilities, skills and knowledge that a firm can leverage to create uniqueness.

Drivers of Uniqueness/Sources of Advantage Product features and product performance Complementary service (delivery, credit, repair) Intensity of marketing activities (advertising spending, signaling) Reputation Technology embedded in design and manufacture Quality of purchased inputs

Drivers of Uniqueness/Sources of Advantage continued.. Location (e.g., retail stores) Degree of vertical integration Skill and experience of employees Procedures influencing the conduct of each value-adding activity (e.g., rigor of quality control, service procedures, frequency of visits to a customer) Proper segmentation

1.Prime Location with Scenic Views 2.Custom Architectural Designs 3.Fine Restaurants 4.Elegantly appointed lobbies and bar lounges. 5.Swimming pools, exercise facilities 6.Upscale Room Accommodations 7.Multiple Guest Services 8.Large Well Trained Staff Differentiation Strategy Competitive Advantage External Environment Sources of Advantage

Combines advantages based on both low cost and differentiation. The firm is able to offer what customers perceive as valuable while at the same time being cost efficient. Best Cost

1.Luxurious, yet comforting atmosphere (D) 2. Well-chosen yet limited menu of services (LC) 3. High quality dining (D) 4. Restaurants are profit centers (LC) 5. Each property has unique “personality”(D) 6. Low building costs (LC) 7. Low costs of capital (LC) Best Cost Strategy Competitive Advantage External Environment Kimpton Hotels Sources of Advantage

Focus Strategy: the firm focuses on a narrower segment of the industry. How would a firm select an appropriate segment? Can a firm pursue a just a “focus” strategy? Examples: Papa Joe’s Grocery, Oink Oink, Inc. (roasted pig ears)

Concentrated Growth Increasing the use of present products in present markets 1. Increasing the rate at which present customers use the product/service (Hospitals creating wellness programs) 2. Attracting competitors’ customers 3. Attracting nonusers of the product (Profiling and contacting potential cosmetic surgery patients) Drs. Rodan & Fields have their own private practices, specializing in dermatologic surgery, cosmetic surgery and acne treatments. Seeing over 1,000 patients a month, Drs. Rodan and Fields developed Proactiv Solution to help relieve the endless frustration and suffering of their patients.

Market Development 1. Opening additional geographic markets 2. Attracting other market segments Selling present products in new markets

Product Development Developing new products for present markets 1.Developing new product features 2. Combining quality variations 3. Brand Extension