Stramgt 258 Strategic Management: Strategy and Organization 3. Positional Advantage and Capabilities Kao Corporation

01/14/03John Roberts2 Low Cost and Perceived Quality Lower cost Higher perceived quality Competitive advantage ultimately manifests itself in your placement in this space

01/14/03John Roberts3 Low Cost and Perceived Quality Lower cost Higher perceived quality Seek to develop CAs that place you in a unique position in this space, away from the competition (and from where it can reach)! A B C

01/14/03John Roberts4 Competitive Advantage CA may come from capabilities (what you can do) or position (who and where you are) or both. Either may be sustainable, but equally either can be subject to erosion. Real power comes from combinations that are mutually re-enforcing. –For example, having positional advantage allows you the time and resources to build capabilities that then strengthen the position.

01/14/03John Roberts5 Creating Long-Term Profit from CAs Barriers exist preventing others from duplicating: –Capabilities: rivals cannot duplicate the capability –Position: rivals are blocked from an equivalent position This is the question of sustainability and one reason we worry about logic

01/14/03John Roberts6 Strategic Capabilities The most valuable capabilities are unique Such capabilities are inherently less understandable: –Tacit –Ambiguous to rivals, analysts, and managers Embodied in organization: –Products or technologies are consequences, not causes Unique capabilities often emerge over time How to manage?: –Manage the development process, not its consequence

01/14/03John Roberts7 Managers over-extend the applicability of their capabilities: –The “competency trap” New rivals offer challenges that your organization did not develop capabilities to deal with: –“Blind spots” among established firms Misapplying Capabilities

01/14/03John Roberts8 Strategic Position There are many forms of valuable strategic position. For example: –Sunk costs –Brand –Reputation –Distribution channels –Switching costs –Geographic incumbency –Network externalities (standards)

01/14/03John Roberts9 Positional Advantage Pitfalls Robust versus fragile strategic positions Insulates firm from capability-creating competition Firm attributes success to capabilities rather than position: –Unwarranted diversification or product/market expansion

01/14/03John Roberts10 Capabilities are sustainable due to causal ambiguity: –Complex interplay of routines, structures and individuals Firm only captures value if embodied in organization not individuals Sustainable Capabilities

01/14/03John Roberts11 A positional advantage is sustainable to the extent that it is not susceptible to erosion by: –Environmental change –Existing or potential rivals’ behavior. Those with same capabilities need to: Make significant (unrecoverable) investments in time or capital to match the firm’s cost or quality Sustainable Positional Advantages

01/14/03John Roberts12 Resources as a Source of CA? If the firm is succeeding just because it controls some (marketable) resource, then either it has to worry that the rents will all accrue to the resource or else it has to be concerned that it is not the best owner of the resource and could realize more value by selling it. Non-marketed resources may be a different story, but in many cases these may actually be better seen as capabilities.

01/14/03John Roberts13 Understanding your CA It is crucial to understand the true nature of your competitive advantage and its sources. –Guide competitive moves –Guide investments in CA Too often (we have arguably seen some examples already) managers do not have this understanding. This leads to really bad decisions.

01/14/03John Roberts14 Strategic Expansion Expansion into new (geographic or product) markets should seek to leverage and extend your firm’s existing competitive advantages or underused (nonmarketable) resources. –Otherwise, how are you going to add value? This places even greater importance on understanding these and the extent to which they can be realized in the new context.

01/14/03John Roberts15 Lessons from Kao Arguably, Kao did not really understand the nature of its CA in Japan and it certainly did not understand how, if at all, it could leverage these internationally. –These are tied up in its relations with the channel participants and its organizational design –They are not easily exported/replicated by Kao, any more than they are easily copied by others in Japan