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

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

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

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

5. 5 Identifying Resource Strengths and Competitive Capabilities l 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. 6 Financial l Firm’s cash account and cash equivalents l Firm’s capacity to raise equity l Firm’s borrowing capacity Physical l Modern plant and facilities l Favorable manufacturing locations l State-of-the-art machinery and equipment Technological l Trade secrets l Innovative production processes l Patents, copyrights, trademarks Organizational l Effective strategic planning processes l Excellent evaluation and control systems Tangible Resources

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

8. 8 Identifying Resource Weaknesses and Competitive Deficiencies l A weakness is something a firm lacks, does poorly, or a condition placing it at a disadvantage l 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. 9 SWOT Analysis -- What to Look For Example StrengthsExample 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

10. 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 Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital Examples:

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

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

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

14. 14 Assessing Sustainability of Resources and Capabilities: Four Criteria No equivalent strategic resources or capabilities Difficult to substitute 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 Not many firms possess Rare Neutralize threats and exploit opportunities Valuable ImplicationsIs the resource or capability...

15. 15 Criteria for Sustainable Competitive Advantage and Strategic Implications Is a Resource… Sustainable competitive advantageYes Temporary competitive advantageNo Yes Competitive parityNo Yes Competitive disadvantageNo Implications for Competitiveness Without Substitutes Difficult to ImitateRareValuable

16. 16 Why Rival Companies Have Different Costs l 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. 17 The Value Chain Concept l Identifies the separate activities and business processes performed to design, produce, market, deliver, and support a product / service l Consists of two types of activities 4 Primary activities 4 Support activities

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

19. 19 Primary activities of the VALUE CHAIN l Inbound Logistics 4 Soundness of material and inventory handling 4 Efficiency of warehousing activities l Operations 4 Productivity of equipment 4 Production processes l Outbound Logistics 4 Efficiency of finished goods delivery l Marketing and Sales 4 Effective market research 4 Innovative sales promotion l Service 4 Customer feedback mechanisms 4 Customer education and training 4 Production control systems 4 Layout & work-flow design 4 Sales force 4 Image, brand loyalty 4 Warranty, guarantee, repair

20. 20 Factors to Consider in Assessing a Firm’s Primary Activities l Location of distribution facilities to minimize shipping times l Excellent material and inventory control systems l Systems to reduce time to send “returns” to suppliers l Warehouse layout and designs to increase efficiency of operations for incoming materials l Efficient plant operations to minimize costs l Appropriate level of automation in manufacturing l Quality production control systems to reduce costs and enhance quality l Efficient plant layout and workflow design l Effective shipping processes to provide quick delivery and minimize damages l Efficient finished goods warehousing processes l Shipping of goods in large lot sizes to minimize transportation costs l Quality material handling equipment to increase order picking l Highly motivated and competent sales force l Innovative approaches to promotion and advertising l Selection of most appropriate distribution channels l Proper identification of customer segments and needs l Effective pricing strategies l Effective use of procedures to solicit customer feedback and to act on information l Quick response to customer needs and emergencies l Ability to furnish replacement parts as required l Effective management of parts and equipment inventory l Quality of service personnel and ongoing training l Appropriate warranty and guarantee policies Inbound Logistics OperationsOutbound Logistics Marketing and Sales Service PROFIT MARGIN

21. 21 Support activities of the VALUE CHAIN l Infrastructure 4 Physical: Size, location, age, flexibility of facilities and equipment 4 Financial: Risk, cost and use of funds, ability to raise capital l Technology Development 4 Research and development 4 Interaction with other departments 4 Technology transfer 4 Encourage innovation l Procurement 4 Obtain raw materials D acceptable quality D lowest cost 4 Supplier relationships l Human Resources 4 Knowledge: Types, levels of knowledge possessed by employees throughout the firm 4 Skills: Various categories of skills and abilities developed over time

22. 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 Human Resource Management Technology Development Procurement PROFIT MARGIN

23. 23 Examples: Key Value Chain Activities Timber Farming, Logging, Pulp Mills Papermaking, Printing & Publishing 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 Coke

24. 24 What Determines Whether a Company Is Cost Competitive? l A company’s cost competitiveness depends on how well it manages its value chain relative to competitors l Three areas contribute to cost differences 1. Suppliers’ activities 2. The company’s own internal activities 3. Forward channel activities Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners Internally Performed Activities, Costs, & Margins Activities, Costs, & Margins of Suppliers Buyer/User Value Chains

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

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

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

28. 28 Margin Margin Primary Activities Support 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 Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement

29. 29 Strategic Rationales for Outsourcing l Improve Business Focus  Lets company focus on broader business issues by having outside experts handle various operational details l 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 l Share Risks  Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities l Free Resources for Other Purposes  Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively