1. Introduction to Firm-Specific Resources; Generic Strategies BM499 Strategic Management David J. Bryce September 17, 2002

2. Discussion 1. Firm Specific Resources and Capabilities 2. Generic Strategies

3. Definition Competitive Advantage – Competitive Advantage – Ability to earn above normal economic returns Sustainable Competitive Advantage – Sustainable Competitive Advantage – Ability to sustainably earn above normal economic returns

4. A Firm’s (potentially) Strategic “Assets” Resources Resources Tangible (physical assets) Intangible (knowledge, goodwill, patents, team-embodied skills, etc.) Competences and Capabilities Competences and Capabilities The know-how that permits an organization to perform its primary and major tasks—combining and mobilizing resources to meet specific ends Dynamic Capabilities Dynamic Capabilities The firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing enviornments

5. Making Assets Strategic To confer sustainable competitive advantage, at least some of a firm’s “assets” must possess all of the following characteristics: To confer sustainable competitive advantage, at least some of a firm’s “assets” must possess all of the following characteristics: Valuable Rare Inimitable non-Substitutable Discussion adapted from Barney (1991, 1997)

6. Making Assets Strategic (cont.) Valuable Valuable Some consumers prefer the product or service to a competitor’s at least some of the time Results in increased revenue, decreased costs, or both Rare Rare Not widely available for purchase on the open market; or the cost of purchase is equal to the NPV of expected returns Possessed by one or a few firms only

7. Making Assets Strategic (cont.) Inimitable Inimitable Firms cannot replicate the resource, capability, or competence perfectly; this happens for three primary reasons: 1. Causal ambiguity The cause of the advantage may not be easily recognizable—others may attempt to imitate the wrong thing—even managers within the firm may not understand the precise cause of the advantage

8. Making Assets Strategic (cont.) Inimitable Inimitable 2. Lock out The imitator may be locked out of specific relationships, resources, or assets (this relates to the “rareness” characteristic); or denied access through patent protection 3. Complexity Replicating a competence that has been developed over years may require replicating the entire developmental path; the sheer number of events makes such attempts doomed to certain failure, even in the absence of causal ambiguity

9. Making Assets Strategic (cont.) non-Substitutable non-Substitutable A close replacement for a firm’s product, service, or “asset” does not exist

10. VRIS Analysis Valuable RareInimitableSubstitutable Competitive Implication Economic Implication NoDisadvantage Below Normal YesNoParityNormal Yes No Temporary Advantage Above Normal Yes No Sustainable Advantage Above Normal

11. Identifying Core Competencies Core competence: An integrating theme for the business of a diversified firm (examples?) Core competence: An integrating theme for the business of a diversified firm (examples?) A core competence provides potential access to a wide variety of markets A core competence provides potential access to a wide variety of markets A core competence should make a significant contribution to the perceived customer benefits of the end product A core competence should make a significant contribution to the perceived customer benefits of the end product A core competence should possess as many characteristics of VRIS as possible A core competence should possess as many characteristics of VRIS as possible

12. NEC … Observed in 1970s the coming convergence of computing and communications (C&C) Observed in 1970s the coming convergence of computing and communications (C&C) Identified trends - Identified trends - 1. From large mainframes to distributed computing 2. From simple ICs (integrated circuits) to VLSI (very large scale integration (of circuitry on a silicon chip)) 3. From communications on mechanical switch networks to ISDN (integrated services digital network) Reasoned that those with the right competencies would become a force in all three areas Reasoned that those with the right competencies would become a force in all three areas Entered into myriad alliances with semiconductor firms for technology access and systematically built core competence Entered into myriad alliances with semiconductor firms for technology access and systematically built core competence

13. How Does the View Help? Creates unique, integrated systems that reinforce fit among the firm’s diverse production and technology skills—a systemic advantage competitors are hardpressed to copy Creates unique, integrated systems that reinforce fit among the firm’s diverse production and technology skills—a systemic advantage competitors are hardpressed to copy Helps decide “what not to do with an underperforming business”; divestiture may be a bad idea Helps decide “what not to do with an underperforming business”; divestiture may be a bad idea Because competences are built over time through a complex learning and integration process, it both urges and guides consistent thematic investments Because competences are built over time through a complex learning and integration process, it both urges and guides consistent thematic investments This prepares firms for emergent market opportunities when they arise This prepares firms for emergent market opportunities when they arise

14. Challenges to the View? How to define competence? How to define competence? What if you name the wrong competence? What if you name the wrong competence? Hard to be so intentional in planning: causal arrow often flows from products to competencies not vice versa Hard to be so intentional in planning: causal arrow often flows from products to competencies not vice versa

15. Generic Strategies OVERALL COST LEADERSHIP DIFFERENTIATION Low Cost Position Uniqueness Perceived by the Customer Industry wide Particular Segment only STRATEGIC ADVANTAGE STRATEGIC TARGET Source: Michael Porter, Competitive Strategy, 1980 FOCUS

16. Common Pitfalls in Cost Leadership Misunderstanding of actual costs Misunderstanding of actual costs False perception of cost drivers False perception of cost drivers Focus on manufacturing Focus on manufacturing Failure to exploit linkages Failure to exploit linkages Ignoring competitor behavior Ignoring competitor behavior Source: P. Ghemawat, Strategy and the Business Landscape, 1999

17. Common Pitfalls in Differentiation Creating differentiation that buyers do not value Creating differentiation that buyers do not value Over-fulfilling buyer needs Over-fulfilling buyer needs Failing to understand costs of differentiation Failing to understand costs of differentiation Failing to recognize buyer segments Failing to recognize buyer segments Creating differentiation that competitors can emulate quickly or cheaply Creating differentiation that competitors can emulate quickly or cheaply Source: P. Ghemawat, Strategy and the Business Landscape, 1999

18. Common Pitfalls in Focus Picking the wrong segment (no one was in there for a reason) Picking the wrong segment (no one was in there for a reason) Picking a segment that cannot meet growth goals Picking a segment that cannot meet growth goals Failing to understand what adds value in a segment Failing to understand what adds value in a segment Failing to create a truly targeted offering for the segment Failing to create a truly targeted offering for the segment Assuming that segment will pay a price premium for a targeted offering Assuming that segment will pay a price premium for a targeted offering

19. Mixing low cost and differentiation $ Industry average competitor Successful differentiated competitor Competitor with dual advantage Successful low-cost competitor Price Cost Price per unit Cost per unit

20. Being Stuck in the Middle $ Industry average competitor Successful differentiated competitor Competitor stuck in the middle Successful low-cost competitor Price Cost Price per unit Cost per unit

21. Innovation as a Generic Strategy Innovation attempts to upset the current structure of competition by Innovation attempts to upset the current structure of competition by Significantly increasing the level of customer value Significantly increasing the level of customer value Significantly reducing costs of production or marketing Significantly reducing costs of production or marketing Innovation means seeking out new customer or user groups Innovation means seeking out new customer or user groups Innovation requires building new business models and critical mass Innovation requires building new business models and critical mass

22. Generic Strategies for Building Competitive Advantage Generic Strategies Cost Focus or Innovation (Change the Rules of the Game) Differentiation Southwest Airlines Wal-Mart IKEA Amazon.com Harley Davidson Toyota