1. Copyright © 2012 Pearson Canada Inc. 0 Chapter 3 The Internal Environment: Resources, Capabilities, and Activities

2. Copyright © 2012 Pearson Canada Inc. 1 Internal Drivers of Strategy and Competitive Advantage Strategy Competitive advantage/ disadvantage Management strategic decision making Capabilities Managers Resources Performance Resources, Capabilities, and Managerial Decisions

3. Copyright © 2012 Pearson Canada Inc. 2 Resources and Capabilities The inputs that firms use to create goods and services Undifferentiated or firm-specific Tangible or intangible Easy to acquire or difficult A firm’s skill in using its resources to create goods and services. The combination of procedures and expertise on which a firm relies to produce goods and services. Capabilities (competencies) Resources Strategy

4. Copyright © 2012 Pearson Canada Inc. 3 Resources and Capabilities Distinctive competence: Capability that sets a company apart from other companies; something that a company can do that competitors cannot duplicate easily. Core competence: Capability that is central to a corporation’s main business operations and allows it to generate new products and services.

5. Copyright © 2012 Pearson Canada Inc. 4 The VRINE Model Performance implicationTestCompetitive implication Valuable?Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties? If so, it satisfies the value requirement. Valuable resources are needed just to compete in the industry, but value by itself does not convey an advantage. Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits which cover the cost of all inputs including the cost of capital). Rare?Assuming the resource or capability is valuable, is it scarce relative to demand? Or, is it widely possessed by most competitors? Valuable resources which are also rare convey a competitive advantage, but its relative permanence is not assured. The advantage is likely only temporary. A temporary competitive advantage conveys the potential to achieve above normal profits, at least until the competitive advantage is nullified by other firms. Inimitable and non- substitut- able? Assuming a valuable and rare resource, how difficult is it for competitors to either imitate the resource or capability or substitute for it with other resources and capabilities that accomplish similar benefits? Valuable resources and capabilities which are difficult to imitate or substitute provide the potential for sustained competitive advantage. A sustained competitive advantage conveys the potential to achieve above normal profits for extended periods of time (until competitors eventually find ways to imitate or substitute or the environment changes in ways that nullify the value of the resources). Exploit- able? For each step of the preceding steps of the VRINE test, can the firm actually exploit the resources and capabilities that it owns or controls? Resources and capabilities that satisfy the other VRINE requirements but which the firm is unable to exploit actually result in significant opportu- nity costs (other firms would likely pay large sums to purchase the VRINE resources and capabilities). Alternatively, exploitability unlocks the potential competitive and perfor- mance implications of the resource or capability. Firms which control unexploited VRINE resources and capabilities generally suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy (though not as depressed as firms lacking resources and capabilities which do satisfy VRINE).

6. Copyright © 2012 Pearson Canada Inc. 5 Value Chain Analysis Primary Activities The primary activities deal with the flow of the product or service through the business, such as: ■ inbound logistics, which include receiving, warehousing, and inventory control of input materials. ■ operations, which include machining, assembling, and all other activities that transform inputs into the final product. ■ outbound logistics, which include warehousing, order fulfillment, and other activities required to get the finished product to the customer. ■ marketing and sales, which include channel selection, advertising, pricing, and other activities associated with getting buyers to purchase the product. ■ service, which includes customer support, repair services, and other activities that maintain and enhance the product’s value to the customer.

7. Copyright © 2012 Pearson Canada Inc. 6 Value Chain Analysis Support Activities The support activities are the activities that support the primary value-chain activities, such as: ■ procurement, which includes purchasing raw materials, components, supplies, and equipment. ■ technology development, which includes research and development, process automation, and other technology development. ■ human resources management, which includes recruiting, hiring, training, development, and compensating employees. ■ company infrastructure, which includes finance, legal, quality management, information systems, organizational structure, control systems, company culture, and so on.

8. Copyright © 2012 Pearson Canada Inc. 7 Transferred assembly and delivery to the consumer Chose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing IKEA Dell Source Assemble Deliver Area of innovation Comparing Competing Businesses Value Chain Analysis

9. Copyright © 2012 Pearson Canada Inc. 8 Value Chain Analysis Outsourcing is sourcing the function, product, or service of a value-chain activity from another company. Offshoring is taking that activity from a high-cost country to a low-cost country. These are separate decisions and a “yes” to one could be a “no” to the other.

10. Copyright © 2012 Pearson Canada Inc. 9 Value Chain Analysis Management may consider the following when selecting activities to outsource: ■ Would outsourcing an activity improve results such as reduced lead time, higher flexibility, reduced inventory, and/ or lower cost? ■ Would outsourcing reduce the risk associated with performing the activity in-house? If the activity relies on fast-changing technology or the product is sold in a rapidly changing market, it may be advantageous to outsource the activity in order to maintain flexibility and avoid the risk of investing in specialized assets. ■ Is the activity a source of competitive advantage that stems from a cost advantage or product differentiation?

11. Copyright © 2012 Pearson Canada Inc. 10 Strategic Leadership: Linking Resources and Capability to Strategy SENIOR MANAGERS Decide how to use resources and capabilities. Configure a company’s value-chain activities. Senior managers also set the context that determines how front-line and middle managers can add value.

12. Copyright © 2012 Pearson Canada Inc. 11 Strategic Leadership: Linking Resources and Capability to Strategy MIDDLE MANAGERS Middle managers are responsible for executing what senior managers want done. They play a key role in what the firm is doing and what it may be adept at doing in the future. This is why senior management considers the firm’s leadership pool as they shape strategy and align their leadership-development programs with long- term aspirations.