Threshold and distinctive capabilities model

Corporate Strategy.

Week 6: Lecture

Analysing Strategic

Capability.

Resource-Based View:

- introduce what the RBV is.

Foundations of Strategic Capability:

- understand resources & capabilities.

VRIN Analysis & Advantage:

- see how VRIN tests capabilities.

Learning Outcomes.

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Just as the external business environment is important (opportunities and threats), managers need to understand the the internal firm environment: the unique strengths and weaknesses of their firm relative to their competitors.

Internal Business Environment.

doing things

When Google entered the search engine market in 1998, there were many established rivals, e.g. AltaVista, HotBot, Lycos, Yahoo! etc.

But Google did not care much about competition. From the start, Google was happy to be different, i.e. different strategies & products.

From 2003, Google diversified into various industries such as Android phones, self-driving car project, Google glass etc.

Watch this video on Google history:

https://www.youtube.com/watch?v=n9eo8b3hEns

diFFerently

Strategic fit is about developing strategy by identifying opportunities in the business environment and adapting resources and competences so as to take advantage of these.

Strategic stretch is about identifying and leveraging the resources and competencies of the organization to yield new opportunities or to provide competitive advantage.

The contrast between strategic fit and strategic stretch exemplifies different views on how firms should compete in global markets.

Strategic Fit versus Strategic Stretch.

Resource-Based View of Strategy.

The RBV says that advantage and superior performance stem from the distinctiveness of what firms can do.

Positioning View: the business opportunity should be the starting point for developing successful strategies.

Resource-Based View: unique firm resources should be the starting point for developing successful strategies.

The RBV suggests that firms differ in their bundles of resources and what they can do – their capabilities.

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Firms have resources and capabilities.

Resources are all assets, capabilities, organizational processes, firm attributes, information, knowledge, patents, real estate etc. controlled by a firm.

Capabilities are complex bundles of skills and collective learning, exercised through organizational processes, that ensure superior coordination of functional activities.

The Components of Capability.

Competence as Tree Metaphor.

Resources versus Capabilities.

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Threshold & Distinctive Capabilities.

Threshold Capabilities are those needed to meet necessary requirements to compete in a given market & achieve parity with competitors – ‘qualifiers’.

Distinctive (Unique) Capabilities are those that critically underpin competitive advantage & that others cannot imitate or obtain – ‘winners’.

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Threshold & Distinctive Capabilities.

(Note this for our seminar analysing the James DYSON case!)

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Identifying Resources & Capabilities.

Capabilities: different ways to identify:-

1). Kay (1993) - Architecture, Reputation, Innovation.

2). Functional Areas: e.g. Marketing, Distribution etc.

3). Value Chain: analyse through primary & secondary activities

How do we identify these for an organisation?

Resources:

1). Grant’s (1998) three categories of Tangible, Intangible & Human to analyse.

2). SWOT can identify resources too.

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Managers must understand the economic value of the different activities that a firm performs.

Value added is the difference between the cost of inputs and the market value of outputs; it is the value that a firm adds to its bought-in materials and services through its own production and marketing efforts within the firm.

The Concept of Value Added.

Example: Product value of South African grapes

Source: Frynas, J. G. and Mellahi, K. Global Strategic Management 3e (Oxford University Press, 2014)

Value Chain Analysis.

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance

by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved

Value chain analysis depicts the main activities inside the firm and aims to reveal the relative value added amongst the different parts of the firm’s operations.

Undertaking a value chain analysis helps the firm to understand its cost position and to identify its competitive strengths.

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Simplifed value chain for South African fresh fruit and vegetables

Core Competences.

Core competences (Hamel & Prahalad, 1990) are the linked set of skills, activities & resources that, together:

deliver customer value

differentiate from competitors

potentially, can be extended & developed as opportunities arise.

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Understanding Advantage

Competitive Advantage is:

“The ability to outperform rivals on significant CSFs, thus earning superior returns.” (Grant, 2013).

Porter (1985): “There are two basic types of competitive advantage: cost leadership and differentiation.”

Kay (1993): advantage is delivered by distinct capabilities & strategic assets.

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VRIN Analysis & Competitive Advantage.

4 criteria to assess capabilities as a basis of achieving sustainable competitive advantage are:

value,

rarity,

inimitability and

non-substitutability

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VRIN Criteria for Testing Capabilities.

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V – Value of Strategic Capabilities.

Strategic capabilities are of value when they:

enhance opportunities & neutralise threats,

provide value to customers

provide potential competitive advantage at a cost that allows an organisation to realise acceptable levels of return.

The question of value: Do a firm’s resources and capabilities enable it to respond to environmental threats or opportunities?

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R – Rarity.

The question of rarity: Do capabilities exist that no (or few) competitors possess?

Rare capabilities are those possessed uniquely by one organisation or by a few others only.

(e.g. a company may have patented products, have supremely talented people or a powerful brand.)

Rarity could be temporary.

(e.g.: patents expire, key individuals can leave or brands can be de-valued by adverse publicity)

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I – Inimitability.

The question of inimitability: Is a resource or capability difficult for competitors to imitate?

Inimitable capabilities are those that competitors find difficult to imitate or obtain.

Advantage can be built on unique resources - e.g key individuals - but may not be sustainable (key people can leave!).

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N - Non-Substitutability.

The question of non-subsitutability: Is the risk of capability substitution low?

Competitive advantage may not be sustainable if there is a threat of substitution.

This can be product or service substitution from a different industry/market. E.g. postal services partly substituted by e-mail.

Competence substitution. For example, a skill substituted by expert systems or IT solutions

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Example: Business model of the clothing retailer Zara

Source: Frynas, J. G. and Mellahi, K. Global Strategic Management 3e (Oxford University Press, 2014)

Zara’s success in achieving extremely fast product cycles was supported by in-house textile manufacturing subsidiary and close relationships with sewing workshops in Spain

Session Summary.

Week 6 Seminar groups will examine Strategic Capability at James DYSON – the British vacuum cleaner maker.

We introduced & explained what the Resource-based View of Strategy is.

We examined Resources & Capabilities plus how to identify them.

We explained VRIN analysis of capabilities & links to advantage.

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Corporate Strategy.

Week 6: Seminar.

Resources, Capability & Advantage at DYSON.

Wk6 Seminar: Session Plan.

Today’s seminar uses ideas from Wk6 to analyse Strategic Capability at DYSON

Prepare by reviewing Wk6 notes plus Moodle (and your own researching) for DYSON case material.

Again there will be class group work. Results should be kept for your assessment revision.

Wk6 Seminar: Session Brief.

The Brief:- (choose one question)

1. What is Strategic Capability? Use these ideas to analyse the Threshold/Distinctive Resources & Capabilities at DYSON.

2. What are Strategic Resources? Use Grant’s 3 types to analyse DYSON’s resources. Which create most advantage?

3. What are Strategic Capabilities? Analyse DYSON’s Distinctive Capabilities & show where on the Value Chain these lie.

Form groups (5/6) to answer the brief. You have 40 mins to produce a flip chart for class sharing.