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Strategy and Strategic Analysis GEST-S-468 Pr Manuel Hensmans
Strategy and Strategic Analysis
GEST-S-468
Pr Manuel Hensmans
MonUniversitéVirtuelle
• Please check regularly!
– http://strategy.skynetblogs.be/
– http://uv.ulb.ac.be
• Syllabus, slides, case info, e-clip info
• Exam info!
2
Last week (1)
• External analysis of the firm: the environment
• Analyse the broad macro-environment of organisations in
terms of political, economic, social, technological,
environmental (‘green’) and legal factors (PESTEL)
• Identify key drivers in this macro-environment and use
these key drivers to construct alternative scenarios with
regard to environmental change.
Last week (2)
• Use Porter‟s five forces analysis in order to define the
attractiveness of industries and to identify their potential for
change
• Importance market segments & strategic customer
• Use these various concepts and techniques in order to
recognise threats and opportunities in the marketplace
Slide 3.5
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.5
The Strategic Position
3: Strategic Capabilities
Today
• Internal analysis of the firm: strategic capabilities
• Identify organisational resources and competences and
how these relate to the strategic capability of organisations.
• Analyse how strategic capabilities might provide
sustainable competitive advantage on the basis of their
value, rarity, inimitability and non-substitutability (VRIN).
• Diagnose strategic capability by means of value chain
analysis, and SWOT analysis.
• Consider strategic options for the future through TOWS
analysis
6 |
Today@Exam
• Pages of textbook to learn
– pp. 82-85 (not 3.2.2)
– pp. 87-94, 97-100 (value chain analysis)
– pp. 106-109
• Discussion slides
• Case
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: Customer-led?
• To what extent does Google’s strategy reflect its
customer-led mission & vision? – Google’s mission is ―to organize the world's information and make it universally
accessible and useful”
– Google’s vision is to “develop a perfect search engine”
- Customer-led:
- Search engine, Google Book Search, Google Maps, Google Scholar, Gmail, …
- But…
- Google buys Motorola, increasing focus on sales advertising space, launch in-
game advertising (AdScape), Facebook-competitor Google Buzz publicises all
Gmail account details without user approval, no user privacy possibilities (all user
details are kept at least 9 months), Android & entry in telephone business,
YouTube from p2p amateur experience to established TV revenue model (most
viewed content is sponsored corporate content)…
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Real mission & vision ?
• Not really customer-led mission, but…
– « challenge Microsoft, Apple, Facebook for the position of
world‟s leading information technology company”
• Not really customer-led vision, but…
– “use revenues derived from monopoly power in Internet search
to become biggest (Internet) company in the world”
• What strategic reality informs real mission & vision? • Compete in terms of distinctive resources & competences!
» Exploit unparallelled information database &
software engineering
» Exploit strategic control over advertising business
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Morale of the story:
In fast-changing environments…
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• When the external environment is subject to rapid
change, internal resources and competences offer a
more secure basis for strategy than market or consumer
focus
• In such case, internal resources and competences are
the primary sources of sustainable competitive adv
Resources and competences
• Resources are…
– the assets that organisations have or can call upon
(e.g. from partners or suppliers), that is, „what we
have’
• tangible and intangible assets of a firm
– tangible: factories, products
– intangible: reputation and brand
Company Valuation
ratio
Country Company Valuation
ratio
Country
Yahoo! Japan 72.0 Japan Coca-Cola 7.8 US
Colgate-Palmolive 20.8 US Diageo 7.4 UK
Glaxo Smith Kline 13.4 UK 3M 7.3 US
Anheuser-Busch 12.6 US Nokia 6.7 Finland
eBay 11.2 US Sanofi-Aventis 6.3 France
SAP 10.8 Germany AstraZeneca 5.9 UK
Yahoo! 10.7 US Johnson & Johnson 5.7 US
Dell Computer 10.0 US Boeing 5.7 US
Sumitomo Mitsui Financial 8.8 Japan Eli Lily 5.6 US
Procter & Gamble 8.4 US Cisco Systems 5.5 US
Qualcomm 8.3 US Roche Holding 5.5 Switz.
Schlumberger 8.2 US L’Oreal 5.3 France
Unilever 8.1 Neth/UK Altria 5.2 US
PepsiCo 8.0 US Novartis 5.1 Switz.
Firms with the Highest Ratios of Market value to Book Value
(December 2006)
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What kind of resources explain
high market to book value
ratios?
Price/earnings ratio (October 2011)
= 18,71
•
= 9,83
• Amazon
= 97,48
•
= 53,49
•
= 14,76
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Four Categories of Resources
• Financial (cash, retained earnings…)
• Physical (plant & equipment, geographic location…)
• Human-intellectual (skills & abilities, patents…)
• Organizational (brand and reputation; culture:
collective experience through
systems, routines & activities…)
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Resources?
• User base: With about 60% of the world’s internet
searches, the Google.com website is the world’s 2nd
most visited website… giving it a massive potential for
market access. Similarly its dominance of online
advertising (>30% of US online adverting revenue) gives
it a powerful position in the entire advertising sector.
• Financial resources: With its cash reserves, huge cash
flow from advertising and massive capacity for raising
debt and equity capital as a result of it huge market
capitalization, Google is well able to broaden its product
range through acquisition.
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Resources
• Human resources. Google is committed to hiring the
best and brightest. Its technical staff—software
engineers in particular—are considered among the best
in the industry.
• Culture. The Google vibrant, entrepreneurial culture
combines informality with a huge emphasis on
innovation, creativity, and initiative
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Resources and competences
• Competences are…
– the ways those assets are used or deployed
effectively, that is, what we do well‟.
• E.g. product design skill, cooperative relationships
Competences
• Software development. Google’s search engine was
based upon the technical brilliance of its founders in
creating new search algorithms. Google continues to
build depth and breadth to its software engineering
capability.
• Product design. The dominance of the Google search
engine over its early rival can be attributed primarily to its
ease of use. Google continues to develop products that
are easy to use even by the users with few computer
skills.
• Entrepreneurship and innovation. As a result of its
culture, systems and people, Google shows a
tremendous capacity to generate new product ideas and
new business initiatives.
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Bundles of resources and
competences make up strategic
capabilities
Strategic capabilities
• Threshold capabilities
– needed for an organisation to meet the necessary requirements
to compete in a given market and achieve parity with competitors
in that market – „qualifiers‟
• Distinctive capabilities
– critically underpin competitive advantage and that others cannot
imitate or obtain – „winners‟
Threshold and distinctive capabilities
VRIN: focus on really distinctive
The four key criteria by which capabilities can be assessed in terms of whether they are really distinctive & a basis for achieving sustainable competitive advantage :
• value
• rarity
• inimitability
• non-substitutability
VRIN framework
Criteria for the sustainability of strategic
capabilities
• in theory: Does the resource or competence
provide customer value?
• the practical: Does the resource result in an
increase in revenues, a decrease in costs, or
some combination of the two?
• Distinctive or threshold?
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Applying VRIN
V – Value of strategic capabilities
Uses of the value chain
• A generic description of activities – understanding the discrete activities and how they both contribute to consumer revenue and how they add to cost.
• Identifying activities where the organisation has particular strengths or weaknesses
• Draw strategic implications
Value chain
Case
– Use value chain analysis
• From manufacturing, to new product development, to
purchasing, to supply chain mgt, to component
manufacture, to assembly..to dealership support, and
after-sales services
– Key resources/competences along value chain
• Strong balance sheet to invest in firm infrastructure,
manufacturing capabilities, new product dvpt capability,
effective supply-chain mgt, global distribution, brand
strength, scale-efficient plants with up-to-date capital
equipment,...
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Assessing a Company’s Resources and Capabilities:
The Case of
RESOURCES Importance
industry
VW’s relative
strength
R1. Finance 6 6
R2. Technology 7 6
R3. Plant and
equipment
8 8
R4. Location 6 6
R5. Distribution 8 6
R6. Brands 6 6
COMPETENCES Importance
industry
VW’s Relative
Strength
C1. Product
Development
9 7
C2. Purchasing 7 6
C3. Engineering 7 9
C4. Manufacturing
efficiency
8 5
C5. Financial
Management
6 4
C6. R&D 5 6
C7. Marketing and
Sales
9 7
C8. Government
Relations
4 8
C9. Strategic
Management
7 5
Both scales range from 1 to 10
(1= very low, 10= very high)
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Compare importance resources and competences
along value chain of industry with Volkswagen’s
relative strengths along its own value chain
Rela
tive S
trength
VW
Strategic Importance in industry
Superfluous Strengths Key Strengths
Zone of Irrelevance Key Weaknesses
1
1
5 10
5
10
R1
R2
R3
R4
R5 C1 C2
C3
C4 C5
C6
C7
C8
(Hypothetical only)
Appraising Resources and Capabilities
C9
R6
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Strategy implications
• Principal strengths
– Deep financial pockets, quality of plant & equipment,
engineering capabilities
• Compete on quality and engineering excellence rather
than cost!
– Focus marketing of all brands on these commonalities
• Use deep financial pockets when rivals are struggling!
– E.g. acquire
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Strategy implications
• Key weaknesses
– Manufacturing costs (resulting from location), mgt
capabilities regarding strong financial orientation &
strategic focus
• Turn German location into reputational advantage
– Reinforced by acquisition of home-grown quality label
• Put in place stable top mgt team
– Able to steer in a long-term, cost-efficient direction
• Superfluous strength
– Government relations? – « White space »?
– Could foster this competence in emerging economies
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R – Rarity
• 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
Applying VRIN
Rarity: key individuals
• « think different » branding
– Dependence on Steve Jobs?
• Steve Jobs helped to fuel « great man » theory
– Rare capability -> core rigidity?
• Search for new « great man »
• Can inhibit change and become key weakness!
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I – Inimitability Inimitable capabilities are those that competitors find difficult to imitate or obtain.
• Competitive advantage can be built on unique resources (a key individual or IT system) but these may not be sustainable (key people leave or others acquire the same systems).
• Sustainable advantage is more often found in competences (the way resources are managed, developed and deployed) and the way competences are linked together and integrated.
Applying VRIN
Inimitability Criteria
Inimitability
strategic
capability
Social
Complexity Culture &
History
Causal
ambiguity
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Social Complexity ( & government lobbying)
• the social relationships entailed in
resources may be so complex that
managers cannot really manage them
or replicate them
The Question of Inimitability
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Applying VRIN
Unique Historical or Cultural conditions
• first mover advantages e.g.
• unique culture
e.g. ―good people do their jobs in their own way”
The Question of Inimitability
37
Applying VRIN
The Question of Inimitability
Causal Ambiguity Is it marketing (Belgian)?
Is it finance (Brazil)? Is it luck? Is it
transnational organization?
• causal links between strategic capability
and competitive advantage understood?
• bundles of resources and competences fog
these causal links
38
Applying VRIN
Patents
• patents may be a two-edged sword
• offer a period of protection if the firm is
able to defend its patent rights
• required disclosure may actually decrease
the cost of imitation, and the timing
The Question of Inimitability
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Applying VRIN
Non-substitutability
• Product or service substitution • E.g. e-mail systems vs postal systems
• No matter how VRI postal services were!
• Competence substitution
– Over-reliance on particular competences
• E.g. Kodak & chemical vs digital processes
• But Rolex vs Casio ?
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Strengths
• Competitive advantage
from strategic capability
Opportunities
• Future Oriented
• Niches
Weaknesses
• Disadvantage rooted
in strategic capability
Threats
•Vulnerability
• Attack Point
SWOT: summary internal & external analysis
Internal analysis (VRIN)
External analysis (PESTEL, 5 forces, market
segments…)
TOWS: formulate strategic options (future)
