1. How does value chain analysis help you understand outsourcing decisions? In your opinion, how do companies typically make outsourcing decisions? How should they make them? (A reply of 200 words). 2Topic 3a Internal Environment – Resources Internal versus External Analysis Industry analysis explains the variation in performance across industries, but does not explain the variation in firm performance within an industry Resource - Based View Firm : A bundle (not random collection) of resources Strategic Resources: All assets, capabilities, organizational processes, information, knowledge, routines etc., controlled by a firm that enable it to develop and implement value -creating strategies Competitive Advantage: Derives from a firm’s endowment of strategic resources Resources • Resources ➢ Tangible resources • Financial resources • Physical resources • Technological resources • Organizational resources ➢ Intangible resources • Human resources • Innovation resources • Reputation resources Tangible Resources • Financial Resources • Cash • Borrowing capacity • Capacity to raise equity • Organizational Resources • Formal reporting structure • Formal planning, control, and coordination systems • Physical Resources • Plants, facilities, and equipment • Location • Technological Resources • Stock of technology, such as patents, trade -marks, copyrights, and trade secrets • Production processes Intangible Resources • Human Resources • Employees’ skills and experience • Trust • Managerial skills • Organizational practices and routines • Innovation Resources • Ideas • Scientific skills • Capacity to innovate • Reputation Resources • Reputation with customers for quality, durability, and reliability • Brand name • Reputation with suppliers for fair and positive -sum relationships Ordinary or Extraordinary Extraordinary resources are better known as “core competencies”. I prefer the more common term, while the text uses the term extraordinary Capabilities • Capabilities ➢ Organizational, not individual ➢ Capacity to deploy resources • The value of resources is different from the value managers can extract from them (resource orchestration ); e.g. poor orchestration may extract little value even when resources are valuable. ➢ Skills to transfer inputs into outputs ➢ Emerge over time through complex interactions among tangible and intangible resources ➢ Based on knowledge exchange and transfer among individuals and groups Capabilities as Best Practices • Reflect excellent capabilities in a particular functional area • Executives are quick to spot best practices in other companies and implement them in their own • Very often they create the impression that this is enough to maintain their competitive advantage • Is this so? • Implementing industry best practices is important, so that companies do not fall behind and lose competitive advantage; they help them stay afloat • But best practices are not enough to generate significant competitive advantage; except possibly in the short run Dynamic Capabilities • If not best practices, then what do they need? • Dynamic capabilities – the ability to sense entrepreneurial opportunities, seize them by making investments, and reconfigure resources in the organization to adapt to changes in the external environment Sensing Seizing Reconfiguring • Sense – opportunity recognition imperative; entrepreneurial function of managers • Seize – combination of opportunity recognition and value creation imperative; overcome tension between prior resource commitments and new investments • Reconfigure – value creation imperative; requires organizational change ( e.g., main point from Assignment 1 – ethical initiatives that resolve the tension above also contribute to financial performance and competitive advantage) Core Competencies = Extraordinary resources • Core Competencies ➢ (strategic assets, strategic capabilities, critical capabilities) ➢ “crown jewels of a company”, activities that a firm performs especially well compared to rivals , and through which the firm adds unique value to its goods or services over a long period of time • Examples ➢ Apple’s new market creation model ➢ Starbucks’ skills at ethically sourcing goods ➢ Kellogg’s reputation for safe and nutritious food products ➢ Robinhood’s service of low -cost stock trades ➢ Beyond Meat’s sustainable business model Core Competencies To be a Core Competence, a Resource Must be:
• Valuable ➢ Help a firm neutralize threats or exploit opportunities (ex. Amazon’s distribution capacity allows them to offer 2 -day shipping reliably) • Rare ➢ Not possessed by many others (ex. few others have a comparably reliable and large -scale distribution fulfillment capability) • Costly to imitate (by others) ➢ Ex. everyone understands the value from fast and reliable shipping, but building such a capability requires a cumulative set of investments over time • Non -substitutable ➢ No strategically equivalent substitutes (ex.
attracting customers to a brick & mortar store is a strategic alternative to shipping online orders, but fulfills a different customer need) This is also called the VRIN criteria Valuable Rare Inimitable Non -substitutable Sources of Inimitability • Physical uniqueness ➢ A resource may be inimitable because it has unique location or is protected by a patent • Unique history ➢ Capabilities may be developed through unique experiences, such as building an organizational culture, brand name, or ethical reputation • Causal ambiguity ➢ This is related to the complexity of knowledge needed to perform an activity. While employees know how it works, those from outside have a hard time figuring out the causal relationships in applying a competence. • Social complexity ➢ Capabilities may be unique because they rely on unique interpersonal relationships within a team, group, or network. Building such ties may require cultivating trust, aligning skillsets, or forming friendship among employees or managers, or with other stakeholders