Strategic Analysis

21/12/2016 1 BUSM3200 Strategic Management Module 3 Strategic Capabilities Dr Xueli (Charlie) Huang School of Management Reviewing Modules 1 -2: Where are we now in our roadmap of strategic management? •Module 1 Introducing strategy –Key points: strategy, level of strategy (corporate, business, and functional), and strategic management. •Module 2 The environment – part of STRATEGIC POSITION –The PESTEL framework –The Porter’s 5 -forces model –The concept of strategic group –Need to understand why ( objectives ) for using these analytical tools, how ( process ) to use them, and make conclusions and understand the implications of your conclusions School of Management 2 RMIT University©2017 A model of strategic management - The roadmap of this course Week 2 Week 3 School of Management 3 RMIT University©2017 21/12/2016 2 Key elements in the concept of strategy Strategy: long -term scope and directions Competitive advantages Stakeholder satisfaction Organizational performance External environment Organisation’ s resources and skills Organization purpose and stakeholder expectation RMIT University©2017 4 School of Management What the firm might do What the firm can do Module 2 The Environment The Macro -env analysis Five Forces Analysis Strategic group Market and competitor Module 3 Strategic capabilities Sustainable Competitive Advantage RMIT University©2011 5 School of Management 5 RMIT University©2017 Learning Objectives After studying this module, you should be able to – Understand the classification of an organisation’s resources and competences . –Identify an organisation’s strategic capabilities using the criteria of value, rarity, inimitability and non - substitutability (VRIN). – Diagnose strategic capability by means of value chain analysis, activity systems mapping, and benchmarking. – Manage strategic capabilities for organisations – Understand resource -base view (RBV) – another dominant strategic perspective . School of Management 6 RMIT University©2017 21/12/2016 3 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 ’, including: –Tangible (e.g., physical, financial, HR) –Intangible (e.g., patent, technological know -how, brand name, goodwill) –Knowledge -based resources •Competences are the ways those assets are used or deployed effectively , that is, what we do well’, including – Skills and ability – Dynamic capability: How quick to learn and adapt to changes LO1 School of Management 8 RMIT University©2017 School of Management 9 Resources Competences Distinctive capabilities Required to achieve competitive advantage Threshold capabilities Required to be able to compete in a market Threshold Resources Threshold Competences Distinctive Resources Distinctive Competences Redundant capabilities Those don’t generate valued to customers The classification of capabilities: redundant, threshold and distinctive capabilities Redundant Resources Redundant Competences RMIT University©2017 What are Threshold and Strategic Capabilities? •Threshold capabilities are those needed for an organisation to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market – ‘qualifiers ’. •Strategic capability refers to the resources and competences of an organisation needed for it to achieve competitive advantage – “winners ”. –They help an organization achieve its long -term survival and competitive advantage School of Management 10 RMIT University©2017 21/12/2016 4 Where strategic capabilities reside? •Each operational activity or process –E.g., marketing, production, R&D –Singapore Airlines: Excellent customer service –McDonald’s: fast customer service –Apple: product innovation –Dell: Distribution –Honda: engine technologies •Linkages of operational activities and processes –The combined effect of all these activities and processes –For example: R&D and Marketing for Nike; 3M: culture School of Management 12 RMIT University©2017 Diagnosing an organisation’s strategic capabilities •The four key criteria by which capabilities can be assessed in terms of providing a basis for achieving sustainable competitive advantage are: •value, •rarity, •inimitability and •non -substitutability VRIN LO2 School of Management 14 RMIT University©2017 Criteria for identifying strategic capabilities - VRIN •Value by customers (from a customer’s perspective) –delivering value for money •Rare (from a competitor’s perspective) –Those resources or competence possessed by one or a few organizations only. •Inimitability (or robustness) of competence – due to: complexity, causal ambiguity, culture and history, and change •Non -substitutability –At the product or service level (e.g., emails vs mail) –At the competence level (Planning skill vs ERP) School of Management 15 RMIT University©2017 21/12/2016 5 Criteria for the inimitability of strategic capabilities School of Management 16 RMIT University©2017 Criteria used for identifying strategic capabilities – Summary Valuable Rare Inimitable Non-sub- stituable Competitive Consequences Performance Implications No No No No Competitive Disadvantage Below Average Returns Yes No No Yes/no Competitive Parity Average Returns Yes Yes No Yes/no Temporary Competitive Advantage Aver/Above Average Returns Yes Yes Yes Yes Sustainable Competitive Advantage Above Average Returns School of Management 17 RC TC SC TC or SC? RMIT University©2017 Diagnosing strategic capabilities •Analytical techniques for diagnosing an organisation's strategic capabilities include: –The value chain and value network –Activity systems mapping –Benchmarking LO3 School of Management 18 RMIT University©2017 21/12/2016 6 Diagnosing competitive strategic capability - Valuable •The value chain and value network –Value chain and value network can be used to diagnose which strategic capability is valuable to customers –The concept of value chain can be used to help understand a firm’s cost position and the value each activity delivers. –It helps in identifying an (or a cluster of ) organization's capabilities in terms of what is valuable . •Value chain divides the activities within and around an organization into two categories: –Primary activities –Support activities School of Management 19 RMIT University©2017 The value chain within an organisation School of Management 20 RMIT University©2017 Uses of the value chain •A generic description of activities – understanding the discrete activities and how they both contribute to consumer benefit and how they add to cost. •Identifying activities where the organisation has particular strengths or weaknesses •Analysing the competitive position of the organisation using the VRIN criteria – thus identifying sources of sustainable advantage. •Looking for ways to enhance value or decrease cost in value activities (e.g. outsourcing) School of Management 21 RMIT University©2017 21/12/2016 7 Benefits and limitations of value chain analysis •Video: What is strategy by Michael Porter – The role of value chain analysis (18’23” – 21’19”) and ILEA’s value chain (31’12” – 42’36”) http://www.youtube.com/watch?v=KvYwKM5bY0s •Questions –Why value chain analysis is useful to analyse a company’s strategy and strategic management? –The two -way relationship between business strategy and value chain –The reinforcement of value chain activities and their alignment to a firm’s business strategy –What are the limitations of value chain analysis? RMIT University©2017 School of Management 22 Diagnosing strategic capabilities (3): Activity systems mapping •Activity systems mapping aims to link an organization's activities and processes to its industry’s critical success factors (CSFs), then identify those resources and competences that are employed to undertake them within the organization. •CSFs are those product or service features that are particularly valued by a group of customers. •Analyzing the features of products and/or services offered –The concept of the total product – layers of products –Levels of product feature –Threshold features (survival features) –Critically successful features School of Management 27 RMIT University©2017 The Concept of the Total Product Core benefit or service Installation Packaging Delivery and credit Warranty Styling Quality Features Brand name After - sale service Augmented product Actual product Core product School of Management 28 RMIT University©2017 21/12/2016 8 SUCCESS Critical success factors Brand Innovation Good service Range Reliable delivery Solving buyers’ problems Flexibility Main benefits to customers – or “Higher order strategic themes ” Rapid response Good personal relations with buyers Accepting returned goods Fast turnround of urgent orders Staff discretion and ‘rule bending’ Low plant utilisation 24 hr despatch Stock levels Use of subcontractors for transport Distribution and logistics systems Resources and competences Diagnosing strategic capability – Activity systems mapping Activity mapping: Linking CSF to a firm’s strategic capability (e.g., its, activities processes, and resources) Activities and processes It is built on the basis of solid understanding of customers, competitors and the organization School of Management 29 RMIT University©2017 The roots of competitive advantages Product/service features Value chain activities and processes Strategic capabilities Resources Capabilities Strategic capability: The roots of competitive advantages Insourcing or outsourcing What customers value: Critical success factors RMIT University©2011 30 School of Management 30 RMIT University©2017 Activity systems mapping vs value chain analysis Critical success factors Features of products and/or service provided Value chain activities and processes Resources and competences (skills and abilities) Activity mapping – a backward approach Value chain analysis – a forward approach School of Management 31 RMIT University©2017 21/12/2016 9 Diagnosing strategic capability (4) - Benchmarking and SWOT analysis •Benchmarking –Horizontal benchmarking –Best -in-class benchmarking ( e.g. BA benchmarked its refuelling operations against Formula 1 ) –Industry/sector benchmarking –Vertical benchmarking –Historic comparison to identify any significant changes in relation to previous years School of Management 32 RMIT University©2017 Diagnosing competitive strategic capability – the other 3 criteria •Rare? –Competitor analysis •Inimitable? –Criteria of inimitability •Non -substitutable? – Product or competence level? School of Management 33 RMIT University©2017 Managing strategic capabilities •Developing strategic capabilities –Internal capability development : –Leveraging capabilities – identifying capabilities in one part of the organisation and transferring them to other parts (sharing best practice). –Stretching capabilities - building new products or services out of existing capabilities. –External capability development – adding capabilities through mergers, acquisitions or alliances. LO4 School of Management 34 RMIT University©2017 21/12/2016 10 Managing strategic capabilities (cont’d) •Protect strategic capability – strategic capabilities need to be protected from imitation or outflowing. •Ceasing activities – non -core activities can be stopped, outsourced or reduced in cost. •Monitor outputs and benefits – to understand sources of consumer benefit and enhance anything that contributes to this. •Managing the capabilities of people – training, development and organisation learning. School of Management 35 RMIT University©2017 Resource -based view (RBV) •The resource -based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities. – Its main proposition : –An organization's performance is largely determined by its resources and capability (skills and capacity) that are valuable, rare, costly to imitate, and hard to substitute. LO5 School of Management 36 RMIT University©2017 Resource -based view (RBV) (cont’d) •A firm can be regarded as a bundle of resource •Two basic assumptions –Resource heterogeneity –Competing firms possess different bundle of resources. –Resource immobility –These resource differences may persist •Strategic implications –Resource -picking ability –Capability development –Strategic leverage School of Management 37 RMIT University©2017 21/12/2016 11 Module summary (1) •Strategic capabilities comprise both resources and competences. •The concept of dynamic capabilities highlights that strategic capabilities need to change as the market and environmental context of an organisation changes. •Sustainability of competitive advantage is likely to depend on an organisation’s capabilities being of at least threshold value in a market but also being valuable , relatively rare , inimitable and non - substitutable. School of Management 39 RMIT University©2017 Module summary (2) •Ways of diagnosing organisational capabilities include: – Analysing an organisation’s value chain and value network as a basis for understanding how value to a customer is created and can be developed. – Activity mapping as a means of identifying more detailed activities which underpin strategic capabilities. – Benchmarking as a means of understanding the relative performance of organisations. School of Management 40 RMIT University©2017 Module summary (3) •Managing strategic capabilities –understanding, developing, protecting, and leveraging •RBV –Main proposition: the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities –Two key assumptions: resource heterogeneity and immobility School of Management 41 RMIT University©2017