CHAPTER 4 Internal Analysis Resources Capabilities and Activities

Chapter. Case 4 From Good to Great to Gone: • Circuit City Ø A GREAT performer from 1982 – 2000 v CC created world-class logistics & customer responsiveness v 4 S: service, selection, savings, & satisfaction v 6 times better investment than GE under Jack Welch! v In a book by Jim Collins in 2001, he reported that “CC outperformed the market 18. 5 times during 1982 -1997. ” • Bankruptcy in fall of 2008! Ø Outflanked by firms like Best Buy and Amazon Christine 4 -2

Chapter. Case 4 From Good to Great to Gone: • 4 S’s ØService – describe it ØSelection – define it ØSavings – how does that work? ØSatisfaction – what makes them come back? Christine 4 -3

Chapter. Case 4 Circuit City (cont’d) • What are the key issues in Circuit City’s demise? Ø Management distracted by other businesses v Creation of Car. Max, Div. X DVD player, and the merger with Blockbuster (who also filed for bankruptcy in 2010) v CC wanted to become more cost-competitive with Best Buy and on-line retailers such as Amazon v Insufficient investments in core competencies – Neglected to upgrade and protect them v Laid-off 3, 000 highly paid, dedicated, very experienced sales staff – Loyal to company and better able to provide superior customer service – Recruited by Best Buy Christine 4 -4

INTERNAL ANALYSIS: Inside the Firm • Comparing two firms in same industry: Internal focus Ø Core Competencies v Unique strengths deep inside that differentiate products and services unique to a firm v Can drive competitive advantage v Important note: Core Competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage (e. g. Circuit City) Ø Strategic Fit v Internal strengths change with external environment Christine 4 -5

EXHIBIT 4. 1 Creating Strategic Fit to Leverage Internal Strengths Christine 4 -6

Internal Analysis: Link to Superior Performance • Combination of Resources & Capabilities Ø Builds core competencies Ø Competencies drive activities v To transform inputs into goods & services Ø Activities can produce competitive advantage & performance Ø Reinvest profits from superior performance v Hone and upgrade core competencies 4 -7

EXHIBIT 4. 2 Linking Resources & Capabilities to Firm Performance Assets such as cash, buildings, intellectual property that a company can draw on FA enable firms to add value by transforming inputs into goods and services Organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically Christine SFP in the marketplace generates profits that can be reinvested into the firm – helps to upgrade a firm’s resources and capabilities in its pursuit of competitive advantage and improved profitability 4 -8

EXHIBIT 4. 3 Christine Company Examples of Core Competencies & Applications 4 -9

THE RESOURCE-BASED VIEW • Resource-Base View Is a model that aids to identify The core competences * This model include all assets that a firm can draw upon when formulating and implementing strategies Cecilia 4 -10

THE RESOURCE-BASED VIEW Two Categories of Resources: • Tangible Resources Ø Visible; physical attributes • Intangible Resources Ø Invisible; no physical attributes Cecilia 4 -11

EXHIBIT 4. 4 Tangible & Intangible Resources Cecilia 4 -12

THE RESOURCE-BASED VIEW • Example: Google Ø Has its Tangible resources: “Fixed Assets” valued at $5 billion Ø Has its Intangible resources: “The Google brand” valued at over $100 billion Ø Googleplex has BOTH tangible and intangible aspects Cecilia 4 -13

THE RESOURCE-BASED VIEW • According to Rothaermel (2013) “Competitive Advantage is more likely to spring from intangible rather than tangible resources” Tangible resources: Fixed Assets Intangible resources: Brand name Buy them if you have money Is built often over long periods of time Google brand name – Faster– than Microsoft, Coca-Cola, IBM, and Mc. Donald —took much longer * Cecilia 4 -14

Exercise: When Brands = Categories CONDITIONS: • Brand valuation can be a major intangible resource for the firm • Some product brands are so well established that the entire category of products (incl. competitors) may be called by the brand name Ø Can you tell me an example of firm or company where this is happening in the marketplace? Cecilia 4 -15

Exercise: When Brands = Categories “IPot”----- when referring to any type of personal portable media player “Jell-O”----- when people mean gelatin dessert “Hoover”----- when people mean vacuum cleaner “Power Point”----- when people mean electronics presentations “Post - its”----- when people mean sticky notes Cecilia 4 -16

Two Critical Assumptions in Resource. Base View • Resource heterogeneity Ø Bundles of resources and capabilities differ across firms • Resource immobility Ø Resources tend to be “sticky” and don’t move easily from firm to firm Cecilia 4 -17

Two Critical Assumptions in RBV • Resource heterogeneity (differ across firm) Example Ø Southwest Airlines (SWA) & Alaska Airlines have different resources v SWA – Higher employee productivity – Job descriptions are informal; pilots help load luggage • Resource immobility (difficult to replicate) Example Ø Southwest Airlines sustained advantage v Several decades superior performance v Competitors (Continental and Delta) have unsuccessfully imitated SWA model Cecilia 4 -18

LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. LO 4 -2 Differentiate between tangible and intangible resources. LO 4 -3 Describe the critical assumptions behind the resource-based view. LO 4 -4 Apply the VRIO framework to assess the competitive implications of a firm’s resources. LO 4 -5 Identify competitive advantage as residing in a network of firm activities. LO 4 -6 Outline how dynamic capabilities can help a firm sustain competitive advantage. LO 4 -7 Identify different conditions that allow firms to sustain their competitive advantage. LO 4 -8 Conduct a SWOT analysis. Cecilia 4 -19

The VRIO Framework • Evaluation of firm’s competitive advantage • Must satisfy VRIO criteria to sustain Savannah • Valuable • Costly to Imitate • Rare • Organized to Capture 4 -14

EXHIBIT 4. 5 Applying RBV: Decision Tree Competitive Implications Savannah 4 -21

The VRIO Framework • Valuable Ø Increase perceived value in the eye of customer Ø Attractive features, lower price Ø Increase revenues Ø Increase profitability • Honda Ø Competency in design Ø Efficient engines Ø Lean manufacturing, built-in Savannah

The VRIO Framework cont. • Rare Ø Few firms possess Ø Commonality = perfect competition • Toyota Ø Leading innovator of lean manufacturing Ø Lower production costs + high quality ‘mass- customized’ cars Ø Valuable + common = competitive parity Savannah

The VRIO Framework cont. • Costly to Imitate Ø unable to buy or develop at reasonable price • Apple Ø V+R+I Ø Sony has strength in inventing Ø Difficult to imitate design, integration, marketing • Crocs Ø Imitators pop up Ø Share price $74. 75 in 2007, $0. 94 in 2008 Savannah

The VRIO Framework cont. • Organized to Capture Ø Firm’s ability to capture value Ø Effective organizational structure Ø Coordinating systems • Xerox PARC Ø First word processing application Ø Failure to exploit PARC breakthroughs • Nintendo Wii Ø Casual Gamer Ø 52 million world wide, 31 Xbox, 23 Playstation Savannah

STRATEGY HIGHLIGHT 4. 1 How Nintendo Focused on the Casual Gamer • Video Gaming Business Ø $22 billion in 2009, growing to $60 billion in 2013 Ø Nintendo understands the casual gamer v Game Boy handheld devices in 1990 v DS in 2004 v Wii consoles in 2007 • 49% of game console market in 2010 Ø Microsoft Kinect introduced in November of 2010 v Competition continues… Savannah Nintendo Marketing Video 1– 26 4 -26

Porter’s Value Chain • Not focused on departments or accounting costs • Focus on systems Ø How inputs change into outputs purchased by the consumer • Not focused on departments or accounting costs Ø Broken down into activities • Activities add incremental value Savannah 1– 27

THE VALUE CHAIN • Primary Activities Ø Add value directly in transforming inputs into outputs v Raw materials through production to customers • Support Activities Ø Indirectly add value v Provide support to the primary activities v Information systems, human resources, accounting, etc. • System of Activities Ø Firm = network of interconnected activities Ø Managers use to gain and sustain competitive advantage Savannah 4 -28

Primary • Inbound logistics Ø Receiving, storing, distributing inputs internally • Operations Ø Transformational activities-change inputs to outputs sold • Outbound logistics Ø Activities to deliver product or service to customer • Marketing and sales Ø Process to persuade clients to purchase from you • Service Ø Activities to maintain value of product or service Savannah 1– 29

Support Activities • Procurement Ø Process of getting resources needed • Human resource management Ø Recruit, hire, train, motivate, reward, & retain workers • Technological development Ø Managing and processing information, protecting company’s knowledge base • Infrastructure Ø Company’s support system, functions that allow day to day operation Ø Accounting, legal, admin, general management Savannah 1– 30

EXHIBIT 4. 6 Value Chain: Primary & Support Activities Savannah 4 -31

Value Chain Savannah 1– 32

Dynamic Strategic Activity Systems • In order for a firm to sustain competitive advantage, strategic activity systems need to evolve over time. Christine 1– 33

Dynamic Strategic Activity Systems • A network of interconnected activities in the firm • Evolve over time – external environment changes Ø Add new activities & upgrade or remove obsolete ones • Vanguard’s Mission Ø “. . . to help clients reach their financial goals by being the world’s highest-value provide of investment products and services” Christine 4 -34

Dynamic Strategic Activity Systems (cont. ) • Vanguard Example Ø A global investment firm - $1. 4 trillion managed assets v Emphasis on low-cost investing and quality service – Among the lowest expense ratios in the industry (0. 20%) Ø Updated the activity system from 1997 to 2011 v New customer segmentation core – catering to the more traditional as well as those who trade often Christine 1– 35

EXHIBIT 4. 7 Vanguard Group’s Activity System 1997 Six large circles depict Vanguard’s strategic core activities – these six are supported by tightly linked activities reinforcing the strategic activity network Legend Core Support Christine 4 -36

EXHIBIT 4. 8 Vanguard Group’s Activity System 2011 Six large symbolize Vanguard’s strategic core activities that help it realize its strategic position as the low-cost leader in the industry. However, system evolved over time as mgmt added a new core activity – customer segmentation. Legend Core Support Christine 4 -37

Dynamic Capabilities Perspective • Dynamic Capabilities Perspective describes a firm’s ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage • Essential in order to gain and sustain competitive advantage Christine 4 -38

Dynamic Capabilities Perspective (cont. ) • A firm can modify its resource base to gain & sustain a competitive advantage Ø Advantage is gained from reconfiguring a firm’s resource base Ø Honda core competency in gas-powered engine design v Could decrease in value if consumers move toward electric- powered cars v BYD (Chinese automaker) competency in batteries would gain advantage over Honda Christine 1– 39

Dynamic Capabilities Perspective (cont. ) • Dynamic capabilities are an intangible resource Ø Intangible is something that cannot be touched or grasped – basically it doesn’t have a physical presence • Resource stocks (firm’s current level of intangible resources) and flows (firm’s level of investments to maintain or build a resource) are a useful view Ø Exhibit 4. 10 uses the bathtub example v Outflows are a reduction in the firm’s intangible-resource stocks, employee turnover (e. g key employees), or if they don’t engage in an activity for a period of time, and then forget how to do that activity. Christine 1– 40

EXHIBIT 4. 10 Role of Inflows & Outflows in Building Stocks Christine 4 -41

LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. LO 4 -2 Differentiate between tangible and intangible resources. LO 4 -3 Describe the critical assumptions behind the resource-based view. LO 4 -4 Apply the VRIO framework to assess the competitive implications of a firm’s resources. LO 4 -5 Identify competitive advantage as residing in a network of firm activities. LO 4 -6 Outline how dynamic capabilities can help a firm sustain competitive advantage. LO 4 -7 Identify different conditions that allow firms to sustain their competitive advantage. LO 4 -8 Conduct a SWOT analysis. Cecilia 4 -42

HOW TO PROTECT A COMPETITIVE ADVANTAGE 1. Better Expectations of Future Values Ø Buy Resources at a low cost v Real Estate Development - highway expansion 2. Path Dependence Ø Current alternatives are limited by past decisions v U. S. is the ONLY industrial nation not on the metric system v Honda’s core competency in gas engines took decades to build v Sony took many decades to build its core competences in electronic miniaturization Cecilia 4 -43

HOW TO PROTECT A COMPETITIVE ADVANTAGE 3. Causal Ambiguity Ø Describe a situation in which the cause of success or effect are not apparent v Apple: i. Mac, i. Pod, i. Phone v Why has Apple had such a string of successful products? – Role of Steve Jobs’ vision? – Unique talents of the Apple design team? – Timing of product introductions? 4. Social Complexity (describe situations in which different social and business systems interact) Ø Two or more systems interact creating many possibilities v. A Cecilia group of 3 people has 3 relationships v A group of 5 people has 12 relationships 4 -44

THE SWOT ANALYSIS • External and internal analysis completed • SWOT combines the two Ø Evaluate current situation + future prospects Ø Internal Strengths and Weaknesses v From VRIO framework Ø External Opportunities and Threats v From PESTEL or competitive forces analysis Ø Internal strengths to exploit external opportunities v Achieving a dynamic fit yields sustained competitive advantage Savannah 4 -31

EXHIBIT 4. 11 Savannah Strategic Questions in the SWOT Analysis 4 -46

THE SWOT MATRIX (cont. ) • The SWOT matrix utilizes the SWOT analysis to develop strategic alternatives for the firm • Look for combinations of internal and external factors that might lead to an alternative Savannah 4 -47

SWOT Matrix: (Text Extension) 4 Categories of Alternatives 1. Strength-Opportunity: “Offensive” alternatives, utilize a strength to address an opportunity 2. Weaknesses-Threat: “Defensive” alternatives, eliminate or minimize a weakness in order to minimize the effect of a threat 3. Strength-Threat: Utilize a strength to minimize the effect of a threat 4. Weakness-Opportunity: Shore up a weakness to enable the organization to take advantage of an opportunity Savannah 4 -48

SWOT Matrix: Hypothetical Example for Mc. Donald’s Strengths 1. Financial stability/resources 2. Brand name/recognition 3. Consistency Weaknesses 1. Market share decline 2. Dependence on fried foods on menu Savannah Opportunities 1. Growth in developing nations 2. Health consciousness of U. S. population Threats 1. Possible increase in minimum wage 2. Popularity of easy-toprepare grocery items Alternatives: 1) Launch new locations in China & Mexico (S 1, S 2, O 1) 2) Develop and emphasize more healthy food menu items (W 1, W 2, O 2) 3) Launch Mc. Donald’s frozen foods in grocery outlets (S 2, S 3, T 2) 4) New ads showing ease of drive-thru order/take home (W 1, T 2) 4 -49

Strategic Alternatives • SWOT matrix to develop alternatives-combination of internal and external factors with each alternative • Pros and cons to each alternative • Select one or more alternatives to implement Savannah 4 -50

CHAPTERCASE 4 Consider This… • Circuit City employees shocked when the company closed rather than being sold and remaining largely open. • Why did Circuit City lose its competitive advantage? • What could Circuit City’s management have done differently? Savannah 4 -51

Minicase 4 1– 52

Starbucks • Howard Schultz, CEO, created what became the trademark of Starbucks – the ambiance Christine 1– 53

Starbucks (cont. ) • Core competency was to create a unique consumer experience the world over – but someone forgot about that Ø Intangible resources atrophied when cookies, books, sandwiches, and other retail merchandise were introduced Ø The unique culture of Starbucks became diluted in the new culture Ø Schultz entered the scene again in 2008 Ø Baristas now working on only two drinks at a time – starting a second while ending the first. Christine 1– 54

Starbucks Discussion Questions • How did Starbucks create its uniqueness in the first place? • Was Starbucks’s uniqueness a VRIO resource? Did it help Starbucks gain and sustain a competitive advantage? Why or why not? • Why and how did Starbucks lose its uniqueness? Team 1– 55

Starbucks Discussion Questions (cont. ) • How is Starbucks attempting to recreate it uniqueness? Do you think it will be successful? Why or why not? • Explain Starbucks’s ups and downs using (a) strategic activity systems (interconnected activities) and (b) the dynamic capabilities perspective (modifying resources). What implications can you draw? • What recommendations would you give Howard Schultz? Support your arguments. Team 1– 56