Chapter 3Examining the Internal Context of Strategy,1,OBJECTIVES,1,2,3,4,5,Explain the internal context of strategy,Identify a firms resources and capabilities and explain their role in its performance,Define dynamic capabilities and explain their role in both strategic change and a firms performance,Explain how valuechain activities are related to firm performance and competitive advantage,Explain the role of managers with respect to resources, capabilities, and valuechain activities,2,COMPARATIVE INDUSTRY REFORMANCE,How dosuch differences in profitability materialize?,ROA,ROS,Grocery Store,Global Auto,Semiconductor,3,TWO THEORIES FOR HOW AND WHY SOME FIRMS PERFORM BETTER THAN OTHERS,A firms resources and capabi-lities determine performance,Success issues from fundamental differences in what firms own and what they can do,A firms activities determine performance,Success is driven by a firmsvalue chain activities:How it configures these activities to add more valuethan competitors,4,RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS,Strategy,Competitive advantage/disadvantage,Management strategic decision making,Capabilities,Managers,Resources,Performance,5,RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING BLOCKS OF STRATEGY,The inputs that firms use to create goods and services Undifferentiated or firms-specific Tangible or intangible Easy to acquire or difficult,A firms skill in using its resources to create goods and services. The combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services,Capabilities (competencies),Resources,Strategy,6,EXAMPLES OF CAPABILITIES,1: Stalk, Evans, and Shulman, 1992 2: Makadok, 2003,Capability,Result,Logistics - distributing vast amounts of goods quickly and efficiently to remote locations,An extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both techno-logical leadership and economies of scale,Generating new ideas then turning those ideas into new, profitable products,200,000-percent return to share-holders during first 30 years since IPO1,25,000-percent return to share-holders during the 30-plus year tenure of CEO John Connelly.2 As for ongoing expenses, share-holders in Vanguard equity funds pay, on average, just $30 per $10,000, vs. a $159 industry average. With bond funds, the bite is just $17 per $10,000,30 percent of revenue from products introduced within the past four years,Company,7,THE VRINE MODEL,Performance implication,Test,Competitive implication,8,Value: A resource or capability is valuable if it allows a firm to take advantage of opportunities or to fend off threats in its environment,THE VRINE MODEL: VALUE,Union Pacific Railroads rail system is a tangible resource that allows UP to compete with other carriers in the long-haul transportation of a variety of goods,Maintain an extensive network of rail-line property and equipment on the U.S. Gulf cost Operates in the western two-third of the United States serving 23 states, linking every major West Coast and Gulf Coast port, and reaching east through major gateways in Chicago, St.Louis, Memphis, and New Orleans Also operates in key north-south corridors The only U.S. railroad serving all six gateways to Mexico Interchanges traffic with Canadian rail systems,Example,Definition,9,THE VRINE MODEL: RARITY,Example,When McDonalds signs an agreement to build a restaurant inside a Wal-Mart store, it has an intangible advantage over Burger King that is valuable and rare,A useful resource or capability that is scarce relative to demand. Valuable resources that are available to most competitors (i.e., that are not rare) simply allow firms to achieve parity,Definition,10,Example,THE VRINE MODEL: INIMITABILITY AND NON-SUBSTITUTABILITY,Barnes & Nobles large store network gave it access to customers and purchasing power that was inimitable , but Afound a substitute,11,TANGIBLE AND INTANGIBLE ADVANTAGES,=,=,=,Intangible,Location selection,Brand,Tangible,Rural real-estate,High traffic real-estate,+,+,+,Wal-Mart,McDonalds,12,THE VRINE MODEL: EXPLOITABLITY,Novell: “I walk down Novell hallways and marvel at the incredible potential for innovation here, but Novell has had a difficult time in the past turning innovation into product in the market place” - CEO Eric Schmidt Xerox: Xerox invented the laser printer, Ethernet, graphical-interface software and computer mouse but could not capitalize on these,Example,A resource of capability that the organization has the capability to exploit (i.e., the capability to generate value from),Definition,13,HOW WOULD YOU DO THAT?,Inimitable andnon-substitutable?,Can competitors imitate? Can they substitute?,Exploitable?,Can Pfizer exploit?,Rare?,Do Pfizers patents provide “rarity”?,Valuable?,Do patents on Zoloft provide value?,PfizersZoloft ,14,STOCK AND FLOW OF CAPABILITIES,Capabilit