Strategy and Strategic Analysis GEST-S-468

Manuel Hensmans

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

Slide 3.4

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

Slide 3.4

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 SWOT analysis.

• Consider strategic options for the future through TOWS analysis

5 |

1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006

Honda

Technical

Research

Institute

founded

1st motorcycle:

98cc, 2-cycle

Dream D

4 cycle

engine

405cc

motor

cycle

Power products:

ground tillers, marine

engines, generators,

pumps, chainsaws

snowblowers

First product:

Model A

clip-on engine

for bicycles

The 50cc

Supercub

N360 mini

car 1000cc

Goldwing

touring

motor cycle

Acura Car

division

Competes in

Isle of Man TT

motorcycle

races

4-cylinder

750cc

motorcycle

Portable

generator

Enters Formula 1

Grand Prix racing

Honda

Civic Enters Indy

car racing

1st gasoline-powered

car to meet US Low

Emission Vehicle Standard

Civic GS

(natural

gas

powered)

Civic Hybrid

(dual gasoline/

electric)

Home co-

generation

system

Begins production of diesel

engines

Honda

wins

Indy

Champi

onship

The evolution of

1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006

Honda

Technical

Research

Institute

founded

1st motorcycle:

98cc, 2-cycle

Dream D

4 cycle

engine

405cc

motor

cycle

Power products:

ground tillers, marine

engines, generators,

pumps, chainsaws

snowblowers

First product:

Model A

clip-on engine

for bicycles

The 50cc

Supercub

N360 mini

car 1000cc

Goldwing

touring

motor cycle

Acura Car

division

Competes in

Isle of Man TT

motorcycle

races

4-cylinder

750cc

motorcycle

Portable

generator

Enters Formula 1

Grand Prix racing

Honda

Civic Enters Indy

car racing

1st gasoline-powered

car to meet US Low

Emission Vehicle Standard

Civic GS

(natural

gas

powered)

Civic Hybrid

(dual gasoline/

electric)

Home co-

generation

system

Begins production of diesel

engines

Honda

wins

Indy

Champi

onship

The evolution of

Biggest motorcycle producer & leading automobile prod. Yet, never defined itself in industry or consumer terms

(motorcycle or motor vehicle company)

But in terms of internal strategic capability Innovative developer of engines

Morale of the story: In fast-changing environments…

8

• 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 that case, internal resources and competences are the primary sources of sustainable competitive advantage

8

Strategic capability made up of…

• 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, brand, visionary leadership…

9

Most valuable company in the world? Due to what resource?

Apple really

changed that

much in this

period?

$623.7 bn 28/09/’12

Resources?

• User base – With about 60% of the world’s internet searches, the Google.com

website is the world’s most visited website in the world

– Dominance of online advertising

• Financial resources – huge market capitalization & cash reserves

• able to broaden its product range through acquisition

Resources

• Culture

– Images from?

• Googleplex

– combine informality with innovation/creativity/initiative

Resources

• Human resources – Google’s technical staff—software engineers in particular—are

considered among the best in the industry.

– 3,000,000 job candidates per year!

• How many out of 100 of the brightest candidates that have been pre-selected through data crunching get a job?

• 1

• Competences are…

– the ways those resources are used or deployed effectively, that is,

‘what we do well’

• E.g. product design skill, cooperative relationships

14

Strategic capability also made up of…

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.

• Speed of innovation – As a result of its culture, systems and people, Google shows a

tremendous capacity to generate new product ideas and new business initiatives.

Bundles of resources and competences make up strategic capabilities

16

Sustainable strategic capability?

17

• 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?

Applying VRIN

V – Value of strategic capabilities

Value chain

19

Case (2007)

– Use value chain analysis

• From inbound logistic to 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,...

Assessing a Company’s Resources and Capabilities:

The Case of

RESOURCES Importance

industry

VW’s relative

strength

R1. Finance 6 7

R2. (Green)

Technology

7 5

R3. Plant and

equipment

8 8

R4. Location 5 4

R5. Distribution 8 6

R6. Brands 6 5

COMPETENCES Importance

industry

VW’s Relative

Strength

C1. Product

Development

8 5

C2. Purchasing 7 6

C3. Engineering 7 9

C4. Manufacturing

efficiency

8 4

C5. Financial

Management

6 5

C6. R&D 5 5

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)

Compare importance resources and competences

along value chain of industry with Volkswagen’s

relative strengths along its own value chain

Assessing a Company’s Resources and Capabilities:

The Case of

RESOURCES Importance

industry

VW’s relative

strength

R1. Finance 6 7

R2. (Green)

Technology

7 5

R3. Plant and

equipment

8 8

R4. Location 5 4

R5. Distribution 8 6

R6. Brands 6 5

COMPETENCES Importance

industry

VW’s Relative

Strength

C1. Product

Development

8 5

C2. Purchasing 7 6

C3. Engineering 7 9

C4. Manufacturing

efficiency

8 4

C5. Financial

Management

6 5

C6. R&D 5 5

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)

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

R5 C1

C2

C3

C4

C5 C6

C7

C8

(Hypothetical only)

Appraising Resources and Capabilities

C9

R6

R4

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

– Common production platforms Golf, Audi & Skoda

• Use deep financial pockets when rivals are struggling!

– E.g. acquire

• Electric mobility at core of strategy, together with clean diesel

– Especially in , where diesel is less popular

24

Strategy implications

• Key weaknesses – Manufacturing costs (resulting from location), mgt capabilities

regarding clear strategic focus

• Turn German location into reputational advantage – Reinforced by acquisition of home-grown quality label

• Put in place top mgt team with strategic acumen – Able to steer all brands in a common long-term, strategic direction

• Superfluous strength

– Government relations? – Foster this competence in emerging economies

– 2012-03: VW most profitable car manufacturer in the world thanks to

25

Sustainable strategic capability?

26

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

Evolution p/e ratio

28 |

WHY?

Price / earnings ratio (30 September 2013)

= 12

= 25

= 13

= 379

29

Why this huge discrepancy???

– $5.1 billion profit since 2003

– Visionary retail juggernaut • growth in any kind of retail,

cloud services…

– Little cash • invest all in growth vision

– Is beating all competition • Wal-Mart, …

– $15 b profit in one quarter

– New vision? • iWhat???

– Sits on $137 b cash • does not know how to invest it

– Being beat? • Samsung, Android…

30 |

Why this huge discrepancy???

– $5.1 billion profit since 2003

– Visionary retail juggernaut • growth in any kind of retail,

cloud services…

– Little cash • invest all in growth vision

– Is beating all competition • Wal-Mart, …

– $15 b profit in one quarter

– New vision? • iWhat???

– Sits on $137 b cash • does not know how to invest it

– Being beat? • Samsung, Android…

31 |

I – Inimitability Inimitable capabilities are those that competitors find difficult to imitate or obtain

• 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

Applying VRIN

Inimitability Criteria

Inimitability

strategic

capability

Social

Complexity Culture &

History

Causal

ambiguity

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

Applying VRIN

Unique Historical or Cultural conditions

• first mover advantages e.g.

• unique culture e.g. “good people do their job in their own way”

The Question of Inimitability

Applying VRIN

The Question of Inimitability

Causal Ambiguity I Is it marketing (Belgian)?

Is it finance (Brazil)? Is it luck? Is it the transnational Europe-Emerging Economy setup?

• causal links between strategic capability and competitive advantage understood?

• bundles of resources and competences fog

these causal links

Applying VRIN

Patents?

• Why do patents present 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

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 ?

Case

• Analyse the strategic capabilities of Dyson – in terms of most distinctive resources and competences

• VRIN of Dyson’s strategic capability?

• Effect of Sir Dyson leaving company?

: distinctive resources

• James Dyson himself

• the Dyson high-end brand in an otherwise staid market

• HQ building and related laboratories designed to foster innovation

• product portfolio and associated patents

• high R&D budget possibly through being privately owned

• history company used extensively in PR & advertising

• ownership of most manufacturing facilities and hence control over working conditions of employees – versus other companies that contract out their manufacturing and

can be accused of supporting poor labour conditions

: distinctive competences

• continuous inspirational leadership around the value of engineering

• design engineering competences that transform ideas into viable products

• competence to make engineering aesthetically attractive

• seamless value chain despite design and manufacturing being in different locations

• being one step ahead of competitors attracting early adopter customers and subsequent followers including premium pricing

• never being boring; always being surprising

Q2: VRIN of strategic capability?

• V: Many valuable resources & competences

– Do same value chain exercise as with

• R: Not products themselves – Competitors have managed to imitate products

– But: J. Dyson = brand, other designers, secret HQ...?

• I: innovation embedded in culture / history – Causal ambiguity

» Is it Dyson, the firm’s design experience, or is it pure marketing genius?

– Social complexity

» the hands-on mgt style: limited CAD!

– So, what explains Dyson’s price premium?

» first in market (history)/ aura (design culture)

• N: none in sight

– innovative culture could help to protect in the future

Q3: departure Sir Dyson?

• Compare with

– Stays on as chief inventor???

– Hands-on mgt style without Dyson?

– Aura of company • exclusive design & first in market without Dyson?

• premium price?

» customers willing to pay more to be different and ahead of the crowd even regarding an object as mundane as a vacuum cleaner

Strengths

• Distinctive competences

& resources

Opportunities

• Future Oriented

• Market segments /

products/services

Weaknesses

• Competences & resources

that are becoming less

valuable & rare & inimitable

Threats

• Vulnerabilities

• Attack Points

SWOT: summary internal & external analysis

Internal analysis (VRIN)

External analysis (PESTEL, 5 forces, market

segments…)

44

Do SWOT for

45 |

Strengths • Most credible promise of best

customer experience

•Robust margins/ finances

•iOS platform effects

•Focus on design (outsource rest)

Opportunities • strong growth in smart mobile

devices for global wealthy

•Mobile: apps rather than search

provide advertising gateway

Weaknesses •”Great man” dependence?

• Reputation of “mature

innovator”: iNext???

• Outsourcing means no

control working conditions

Threats •Android: open innovation

always wins?

•Dependence on suppliers that

are competitors too (Samsung..)

•Too high-end for em. ecs?

Internal analysis External analysis

Do SWOT for

46 |

Strengths • Most credible promise of best

customer experience

•Robust margins/ finances

•iOS platform effects

•Focus on design (outsource rest)

Opportunities • strong growth in smart mobile

devices for global wealthy

•Mobile: apps rather than search

provide advertising gateway

Weaknesses •”Great man” dependence?

• Reputation of “mature

innovator”: iNext???

• Outsourcing means no

control working conditions

Threats •Android: open innovation

always wins?

•Dependence on suppliers that

are competitors too (Samsung..)

•Too high-end for em. ecs?

Internal analysis External analysis

TOWS: formulate strategic options (future!!!)

48 |

- Launch « iNext « soon to lock in

more users on iOS platform

- Become the leading advertising

gateway through app-store

- Build reputation of other Apple

leaders retrospectively (Tim Cook)

- Build Apple University reputation

for future iNext generations

- Work with telecom providers in

emerging economies to provide

package entry deal

- Upgrade supply chain integration

- Try more open innovation &

more subsidising of application

development in em economies

TOWS (non-exhaustive)