Business Strategy & Analysis Week 3

MPM703 Business Strategy & Analysis
Week 3
Managerial Challenges:
How do you, as a manager, describe the resources and capabilities of
firm such that you can infer the firm’s weakness or strength relative
to others?
How do you, as a manager, explain the roles of strategic resources or
capabilities to the firm’s competitive advantage and sustainable
performance?
How do you, as a manager, discuss the generic value creation process
within a firm?
1
Outline
Understanding resources and capabilities
Resources, capabilities and the value chain
The RBV and the VRIO framework
VRIO resources in a knowledge-based economy
The intellectual assets of firms
The dynamic capabilities of firms
The strategic ambidexterity of firms
The IFE Matrix
2
Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
3
GLO7: Team work
The Strategy Tripod: Three Leading Perspectives on Strategy
4
INDUSTRY FORCES
INSTITUTIONAL
FORCES

ORGANISATIONAL
CAPABILITIES

STRATEGIES
OF FIRMS
PERFORMANCE
OUTCOMES
Source: Peng, M., Sun, S., and Chen, H. 2009, The institution-based view as a third leg for a strategy
tripod, Academy of Management Perspectives, August, pp. 63-81
Our focus
this week!

The resource-based considerations of strategy
Theory: The resource-based view of the firm (strategy) (RBV) (Barney
1986)
The resource-based view (RBV) of strategy suggests that a firm gains
competitive advantage and reap superior rates of return (i.e.
performance) due to the distinctive quality of its resources and/or
capabilities. When these resources/capabilities possess the right kind of
characteristics that make them ‘strategic assets’, the firm is able to
outperform its rivals, achieve and sustain a superior performance.
*Competitive advantages give a company an edge over its rivals and an
ability to generate greater value for the firm and its shareholders
5
Understanding Resources and/or Capabilities
6
Resources, Capabilities and the Value Chain
Value Chain
The functional activities within the firm that create value in the goods and
services produced
Components of the Value Chain
Primary activities
Are directly associated with the development, production, and distribution of goods and
services
Support activities
Assist in the accomplishment of primary activities
7
The Value Chain
Figure 3.1
The resources
and capabilities
of a firm
can be found in
these segments
of the value
chain.
8
The Value Chain
A generic description of activities – understanding how the discrete
activities (or clusters of linked activities) contribute to consumer benefit
Identifying activities where the organisation has particular strengths or
weaknesses
Analysing the competitive position of the organisation using the VRIO
criteria (value, rarity, inimitability, organisation)– thus identifying sources
of sustainable advantage
Looking for ways to
enhance value or decrease cost in value activities (e.g.
outsourcing)
9
10
11
RBV: Characteristics of Strategic Assets
12
What exactly are those characteristics of
resources/capabilities that turn these into ‘strategic
assets’ which in turn, enable a firm to gain competitive
advantage?
V.R.I.O.

VRIO Model:
Is the firm’s particular resource or capability:

Valuable? Rare? Costly to be
imitated by
others?
(Exploited well by
the)
Organisation?
COMPETITIVE POSITION IMPACT ON PERFORMANCE
(Outcomes)
No
*
– * – * Competitive
Disadvantage
Below then Industry
Average
Yes No Yes Competitive Parity Just about Industry
Average
Yes Yes No Yes Temporary or Short
lived Competitive
Advantage
Above Average
(for the time being)
Yes Yes Yes Yes Sustainable
Competitive Advantage
Superior Competitive
Advantage

*if a resource is not valuable, questions about its rarity, inimitanility and organisation are irrelevant to the firm
13
VRIO Characteristics of Strategic Assets
V: Value
How valuable is the resource or capability to the firm and its industry?
A resource is valuable it if provides customer value and competitive advantage
Using a valuable resource – a firm is able to either charge more for its products than
competitors OR enjoy a lower cost structure that their competitors
R: Rarity or Rareness
How rare or unique is a particular resource possessed by the firm?
A resource is rare if only the focal firm is in possession or has control over a resource or
capability (and competitors do not have it/don’t have access to it)
The rule of thumb is that if one (only) competitor has the same resource/capability at even the
equivalent level then it is still relatively rare; however, if more than one competitor has the same
resource, then it fails at Rarity and would be eliminated as a potential source of competitive
advantage
14
VRIO Characteristics of Strategic Assets
I: Inimitability
How costly is it for others to imitate the resource possessed by the focal firm?
A resource is inimitable valuable it if provides customer value and competitive advantage
Inimitability refers to the rate at which a firm’s underlying resources or capabilities can be duplicated by
others
To the extent that a firm’s distinctive competency gives it competitive advantage in the marketplace,
competitors will do what they can to learn and imitate that set of skills and capabilities
A resource or capability is easily imitated due to its:
transparency: the speed with which other firms can understand the relationship of resources and
capabilities supporting a successful firm’s strategy
transferability is the ability of competitors to gather the resources and capabilities necessary to
support a competitive challenge
replicability is the ability of competitors to use duplicated resources and capabilities to imitate the
other firm’s success.
15
Inimitability
16
VRIO Characteristics of Strategic Assets
O: Organisation
Is the focal firm organised enough to exploit and leverage the resource or capability to its effective use
towards competitive advantage?
If a firm is well-organised to leverage its valuable, rare and inimitable resources, it should have the capacity
to develop and implement sound policies, procedures, culture, and norms that serve as the productive
ecosystem for those strategic resources to be put into optimal use.
Firms must be organised enough so that it is structured and aligned around the true competitive
advantages of the business
17
The VRIO resources or capabilities in the
knowledge-based economy
Old or classical paradigm: production efficiency-focused organisations driven by
machinery, equipment, physical infrastructure, inventory; short-term focused to
satisfy shareholders
Knowledge-based economy: smart or intelligent organisations driven by innovation
an relationships to create long-term value to various stakeholders
The key to success is acquisition, recognition, development, enhancement and
exploitation of knowledge-based strategic assets, resources or capabilities:
Intellectual Capital (IC)
Dynamic Capabilities (DC)
Strategic Ambidexterity (SA)
18
Intellectual capital of firms
the intangible assets of an organisation
all non-monetary and non-physical resources that are
fully or partly controlled by the organisation and that
contribute to the organisation’s value-creation
group of knowledge-based assets or resources of an
organisation that forms the basis of its competitive
advantage
the intellectual material – knowledge, information,
intellectual property, experience – that can be put to
use to create wealth
19
Three Main Dimensions of Intellectual Capital
20
IC Dimensions: Human capital
the knowledge, skills, and experience that employees
take with them they leave the organisation
includes individual and knowledge-based assets such
as talent, competence, attitude, skill, tacit knowledge,
creativity, motivation, satisfaction, loyalty, formal
training, education, experience, personal networks,
entrepreneurial proclivity, abilities, etc.
can be generic (e.g. university qualification) or unique
(innovativeness) to an individual
21
IC Dimensions: Organisational or Structural
Capital
all those things or resources that remain in the organisation when the employees have left the building but that
you cannot find in the balance sheet
It comprises organisational routines, procedures, systems, cultures and databases
examples are organisational flexibility, a documentation service, the existence of a knowledge centre, the
general use of information technologies, and organisational learning capacity
some of them may be legally protected and become intellectual property rights, legally owned by the firm
includes resources such as brands, intellectual property, processes, systems, organizational structures,
information (in paper or data bases) and the like.
Externally-oriented: brands, trademarks, service offerings, product concepts, patents and other
intellectual property
Internally-oriented: processes, organisational structures, systems, information on paper, information in
databases, software, organizational culture
22
IC Dimensions: Relational or Social Capital
all resources linked to the external relationships of the firm: with customers,
suppliers, distributors or partners in research and development
It comprises that part of human and structural capital involved with the
company’s relations with stakeholders (investors, creditors, customers,
suppliers), plus the perceptions that they hold about the company.
Examples: customer loyalty, customer satisfaction, links with suppliers,
commercial power, negotiating capacity with financial entities and
environmental activities.
Directly-business relationships: customers, suppliers, partners, unions,
channels to markets
Indirectly-business relationships: banks, media, regulatory bodies, pressure
or interests groups, local government, national government, educational
institutions, sources of new knowledge (e.g. R&D centres, think-tanks and
universities)
23
24
IC and Competitive Advantage of Firms
Potent source of VRIO resources or capabilities?
Enabler of some dynamic capabilities
Enabler of strategic ambidexterity
Buffer to address external environment
IC as foundation of robust & long-term performance
(financial and non-financial measures such as profitability
and innovation)
25
Intellectual
Capital
Strategic
Ambidexterity
Exploration
Exploitation
Dynamic capabilities
Sensing
Seizing
Transformative
Firm Performance
Profitability
Market value
Growth
Innovation
Employee
satisfaction
Customer
satisfaction
Stakeholders
satisfaction
Environmental
performance
Social
performance
Generic Conceptual Framework: Role of Intellectual Capital

STRATEGIES

26
The Dynamic Capabilities of Firms
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Dynamic Capabilities
Capabilities that can be harnessed by a firm to
continuously create, extend, upgrade, protect, and
keep relevant the firm’s unique asset base or
resources
Difficult to replicate capabilities required to adapt
to changing customer and technological
opportunities
Capacity to shape its internal business
environment, innovate (through new products and
services and processes), and design and implement
new business models
Transform/Renew
Seize
Sense
28
Dynamic capabilities enable a firm to continuously
evolve in order to strategically fit an every changing
business environment.
The Firm
Transform/Renew
Seize
Sense

FIT

29
Three (3) Types of Dynamic Capabilities
1. Sensing Capabilities
2. Seizing Capabilities
3. Transforming or Reconfiguring or Renewing
Capabilities
30
Sensing Capabilities
a firm’s capabilities to identify, make sense or interpret business
opportunities and threats
enable a firm to detect opportunities through differential access to
information or knowledge which are essential the firm’s value chain
capabilities to scan, search, and explore the business environment to
identify new market opportunities
Examples include: research and development, market research capability,
competitive analytical capability, partnership capability, learning capability,
managerial analytical capability, entrepreneurial capability, strategic
planning capability, knowledge management capability
31
Seizing Capabilities
A firm’s capabilities to seize and take advantage of opportunities and fend off harmful
effects of threats from the external environment
Once opportunities are sensed, identified and defined, firms use their seizing
capabilities to take advantage of these emerging opportunities
Turning opportunities into exploitable spaces towards commercialisation to enhance
the firm’s value chain
Capabilities to invest on these opportunities with the view towards enhancing the
competitiveness and performance of firms
Examples include: research and development capability, innovation capability,
internationalisation capability, market expansion capability, knowledge management
capability, partnership capability, alliance capability, networking capability,

32
Transforming Capabilities
A firm’s capabilities to maintain its competitiveness by enhancing, combining,
protecting, and when necessary reconfiguring the firm’s intangible and tangible
assets
These are key to a firm’s sustainable growth by enabling the firm to recombine
and to reconfigure assets and organisational structures as the firm grows and as
markets and technologies change
Reconfiguring capabilities maintains the fitness or suitability of the firm to the
most current state of its business environment (industry and PESTEL
environment)
Examples include: innovation capability, entrepreneurial capability, capability to
engage in strategic organisational renewal, change management capability,
knowledge management capability, research and development, technological
leadership capability
33
Dynamic Capabilities at Apple (Teece, 2011)

Product Domain Sensing Seizing Transforming Result/Outcome
iPod existing mp3
players were
too “geeky”
Due to market
sensing
capability
market research
customer
orientation
create an aesthetically
appealing portable device
with a simple interface over
an accelerated product
development cycle;
later: improve
appropriability with
exclusive FairPlay DRM in
the iTunes Music Store
Product development
capability
Innovation capability
port iTunes software
to rival Windows
platform;
expand into content
distribution with the
iTunes Music Store;
shift company
emphasis from
computers to
consumer electronics
Innovation capability
Production capability
domination of the
portable digital music
player market;
expansion to video
capabilities (playback
and distribution).

34
Dynamic Capabilities at Apple (Teece, 2011)

Product Domain Sensing Seizing Transforming Result/Outcome
iPhone existing “smart
phones”
retained an
awkward
interface too
close to their
cell phone
roots.
create a multimedia phone
with a large screen and an
intuitive interface; promote
complementary asset
creation with the App Store
infrastructure.
develop telephony
capabilities; enter the
regulated telephony
market
one of the only
companies making
money with smart
phones

35
Dynamic Capabilities at Apple (Teece, 2011)

Product Domain Sensing Seizing Transforming Result/Outcome
iPad netbooks”
provide an
unsatisfying
computing
experience and
“E-readers”
provide limited
functionality.
scale up the iPhone
interface to provide a richer
multimedia platform
without phone functionality.
extend the “simple
interface” aesthetic to
a computing platform.
Market leadership in
world tablet market

36
Dynamic capabilities: Synthesis
A firm’s set of capabilities to ask and
find answers to ff. questions:
What is missing out there?
What does the market
need/want?
What is the problem out there?
A firm’s set of capabilities to ask and find
answers to ff. questions:
What can we do to address a market
need/want?
What is our solution to a
market/customer/consumer problem?
How can we commercialise a
business idea?
A firm’s set of capabilities to ask and find
answers to ff. questions:
What can we do to make our
products/services even better?
How else can we make our customers
buy from us and stay with us?
How can improve/enhance and
change what we have in order to do
more and better?
How ca we use what we have learned
from sensing and seizing?
37
Dynamic Capabilities of
Sensing Capabilities:
Market research capability
Customer orientation/customer focused mindset of managerial team
Relational capital/networks with suppliers/app developers
Solutions-focused mindset and expertise of managers and employees
Where do you find these in the value chain? HR function? Procurement? Sales and Marketing? Top Management Team? Are
these primary or secondary?
Apple developed these capabilities in response to:
increasing bargaining power of buyers (too many brands/choices out there)
low barriers to entry (new global players – Samsung, LG, Huawei etc)
rivalry of current players (Apple vs. Samsung for example)
low bargaining power of suppliers (wide latitude to conceptualise new products based on what is sensed out there)
38
Dynamic Capabilities of
Seizing Capabilities:
Technological capability
Innovation capability
Marketing/Customer orientation
Marketing capability – 4Ps
R&D capability
Relational capability – with partners
such as suppliers and app developers
Where do you find these in the value chain? HR function?
Operations? In-bound logistics? Sales and Marketing? Top
Management Team? Are these primary or secondary?
Apple developed these capabilities in response to:
increasing bargaining power of buyers (too many
brands/choices out there)
low barriers to entry (new global players – Samsung, LG,
Huawei etc) – erect barriers to entry!
rivalry of current players (Apple vs. Samsung for example)
low bargaining power of suppliers (wide latitude to
conceptualise new products based on what is sensed out
there)
substitutes?
39
Dynamic Capabilities of
Transforming or Reconfiguring or Renewing Capabilities
Knowledge management capability – leveraging products/capabilities into other markets
Market research/customer orientation
Innovation capability
Where do you find these in the value chain? HR function? Operations? Sales and Marketing? Top Management Team? Are these primary or secondary?
Apple developed these capabilities in response to:
increasing bargaining power of buyers (too many brands/choices out there)
low barriers to entry (new global players – Samsung, LG, Huawei etc) – erect barriers to entry!
rivalry of current players (Apple vs. Samsung for example)
low bargaining power of suppliers (wide latitude to conceptualise new products based on what is sensed out there)
substitutes?
40
Strategic Ambidexterity
The dynamic capability of a firm to survive and succeed over time by:
Exploiting, leveraging or using current or existing strategic assets
(i.e. resources and capabilities) in a revenue-generating manner
AND simultaneously
Exploring new technologies and markets and rally these strategic
assets in order to capture existing and new opportunities
enables a firm to engage in sufficient exploitation (of what it currently possesses) to ensure its
current viability and devote ample energy to exploration to ensure its future viability
ability to be aligned and efficient in the management of today’s business demands while at the
same time being adaptive to changes in the external business environment
41
Strategic Ambidexterity
It is a dynamic capability because it enables firms to
Sense emerging business opportunities: scan, search, explore new opportunities
Seize these opportunities – by offering new products/service/processes
Reconfigure current resources and capabilities to be more responsive and attuned to the demands
of the dynamic business environment
A strategic stance to maintain ecological fitness by being able to address
emerging threats and opportunities
Enables a firm to focus on innovation:
Ambidextrous firms are capable of simultaneously pursuing explorative (discontinuous or radical)
innovation as well as exploitative (incremental innovation)
Innovation enables a firm to take a leading role in their markets and industries
42
Strategic Ambidexterity
Exploitation-related activities:
Refinement of current resources and capabilities
Efficiency of activities in the value chain
Selection of resources and capabilities to leverage towards value creation
Implementation of revenue-generating plans, programs, and activities
Exploration-related activities
Searching for new resources and capabilities, 4Ps (products, pricing, place, promotion)
Variation of existing resources and capabilities, 4Ps and value chain activities
Experimentation and Discovery (e.g. innovation, R&D, etc.) of new technologies and markets
43
Strategic Ambidexterity
Need to balance exploitation and exploration-related activities for the long-term
survival and success of firms
Too much focus on exploitation leads to ‘competency trap’:
Not being able to respond to emerging changes
Too much focus on exploration leads to ‘endless, costly and no reward cycle trap
or failure trap’
Not being able to harvest rewards or returns on investment
In other words ambidextrous firms do not compromise the present (exploitation
towards short term goals) by pursuing future opportunities (exploration towards
long term goals) AND not foregoing future opportunities by focusing on short
term returns.
44
Strategic Ambidexterity
Firms with strategic ambidexterity demonstrate:
Compelling strategic intent that intellectually justifies the importance of both exploration and
exploitation
A well articulated shared vision and values within the organization – common identity
Strong senior management team that promotes exploitation and exploration (and rewards
achievers accordingly)
Well defined, separate but aligned organizational architectures (i.e. business models, structure,
reward system, culture, etc.) for exploratory and exploitative units in the value chain
Strong leadership that tolerates and resolves tensions arising from this separate alignments of
exploitative and explorative units
The first two = easy – strategy articulation
The last three = more challenging – strategy execution
45
Dimensions of Strategic Ambidexterity of
Multinational Firms from Emerging Economies
Co-orientation
Simultaneously seek short-term survival and long-term growth in a balanced manner
leverage their existing competitive advantages for short-term survival and reasonably rapid returns on
investment while acquiring assets longer term growth, organizational scalability, and resilience to external
shocks
Co-competence
deploy, exploit, and utilise both transactional (market-based) and relational (network-based) capabilities as
they navigate and operate internationally
Transactional capabilities such as IT capability, marketing capability, expertise in any segment of the value
chain
Relational capabilities such as networks and managerial ties (with government, industry partners, key
stakeholders, etc.)
46
Dimensions of Strategic Ambidexterity of
Multinational Firms from Emerging Economies
Co-opetition
Competing and cooperating at the same time with international business stakeholders (rivals,
partners, suppliers, distributors, etc.)
Benefit from collaborative competitive advantages
Overcome constraints in doing business overseas
Co-evolution
simultaneously respond to and actively influence the external (especially institutional)
environment they face in both home and host countries
47
Strategic Ambidexterity and Firm Performance
Strategic ambidexterity has been shown to enhance:
Profitability
Growth
Revenue
48
Intellectual
Capital
Strategic
Ambidexterity
Exploration
Exploitation
Dynamic capabilities
Sensing
Seizing
Transformative
Firm Performance
Profitability
Market value
Growth
Innovation
Employee
satisfaction
Customer
satisfaction
Stakeholders
satisfaction
Environmental
performance
Social
performance
Generic Conceptual Framework: Role of Intellectual Capital

STRATEGIES

49
Internal Factor Evaluation (IFE) Matrix
An analytical tool for systematic analysis and presentation of the
strong and weak points of a company.
These strong/weak points are identified through your analysis of the
strategic capabilities of a focal firm (using VRIO framework, value
chain analysis and value system or network analysis.
50
Internal Factor Evaluation (IFE) Matrix
List key internal factors as identified in your analysis of the internal environment (e.g. strategic
capability) of the firm.
Assign a weight that ranges from 0.0 (not important) to 1.0 (all-important) to each factor. (Total
weight should be equal to 1).
Assign a 1-to-4 rating to each factor to indicate whether that factor represents a strength or
weakness. (1-major weakness, 2-minor weakness, 3-minor strength, 4-major strength).
Multiply each factor’s weight by its rating to determine a weighted score for each variable
Sum the weighted scores for each variable to determine the total weighted score for the firm.
(below 2.5= generally weak strategic position)
51
Internal Factor Evaluation (IFE) Matrix
A Sample for a Retail Computer Store
52
Synthesis
The resource-based view of strategy and firm performance
The VRIO framework
The Value chain analysis
IC, Dynamic Capabilities, Strategic Ambidexterity
Analytical tool: IFE Matrix
53
1–54
Concept Map
Theory: Resource-based view of the firm (RBV)
A Generic Value Chain of a Firm
Framework: VRIO
Strategic Assets
or Capabilities in
a knowledge
economy
Intellectual
Capital:
Human, Relational,
& Organisational
Capital
Dynamic
Capabilities:
Sensing,
Seizing, &
Transforming or
Renewing
Capabilities
Strategic
Ambidexterity:
Exploitation
& Exploration
Analytical Tool: IFE Matrix
Unit Learning Outcomes (ULOs)
Upon completion of this unit, successful students can:
ULO 1: Analyse systematically the internal an external business environments of a firm to inform
managerial and business decisions
ULO2: Apply appropriate theories, concepts, and analytical tools in strategy
development, implementation and evaluation across diverse business contexts
ULO3: Recommend relevant and sustainable strategic business decisions
in addressing various business issues
ULO4: Contribute to building a cohesive and productive team with effective business skills
GLO1: Discipline-specific
knowledge and capabilities (
in
Strategic Management
)
Deakin’s Graduate Learning
Outcomes GLOs
GLO2: Communication
GLO5: Problem solving
ULO5: Communicate effectively, in oral or written form, the results of
managerial analysis of various business issues and relevant recommendations
55
GLO7: Team work