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.
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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
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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
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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

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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
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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