Session 4 Lecture

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MA (LPC with Business) Strategy

Session 4 Lecture

Anthony Komedera

anthonykomedera@bpp.com @Anthony_BPP

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How this module works ___________03

Core Text ___________04

Re-caps on session 1 - 3 ___________05

Analysing Resources and Capabilities Lecture ___________09

Case Study – Manchester United - Life Without Ferguson______29

Additional Reading___________30

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Grant, R.M. (2013)

Contemporary Strategy Analysis

8th ed.,Chichester, John Wiley & Sons

Before the next seminar you should read:

-Grant, R.M. (2013)

1. Chapter 5, ‘Analysing Resources and Capabilities’, Pages 111 - 140,

& The Case Study, Wal-Mart Stores Inc Page 503

3 MA (LPC with Business) STRATEGY MODULE

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Strategy so far –

Re-caps on

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— Strategy is a key ingredient of success for businesses, it cannot guarantee success, but it can improve the odds.

— Successful strategies embody:

-1. Clear, long-term goals.

2. Profound understanding of the external environment. 3. Astute appraisal of internal resources and capabilities. 4. Effective implementation.

— Strategy is no longer so concerned about detailed plans but more about the direction, identity and exploiting the sources of

superior profitability.

— Strategy must make clear the “where” and the “how”.

— Strategy should be a mix of rational design and emergent response.

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— The common denominator in entrepreneurial goals, vision and mission is the desire, and need, to create value.

— A business operates for multiple constituencies which can be classified using “stakeholder analysis”. Shareholders demand a “total return”; dividends plus capital gain.

— Performance analysis should incorporate forward-looking and

backward looking performance measures; it needs to identify sources of unsatisfactory performance and identify strategies to improve the financial performance of the business.

— Past performance provides guidance on internal resources and capabilities and sources of superior performance; strategy must

protect and enhance these determinants of success

— Performance targets need to be consistent with long-term goals

and link strategy with the relevant tasks and responsibilities of the business; objectives need to be SMART.

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—Three arguments why CSR is good for business are, The Sustainability Argument, The Reputation

Argument, and the Licence to Operate Argument. —CSR is about expanding the total pool of economic

and social value.

—Strategic CSR identifies the intersections between the interests of the business and society.

—Professional people should follow a simple set of ethical guidelines and avoid the pitfalls of ethical dilemmas.

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— Define the industry, Understand the Structure, Is the Industry attractive?

— Analyse using P5F and draw conclusions.

— Alleviate competitive pressure - Consolidate, Cut excess capacity, Build customer loyalty, Build barriers to entry, go for Architectural

Advantage

— Segment & Position in attractive “MASS” niche markets. Look for

Complements - monopolise, differentiate with shortage of supply — Prevent demand-side and seek supply-side substitution

— Identify KSFs and develop strategies that are unique within the industry

— Use Game Theory to predict outcome of competition & identify optimal strategic choices.

— Gather Competitive Intelligence to understand competition weakness, adopt Innovative Differentiation

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Session 4

Analysing

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Introducing Analysing Resources and Capabilities through:

-— Appraising Resources and Capabilities using Analytical Models

— Critical evaluation of a given organisation’s Resources and Capabilities as a foundation for Strategy Formulation

— Evaluation of the potential for a businesses Resources and capabilities to confer sustainable Competitive Advantage — Understanding the results of Resources and Capability

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Role of resources and capabilities in strategy formulation

“You gotta do what you do well”

Lucino Noto, Vice Chairman, ExxonMobil

Resources and capabilities are becoming more important because of:

-• The turbulence of the external environment • Competitive advantage is superior to industry

attractiveness as the source of superior profitability

MA (LPC with Business) STRATEGY MODULE

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—See figure 5.1, Grant, page 113, demonstrating the interface between strategy and the business.

—Honda makes motorcycles cars and aeroplanes – its core competence is manufacturing engines

—See figure 5.2, Grant, page 114 about Honda

—Due to rapidly shifting consumer taste product life cycles have become shorter; businesses need to launch new products on a regular basis; a core competence in the

technology makes the launching of new products less risky. —Disruptive technology is difficult to copy, finding a profitable

niche for the core competence may provide a successful strategy for survival.

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—If the business can dominate the market it may be able to establish superior profits (rents) as a monopoly, monopoly rents.

—In situations of fierce competition monopoly rents are

unavailable and a business must seek superior profitability through their internal resources and capabilities, they need to either excel or differentiate themselves against the

competitors; profits from superior resources are known as

Riccardian rents.

—Using the knowledge gained from P5F, it is sometimes clear that “power” and “barriers” arise from resources. It would make little sense to enter a new market if you did not have the resources and capabilities to compete within that market.

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— Resources are being productive assets owned by the business;

“resources” need to work together as a team; a factory is useless unless it is equipped with plant and machinery.

— Capabilities are the essence of superior performance.

— See figure 5.3, Grant, page 11 for the relationships between resources, capabilities and competitive advantage.

— We should start with our list of KSFs for the industry and identify the

resources and capabilities needed to deliver these.

— The KSF for a budget airline is low operating costs, ergo the airline needs the resources of fuel efficient planes, young,

motivated, non-union workers and the capabilities achieved though a culture of frugality.

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—These are normally classified into tangible, intangible and human resources

—Assets are listed in the company’s accounts but we are not interested in accounting values, we need to

understand composition and characteristics and contribution to superior profitability.

—A thorough re-appraisal may lead to two separate conclusions:

-—What opportunities exist for assets disposal? —What opportunities exist to deploy assets more

profitably?

—See strategy capsule 5.2, Grant, page 115 for an example of the application of this approach.

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— Intangible resources, such as brands and trademarks, can often be a powerful tool in providing superior profitability but these are normally not disclosed on a company’s balance sheet due to international accounting standards.

— Similarly intellectual property, patent, copyright, trade

secrets and artistic resources, all of which may be defined and protected in law, are not valued and disclosed.

— See tables 5.1 and 5.2, Grant, pages 119-120, four comparisons of market values and brand values.

— Businesses have become adept at utilising “brand value” through the concept of brand extensions, e.g., Nike shoes, clothing, and sports equipment and Mars chocolate and ice creams.

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— Modern businesses carefully select, train, nurture and

appraise their human resources and seek to establish long-term relationships with their employees.

— Empirical evidence links psychological and social attitudes to superior work, there is a trend to “hire for attitude; train for skills”. — Assessing performance as the quantity of tasks performed has

given away to an approach based on skill sets, content knowledge, attitudes and values towards superior performance, “competency modelling”.

— People working together, copy and learn from each other and

develop a distinct culture which acts to reinforce and disseminate competences throughout the business; the culture of the

business is a key resource.

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— The terms capabilities and competencies are interchangeable.

— Individuals who are highly capable are often referred to as “gifted”, many people know how to play tennis but the “gifted” players win the tournaments.

— An important required competence is the ability to effectively deploy the resources to work together.

— The term “core competencies” describes capabilities fundamental to a businesses strategy and performance:

-• Making a disproportionate contribution to customer value

• Providing a basis for entering new markets

— See table 5.3, Grant, page 122 for a classification of functional capabilities

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This provides us with a checklist for identifying capabilities

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— We may classify our capabilities into broad sub-headings

such as manufacturing, marketing, supply chain management, etc., however a proper understanding requires these to be

disaggregated (along the lines of the DuPont model approach).

— See strategy capsule 5.3, Grant, page 124 on the interaction of resources and capabilities and figure 5.6, Grant, page 126 great hierarchy of capabilities.

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—It is not enough to simply have resources and capabilities it is necessary to use these to create value:

-• Different elements will have significantly different strategic importance

• The important factor is how do we rate relative to our competitors and do we have significant competitive advantage?

—See figure 5.7, Grant, page 127 for an appraisal of “strategic importance”

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Strategic importance of resources and

capabilities

— To establish competitive advantage a resource or capability must be: -• Scarce

• Relevant to the KSF for the industry

— To sustain competitive advantage a resource or capability must be: -• Durable – provide advantage over the long-term

• Not easily transferred – otherwise it is easily imitated by the

competitors – raw materials are often found only at specific locations • Not easily replicated – no airline has ever replicated the superior

in-flight service of Singapore airlines

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— A lot of business culture is based upon symbols, myths and stories, past glories, hopes for the future and wishful thinking. —Benchmarking provides a systematic framework and

methodology for identifying particular functions and processes and then comparing their performance both internally and

against other businesses.

— See strategy capsule 5.4, Grant, page 130 for an interesting example of the returns available from superior capabilities.

— Benchmarking must be used carefully and selectively “what is good for the goose may not be good for the gander”.

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—See figure 5.8, Grant, page 131 for a framework for appraising resources and capabilities.

—Each business must ensure that its critical strengths are deployed to the greatest effect.

—Each business must compare itself against the competitors within the industry:

-• Businesses with few key strengths may need to adopt a niche market strategy.

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—If a business is incapable of doing it well itself then it should seriously consider outsourcing this particular function to someone who can do it better.

—Many businesses are loath to “abandon” resources

which might be cherished, by taking the long-term view businesses should be prepared to ditch areas which cannot be classed as “key strengths”.

—The implication is that strategies need to be formulated whereby a business outperforms every competitor in the industry in each function of the businesses’ activities

• Value chain analysis should identify areas that need significant improvement.

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—The process of disaggregation of activities and analysis through the value chain should highlight areas of the business which might have traditionally been regarded as key strengths, but in reality add little value.

—Superfluous strengths are a drain on capital resources and therefore need to be converted into these strategy differentiators or they should simply be abandoned.

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Resources and capabilities in an industry

context

—Businesses might find it difficult to determine the real value of resources and capabilities due to the “cultural baggage and misconceptions” established through the history of the business.

—Revisiting industry analysis and mapping this to the

value chain analysis and internal review might provide insight into new segments within the industry which

provide a better match to the specific key strengths of the business.

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— Competitive advantage is superior to industry attractiveness as the source of superior profitability — List KSFs for the industry and identify the resources and capabilities needed to deliver these — Core competencies

-• Make a disproportionate contribution to customer value • Provide a basis for entering new markets

— Porter’s value chain analysis needed

— Resources are tangible, intangible and human

— Resources include brands and trademarks, intellectual property, patent, copyright, trade secrets and artistic resources

— What opportunities exist for assets disposal and to deploy assets more profitably? — “hire for attitude; train for skills”.

— Resources need to be :

-• Durable, Not easily transferred, not easily replicated & Provide a return to the relevant stakeholder (appropriability)

— Benchmarking against competitors is a useful tool

— Ditch cultural baggage and misconceptions, be prepared to abandon

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Walmart has grown to be the world’s largest retailer and the world’s biggest business in terms of revenue.

In the fiercely competitive world of discount retailing what is the basis of Walmart’s competitive advantage? Understanding the basis of Walmart’s success requires careful analysis of the resources and capabilities that Walmart has built over time

Grant, Page 503

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Additional reading

Prahalad, C.K. and Hamel, G. (1990)

“The Core Competence of the Corporation“

Harvard Business Review May-June

pp. 79-91.

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MA (LPC with Business) Strategy

Session 3 Lecture

Anthony Komedera