Chapter 2 - Strategic Capability Flashcards
1.
The organization’s Resources
A Position Audit is undertaken in order to give strategic Managers a picture of the organization’s Strategic Capability, which is the Resources, Competences and the Constraints that limit their use.
1.1
Strategic Capability
Strategic Capability, which refers to enough and suitable Resources and Competences allows an organization to survive and prosper, Johnson et al 2005.
1.1
Position Audit
It is the part of the planning process that examines the current state of the business entity’s strategic capability, ie resources and competences.
1.2
Resources and Limiting Factors
A Resource Audit is a review of resources the organization uses.
Ms Model categories the factors and give examples as follows:
Resource: Machinery
Example: Age, Condition, Value, Replacement cost.
Resource: Makeup
Example: Culture and Structure, patents, goodwill, brands.
Resource: Management
Examples: Size, Skills, Loyalty, Career progression and Structure
Resource: Management Information
Example: Ability to generate and disseminate ideas, Innovation, information systems.
Resource: Markets
Examples: Specialized, Regional, National or International.
Resource: Materials
Example: Source, Suppliers and partnering, waste, new materials, cost, availability, future provision.
Resource: Men and Women
Examples: Number, Skills, Adaptability, Innovatory capacity, Labour turnover.
Resource: Methods
Example: How are activities carried out? Outsourcing, quality.
Resource: Money
Examples: Credit and turnover periods, Cash, Short term and long-term finance, Gearing levels.
A Unique Resource is better and difficult to imitate thereby giving competitive advantage.
1.3
Limiting Factors
Organizations operate under Resource constraints.
A Limiting Factor is a factor which at any time limit the activity of an entity, often where there is shortage, Rao 2003.
Examples of Limiting Factors
a) A shortage of production capacity.
b) A limited number of key personnel.
c) Lack of money
d) Too few managers with knowledge about finance.
Once Limiting Factors have been identified planners should do either of the following two:
a) Make best use of the available resources in the Short term.
or
b) Try to reduce the limitation in the long run.
1.4
Two approaches to Strategy
a) Position-based- Strategy
b) Resource-based Strategy
Position-based Strategy is when an organization responds to the external opportunities or threats it discerns from the competitive environment and develop appropriate competences and resources that enables it to gain competitive advantage.
Resource-based Strategy is when an organization gets competitive advantage through the use of unique Resources such as physical natural goods like diamonds or competences. Thus it focuses on internal factors, opposed to external.
1.5
Terminology
a) Strategic Capability- is the adequacy and suitability of Resources and Competences of an organization for it to survive and prosper.
b) Tangible Resources- are the physical assets of an organization, such as Plant, labour and finance.
c) Intangible Resources- are non-physical assets such as information, reputation and knowledge.
d) Competences- are the activities and processes through which an organization deploys its Resources effectively.
e) Threshold Capabilities- are those capabilities essential for the organization to be able to compete in a given market.
f) Threshold Resources and Threshold Competences are needed to meet customers minimum requirements and therefore for the organization to continue to exist.
g) Unique Resources and Core Competences underpin competitive advantage and are difficult for competitors to imitate or obtain.
Johnson et al 2005.
The Resource-based approach is the opposite to the marketing concept since, instead of approaching strategy on the basis of giving customers what they want, it concentrates on exploiting what the business already has to offer.
1.6
The importance of cost efficiency
Cost efficiency is the possession and efficient use of appropriate resources and the ability to manage or lower costs constantly.
- Customers are price sensitive.
- Most firms seek to lower down prices so as to offer better value to the customer.
1.7
Four sources of Cost Efficiency according to Johnson et al 2005.
1.7.1 Economies of Scale
1.7.2 Supply Costs
1.7.3 Design of Products and Processes
1.7.4 Experience
1.7.1 Economies of Scale
Economies of Scale do reduce costs per unit as the Scale of operations increases.
1.7.2 Supply Costs
These relates to transport costs of inputs and lower purchase prices.
1.7.3 Design of Products and Processes
Well designed and good business Processes are a source of cost efficiency. A product can be designed in such a way that maintenance costs will be lower.
1.7.4 Experience
As workers become more familiar with their jobs, they learn to do them more efficiently. Experience is the best teacher, as a process is repeated, there will be efficiency hence reduced costs.
2
Strategic Capability and Sustainable Competitive advantage.
There are 4 qualities of Strategic Capabilities according to Johnson et al 2005, namely:
a) They must produce effects that are Valuable to buyers.
b) They must be rare.
c) They must be Robust (Difficult for competitors to imitate)
d) They must be non-substitutable.
Porter’s Diamond Model suggests that some nations’ industries are more internationally Competitive than others.
2.1
The Importance of Customer needs.
Strategic Capability only exists when it contributes to the organization’s ability to satisfy it’s customer’s needs.
2.2
Rarity- They must be rare.
A single Unique Resource has the potential to create Competitive advantage by itself.
Examples are:
- Tangible Resource like Scarce valuable minerals.
- Intangible Resource like Copright ownership of a best selling novel.
- Core Competences in fields like extinguishing oil.
2.3
Robustness- They must be Robust
These are resources that are difficult to imitate or copy according to Johnson et al 2005.
2.4
Non- Substitutability - They must be not substituted.
These are products that are very difficult to substitute by other products from different Industries.
2.5
Hyper-Competition and Dynamic Capabilities
Under Hyper-Competition environment, market changes rapidly, and firms must possess Dynamic Capabilities in order to cope.
Dynamic Capabilities are an organization’s abilities to develop and change competences to meet the needs of rapidly changing environments, Johnson et al 2005.
Such Capabilities demand the ability to change, inovate and to learn.
2.6
Porter’s Diamond
The Competitive advantage of nations.
Porter’s Diamond Model is relevant to business expansion and investment into a different country.
Porter’s Diamond has four Principal determinants:
a) Factor Conditions
b) Firm Strategy, Structure, Rivalry
c) Demand Conditions
d) Related and Supporting Industies.
Porter believe that Conditions within a country may help firms to compete.
DIAMOND MODEL
Firm Strategy,
Structure, Rivalry
Factors Conditions. Diamond
Conditions
Related and
Supporting Industries
2.7
Analyzing the Diamond
2.7.1 Factors Conditions
Factors Conditions are a country’s endowment of inputs to production like:
a) Human resources (Skills, price, motivation, industrial relations)
b) Physical resources (Land, Minerals, climate, location)
c) Knowledge ( Scientific and Technical know-how, educational institutions)
d) Capital (Amount available for investment, how it is deployed)
e) Infrastructure (Transport, Communications, housing)
Porter’s 1990 distinguishes between Basic Factors and Advanced Factors.
Basic Factors.
Natural resources, climate, semi skilled and unskilled labour. These are inherent and are widely available.
Advanced Factors
These are associated with well developed Scientific and technological infrastructure, highly educated people, university laboratories etc.
Efficiency with which the Factors are deployed is more important than just having abundance of them.
2.7.2
Demand Conditions: The Home Market
The home market determines how firms perceive, interpret and respond to buyer needs. Firms are encouraged to be innovative and have global ambitions.
a) No cultural impediments to communication.
b) Companies will be successful globally in segments which are similar to the home market.
c) Sophisticated and demanding home buyers set high standards that will enable the firms to compete on the international market.
d) If consumer needs are communicated in the home market earlier, the firm gets experience on the world market.
f) Slow growing home markets rarely adopt technology.
g) Early saturation of the home market encourages firms to export to international markets.
2.7.3
Related and Supporting Industries
Competitive success in one industry is linked to succes in related industries.
2.7.4
Firm Strategy, Structure, Rivalry
This refers to management style and industrial structure. Nations display competitive advantage in industries that are culturally suited to their normal management practices and industrial structures.
a) National Capital Markets set different goals for performance. In Germany and Switzerland, banks are the main source of Capital, and not equity shareholders.
b) National attitudes to wealth are important.
c) National Culture affects industries. Italy values fashion and furnishings.
Domestic Rivalry is important:
- With little Domestic Rivalry, firms are happy to rely on the home market.
- Tough Domestic rivals teach a firm about competition.
- Domestic Rivalry forces firms to compete.
- Each Rivalry can try a different strategic approach.
2.8
Influencing the Diamond
A nation’s industries tend to be clustered. Porter 1990 believes clustering to be key to national competitive advantage.
A cluster is a linking of industries through relationships that are either (buyer-Supplier) or horizontal (common customers, technology and skills.)
One famous Cluster is the High-tech cluster around Silicon Valley in California where we have high-tech innovators like: Apple, Google, Facebook and eBay. In this area we have Stanford University that provides new graduates in high-tech specialisms. We also have highly skilled workers with expertise in technology and innovation in Silicon Valley.
How does a country create a Diamond of competitive advantage?
Only firms can compete and not the Government.
a) Factors of production provide the basis for a given industry.
b) Related and Supporting Industries can also be a foundation.
c) Government should support cluster development, promote high standards of education, research and relevant technologies.
Government can also attract investments through good tax policies.
d) Extraordinary demand in the home market and conditions can set the demand conditions in the Diamond.
A firm can take a number of steps to succeed:
1) Compete in the most challenging market, to emulate domestic Rivalry and obtain information. This results in it being able to compete anywhere.
2) Spread research and development activities where there is an established cluster and research base.
3) Invest heavily in innovation.
4) Invest in Human resources for the firm and industry through training.
5) Look out for new technologies.
6) Collaborate with foreign companies, learn production techniques from other developed countries.
7) Supply overseas companies with say quality components.
8) Source quality components from overseas and produce finished goods.
9) Exert pressure on politicians to create better conditions for the Diamond to develop eg in education.
NB: Only apply Models that are relevant to scenarios, that is what earns marks.
2.9
Knowledge Management
Knowledge Management is the process by which organizations generate value from their intellectual and Knowledge based assets. This involves:
a) Discovering or identifying Knowledge.
b) Capturing Knowledge
c) Sharing Knowledge
d) Distributing Knowledge
e) Using Knowledge
f) Maintaining Knowledge
Knowledge Management has three phases namely:
1) Capture
2) Record
3) Disseminate or Distribute.
Knowledge is an important resource and is a competence.
2.9
Knowledge Management
Knowledge Management is the process by which organizations generate value from their intellectual and Knowledge based assets. This involves:
a) Discovering or identifying Knowledge.
b) Capturing Knowledge
c) Sharing Knowledge
d) Distributing Knowledge
e) Using Knowledge
f) Maintaining Knowledge
Knowledge Management has three phases namely:
1) Capture
2) Record
3) Disseminate or Distribute.
Knowledge is an important resource and is a competence.
2.9
Knowledge Management
Knowledge Management is the process by which organizations generate value from their intellectual and Knowledge based assets. This involves:
a) Discovering or identifying Knowledge.
b) Capturing Knowledge
c) Sharing Knowledge
d) Distributing Knowledge
e) Using Knowledge
f) Maintaining Knowledge
Knowledge Management has three phases namely:
1) Capture
2) Record
3) Disseminate or Distribute.
Knowledge is an important resource and is a competence.
2.10
Organizational Learning
Organizational Knowledge is the collective and shared experience accumulated through systems, routines and activities of sharing across the organization. Johnson et al 2005.
Organizational learning is important in the increasing number of task environments that are both dynamic and complex.
The aim of Knowledge management is to exploit existing knowledge and to create new knowledge.
Tacit knowledge is untapped knowledge from people who do not realize its value or achives.
2.11
Managing Explicit Knowledge
2.11.1 Data, Information and Knowledge
Data - consists of facts, opinions, reactions and beliefs.
Information- Is processed Data that is organized in some useful way.
Difference between Information and Knowledge.
Knowledge is useful original context while Information is useful outside of it’s original context of a department eg accounts department.
2.11.2
Other ideas about knowledge.
Individuals aquire Knowledge through:
a) Education and training
b) Experience of work
c) Observation of others
d) Informal exchanges such as brain storming.
According to Davenport and Prusak 1998, People create Knowledge from information by four processes namely:
1) Comparison with earlier experience
2) Consequences- The implication of information
3) Connections - Relations between items
4) Conversation- Discussions with others.
2.11.3
Knowledge Management (KM) Systems
Knowledge must be managed in a way that makes it easily available.
Explicit Knowledge is Knowledge that is widely distributed.
Tacit Knowledge exists within individuals’ brains and is not readily available.
a) Office automation systems are IT applications that improve productivity in an office.
b) Group ware such as Google Sheets provides functions for collaborative work groups like messaging, to do lists etc.
c) An intranet is an internal network used to share information using internet technology and protocols. Each employee uses a browser to access a Server computer that holds corporate information like, Newspapers, induction material, procedure and policy manuals and internal database.
It is much easier to update information in electronic form.
When an Intranet is extended to trusted external agencies such as Suppliers and Customers, it becomes an Extranet.
d) An Expert system is a computer system that captures human expertise in a limited domain of knowledge.
Financial Institutions use the expert system to process loan applications.
The user enters key facts into the expert system like: Name, address, income, details of other loans and the system will compare this with:
1) previous records in the database in order to see track record.
2) Perform calculations to whether applicant can afford to repay the loan.
3) Make a judgment
4) A decision is then suggested based on the results of the processing.
e) IT can be used to store vast amounts of data in accessible form.
A data warehouse receives data from operational systems, such as sales order processing system.
f) The value of data warehouse is enhanced when data mining software is used. Data mining is a contribution to organizational learning.
2
Summary
Johnson et al 2005 suggest Strategic Capabilites must have 4 qualities:
a) Value to buyers
b) Rarity
c) Robustness (Difficult for competitors to imitate)
d) Non-Substitutability
Under conditions of Hyper-Competition, organizations must possess dynamic Capabilites: ie the ability to develop and adjust competences to cope with rapidly changing environmental pressures.
Porter’s Diamond Model identifies four determinants of national competitive advantage as:
a) Factor Conditions
b) Demand Conditions
c) Firm Strategy, Structure, Rivalry
d) Related and Supporting Industries.
Knowledge Management is concerned with Capturing, Organizing and Distributing Knowledge.
- Converting Resources: The Value Chain
The Value Chain Model was developed by Porter 1985 and it includes the main activities of the bud and linkages between them.
3.1
Value Activities
Value Activities are the means by which a firm creates value in its products.
Customers purchase the Value which they measure by comparing a firm’s product with other offerings.
