Grant Textbook 4E

7/29/2019 Grant Textbook 4E

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SBS-EM

Contemporary Strategy

Analysis, 6th edition, R.M.

Grantsummary

Jerome Derycke

2009-2010

This document summarizes only the chapters spotted by professor P. Verdin: chapters 1, 2, 3, 5, 7, 8, 9 and

16


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Contents1) Chapter1: The concept of Strategy (pg3) .....................................................................................................7

a. The role of Strategy in Success .................................................................................................................7

i. Goals that are simple, consistent and long term .................................................................................7

ii. Profound understanding of the competitive environment ..................................................................7

iii. Objective appraisal of resources ..........................................................................................................7

iv. Effective implementation .....................................................................................................................7

b. The basic framework for Strategy Analysis ..............................................................................................7

i. Whats wrong with SWOT?...................................................................................................................8

ii. Strategic fit ...........................................................................................................................................8

c. A brief history of business Strategy ..........................................................................................................8

i. Origins and military antecedents .........................................................................................................8

ii. From corporate planning to strategic management ............................................................................8

d. Strategic Management today ...................................................................................................................9

i. What is strategy? ..................................................................................................................................9

ii. Corporate and business strategy ..........................................................................................................9

iii. Describing a firm strategy .....................................................................................................................9

iv. How is strategy made? Design Vs. Emergence .....................................................................................9

v. Multiple roles of strategy .................................................................................................................. 10

e. The role of analysis in strategy formulation .......................................................................................... 10

f. Summary ................................................................................................................................................ 11

g. Self-study questions .............................................................................................................................. 11

2) Chapter2: Goals, values and performance ................................................................................................ 11

a. Introduction and Objectives .................................................................................................................. 11

b. Strategy as a Quest for Value ................................................................................................................ 11

i. In whose interest? Shareholders vs. Stakeholders ............................................................................ 11

ii. What is profit? ................................................................................................................................... 12iii. From accounting profit to economic profit: pg 37-38 ....................................................................... 12

iv. Linking profit to enterprise value: pg 39-40 ...................................................................................... 12

v. Applying DCF Analysis to valuing companies, businesses and strategies ......................................... 12

c. Strategy and Real Options ..................................................................................................................... 12

i. Calculating real option value ............................................................................................................. 13

ii. Strategy as Options management ..................................................................................................... 13

d. Putting Performance Analysis into Practice .......................................................................................... 13

i. Appraising current and past performance ........................................................................................ 14


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ii. Performance diagnosis ...................................................................................................................... 14

iii. Evaluating alternatives strategies ..................................................................................................... 15

iv. Setting performance targets ............................................................................................................. 15

e. Beyond profit: Values and Social responsibility .................................................................................... 16

i. The paradox of profit ......................................................................................................................... 16

ii. Values and principles ......................................................................................................................... 17

iii. The debate over corporate social responsibility ............................................................................... 17

f. Summary pg 61 ...................................................................................................................................... 17

g. Self-study questions .............................................................................................................................. 17

3) Chapter3: Industry Analysis: The fundamentals........................................................................................ 17

a. Introduction and objectives .................................................................................................................. 17

b. From environmental analysis to industry analysis ................................................................................ 18

c. The determinants of industry profit: demand and competition ........................................................... 18

d. Analyzing industry attractiveness .......................................................................................................... 18

i. Porters five forces of competition framework ................................................................................. 19

ii. Competition from substitutes ........................................................................................................... 20

iii. Threat of entry ................................................................................................................................... 20

iv. Rivalry between established competitors ......................................................................................... 21

v. Bargaining power of buyers............................................................................................................... 22

vi. Bargaining power of suppliers ........................................................................................................... 23

e. Applying industry analysis ..................................................................................................................... 23

i. Describing industry structure ............................................................................................................ 23

ii. Forecasting industry profitability ...................................................................................................... 23

iii. Strategies to alter industry analysis structure ................................................................................... 23

f. Defining industries: where to draw the boundaries ............................................................................. 23

i. Industries and markets ...................................................................................................................... 23

ii. Defining markets: substitution in demand and supply ..................................................................... 24

g. From industry attractiveness to competitive advantage: identifying key success factors ................... 24

h. Summary page 93-94 ............................................................................................................................. 25

4) Chapter5: Analyzing resources and Capabilities ....................................................................................... 25


b. The role of resources and capabilities in strategy formulation ............................................................. 25

i. Basing strategy on resources and capabilities ................................................................................... 26

ii. Resources and capabilities as sources of profit ................................................................................. 26

c. The resources of the firm ...................................................................................................................... 26


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i. Tangible resources ............................................................................................................................. 27

ii. Intangible resources .......................................................................................................................... 27

iii. Human resources ............................................................................................................................... 27

d. Organizational capabilities .................................................................................................................... 28

i. Classifying capabilities ....................................................................................................................... 28

ii. The architecture of capability ............................................................................................................ 29

e. Appraising resources and capabilities ................................................................................................... 30

i. Establishing competitive advantage .................................................................................................. 30

ii. Sustaining competitive advantage .................................................................................................... 30

iii. Appropriating the returns to competitive advantage ....................................................................... 31

f. Putting resource and capability analysis to work: a practical guide ..................................................... 31

i. Step1: Identify the key resources and capabilities ............................................................................ 31

ii. Setp2: appraising resources and capabilities .................................................................................... 31

iii. Step3: developing strategy implications ........................................................................................... 32

g. Developing resources and capabilities .................................................................................................. 33

i. The relationship between resources and capabilities ....................................................................... 33

ii. Replicating capabilities ...................................................................................................................... 33

iii. Developing new capabilities .............................................................................................................. 33

iv. Approaches to capability development............................................................................................. 34

h. Summary ................................................................................................................................................ 35

i. Appendix: knowledge management and the knowledge-based view of the firm See Page 159 .......... 35

i. Types of knowledge ........................................................................................................................... 35

ii. Types of knowledge process .............................................................................................................. 35

iii. Knowledge conversion ...................................................................................................................... 35

iv. Conclusion ......................................................................................................................................... 35

5) Chapter7: the nature and sources of competitive advantage .................................................................. 35


b. The emergence of competitive advantage ............................................................................................ 36

i. External sources of change ................................................................................................................ 36

ii. Competitive advantage from responsiveness to change .................................................................. 36

iii. Competitive advantage from innovation: New game strategies ................................................... 37

c. Sustaining competitive advantage ........................................................................................................ 37

i. Identification: obscuring superior performance ............................................................................... 38

ii. Deterrence and preemption .............................................................................................................. 38

iii. Diagnosing competitive advantage: causal ambiguity and uncertain imitability ....................... 38


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iv. Acquiring resources and capabilities ................................................................................................. 38

v. First-mover advantage....................................................................................................................... 38

d. Competitive advantage in different market settings ............................................................................ 38

i. Efficient markets: the absence of competitive advantage ................................................................ 39

ii. Competitive advantage in trading market......................................................................................... 39

iii. Competitive advantage in production markets ................................................................................. 40

e. Types of competitive advantage: cost and differentiation ................................................................... 40

f. Summary page 220 ................................................................................................................................ 41

6) Chapter8: Cost advantage ......................................................................................................................... 42


b. Strategy and cost advantages ................................................................................................................ 42

c. The sources of cost advantage .............................................................................................................. 42

i. Economies of scale ............................................................................................................................ 43

ii. Economics of learning ....................................................................................................................... 44

iii. Process technology and process design ............................................................................................ 44

iv. Product design ................................................................................................................................... 44

v. Capacity utilization ............................................................................................................................ 45

vi. Input costs ......................................................................................................................................... 45

vii. Residual efficiency ......................................................................................................................... 45

d. Using the value-chain to analyze costs .................................................................................................. 45

i. The principal stages of value chain analysis ...................................................................................... 45

e. Summary ................................................................................................................................................ 46

7) Chapter9: Differentiation advantage ........................................................................................................ 46


b. The nature of Differentiation and Differentiation advantage ............................................................... 46

i. Differentiation variables .................................................................................................................... 46

ii. Differentiation and segmentation ..................................................................................................... 47

iii. The sustainability of differentiation advantage ................................................................................ 47

c. Analyzing Differentiation: The demand side ......................................................................................... 47

i. Product attributes and positioning (see page 246 for details) .......................................................... 47

ii. The role of Social and Psychological factors ...................................................................................... 47

d. Analyzing Differentiation: The supply side ............................................................................................ 48

i. The drivers of uniqueness ................................................................................................................. 48

ii. Product integrity ................................................................................................................................ 48

iii. Signaling and Reputation ................................................................................................................... 49


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iv. Brands ................................................................................................................................................ 49

v. The costs of Differentiation ............................................................................................................... 49

e. Bringing it all together: the value Chain in differentiation Analysis ...................................................... 49

i. Value chain analysis of producer goods ............................................................................................ 50

ii. Value chain analysis of consumer goods ........................................................................................... 50

f. Summary ................................................................................................................................................ 51

8) Chapter 16: Managing the Multibusiness Corporation ............................................................................. 51


b. The structure of the Multibusiness Company ....................................................................................... 51

i. The theory of the M-form ................................................................................................................. 51

ii. Problems of divisionalized Firms ....................................................................................................... 52

c. The role of Corporate Management...................................................................................................... 52

d. Managing the corporate Portfolio ......................................................................................................... 52

i. GE and the development of strategic planning ................................................................................. 52

ii. Portfolio planning: the GE/McKinsey Matrix ..................................................................................... 53

iii. Portfolio planning: BCGs growth-share matrix ................................................................................. 54

iv. Value Creation through corporate restructuring .............................................................................. 54

e. Managing Individual businesses ............................................................................................................ 55

i. The strategic planning system ........................................................................................................... 55

ii. Performance control and the budgeting process .............................................................................. 55

iii. Balancing strategic planning and financial control ............................................................................ 55

iv. Using PIMS in strategy formulation and performance appraisal ...................................................... 56

f. Managing Internal Linkages ................................................................................................................... 56

i. Common corporate services .............................................................................................................. 56

ii. Business linkages and Porters corporate strategy types .................................................................. 56

iii. The corporate role in managing linkages .......................................................................................... 57

g. Leading Change in the Multibusiness Corporation ............................................................................... 57

h. Summary ................................................................................................................................................ 58


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Part1-Introduction

1)Chapter1: The concept of Strategy (pg3)a. The role of Strategy in Success

The book goes through 3 very different cases: Madonna, Vietnam war (North Viet Vs. US), Lance Armstrong

and the Tour de France. Here are the common points highlighted:

i. Goals that are simple, consistent and long termMadonna: being a superstar

ii. Profound understanding of the competitive environmentUS and South Vietnam were not defeated by superior resources, but by superior Strategy! (US and South

Viet have a far larger army!): North Viet won because their enemy gave up! They undermined us will to win

by playing on the political field: supporting peace movements in us, and separating the US from theirwestern allies. Besides, the US has no clear aim: supporting South Viet? Fighting Vietcong Terrorists?

Combating World Communism? Confusion: who is the enemy? What does the war underlie? in this

context it is not possible to keep LT strategy

iii. Objective appraisal of resourcesExploit internal strength and protect areas of weakness

iv. Effective implementationWithout implementation, the best strategy is not very useful

b. The basic framework for Strategy AnalysisWe take the 4 previous points and sort them into 2 categories: the firm environment and the industry one.

Simple, consistent,

LT goals

Profound

understanding of thecompetitive

environment

Objective appraisal

of resources

Effective implementation

Successful Strategy

-Goals

-Resourcesand

capabilities

-Structure

-competitors

-customers

-suppliers

Strategy

Industry environmentFirm environment


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The task of the business Strategy is to determine how the firm will deploy its resources within the

environment and so satisfy its LT goals, and how to organize itself to implement that strategy.

i. Whats wrong with SWOT?Is it better to use a 2-way distinction (cf supra) between internal and external influences or a 4-way SWOT

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taxonomy? The categorization into 4 groups is a bit arbitrary and does not always fit to reality since a factor

can be sort both as a strength and a weakness for example. So the most important is to identify internaland external factors, and then think deeply about their implications.

ii. Strategic fitTo make a strategy successful, the latter has to be consistent with-to fit with both external and internal

environment.

c. A brief history of business Strategyi. Origins and military antecedents

Strategy = the overall plan for deploying resources to establish a favourable position Tactics = a scheme for a specific action

ii. From corporate planning to strategic managementAt the beginning, we made forecasts about the total demand, our market shares, and then we estimate our

production capacity, the costs encountered, the necessary investments, etc... That was corporate planning.

But after 2 oil crisis it turns out that with such moving world it was not possible anymore to forecasts

everything. We had then, to move to Strategic management that focuses less on details such as setting the

number of machines we will have to buy, etc...Now, we focus on competition and competitive advantage,

positioning on the markets...

Then, shift from analyzing external environments to analysing company resources: focus on what we arerather than aiming at the most attractive markets. Porter: Competitive Strategy is about being different. It

means deliberately choosing a different set of activities to deliver a unique mix of value

The internet technology and other technologies are now the important drivers for opportunities and threats.

The uncertainty that resulted from all this technology makes the purpose of the strategy not only being the

quest for profit, but also the management of uncertainty: real option and flexibility.

Figure 1.3 page 18 summarizes the history

1Swot : strengths & weaknesses (internal), opportunities & weaknesses (external)


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d. Strategic Management todayi. What is strategy?

ii. Corporate and business strategy

The purpose of the Strategy is to achieve certain goals, for a company the goal is to survive or prosper, which

means, having rate of return on capitals > to cost of capital. There are two ways to achieve this; you canmove to an attractive market with high rates of return, or you could attain a position in an industry so that

you earn superior rate of return than the average of the industry.

Corporate Strategy: the scope is the industry; it concerns investment in diversification, verticalintegration, acquisitions, allocation of resources among the businesses... Domain selection:where to compete?

Business Strategy (= competitive Strategy): how the firm competes within the industry, competitiveadvantage... Domain Navigation: how to compete?

These 2 notions are closely linked and may depend on each other.

iii. Describing a firm strategyWhere to find a firm strategy? (Strategy is in top managers minds, but we are not mind readers)

Start-up? In the business plan Big enterprise? In its Vision, but it might be too idealized. In its Mission

In its Business Model, it is a statement of the basis on which a business will generate profit. It is a

preliminary to a Strategy

In its Strategic plans, it documents the strategy in terms of performance goals, approaches to achieve

these goals...

iv. How is strategy made? Design Vs. EmergenceAccording to Mintzberg, there are 3 ways of making a strategy:

Intended strategy: it is decided by the top management, it is a process of bargaining, negotiationsand compromises involving many people and groups

Realized strategy: thats the actual strategy, only partly related to the intended strategy Emergent strategy: the decision that emerges from the complex process in which individuals

managers interpret the intended strategy and adapt it to circumstances

Rate of return > cost ofcapital (how do we

make money?)

Industry attractiveness(which industries should

we be in?)Corporate Strategy

Competitive advantage(how should we

compete?)Business Strategy


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The debate is about whether the Strategy is something deliberately planned or something that comes out a

complex process of organizational decision making.

Mintzberg argues that analytical approaches to design strategy are a poor way of designing it: the strategy is

closely linked to the day-to-day management and there is a lot to learn from the continuous interaction

between Strategy Formulation and Strategy implementation, where Strategy is constantly being adjusted.

Bref, Strategy is made through a combination of design and emergence: strategy is made at boards level, but

also at the middle management level where it is interpreted: it is a condition for a maximized responsiveness

and adaptability Vs. Rigid imposed Strategy that does not fit every specific circumstances met by middle

managers.

Strategy planning combines top-down and bottom-up strategy making it leads to planned

Emergence.

So the idea is to provide guidelines from the top to down, and let the down interpret these in an adaptive

and innovative ways. (Decentralized decision making)

The balance between design and emergence depends on the stability of the external environment, the more

uncertain is the environment, and the more emergent should be the strategy.

v. Multiple roles of strategyStrategy making is part of the management process and plays multiple roles within the organizations:

1. Strategy as Decision Support Strategy simplifies decision making by constraining the range of decision alternatives: human

rationality is limited!

A strategy-making process is a reflexion on-and a process that integrates the knowledge of differentindividuals

A strategy-making process helps the use of analytical tools2. Strategy as a coordinator device

It is a communication device that allows the ceo to communicate goals, company's identity...

The strategic planning process enables everyone to participate: views are exchanged and consensus are

developed

The implementation of the strategy also ensures that the organization moves forward in a consistent

direction

3. Strategy as targetIt is no enough to establish a direction for the development of the firm, the strategy has also to set

aspirations that can motivate and inspire the members of the organization

Some says Strategy does not necessary have to fit existing resources of the company, there can be a gap

between ambitions and resources: then strategy plays the role of resource leverage and for the organization

it is a challenge to close the gap by building new competitive advantages.

e. The role of analysis in strategy formulationThe analytic techniques are there to help us identify, classify and understand the principal factors relevant to

strategic decisions. It guides us to the questions we need to answer and this analytical approach is no


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substitute for creativity, intuition, etc...But an important complement, an important input in the strategy

formulation.

f. SummaryStructure of the book page 28

g. Self-study questions

Part2-The tools of strategy Analysis

2)Chapter2: Goals, values and performancea. Introduction and Objectives

In the book we assume that the primary goal of the firm is to maximize profit over the long term: Business

strategy is then a quest for profit. But the successful businesses are the ones driven by their ambitions other

than profit. Profit is the life-blood but it is not what motivates people: important to link business to the

missions it pursues.

b. Strategy as a Quest for ValueBusinesses are about creating value; for the customer first, and then try to extract some of that value in the

form of profit.

Value through production: transformation of products that become more valuable to customers Value through commerce: transfer a product to one place to another one where it is more valuable.

i. In whose interest? Shareholders vs. StakeholdersIt is a long debate. But Grant assumes that companies operate in the interests of their shareholders, their

owners (English speaking countries approach) by maximizing long term profit. Why?

Competition: the competition makes the interests of stakeholders converging to a common goal:survival. And survival requires in the long term, rates of returns > cost of capital. If competition is

harsh, the only way is profit seeking.

The market for corporate control: Management teams that fail to maximize profit are replaced byothers: there is a pressure on board directors to improve shareholder returns.

Convergence of stakeholder interests: Long-term profitability requires employees loyalty, trustingrelationships with suppliers and customers and support from government and communities, etc...

Simplicity: stakeholder approach implies high level of complexity and the basic tools are designedfor profit maximization.

analysis of industry and competition

ch3-industry analysis: the fundamentals

analysis of the firm

ch2-goals, values and performance

ch5-analyzing resources and capabilities


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But we know that a profit is not the sole motivation driving businesses, changing the world is a very

important one among others. But goals other-than-monetary requires financial success to be achieved.

ii. What is profit?It is the surplus of revenues over costs available for distribution to the owners of the firm. But...

Maximizing total profit or rate of profit? Percentage of sales? (ROS) Total assets? (ROA) orshareholders equity? (ROE)

Over what time of period? Quarterly? Annual? How to measure profit? Be aware of the accounting practices, depending on firms, countries...

iii. From accounting profit to economic profit: pg 37-38iv. Linking profit to enterprise value: pg 39-40

We calculate NPV of return to company assets. The value of the firm is the sum of its discounted cash flows.

Cash flow is relevant, accounting revenues are not.

Maximizing enterprise value and shareholder value means the same thing in the perspective of strategy

analysis.

v. Applying DCF Analysis to valuing companies, businesses and strategiesSame methods used for business and firms valuation can be used for strategy valuation: forecast the cash

flows related to each alternative strategy and choose the one with the highest NPV. This approach implies

some steps:

Identify strategy alternatives Estimate the cash flows associated with each strategy Estimate the implication of each strategy for the cost of capital, taking into account risk and

financing implications

Select the strategy that generates the highest NPV(Refer to advanced finance for discussions on NPV).

It is simple in theory but in practice it is hard to apply; Cash flow forecast, unpredictability of future business

conditions, linking specific cash flows with a strategy is doubtful, ...

A strategy is more consistent with product introductions, output levels, prices and investments in new

plants.

Qualitative approaches may be better for Strategy

Strategy as a portfolio of options rather than investments.

c. Strategy and Real OptionsReal option analysis as a new field of finance gives important implications for Strategy.

You can make an investment that at first does not look like to yield profits for shareholders, but those

investments may be an option on further markets or investments. For instance, you invest in renewable

energies because it has an option value; you invest to be a leading player in alternatives energy for the timewhen a conflict or a crisis strikes in the oil market or regulation.


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Once made, investments are irreversible, and in a world of uncertainty, flexibility is valuable.

Thats why you split a project into phases, so at the end of each phase you see if you go onto the next one or

not, depending on the new circumstances.

i. Calculating real option valueThe techniques are quiet complex and it might be a problem for the analyst. But the underlying idea is

straightforward. This is the 4 stage process of McKinsey to value flexibility in a process (can be applied to

business strategy)

Apply a standard DCF analysis to the project without taking account of any flexibility options Model uncertainty in the project using event trees. This requires identifying the key uncertainties

facing the project at each point of time and identifying the cash flows associated with different

outcomes.

Model flexibility using a decision tree. Identify the key managerial decisions with regard to flexibilityat each stage of the development of the project in order to convert the event tree into a decision

tree. Flexibility may relate to abandonment, deferring investment, or changing the scale of theproject.

Estimate the value of flexibility. For this, the following two approaches can be usedo Real option valuationo Decision trees

ii. Strategy as Options managementCreating options, by increasing the strategic flexibility of the firm, increases the firms value.

It is critical to compare the flexibility costs to the option value that such flexibility creates.

Plants that can produce a large variety of products are more valuable than specialized plants for instance.

For complete strategies, so not just for a single project, creating option value means positioning the firm in a

way it has numerous possible opportunities. Example:

Platform investments: it creates a stream of additional options Strategic alliances and joint ventures: limited investments that offer options for the creation of

whole new strategies.

Organizational capabilities: if a knowledge, an asset can offer multiple business opportunities. Forinstance, the skills in miniaturization can help in CD screens, solar Cells, PDAs...

d. Putting Performance Analysis into PracticeProfit maximization is convenient and reasonable assumption for the purpose of strategy formulation

Profit can be measured in many different ways

DCF valuation underestimates values when there are important option values

Using value maximization as a basis for selecting an optimal strategy is difficult: hard to forecast cash flows,

real option approach is complex and we lack information

Given these, how should we use financial analysis in Strategy? 4 points:


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i. Appraising current and past performanceThe first thing to do in strategy formulation is to assess current situation; identify current strategy and its

financial performance. Then diagnose: identify the sources of problems.

Forward-looking performance measures: stock market valueWe look at the stream of profit (Cash Flow) over the rest of the firms life. For public companies we can use

stock market price to evaluate strategy and management team performance. But 1) the information in stock

price is imperfect and 2) expectations about a firms future revenues is volatile and depend on external

factors (global economy...)

Backward-looking performance measures: Accounting ratiosGiven the problems linked to stock price as an indicator, we prefer accounting and financial ratios and these

are historical. Commonly used performance indicators:

ROIC: return on invested capital ROE: measure the profitability for shareholders of the capital that shareholders have brought ROA Gross margin: measure the extent to which a firm adds value to the goods and services it buys in Operating margin: measure the ability to extract profit from its sales Net margin: idem

Be aware of the possible bias and use several indicators to validate their consistency.

ii. Performance diagnosisIf we face poor performance, we have to identify the sources of this problem: we disaggregate the return on

capital employed to spotlight the problems


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You combine this information with qualitative information on business strategy, operations, product

strategy, organizational issues faced, and the condition of the world market and then you can try to

formulate hypothesises on explanations of the problems/successes identified. After that you can identifymeasures to be taken.

Good example of the use of this disaggregation page 48-49

iii. Evaluating alternatives strategiesIf a firm underperforms, the main priority for strategy is to address these sources of deficient performance.

If the firm is in very bad situation, then strategy goal is to adopt short-term orientation.

If a firm performs well, we should not say ok, there is nothing to change and strategy has to prepare the

business for changing market and competitive conditions.

Because forecasting cash flows is difficult, qualitative analysis such as industry trends, product market

conditions and sources of competitive advantage can be a good basis for strategy formulation.

iv. Setting performance targetsIf to the overall firm maximizing enterprise value is meaningful, it is totally meaningless for managers down

the hierarchy: set targets that are specific to the departments and meaningful for the managers match

performance target with the variables managers can control.

ROCE (ROIC)

return on sales

cost of goodssold/Sales

depreciation/sales

Sales, general andadministrative

expenses/ sales

sales/capitalemployes

fixed asset turnover(Sales/ plant, property

and equipment)

inventory turnover(sales/inventories)

creditor turnover(sales/receivables)

turnover of otheritems of working

capital


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We can use the disaggregate principle here, to identify where the problems lie.

Balanced scorecardsThe general problem with system of performance management is that goals are long-term while it has to be

monitored over the short-term. The scoreboard is a method to make sure that the pursuit of financial goals

is not at the expense of long-term strategic position: it helps balance financial and strategic goals and the

performance measurement is expanded down the firm (business units...)

How do we look to shareholders? How do customers see us? What must we excel at? Can we continue to improve and create value?

Full example page 52.

e. Beyond profit: Values and Social responsibilityi. The paradox of profit

The most profitable companies are the one that have other goals than enterprises value maximization:

other factors play major roles; a strong vision, an idea, a motivation to change something. Why?

A strategic goal (everyone will have a car), leads a company to direct its efforts towards the sources of

competitive advantage within its industry

Motivation: the goal of maximizing shareholders value is unlikely to motivate employees, to induce a good

cooperation, ...


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Profits are to business as breathing is to life, it is essential but it is not what you live for. (But without long-

term profitability, you cannot reach any of your goals, thats why in the book they make the assumption of

LT profit seeking, even if it goes with sustainable environment)

ii. Values and principlesThe pursuit of the financial goal is likely to be constrained by employees values, ideals and principles for

instance.

Values and principle is not only image management, it transcends the pursuit of profit and even impact the

behaviour of employees, their propensity to collaborate...

Values complement the vision: put together core ideology and vision and you get a powerful sense of

strategic direction.

So strategy is also about creating purpose and unifying the energy and creativity of organizational members

in pursuing that purpose.

iii. The debate over corporate social responsibilityValues and principles may conflict with commercial interests.

Plus, personal interests of the CEO may lead to spend owners money to serve general social interest. Two

different conceptions

The property conception The social entity conception

But one says toward the property conception that today shareholders are not anymore owners that run the

company (vs. 19th

century), they are just investors. It is important to reward shareholders, but companies

live to do something better or different than anyone else.

The company is a living organization whose lifespan depends on its ability to adapt itself to the environment.

And this can only be achieved through close interactions and supportive relations with the stakeholders.

In the long-term, shareholders and stakeholders interests converge.

f. Summary pg 61g. Self-study questions

3)Chapter3: Industry Analysis: The fundamentalsa. Introduction and objectives

The firms proximate environment is its industry environment; this is why we will study industry analysis. The

latter is consistent for both corporate and business level:

Corporate strategy: in which industries shall we compete? What should be the allocation of theresources among these? we need to analyse the attractiveness of n industry to answer that

question

Business strategy: how should we compete? On what competitive advantage? The key is to identifythe sources of competitive advantage in an industry: the key success factors


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b. From environmental analysis to industry analysisThe business environment of the firm consists of all external influences that affect its decisions and

performance. Given the large number of possible external influences, managers need to use a framework to

organize information (Ex: PEST analysis: political, economic, social and technological factors):

Distinguish what is vital from what is not important with regard to profit making Understand the customers to whom you deliver value Understand and manage the suppliers from whom you buy goods and services Understand the competition

So customers, suppliers and competitors form the firms industrial environment

Of course more macro-level factors may impact the firm and the latter has to understand the implications of

macro-level changes.

c. The determinants of industry profit: demand and competitionThe starting point is: what determines the level of profit in an industry?

The value of the product for the customer The intensity of competition The bargaining power of the producers relative to their suppliers

Industry analysis brings these 3 factors into a single analytic framework.

d.Analyzing industry attractivenessThe competitive behaviour and so the profitability of an industry is not a random thing; it depends on the

industrys structure. The theories underlying this are the theory of monopoly and the theory of perfect

competition; monopoly if a single actor with high barriers to entry; perfect competition if several actors

provide the same product and low barrier to entry; oligopoly if few actors dominate the industry. In reality

firms evolve in a mix of those theories.

The industry

environment-Suppliers

-competitors

-customers

government andpolitics

technology

the

national/internationaleconomy

the naturalenvironment

demographicstructure

social structure


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Perfect

competition

oligopoly duopoly Monopoly

Concentration Many firms A few firms Two firms One firm

Entry and exit

barriers

No barriers Significant barriers High barriers

Product

differentiation

Homogeneous

product

(commodity)

Potential for product differentiation

Information

availability

No obstacles to

information flow

Imperfect availability of information

Analyze the principal structural features and their interactions and it will be possible to predict the

competitive behaviour and the resulting profitability of an industry.

i. Porters five forces of competition framework5 forces of competition that determine the competition level and the profitability of an industry:

3 horizontal forces:o Competition from substituteso Competition from entrantso Competition from established rivals

2 vertical forces:o The power of supplierso The power of buyers

The strength of each of these forces is determined by key variables:

Buyer powero Price sensitivity:

Cost of product relative to total cost Product differentiation Competition between buyers

o Bargaining power:

industryrivalry

supplierpower

threat ofsubstitutes

buyerpower

threat ofentry


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Size and concentration of buyers relative to producers Buyers switching costs Buyers information Buyers ability to backward integrate

Supplier powero See buyer power

Threat of entryo Capital requirementso Economies of scaleo Absolute cost advantageso Product differentiationo Access to distribution channelso Government and legal barrierso Retaliation by established producers

Threat of substituteso Buyer propensity to substituteo Relative prices and performances of substitute

Industry rivalryo Concentrationo Diversity of competitorso Product differentiationo Excess capacity and exit barrierso Cost conditions

ii. Competition from substitutesPresence of substitutes means that customer will switch to substitutes if the relative price of the productincreases or other things than the price such as the convenience etc...Cf. advanced Marketing. The more

complex a product, the more difficult it is to discern its price-performance and the least consumer will make

their choice based on price; ex: failure of cheaper perfume because we cannot discern the performance of

different flagrances.

iii. Threat of entryIf an industry earns a return on capital in excess of its cost of capital, and if barriers to entry are low, new

firms will enter it until competition reduced the possible profit to zero. The threat of entry is enough to

cause a situation where established firms lower their prices.

An industry with no sunk costs investments make it vulnerable for hit and run entry.

A barrier to entry is any advantage that an established firm has over new entrants. The principal sources of

barriers to entry are discussed below.

1. Capital requirementsIf the necessary capital costs to get into an industry are high it may discourages new entrants

2. Economies of scaleThe problem for new entrants is whether to deal with small scale and high unit costs or large scale but risk of

underutilization costs.

The main source of scale economies is new product development costs.


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3. Absolute cost advantagesA cost advantage is an advantage that is not linked with the scale. These absolute cost advantages may be

the result of the acquisition and the control of low-cost sources of raw materials or it could result from

economies of learning.

4. Product differentiationIt relates to brand recognition and customer loyalty. New entrants must spend a lot in advertising andpromotion to gain brand awareness similar to established firms.

5. Access to channels of distributionA limited capacity within distribution channels (shelf spaces...) limits the access to the industry: Example: the

battle for the shelf space in supermarkets and the phenomenon of slotting fees. Internet allowed new

businesses to circumvent barriers to distribution.

6. Governmental and legal barriersExample: licenses given by the public authority, patents, copyrights, regulatory requirements, safety

standards...

It is a barrier because it raises compliance costs for new entrants.

7. RetaliationBarriers to entry also depend on the possibility of aggressive price-cutting, increased advertising, sales

promotion or litigation driven by established firms.

To avoid retaliation, new entrants start by entering a less visible market segment. For example Asiatic car

manufacturers started in the US small cars segment in order to penetrate US car market.

8. The effectiveness of barriers to entryIndustries protected by high barriers to entry tend to earn above average rates of profit. Capital

requirements and advertising appear to be particularly effective obstacles to entry.

The effectiveness of these barriers depend on the resources of the new entrants: barriers effective against

new entrants may be ineffective against firms from other industries that are diversifying. There are different

ways to overcome barriers; the power of the Brand, the skills, etc...

iv. Rivalry between established competitors1. Concentration

It refers to the number and the size of firms in the industry. It is commonly measured by the concentration

ratio: the combined market share of the leading producers.

Oligopoly or duopoly? Firms tend to collusion on price and compete on advertisement, promotions and

product development. The more actors there are, the less feasible is the collusion and bigger the likelihood

that one will start a price-cut.

Note that the effect of concentration on profitability is weak (Richard Schmalensee)

2. Diversity of competitorsThe less similar (cost structure, origins, objectives, strategies...) are the competitors, the smaller is the

likelihood of collusion. The hard competition of the car market is due to the different origins, costsmanagement styles and strategies of the manufacturers.


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3. Product differentiationIn industries where products are differentiated, price competition tend to be weak, even though there may

be any firms competing.

4. Excess capacity and exit barriersIt is linked to the balance of demand and production capacity. The idea of overcapacity is to push price cuts

and attract new business so that fixed costs can be spread over greater sales volume.

In industries where resources are durable and specialized, and where employees are entitled to job

protection, barriers to exit may be important.

5. Cost conditions: scale economies and the ratio of fixed to variablecosts

When excess capacity causes price competition, how low will prices go? It depends on the cost structure: if

fixed costs are important relative to total costs, effect on profitability can be disastrous. For instance, the

variable cost of filling empty seats for airlines is very low: they face high fixed costs.

There is a critical level of production at which you can benefit from scale economies, but given the fixed

demand, firms fight for market shares to be able to reach that critical level.

v. Bargaining power of buyersIn an industry, firms can operate in 2 types of markets:

In Input markets: firms purchase raw materials, components and financial and labor services. In Output markets: firms sell their goods and services to customers (who may be distributors,

consumers or other manufacturers

In both markets, value is shared among buyers and sellers. Here we start with the output market: the firm

and its customers. The strength of a buyer depends on two things:

1. Buyers price sensitivity The greater the importance of an item in its structure cost, the more buyers will be price sensitive The less differentiated the products of the supplying industry, the more the buyer will switch from

one supplier to another based on the price.

The more intense the competition among buyers, the greater their need for price reduction formsellers

The more critical is an industrys product to the quality of the buyers product or service, the lessprice sensitive are buyers

2. Relative bargaining powerHaving bargaining power roughly means having the power to refuse to deal with the other party. The

bargaining power of both parties depends on their credibility and on the relative costs each party issue by

not making the deal.

Size and concentration of buyers relative to suppliers: the smaller the number of buyers and thebigger their purchases, the greater the cost of losing one (? Empirical study page 79)

Buyers information: the more information buyers have the more they will be able to bargain. Youneed information on price and on quality, otherwise you cannot bargain

Ability to integrate vertically: ability to find another supplier or to do the job yourself; backwardintegration.


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vi. Bargaining power of suppliersNow we cope with the input market: the firm and its suppliers: the analysis is similar to the bargaining power

of buyer, the roles are inverted.

e. Applying industry analysisNow we know what drives competition, we can describe an industry structure, try to forecast its profitability

and ultimately, put in place strategies to change its structure.

i. Describing industry structureIdentify the main players: the producers, the customers, the suppliers, the producers of substitutes... Then

identify their characteristics to determine the competition and their bargaining power.

It is critical to define the frame of what we call our industry in both products and geographical scope

(Frame of reference, Cf. Reading market 3 questions you have to ask).

ii. Forecasting industry profitabilityChanges in industry structure tend to be long term and are the results of fundamental shifts in consumer

behaviour, technology and firm strategies. We can use our current observation to identify emerging industry

trends. The analysis follows 3 stages:

Examine to what extent current level of competition and profitability are a consequence of presentindustrys structure.

Identify the trends that are changing the industrys structure: new entrants? Concentration?Differentiation or commoditization? Demand?

Compare to today, does the changes look like tough? Identify the impacts on the 5 forces:weakening or strengthening competition?

iii. Strategies to alter industry analysis structure Identify the key features that have a negative impact on profitability See which of these features are ductile through strategic initiatives.

f. Defining industries: where to draw the boundariesi. Industries and markets

Definition from the economists: an industry is a group of firms that supplies a market

There is a close correspondence between industries and markets but the difference is that industry if

identified with broad sectors while markets refer to specific products: a firm in the food industry compete on

many markets!

So the starting point is the market: which are the groups of firms that compete to supply a particular service,

a particular market?

We start at micro-level with customers choosing between rival offerings.

Competitive strategy is the positioning of a single offering vis--vis a unique set of potential customers and

competitors. (it has no sense to talk about the watch market, because you have the luxurious ones, the

sport ones...and these are different offerings).

This approach contrasts with global approach of Porter. The choice between both approaches depends on

the type of questions we want our strategy to answer: for marketing strategy (product design, pricing...) it is


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relevant to go onto the micro-level. But for mid-term profitability analysis, the aggregate level approach of

Porter fits.

ii. Defining markets: substitution in demand and supplySo to define industrys boundaries we look at the markets. But now how do we define markets?

Markets boundaries are defined by substitutability on the demand side and on the supply side.

Demand side: if Jaguars customers are not willing to substitute trucks for cars, Jaguar is in the automobiles

market and if customers are likely to substitute the Jaguar for a luxury car then Jaguar is in the luxury car

market.

Supply side: but if Jaguar can easily switch its production to family cars (using the same plants), then it is

competing on a broader automobiles market.

Geographic scope: substitutability again: if customers are able to substitute their car with others from

different national origins and if manufacturers can divert their output among different countries, then the

market is global.

Note that substitutability is higher in the long run and so the longer the term of your analysis, the broader

will you consider your markets.

Sometimes markets area continuum and can be seen as a set of more or less overlapping concentric circles.

To use the 5 forces, the market boundaries are not that important as we use also external factors.

g. From industry attractiveness to competitive advantage: identifyingkey success factors

We have a framework to identify industrys potential for profit. But how will this profit be shared among

competing firms?

Competition between firms is a battle for competitive advantage. To proposer/survive, a firm has to assess

two questions:

What do our customers want? (Really? See Marketing reading on market driven and marketdrivers?): it is the basis for a chain analysis; if customers want low price, then the key issues concern

our cost structure.

What does the firm need to do to survive competition?Analysis of disaggregated financial ratios can provide a framework to identify the key factors of profitability.


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h. Summary page 93-944)Chapter5: Analyzing resources and Capabilities

a. Introduction and objectivesb. The role of resources and capabilities in strategy formulation

Strategy is about matching the resources and capabilities to external opportunities. Strategy can be about

the external opportunities but here we focus on opportunities in the internal environment.

Prerequisite for

success

What do customers

want?

How does the firm

survive competition?

Analysis of demand

-who are our customers?

-what do they want?

Analysis of competition

-what drives competition?

-what are the main dimensions

of competition?

-how intense is the

competition?

-how can we obtain a superior

competitive position?

Key success factors

The Firm

-goals and values

-resources and

capabilities

-structure and systems

The industry

environment

-competitors

-Customers

-Suppliers

Strategy

The firm-strategy

interface

The environment-

Strategy interface


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Why the shift from industry environment to internal resources and capabilities? Because it is safer vs.

unstable environment and because profitability comes more from competitive advantage than from the

attractiveness of an industry.

i. Basing strategy on resources and capabilitiesResources and capabilities is a much stable basis on which a company can define its identify and a long-term

strategy whereas the industry and the external environment is much less stable.

Firms are built around specific technological capabilities and where these capabilities are applied is of

secondary importance.

ii. Resources and capabilities as sources of profitCompetitive advantage is more important than industry attractiveness for the simple reason that finding a

safe and LT profitable unexploited industry is increasingly hard. Thats why developing resources and

capabilities has become the big focus of strategy.

But in practice the line is between both is not obvious as industry attractiveness comes from ownership of

superior resources (ex: barriers to entry come from the ownership of patents...).

When strategy is about choosing the right industry and positioning, firms follow similar strategy When you follow a resource-based approach, firms focus on exploiting their uniqueness and on

leveraging points of differences. (reading market: 3 questions)

So a deep understanding of the firms resources and capabilities is important and allow us to:

Select a strategy that exploits our key strengths Develop the firms resources and capabilities to fill the gaps (so not just use our current capabilities):

it allows us to better fit to changing business conditions

c. The resources of the firmSo we start by assessing the resources and capabilities available to the firm

Resources: productive assets owned by the firm Capabilities are what the firm can do

Individual resources are not competitive advantage, they have to work together to build organizational

capabilities.

Types of resources and relationships in the figure below:


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i. Tangible resourcesKnowing that a company possesses fixed assets with a book value of X billion is useless with regard to

strategy. What we need to know is the composition of these assets, their location, the type of assets, their

age, etc... Once we know that, we see how to create more values with those assets, for that we have to ask 2

questions:

What opportunities exist for economizing on their use? Use fewer resources to support the samebusiness level? Or reach a higher business activity with the same level of resources? Better inventory

control and better cash control?

What are the possibilities for employing existing assets more profitably? Redeploy assets foranother use? In another location?

ii. Intangible resources Brands name and trademarks for instance. These are reputational assets that come from the trust

of the customers. The brand has a value if it can charge a premium. The value of a brand can beincreased by increasing its product/market scope.

Technology, intellectual property, patents...iii. Human resources

It is the expertise and the efforts provided by the employees.

Competency modelling: identification of a set of skills, content knowledge, attitudes and valuesassociated with superior performers within a job category and then confronting each employee to

this profile. You can use the results to identify the necessary trainings, formations, to make hiring

selection, etc...


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The culture of the organization (values, traditions and norms): it plays a role in the interactions ofthe employees. In general firms with strong financial performance are those with strong managerial

values that conduct the business.

d. Organizational capabilitiesResources are not productive on their own: to perform a task, a team of resources must work together and

thats the organizational capability of a firm; its capability to deploy resources to achieve a task.

Core competences are those thato Make a disproportional contribution to customer value or to the way it is deliveredo Provide a basis for entering new markets

i. Classifying capabilitiesIt is necessary to categorize to be able to identify and disaggregate a firms capabilities. 2 possible

approaches:

A functional analysis identifies the capabilities in relation to each of the principal functional areas ofthe firm

A value chain analysis separates the activities of the firm into a sequential chainFunctional classification

Functional Areas Capability

Corporate functions Financial control

Strategic management of multiple businesses

Strategic innovation

Multidivisional coordination

Acquisition management

International management

Management information Comprehensive, integrated MIS network linked to

managerial decision making

R&D Research

Innovative new product development

Fast-cycle new product development

Operations Efficiency in volume manufacturing

Continuous improvements in operations

Flexibility and speed of response

Product design Design capability

Marketing Brand managementPromoting reputation for quality

Responsiveness to market trends

Sales and distribution Effective sales promotion and execution

Efficiency and speed of order processing

Speed of distribution

Quality and effectiveness of customer service


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And below the Value chain of Porter:

ii. The architecture of capabilityLets try to understand organizational capabilities by looking at their structure

1. Capability as routineOrganizational routines are regular and predictable patterns of activity made up of a sequence of

coordinated actions by individuals.

Routinization is an essential step in translating directions and operating practices into capabilities.

Ex: sales, ordering, distribution and customer service activities are organized through a number of

standardized and complementary routines.

2. The hierarchy of capabilitiesWe can disaggregate the broad capabilities into more specialist capabilities performed by smaller teams of

resources: we can draw a hierarchy of capabilities.

Ex: A hospitals capability in treating heart disease depends on its integration of capabilities in diagnosis,

physical medicine...


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e. Appraising resources and capabilities

The profits that a firm earns from its resources and capabilities depend on 3 factors: their ability to establish

a competitive advantage, to sustain that advantage and to appropriate returns on that advantage.

i. Establishing competitive advantageResources and capabilities have to meet 2 conditions to establish a competitive advantage:

Scarcity: if all the players have a capacity, it might be needed to play (points of parity?), but it isprobably not enough to build a competitive advantage: build competitive advantage on scarce

resources and capabilities (points of difference? See marketing course and reading 3questions).

Relevance: it has to be relevant with regard to the key success factors in the marketii. Sustaining competitive advantage

Profits earned depend on how long the competitive advantage can be maintained

Durability: technology capability is difficult to hold, it has to be constantly renew while brands nameseem to be more durable (Coca-Cola, Heinz...)

Transferability: if someone is able to buy a capability it means it is transferable. Here are someobstacles to transferability:

o Geographical immobilityo Imperfect information regarding to the quality and productivity of resourceso Complementarities between resources the detachment of one resource will decrease its

productivity

o Organizational capabilities, because they are less mobile than individual resources

the profit-earning potential of aresource or capability

the extent of the competitiveadvantage established

scarcity

relevance

sustainability of the competitiveadvantage

durability

transferability

replicability

Appropriability

property rights

relative bargaining power

embeddedness


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Replicability: if a firm cannot buy a capability, it must build it, if it possible, then the capability isreplicable. Less replicable capabilities are those based on complex organizational routines

o asset mass efficiencies: a strong initial position facilitates the accumulation of theseresources

o time compression diseconomies: replicated resources tend to be less productive than similarexpenditures made over a longer period

iii. Appropriating the returns to competitive advantageCapabilities based on knowledge and human skills may yield profits through competitive advantage but since

the firm does not really own those, it may not be able to appropriate the profits.

The less clearly defined is the ownership of resources and capabilities, the greater the bargaining power of

deciding the repartition of the profits between the firm and its individual members. The more an employee

skill is integrated into an organizational routine, the less it has bargaining power.

If:

The individual contribution is clearly identifiable If the employee is mobile And if the skill offers similar productivity in other firms

Then the employee has important bargaining power in appropriating the profits.

f. Putting resource and capability analysis to work: a practical guideHow do we appraise our resources and capabilities and then use the appraisal to guide strategy formulation?

i. Step1: Identify the key resources and capabilities From an external focus: we examine the key success factors (Chap3) (design, low-cost, ...) What capabilities and resources do these key success factors imply? Switch to the internal focus: Then we can categorize through the value chain to have a sequence or

through the functional divisions. It allows us to underpin which resources underpin each capabilities.

ii. Setp2: appraising resources and capabilities 1st criteria: importance 2nd criteria: where are our strengths and weaknesses compared to competitors?

1. Assessing importanceNeeded to play vs. needed to win.

Do not concentrate only on customer choice criteria but on establishing competitive advantage.

2. Assessing relative strengthRelative and not objective because how to be objective? The risk is to blindly assess your strength based on

your previous successes.

So conduct the analysis both inside and outside and focus on insight and understanding rather than on just

having datas:

Inside: try to identify patterns in historical performance Outside : use benchmarking


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3. Bringing together importance and relative strengthSee page 146 and 147.

Importance Relative Strengths comments

Resources

R1 6 5

R...

Capabilities

C1 9 7

C...

Both scales range from 1 to 10. The ratings are based on the authors subjective judgement . The Relative

strengths are compared to benchmarks, each resource and each capability may have its own benchmark

(you take for benchmark the best company in the field)

Then you can map the results:

iii. Step3: developing strategy implications1. Exploiting key strengths

Formulate a strategy that ensures that these resources are effectively deployed.

Ex: if engineering is a key strength, then focus on differentiation through technical sophistication and safety

features

2. Managing key weaknessesConverting weaknesses into strengths is a long-term process. A better solution might be to outsource (and

what if it is related to a key success factor? You outsource it?), or you can converse it into a strength (Harley

Davidson transformed its poor technological capacities into a strength: old bike components are part of the

retro-look and are valuable in that way!)


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3. What about superfluous Strengths?These are strengths that do not seem to be important for sustainable competitive advantage. You can

disinvest in those capabilities to reinvest in key strengths or you can make these superfluous strengths key to

your business.

g. Developing resources and capabilitiesGap analysis between the current position and the desired one is very limited, since the investments to fillthe gaps ay be very expensive or of little productivity (complementary assets for example).

i. The relationship between resources and capabilitiesIt is not the size of a firms resource base that leads to success, but its capacity to leverage its resources. That

can be done in the following ways:

Concentrating resources through the process of converging resources on a limited set of clear andconsistent goals and target the activities that have a clear impact on customer value

Accumulating resources through mining experience in order to achieve faster learning andborrowing from other firms (alliances, outsourcing...)

Complementing resources involves increasing their effectiveness through linking them withcomplementary resources and capabilities

Conserving resources involves utilizing resources and capabilities to the fullest by recycling themthrough different products, markets...

ii. Replicating capabilitiesReplicate your capabilities internally, for other products or for other locations for instance.

Replication requires systemization of the knowledge that underlies the capabilities- typically through the

formulation of standard operating procedures (ex: McDo).

iii. Developing new capabilitiesIt is hard

1. Capability as a result of early experiencesOrganizational capability is path dependent, a companys capabilities today depends on its history and

history will set constraints for future development.

So a starting point to understand the current capabilities is to go back in time in the foundation and the early

development of the firm to identify the key circumstances.

2. Organizational capability: rigid or dynamic?Having highly developed organizational capabilities give little margin for the firm to adapt to environment

changes. Core capacities are simultaneously core rigidities.

But there are firms able to upgrade and extend continuously their organizational capabilities: dynamic

capabilities; those that enable the firm to address rapid changes.

No clear agreed definition of what dynamic capabilities are.

Strong organizational capabilities may be barriers to entry-a disadvantage for new entrants- but also barriers

for new capabilities development-and so an opportunity for new entrants-. So what it is? It depends

whether the innovation is competence destroying or competence enhancing.


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iv. Approaches to capability developmentHere are 3 common approaches to capability development.

1. Acquiring capabilities: Mergers and AcquisitionsIf acquiring capabilities it is a long-term process, then acquiring a firm that already developed those is a good

shortcut.

But it may be risky and it is not enough just to acquire, you still have to find a way to integrate: risk of culture

clashes, personality clashes, incompatibility management systems...and these risks can lead to the

destruction of the searched capabilities.

2. Accessing capabilities: Strategic alliancesM&A is costly, and then alliances may be a cheaper alternative.

Strategic alliances: a cooperative relationship between firms involving the sharing of resources forthe pursuit of common goals.

Ex: joint-research, joint distribution, technology-sharing arrangements, shared manufacturing, jointmarketing...

The risk is a competition between the 2 firms to acquire competences of the other. That may destabilize the

relationship.

3. Creating capabilitiesTo create the capabilities, you first have to acquire and integrate the necessary resources.

Moreover we assume (we do not really know) that organizational routines that capabilities are based on,

emerge through the process of learning by doing.

Organizational structure and management systems play an important role:

Capabilities need to be housed within dedicated organizational units (Ex: product development iseasier if undertaken in the product development unit^^)

But if there is a department dedicated to each capability, we will face an organizational complexity. Organizations need to be systematic in their approach to capability development. One point is the

role of performance aspirations to drive capability development

Sometimes, the organization structure and the management systems do not allow the development of some

capabilities, and then it may be a solution to develop it into a new organizational unit that is geographically

separated from the firm.

Or we can use the push-pull approach: push the development of a product and that will pull the capabilities

required for the development of that same product.

In every case, the process has to be incremental.

A powerful tool for managing the integration of the knowledge of multiple organizational members is

knowledge management: see appendix of the chapter, page 159.


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h. SummaryHere is a framework for analyzing resources and capabilities:

i. Appendix: knowledge management and the knowledge-based view ofthe firm See Page 159

i. Types of knowledgeii. Types of knowledge process

iii. Knowledge conversioniv. Conclusion

Part3: the analysis of competitive

advantage

5)Chapter7: the nature and sources of competitive advantage

1. Identify the firms resources andcapabilities

2. Explore the linkages betweenresources and capabilities

3. Appraise the firms resources andcapabilities in terms of:

a. Strategic importanceb. Relative strength

4. Develop strategy implications:a. In relation to strengths

i.

How can these be exploited moreeffectively and fully?

b. In relation to weaknesses:i. Identify opportunities to outsource

activities that can be better

performed by other organizations

ii. How can weaknesses be correctedthrough acquiring and developing

resources and capabilities

Strategy

Resources

Capabilities

Potential for

sustainable

competitive

advantage


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a. Introduction and objectivesb. The emergence of competitive advantage

Definition of a competitive advantage:When two or more firms compete within the same market, one firm possesses a competitive advantage

over its rivals when it earns (or has the potential to earn) a persistently higher rate of profit

The point is that competitive advantage may not be revealed in higher profitability, because the firm spends

its current profit in investments in market shares, technology, customer loyalty or executive perks

i. External sources of changeThe more turbulent and industrys environment, the greater the number of sources of change, and the

greater the differences in firms resources and capabilities, the greater the dispersion in firms profitability.

The process of the emergence of competitive advantage:

ii. Competitive advantage from responsiveness to changeThe ability of quick and good responsiveness to change is crucial in establishing competitive advantage and

so taking advantage of the change.

This ability is what we call entrepreneurship and is a core management capability.

Responsiveness is also about anticipating the changes.

Responsiveness to opportunities provided by external changes requires:

An important resource: information: provided by relationships with customers, suppliers,competitors...

An important capability: flexibility: speed is a source of competitive advantage and the faster yourespond to a change, the less you have to forecast the future

how does competitiveadvantage emerge?

*external sources of change

-changing customer demand

-changing prices

-technological change

resource heterogeneityamong firms meansdifferential impact

some firms are faster andmore effective in exploiting

change

*internal resources of change

some firms have greatercreative and innovative

capability


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iii. Competitive advantage f

Grant Textbook 4E

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