Unit-4

1. Important Terms:

Strategic capability is the adequacy and suitability of the resources and competences of an
organization for it to survive and prosper.

Threshold capabilities are those capabilities essential for the organization to be able to compete
in a given market.

Dynamic capabilities are an organizations abilities to develop and change competences to meet
the needs of rapidly changing environments.

Unique resources are those resources that critically underpin competitive advantage and that
others cannot easily imitate or obtain.

Competences are the activities and processes through which an organization deploys its
resources effectively.

Core competences are the activities and processes through which resources are deployed in such
a way as to achieve competitive advantage in ways that others cannot imitate or obtain.

Distinctive Competences. When core competencies are superior to those of the competition,
they are called distinctive competencies.

Barney, in his VRIO framework of analysis, proposes four questions to evaluate a firms
Competencies:
1. Value: Does it provide customer value and competitive advantage?
2. Rareness: Do no other competitors possess it?
3. Imitability: Is it costly for others to imitate?
4. Organization: Is the firm organized to exploit the resource?

2. CAPABILITIES FOR SUSTAINABLE COMPETITIVE ADVANTAGE

2.1. Value of strategic capabilities is important to emphasize that if an organization seeks to

build competitive advantage it must meet the needs and expectations of its customers. The
importance of value to the customer may seem to be an obvious point to make but in practice it is
often overlooked or ignored. Managers may argue that some distinctive capability of their
organization is of value simply because it is distinctive. Having capabilities in terms of resources
or competences that are different from other organizations is, of itself, not a basis of competitive
advantage. There is little point in having capabilities that are valueless in customer terms; the
strategic capabilities must be able to deliver what the customer values in terms of product or
service.
2.2. Rarity of strategic capabilities

Clearly, competitive advantage cannot be achieved if the strategic capability of an organization is

the same as other organizations. It could, however, be that a competitor possesses some unique or
rare capability providing competitive advantage. This could take the form of unique resources.
For example, some libraries have unique collections of books unavailable elsewhere; a company
may have a powerful brand; retail stores may have prime locations.

Rarity may depend on who owns the competence and how easily transferable it is. For example,
the competitive advantages of some professional service organizations are built around the
competence of specific individuals such as a doctor in leading-edge medicine. Or the
reputation of a fashion house may be built on a top designer. But since these individuals may
leave, or join competitors, this resource may be a fragile basis of advantage. Or a core
competence may be embedded in the culture that attracts them to work for the particular
organization.

2.3. Robustness of strategic capabilities It is evident that the search for strategic capability that
provides sustainable competitive advantage is not straightforward. It involves identifying
capabilities that are likely to be durable and which competitors find difficult to imitate or obtain.
Indeed the criterion of robustness is sometimes referred to as non-imitability. At the risk of
over-generalization, it is unusual for competitive advantage to be explainable by differences in
the tangible resource base of organizations since over time these can usually be imitated or
traded. Advantage is more likely to be determined by the way in which resources are deployed to
create competences in the organizations activities.

3. USING RESOURCES TO GAIN COMPETITIVE ADVANTAGE

Proposing that a companys sustained competitive advantage is primarily determined by its

resource endowments; Grant proposes a five-step, resource-based approach to strategy analysis.

1. Identify and classify the firms resources in terms of strengths and weaknesses.

2. Combine the firms strengths into specific capabilities and core competencies.

3. Appraise the profit potential of these capabilities and competencies in terms of their potential
for sustainable competitive advantage and the ability to harvest the profits resulting from their
use. Are there any distinctive competencies?

4. Select the strategy that best exploits the firms capabilities and competencies relative to
external opportunities.

5. Identify resource gaps and invest in upgrading weaknesses

Where do these competencies come from? A corporation can gain access to a distinctive
competency in four ways:
It may be an asset endowment, such as a key patent, coming from the founding of the company.

For example, Xerox grew on the basis of its original copying patent.

It may be acquired from someone else. For example, Whirlpool bought a worldwide distribution
system when it purchased Philipss appliance division.

It may be shared with another business unit or alliance partner. For example, Apple Computer
worked with a design firm to create the special appeal of its personal computers and iPods.

It may be carefully built and accumulated over time within the company. For example, Honda
carefully extended its expertise in small motor manufacturing from motorcycles to autos and
lawnmowers. There is some evidence that the best corporations prefer organic internal growth
over acquisitions.

Continuum of Resource Sustainability.

4. Value chain

The value chain describes the activities within and around an organization which together create
a product or service. It is the cost of these value activities and the value that they deliver that
determines whether or not best value products or services are developed. The concept was used
and developed by Michael Porter in relation to competitive strategy. Exhibit below is a
representation of a value chain.
Primary activities are directly concerned with the creation or delivery of a product or service and
can be grouped into five main areas. For example, for a manufacturing business:

Inbound logistics are the activities concerned with receiving, storing and distributing the inputs
to the product or service. They include materials handling, stock control, transport, etc.

Operations transform these various inputs into the final product or service: machining,
packaging, assembly, testing, etc.

Outbound logistics collect, store and distribute the product to customers. For tangible products
this would be warehousing, materials handling, distribution, etc. In the case of services, they may
be more concerned with arrangements for bringing customers to the service if it is a fixed
location (e.g. sports events).

Marketing and sales provide the means whereby consumers/users are made aware of the product
or service and are able to purchase it. This would include sales administration, advertising,
selling and so on. In public services, communication networks which help users access a
particular service are often important.

Service includes all those activities which enhance or maintain the value of a product or service,
such as installation, repair, training and spares.

Each of these groups of primary activities is linked to support activities. Support activities help
to improve the effectiveness or efficiency of primary activities. They can be divided into four
areas:

Procurement refers to the processes for acquiring the various resource inputs to the primary
activities. As such, it occurs in many parts of the organization.
 Technology development. All value activities have a technology, even if it is just know-how.
The key technologies may be concerned directly with the product (e.g. R&D, product design) or
with processes (e.g. process development) or with a particular resource (e.g. raw materials
improvements). This area is fundamental to the innovative capacity of the organization.

Human resource management. This is a particularly important area which transcends all primary
activities. It is concerned with those activities involved in recruiting, managing, training,
developing and rewarding people within the organization.

Infrastructure. The systems of planning, finance, quality control, information management, etc.
important to an organizations performance in its primary activities. Infrastructure also consists
of the structures and routines of the organization.

4. Value Network

In most industries it is rare for a single organisation to undertake in-house all of the value
activities from the product design through to the delivery of the final product or service to the
final consumer. There is usually specialization of role and any one organization is part of the
wider value network. The value network is the set of inter-organizational links and relationships
that are necessary to create a product or service (see Exhibit below). It is this process of
specialization within the value network on a set of linked activities that can underpin excellence
in creating best-value products. So an organization needs to be clear about what activities it
ought to undertake itself and which it should not and, perhaps, outsource. However, since much
of the cost and value creation will occur in the supply and distribution chains, managers need to
understand this whole process and how they can manage these linkages and relationships to
improve customer value. It is not sufficient to look at the organizations internal position alone.
For example, the quality of a consumer durable product (say a cooker or a television) when it
reaches the final purchaser is not only influenced by the linked set of activities which are
undertaken within the manufacturing company itself. It is also determined by the quality of
components from suppliers and the performance of the distributors. It is therefore critical that
organizations understand the bases of their strategic capabilities in relation to the wider value
network.
Important considerations are

Where cost and value are created. An important strategic capability in any organization is to
ensure attention is paid to achieving and continually improving cost efficiency. This will involve
having both appropriate resources and the competences to manage costs. Customers can benefit
from cost efficiency in terms of lower prices or more product features for the same price. In
some public services the key stakeholder may be the budget provider who wishes to maintain
levels of service provision and quality but at reduced cost. The management of the cost base of
an organization could be a basis for achieving competitive advantage.

Which activities are centrally important to their own strategic capability and which are less
central. A firm may, for example, decide that it is important to retain direct control of centrally
important capabilities, especially if they relate to activities and processes that it believes are core
competences. On the other hand, another firm in a highly competitive market may require cutting
costs in key areas and may decide it can only do so by outsourcing to lower cost producers.

Where the profit pools are. Profit pools are defined here as the potential profits at different parts
of the value network. The point is that some parts of a value network are inherently more
profitable than others because of the differences in competitive intensity. For example,
historically in the computer industry microprocessors and software have been more profitable
than hardware manufacture.

The strategic question becomes whether it is possible to focus on the areas of greatest profit
potential? Care does have to be exercised here however. It is one thing to identify such potential;
it is another to be successful in it given the competences the organization has. For example, in
the 1990s many car manufacturers recognized that greater profit potential lay in services such as
car hire and financing rather than manufacturing but found they did not have the relevant
competences to succeed in such sectors.

The make or buy decision for a particular activity or component is therefore critical. This is the
outsourcing decision. There are businesses that now offer the benefits of outsourcing . Of course,
the more an organization outsources, the more its ability to influence the performance of other
organizations in the value network may become a critically important competence in itself and
even a source of competitive advantage.

Who might be the best partners in the various parts of the value network? And what kind of
relationships is important to develop with each partner? For example, should they be regarded as
suppliers or should they be regarded as alliance partners? Some businesses have seen the benefit
of moving closer in their relationships with suppliers such that they are cooperating more and
more on such things as market intelligence, product design, and research and development.

5. Cost Efficiency

Cost efficiency is determined by a number of cost drivers (exhibit below), as follows

Economies of scale may be an important source of cost advantage in manufacturing

organizations, since the high capital costs of plant need to be recovered over a high volume of
output. Traditionally manufacturing sectors in which this has been especially important have
been motor vehicles, chemicals and metals. In other industries, such as drinks and tobacco and
food, scale economies are important in distribution or marketing. In other sectors such as textiles
and leather goods, economies of scale have been less significant.

Supply costs influence an organizations overall cost position. Location may influence supply
costs, which is why, historically, steel or glass manufacturing was close to raw material or energy
sources. In some instances, ownership of raw materials gave cost advantage too. How supplier
relationships are fostered and maintained is of major importance in sustaining this position.
Supply costs are of particular importance to organizations which act as intermediaries, where the
value added through their own activities is low and the need to identify and manage input costs is
critically important to success. For example, in commodity or currency trading, the key resource
is knowledge of how prices might move and hence competitive advantage can be gained through
competences that maintain higher-quality information than that of competitors. Traditionally, this
was concerned with personal contacts and networks that were often difficult to imitate. But now
information technology capability is critical to success. Since all traders now have access to
similar information systems, ensuring that such technology is up-to-date has become a threshold
competence and attempts to innovate to create advantage are likely to be eroded. Achieving
competitive advantage is more likely to be about innovative ways in which systems are exploited
and these may also be short-lived.

Product/process design also influences the cost position. Efficiency gains in production
processes have been achieved by many organizations over a number of years through
improvements in capacity-fill, labour productivity, yield (from materials) or working capital
utilization. The important issue is having the knowledge to understand the relative importance of
each item to maintaining a competitive position. For example, managing capacity-fill has
become a major competitive issue in many service industries: an unfilled seat in a plane, train or
theatre cannot be stocked for later sale. So marketing special offers (while protecting the core
business) and having the IT capability to analyze and optimize revenue are important
competences. In contrast, much less attention has been paid to how product design may
contribute to the overall cost competitiveness of an organization. Where it has been undertaken,
it has tended to be limited to the production processes (e.g. ease of manufacture). However,
product design will also influence costs in other parts of the value system for example, in
distribution or after-sales service. Canon gained advantage over Xerox photocopiers in this way
Canon eroded Xeroxs advantage (which was built on the Xerox service and support network)
by designing a copier that needed far less servicing. The ability to conceive of the design/cost
relationship in this more holistic way and to gain the information needed for such an
understanding requires successful organizations to have good knowledge of where and how cost
is added throughout the value chain .

Experience can be a key source of cost efficiency and there is some evidence it may provide
competitive advantage. There have been many studies concerning the important relationship
between the cumulative experience gained by an organization and its unit costs described as the
experience curve represented below.
The experience curve suggests that an organization undertaking any activity learns to do it more
efficiently over time, and hence develops core competences in this activity. Since companies
with higher market share have more cumulative experience, it is clearly important to gain and
hold market share. It is important to remember that it is the relative market share in definable
market segments that matters. There are important implications of the experience curve concept
that could influence an organizations competitive position:

Growth is not optional in many markets. If an organization chooses to grow more slowly than
the competition, it should expect the competitors to gain cost advantage in the longer term
through experience.

First mover advantage can be important. The organization that moves down the experience
curve by getting into a market first should, on the face of it, be able to reduce its cost base
because of the accumulated experience it builds up over its rivals by being first.

However, the likelihood of sustained advantage through experience curve benefits are not high.
It would be likely to require very high market share advantages not available to most firms.

The implication of this is that continual reduction in costs is a necessity for organizations in
competitive markets. Even if it is not able to provide competitive advantage, it is a threshold
competence for survival.