L16 - Strategic capabilities

Question 1

What is the resource-based view of strategy?

Answer 1

The competitive advantage and superior performance of an organisation are explained by the distinctiveness of its capabilities

Question 2

What is a capability?

Answer 2

Capability - an ability the firm has that can produce economic value. Synonym: competence

Question 3

Why should resources and capabilities be included in strategy?

Answer 3

Its obvious from inspection, from business and economic history, that firms develop unique capabilities/obtain unique access to resources

Firms should be thought of as bundles of productive R&Cs (think: why don’t individuals simply produce and trade products/services?)

Firms vary by the different bundles of these R&C’s firm heterogeneity and uniqueness

Distinctive/Unique/Rare R&C differences underlie competitive advantages of high performing firms –the “resource based view” of strategy

Question 4

What are strategic capabilities?

Answer 4

The capabilities of an organisation that contribute to its long-term survival or competitive advantage

There are 2 components: resources and competences

Resources – the assets that organisations have or can call upon

Competence – the way those assets are used or deployed effectively

Question 5

What are dynamic capabilities?

Answer 5

To provide basis for long-term success, strategic capabilities cannot be static

Dynamic capabilities – an organisation’s ability to renew and recreate its strategic capabilities to meet the needs of changing environments

Acknowledges the danger that capabilities that were the basis of competitive success can over time be imitated by competitors, become common practice in an industry or become redundant as its environment changes

Dynamic in the sense that they can create, extend or modify an organisation’s existing operational capabilities

Question 6

What are three generic types of dynamic capabilities?

Answer 6

Sensing – implies organisation must constantly scan, search and explore opportunities across various markets and technologies
Seizing – once an opportunity is sensed it must be seized and addressed trough new products or services, processes, activities etc.

Reconfiguring – to seize an opportunity may require renewal and reconfiguration of organisational capabilities and investments in technologies, manufacturing, markets, etc.

Question 7

What are threshold capabilities and why are they important?

Answer 7

Threshold – those needed for an organisation to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market. Without such capabilities, organisation cannot survive.

Important for firms entering, however, also important for incumbents as there could be changing threshold resources

Levels of capability will change as critical success factors change through the activities of competitors and new entrants.

Question 8

What are distinctive capabilities and why are they important?

Answer 8

Required to achieve competitive advantage

Dependent on an organisation having distinctive or unique capabilities that are of value to customers and which competitors find difficult to imitate

E.g. distinctive resources that critically underpin competitive advantage that others cannot imitate or obtain or distinctive competences - ways of doing things that are unique to that organisation and effectively utilised so as to be valuable to customers and difficult for competitors to obtain or imitate.

Question 9

What is VRIO?

Answer 9

Four key criteria by which capabilities can be assessed in terms of their providing a basis for achieving sustainable competitive advantage: value, rarity, inimitability and organisational support

Question 10

What is value and what are

the 3 components (VRIO)?

Answer 10

Strategic capabilities are valuable when they create a product or a service that is of value

(1) Taking advantage of opportunities and neutralising threats - to be valuable capabilities need to provide the potential to address the opportunities and threats that arise in the organisation’s environment, which points to an important complementarity with the external environment of an organisation. Capabilities are valuable if they address opportunities and/or threats and generate higher revenues or lower costs or both compared to if the organisation did not have those capabilities.
(2) Value to customers – meet customers’ CSF
(3) Cost – should still allow organisation to make returns

Value chain analysis and activity mapping

Question 11

What is rarity (VRIO)?

Answer 11

If competitors have similar capabilities, they can respond quickly to the strategic initiative of a rival

Rare capabilities – those possessed uniquely by one organisation or by a few others. Here competitive advantage is longer-lasting

Question 12

What is inimitability (VRIO)?

Answer 12

Those that competitors find difficult and costly to imitate or obtain or substitute

Advantage is more likely to be determined by the way in which resources are deployed and managed in terms of an organisation’s activities - competences.

They often include linkages that integrate activities, skills, knowledge and people both inside and outside the organisation in distinct and mutually compatible ways. These linkages can make capabilities particularly difficult for competitors to imitate

Question 13

What are there primary reasons why an organisation’s capabilities might be difficult to imitate?

Answer 13

(1) Complexity – involve interlinkages

Internal linkages - linked activities and processes that, together, deliver customer value

External interconnectedness - developing activities together with customers or partners such that they become dependent on them. This is sometimes referred to as co-specialisation

(2) Casual ambiguity – competitors find it difficult to discern the causes and effects underpinning an organisation’s advantage

Two reasons: First because the capability itself is difficult to discern or comprehend, perhaps because it is based on tacit knowledge based on people’s experience (characteristic ambiguity).

Second because competitors may not be able to discern which activities and processes are dependent on which others to form linkages that create distinctive competences (linkage ambiguity).

(3) Culture and history – e.g. culture, Coordination
between various activities occurs ‘naturally’ because people know their part in the wider
picture or it is simply ‘taken for granted’ that activities are done in particular ways. The history by which capabilities and resources have developed over times are referred to as path dependency

Question 14

What is organisational support (VRIO)?

Answer 14

The organisation must be suitably organised to support the capabilities including appropriate organisational processes and systems

To take full advantage of capabilities

Works as an adjustment factor – some of the potential competitive advantage can be lost if the organisation is not organised in a way that it can fully take advantage of valuable and/or rare and/or inimitable capabilities.

Question 15

What are 2 limitations of VRIO?

Answer 15

Applying VRIO from OUTSIDE the organizationit is not always possible to:

(a) work out the organisation’s SCA – e.g. trade secrecy
(b) Or if you CAN work out the SCA you may find you… CANNOT COPY IT!

Question 16

How can we use Internal R&C analysis to develop future competitive advantage?

Answer 16

Develop (strengthen) the capability, add related capabilities - Enter product markets where SCA can provide superior products

Overcome resource & capability weaknesses - Build, acquire, or outsource to strengthen internal R&Cs and Exit businesses where R&C weaknesses are strategically important

Timing & staging are important to incrementally build on and expand existing R&C’s

Through time this entails (1) Doing research, (2) Changing the skill base and (3) Ensuring opportunities for intellectual property are exploited

Question 17

What is the value chain?

Answer 17

The value chain describes the categories of activities within an organisation which, together, create a product or service.

Question 18

What is Michael Porter’s value chain?

Answer 18

Primary activities – inbound logistics, operations, outbound logistics, marketing and sales, service

Support activities – procurement, technology development (may be concerned directly with product – e.g. R&D or may with processes – e.g. process development), human resource management (transcends all primary activities) and infrastructure (the formal systems of planning, finance, quality control, information management
and the structure of an organisation)

Question 19

What are the 3 ways the value chain can be used to understand the strategic position of an organisation and analyse strategic capability?

Answer 19

(1) a generic description of activities it can help managers understand if there is a cluster of
activities providing benefit to customers located within particular areas of the value chain.

(2) analysing the competitive position using VRIO criteria

V - Which value -creating activities are especially significant for an organisation in meeting customer needs and could they be usefully developed further?

R - To what extent and how does an organisation have bases of value creation that are rare?

I - What aspects of value creation are difficult for others to imitate?

O - What parts of the value chain support and facilitate value creation activities in other sections of the value chain?

(3) to analyse the cost and value of activities

Identifying sets of value activities - ask (i) which separate categories of activities best describe the
operations of the organisation and (ii) which of these are most significant in delivering the strategy and achieving advantage over competitors?

Relative importance of activity costs internally - Which activities are most significant in terms of the costs of operations? Does the significance of costs align with the significance of activities? Which activities add most value to the final product or service? It can also be important to establish which sets of activities are linked to or are dependent on others and which, in effect, are self-standing.

Relative importance of activities externally - How does value and the cost of a set of activities compare with the similar activities of competitors?

Where and how can costs be reduced?

Question 20

How can we use a SWOT analysis?

Answer 20

Used to encourage internal discussion of how to move management focus from ”daily” organizational tasks to a ”strategic” perspective

Summarising key issues arising from an analysis of strategic capabilities and the analysis of the business environment to gain overall picture of an organisation’s strategic position

The aim is to identify the extent to which strengths and weaknesses are relevant to, or capable of dealing with, the changes taking place in the business environment.

SWOT analysis is most useful when it is comparative – if it examines strengths, weaknesses, opportunities and threats in relation to competitors

Question 21

How can we prioritise issues in a SWOT analysis?

Answer 21

First, as indicated above, focus on strengths and weaknesses that differ in relative terms compared to competitors and leave out areas where the organisation is at par with competitors.

Second, focus on opportunities and threats that are directly relevant for the specific organisation and industry and leave out general and broad factors.

Third, summarise the result and draw concrete conclusions.

Question 22

What is the value system?

Answer 22

Most organisations are part of a wider value system, the set of inter-organisational links and relationships that are necessary to create a product or service.

You can analyse activities and cost/prices structures of the value system. Essential as changes in the environment may require outsourcing or integration of activities

The ‘make or buy’ decision for a particular activity is critical - This is the outsourcing decision. Increasingly outsourcing is becoming common as a means of lowering costs. Of course, the more an organisation outsources, the more its ability to influence the performance of other organisations in the value system may become a critically important capability in itself and even a source of competitive advantage.

Partnering – who are the best partners in the various parts of the value system? What kind of relationships should be developed?

Question 23

What are activity systems?

Answer 23

Important to identify what these activities are, why they are valuable to customers, how the various activities fit together and how they are different from competitors

The starting point is to identify what Porter refers to as ‘higher order strategic themes’ – (the ways in which the organisation meets the critical success factors determining them in the industry).

The next step is to identify the clusters of activities that underpin each of these themes and how these do or do not fit together.

Question 24

Why are linkages and fit important for activity systems?

Answer 24

An activity systems map emphasises the importance of different activities that create value to customers pulling in the same direction and supporting rather than opposing each other. So the need is to understand (i) the fit between the various activities and how these reinforce each other and (ii) the fit externally with the needs of clients.

Question 25

What is the relationship between activity systems and VRIO?

Answer 25

It is these linkages and this fit that can be the bases of sustainable competitive advantage. In combination they may be valuable to clients, truly distinctive and therefore rare. Moreover, while individual components of an activity system might be relatively easy to imitate, in combination they may well constitute the complexity and causal ambiguity rooted in culture and history that makes them inimitable

Question 26

What are superfluous activities?

Answer 26

Activities not required to pursue a particular strategy

Question 27

What are 2 approaches to benchmarking?

Answer 27

Industry/sector benchmarking or best-in-class benchmarking

Question 28

What are 2 limitations to benchmarking?

Answer 28

(1) Surface comparisons: does not directly identify reasons for relative performance, and (2) simply achieving competitive parity (to achieve competitive advantage, an organisation needs to move further and develop its own distinctive resources and capabilities)

Question 29

What is innovation?

Answer 29

An important dynamic capability. The conversion of new knowledge into a new product, process or service and the putting of this new product, process or service into actual commercial use. The importance changes as industries evolve over time

Question 30

What is technology push or market pull?

Answer 30

Technology push view: new knowledge created by technologists or scientists pushes the innovation process. Market pull view: innovation goes beyond invention, sees the importance of actual use. Users are common sources of important innovations. The key is to have balance between the 2.

Question 31

What is open vs. closed innovation?

Answer 31

Closed: rely on organisation’s own internal resources, secretive, anxious to protect intellectual property and avoid free riders. Open: deliberate import and export of knowledge by an organisation in order to accelerate and enhance its innovation. Motivation: better and faster products.

Question 32

What is platform leadership?

Answer 32

Refers to how large firms consciously nurture independent companies through successive waves of innovation around their basic technological ‘platform’. Relates to open innovation.