Business Strategy

Identifying resources and capabilities

Resources are the productive assests owned by the firm, and it comes in 3 forms..

-       Tangible resources – Financial resources and physical assets

-       Intangible resources – Brand names and reputation

-       Human resources – Skills and productive effort of employees

An organisational capability refers to a firms capacity to deploy resources for a desired end product.

-       Core competencies – Skills, knowledge and technologies that establish competitive advantage

      *A core competency must have 4 capabilities, as it must be rare, valuable, costly to imitate and non-substitutable, in order to serve as a competitive advantage

Identifying resources and capabilities

Once a firm identifies its resources and capabilities, it must then appraise their potential for value creation. This can be done in 3 ways…

1)     Establishing a competitive advantage using resources and capabilities

-       - Scarcity within the market

-      -  Must be relevant to key success factors

2)     Sustain this competitive advantage

-      -  Must be durable

-       - Must not be easily transferable or easily replicable

3)     Appropriating its returns

-       Property rights, bargaining power of buyers, embedded skills and knowledge

Strategy implications of resources and capabilities

Once an organisation has identified its resources and capabilities and appraised them in terms of strategic importance, it is then crucial to manage the strengths and weaknesses that may arise from these resources and capabilities.

Key strengths –

Must be exploited as it can help firms differentiate within a market

Key weaknesses –

Converting into strengths tend to be a long-term task, solution may be to outsource

Superfluous strengths –

Refers to strengths that do not appear to be important, so it may be wise to lower the level of investment into these resources and capabilities. Firms may also choose to use innovative strategies in order to turn these strengths into key strengths

How does competitive advantage emerge?

Competitive advantages can emerge as a result of either internal or external sources of change.

• External changes – Change in consumer demand, price, or technology
• Internal changes – Strategic innovation (i.e - creative destruction), blue-ocean strategy

How is competitive advantage sustained –

Barriers to imitation must be created in order to protect competitive advantage from imitation and innovation.

• Obscure superior profitability – Keeping financial information disclosed
• Pre-emption – Occupying existing and potential market niches
• Casual ambiguity – Increases difficulty for rivals to pinpoint success factors
• Barriers to transferability and replicability – Potential imitation barrier

Types of competitive advantage

Cost advantage (Similar product at lower cost) -

Economies of scale – Decreasing average cost per unit by increasing total output

Product design – Design for easy of production rather than functionality

Input costs – Vertical integration can help, locational differences can hinder these costs

Economies of learning – Firms benefit as a result of learning by doing

Differentiation advantage (Price premium from unique product) -

Product characteristics – Quality, design and reliability

Complementary services – Credit, delivery or repair etc

Location of the firm

Industry life cycle and the drivers of evolution

The industry life cycle illustrates the pattern of evolution, and there are 2 main forces that driver industry evolution…

 1) Demand growth

This suggests that the life cycle and changes within it are defined mainly by changes in an industry’s growth rate over time.

Introductory stage – Miniscule sales, Low market penetration, Innovation-oriented customers

Growth stage – Rapid market penetration due to technological advancements

Maturity stage – Market saturation reduces growth rate, Increased competition within market

Decline stage – Demand shifts to new industries that produce technologically superior products

2) Creation & diffusion of knowledge

As an industry involves products become standardised and increased innovation takes place.

Implications of the life cycle for competition and strategy

Changes in demand growth and technology over the cycle have implications for industry structure, the population of firms, and competition.

Product differentiation – Trend towards standardisation creates incentive for differentiation

Organisational demographics and industry structure -

Number of firms within an industry increases rapidly during early years. Shakeout phase reduces this number during the maturity stage. Niche markets can be created due to concentrated industries.

International migration –

With maturity, commoditization, and deskilling of production processes, production eventually shifts to developing countries with low labour costs.

Nature and intensity of competition –

A shift takes place from non-price competition to price competition, as competitors increase.

Organisational inertia and its sources

Organisational inertia is the tendency of a mature organisation to continue on its current trajectory, as they find change difficult. There are various sources of organisational inertia…

Organisational routines

Existing routines can make it difficult to develop new capabilities - potential competancy traps

Social system

Organisations develop patterns of interaction that make organisational change stressful

Political system

Change represents a threat to the power of those inn positions of authority in organisations

Imitating

Firms imitating one another can lock firms into common structures and strategies

Limited search

Tools of strategic change management

There are various ways in which organisational inertia can be weakened…

Creating the perception of crisis – Better prepared and could lead to damage limitation

Establishing stretch targets – Limits complacency and motivates employees

Organisational initiatives – Creates positive environment, which could increase production

Reorganising and introducing new blood – Fresh new ideas for strategic change

Multiple scenario analysis – Offers structure approach to prepare for the future

Competitive advantage within mature industries

Mature industries are characterised by a lack of technological change and the emergence of overseas competitors. However, there is still potential for competitive advantage…

Cost advantage

Low-cost inputs – Migrating from advanced to newly industrialised countries

Lowering overheads – Corporate restructuring, this includes downsizing and outsourcing

Segment & customer selection

Niche markets have the potential to offer strong growth with low competition

Differentiation

Complementary services – Reading sessions within bookshops etc

Variety, style and ambience – Breaking the shackles of standardisation

Strategies for declining industries

The transition from maturity to decline can be a result of technological substation, changes in consumer preferences, demographic shifts, or foreign competition. In turn, companies must consider strategies to pursue profitability within declining industries…

Takeover or acquisition – Demonstrates commitment and encourages the exit of rivals

Niche strategy – Leadership strategy could be adopted, and unlikely to be invaded by rivals

Harvesting – Maximising cash flow from existing assets, whilst avoiding further investment

Divesting – If the future looks bleak, sell whilst it is still possible to find a buyer

Benefits and costs of vertical integration

Benefits

Reduces transaction costs

Greater monopoly position - Firms may be able to set prices for final products or factor inputs

Erects entry barriers - Could refuse to sell to rivals

Economies of scale

Costs

Risky - Problem at one stage of production could threaten all the stages

May damage competitive position of origional business - Strained relationships

Managing strategically different business - Requires different organisational capabilities

Implications of competition for industry analysis

Patterns of internationalisation…

Sheltered industries – Served exclusively by national firms and protected from foreign rivals

Trading industries – Internationalization occurs though imports and exports

Multidomestic industries – Internationalization through direct investment

Global industries – Both trade and direct investment is important

Implications for competition

Potential new entrants - MNCs may benefit from falling transportation costs and tariff reductions

Rivalry between existing firms- Internationalization increases number of firms within an industry

Bargaining power of industrial buyers - Occurs due to sourcing from overseas

Benefits and costs of a global strategy

A global strategy is one that views the world as a single market, and there are 5 main sources of value from operating internationally…

Cost benefits – Scale and reputation

Global customers – Greater profit opportunities

Arbitrage benefits – Produce where it’s cheap, sell where it’s profitable

Learning benefits – Transfer and integration of knowledge from different locations

Strategic advantage – Ability to use resources from other national markets

Motives for diversification

Over the years corporate diversification has been driven by growth, risk reduction and also the creation of shareholder value.

Corporate growth – Can increase a firm’s awareness as well as profit opportunities

Risk reduction – Can combine cash flows of different businesses and bring them together

3 tests can be used in order to determine whether diversification can create shareholder value…

Attractiveness test – Industries chosen for diversification must be structurally attractive

Cost of entry – The costs must not capitalise all future profits

Better-off test – A firm must consider if they will benefit from this strategy

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