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Class Plan 3 “The early bird may get the worm, but the second mouse gets the cheese” Anonymous
Questions for the next case
Brief discussion of the Apollo case
Review of 5-forces, including exercise Move on to Chapter 3 on Internal Analysis + extra information on VRIO approach
Exercises & video on Internal Analysis

Questions for the Nokia case
Have Nokia’s mission and vision (or their implementation) been partially responsible for their faltering performance?
Using the 5-forces model, what industry threats should Nokia have identified in their strategic pursuits?
What can Nokia do to continue to compete globally and domestically?

Porter’s Five Forces Model (Fig 2.2 p45 adapted)
Rivalry among established firms
Risk of entry by potential competitors
Bargaining power of suppliers
Bargaining power of buyers
Threat of substitute products

Special role of complements

Product Lifecycle

Time
Demand
Embryonic
Growth
Shakeout
Mature
Declining

Macro-environmental Forces [Environmental Scanning]
Macroeconomics: growth rate of the economy, interest rates, currency exchange rates, inflation rates
Technological: “creative destruction”, shifting barriers to entry
Social: lifestyles, trends and attitudes
Demographics: composition of the population, factors such as income distribution, education, labour mobility, gender
Political & Legal : deregulation and free trade
Global: falling barriers to trade, new economic development

More on 5-forces model
Strategic Groups Def.: subsections of industry with the same basic strategy in-group
Implications:
closest competitors are in the same group
groups, to some extent, face different 5+-forces
exit & entry barriers exist between groups

Limitations of 5+-Forces & Strategic Groups models
Static picture with limited attention to innovation. Industries evolve “unfrozen and reshaped” by technology : punctuated equilibrium hyper-competitive industries with no equilibrium
downplays individual company differences
studies show that industry only accounts for 10%-20% of variance in firms’ profit rates

Internal Analysis
The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization.
Strengths lead to superior performance. Weaknesses lead to inferior performance.

Internal Analysis includes an assessment of:
Quantity and quality of a company’s resources and capabilities
Ways of building unique skills and company-specific or distinctive competencies

The Theory Behind Internal Analysis
The Resource-Based View
• developed to answer the question: Why do some
firms achieve better economic performance
than others?
• assumes that a firm’s resources and capabilities
are the primary drivers of competitive advantage
and economic performance
• used to help firms achieve competitive advantage
and superior economic performance

The Resource-Based View
Resources and Capabilities
Resources:
• tangible and intangible assets of a firm
» tangible: factories, products intangible: reputation
• used to conceive of and implement strategies
Capabilities:
• a subset of resources that enable a firm to
take full advantage of other resources
» marketing skill, cooperative relationships

The VRIO Approach
Value: Do a firm’s resources & capabilities in each section of the Value Chain enable the firm to respond to environmental threats or opportunities?

Rarity: Is a resource currently controlled by only a small number of firms?
(In)Imitability: Do firms without a resource face cost disadvantages in obtaining or developing it?

Organization: Are a firm’s other policies and procedures organized to support the exploitation of its valuable rare and costly to imitate resources?

The VRIO Framework
• a resource or bundle of resources is subjected to
each question to determine the competitive
implication of the resource
Applying the Tool
• each question is considered in a comparative
sense (competitive environment)
For further application information, see
Conner, Tom (2002) “The resource-based view of strategy
and its value to practising managers” ,
Strategic Change 11, 307-316)

Applying the VRIO Framework
The Question of Value
• in theory: Does the resource enable the firm
to exploit an external opportunity or neutralize
an external threat?
• the practical: Does the resource result in an
increase in revenues, a decrease in costs, or
some combination of the two? (Levi’s reputation
allows it to charge a premium for its Docker’s pants)

Applying the VRIO Framework
The Question of Rarity
• a resource must be rare enough that perfect
competition has not set in
• if a resource is not rare, then perfect competition
dynamics are likely to be observed (i.e., no
competitive advantage, no above normal profits)
• thus, there may be other firms that possess the
resource, but still few enough that there is scarcity
(several pharmaceuticals sell cholesterol-lowering
drugs, but the drugs are still scarce—look at prices)

Applying the VRIO Framework
Valuable and Rare
If a firm’s resources are:
The firm can expect:
Not Valuable
Competitive Disadvantage
Valuable, but Not Rare
Competitive Parity
Valuable and Rare
Competitive Advantage
(at least temporarily)

Applying the VRIO Framework
The Question of Inimitability
• the temporary competitive advantage of valuable
and rare resources can be sustained only if
competitors face a cost disadvantage in imitating
the resource
» intangible resources are usually more
costly to imitate than tangible resources
(Harley-Davidson’s styles may be easily
imitated, but its reputation cannot)

Applying the VRIO Framework
The Question of Inimitability
• if there are high costs of imitation, then the firm
may enjoy a period of sustained competitive
advantage
» a sustained competitive advantage will last
only until a duplicate or substitute emerges
if a firm has a competitive advantage, others
will attempt to imitate it (Razor scooters
were a big hit and others quickly imitated them)

Applying the VRIO Framework
Value, Rarity, & Inimitability
If a firm’s resources are:
The firm can expect:
Valuable, Rare, but
not Costly to Imitate
Temporary
Competitive Advantage
Valuable, Rare, and
Costly to Imitate
Sustained
Competitive Advantage
(if Organized appropriately)

Applying the VRIO Framework
The Question of Organization
• a firm’s structure and control mechanisms
must be aligned so as to give people ability
and incentive to exploit the firm’s resources
• examples: formal and informal reporting structures,
management controls, compensation policies,
relationships, etc.
• these structure and control mechanisms complement
other firm resources—taken together, they can help a
firm achieve sustained competitive advantage

The VRIO Framework
Valuable?
Rare?
Costly to
Imitate?
Organization?
Competitive
Implications
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Disadvantage
Parity
Temporary
Advantage
Sustained
Advantage
Economic
Implications
Below
Normal
Normal
Above
Normal
Above
Normal

Generic Value Chain

A Typical Value Chain (Oil-based refined products)
Exploring for crude oil
Drilling for crude oil
Pumping crude oil
Shipping crude oil
Buying crude oil
Refining crude oil
Sending refined products to distributors
Shipping refined products
Selling refined products to final customers

Value Chain Approach
Analyze each of the functions that lead to production of the final product or service

How well do they each perform?
– quantitative & qualitative tools needed here
How effectively do the different functions interact?

Are the supporting functions adequate?

The Building Blocks Approach
(Figure 3.6, p 95)
Efficiency: What is the usual measure of efficiency?

Quality: Excellence and reliability
Innovation: Importance of both process and product innovation, role of innovation in becoming unique

Customer responsiveness: Includes response time, customization, and after sales service and support

Applying the Building Blocks Approach
Itemize instance of significant operational and managerial achievements and/or deficiencies under each of the categories.
Use these noted observations to guide your recommendations.

Why companies fail
Inertia
Companies find it difficult to change their strategies and structures

Prior Strategic Commitments
Limit a company’s ability to imitate and cause competitive disadvantage

The Icarus Paradox
A company can become so specialized and inner directed based on past success that it loses sight of market realities
Categories of rising and falling companies:
• Craftsmen • Builders • Pioneers • Salespeople

Avoiding Failure
Focus on the Building Blocks of Competitive Advantage
Develop distinctive competencies and superior performance in:
Efficiency  Quality
Innovation  Responsiveness to Customers
Institute Continuous Improvement and Learning
Recognize the importance of continuous learning within the organization
Track Best Practices and Use Benchmarking
Measure against the products and practices of the most efficient global competitors
Overcome Inertia
Overcome the internal forces that are barriers to change

Questions for Starbucks’ Video
1) List Starbucks’ major capabilities
and discuss the strategic implications of these capabilities.
2) How is Starbucks’ utilizing their resources and capabilities to develop their brand overseas?
3) Describe Starbucks’ people-to-people business philosophy. How has this resource/capability contributed to Starbucks’ strategic success?

Questions
1) What is the role of luck in gaining possession of a particular resource or capability? Can a firm manage luck? Give 3 examples of resources or capabilities that specific organizations gained through luck.
2) Some firms’ products are so well known that the entire category of products offered in the industry (including rivals’ products) is often referred to by the leading firm’s brand name (which is called an eponym). Identify three such products, and for each case discuss whether their brand recognition gives the leading firm a competitive advantage. Why or why not?