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THEORIES OF ORGANIZATIONAL ADAPTATION

• Theory of population ecology EXTERNAL ENVIRONMENT

proposes that once an organization is successfully established in a particular • External intervention.

environmental niche, it is unable to adopt to changing conditions. The company is
thus replaced (is bought out or goes bankrupt) by other organizations more suited to A change in strategy may involve alterations in the supply chain, including demand,
the new environment. supply, and environmental risks. Unpredictable customer demands cause demand
risks while supply risks are caused by interruptions to the flow of product, including
• Institution theory raw materials in the supply chain. The environmental risks are usually related to
economic, social, governmental, and climate factors, including the threat of
proposes that organizations can do adopt to changing conditions by imitating other terrorism.
successful organizations. The theory does not however explain how or by whom
successful new strategies are developed in the first place. • Strategic inflection point.

• Strategic choice perspective A change in strategy may involve a major alteration in the company due to the
introduction of new or disruptive technologies, a different regulatory environment, a
proposing that not only do organizations adapt to a changing environment, but they change in customers’ values, or a change in customers’ preference.
also have the opportunity and power to reshape their environment.

• Organizational learning theory

WHAT MAKES A DECISION STRATEGIC
an organization adjusts defensively to a changing environment and uses knowledge
offensively to improve the fit between itself and its environment. This perspective - Unlike many other decisions, strategic decision deal with the long-run future of an
expands the strategic choice perspective to include people at all levels becoming entire organization and have three characteristics:
involved in providing input into strategic decisions.
1. Rare:

Strategic decisions are unusual and typically have no precedent to follow.

INITIATION OF STRATEGY: TRIGGERING EVENTS
2. Consequential:
Internal
Strategic decisions commit substantial resources and demand a great deal
• New Chief Operating Officer (CEO). of commitment from people at all levels.

A change in strategy may involve a newly appointed officer who forces the 3. Directive:
people to question the reason for the company’s existence.
Strategic decisions set precedent for lesser decisions and future actions
• Performance measure. throughout an organization.

A change in strategy may involve a gap that exists when performance does MINTZBERG’S MODES OF STRATEGIC DECISION MAKING
not meet expectations. Sales and profits either are no longer increasing or
may even be falling. Entrepreneurial mode

• Threat of a change in ownership. • The major focus is on opportunities

A change in strategy may involve a different firm that initiates a takeover by buying • Strategy is guided by the founder’s own vision
a company’s common stock.
• The dominant goal is growth of the business.
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• Example – Amazon.com, founded by Jeff Bezos, reflects Bezo’s vision of Logical incrementalism
using the internet for marketing everything that can be bought.
• Can be viewed as a synthesis of the planning, adaptive and to a lesser
Adaptive mode extent the entrepreneurial mode.

• Characterized by reactive solutions to existing problems • Top management has a clear idea of the firm’s mission and objectives but
choses to use an interactive process.
• There is no proactive search for new opportunities
• They probe the future, experiment, and learn from a series of partial
• There is much bargaining priorities (incremental) commitments.
• Strategy is fragmented and developed to move a corporation forward • Strategy is allowed to emerge out of debate, discussion, and
incrementally experimentation.
• Common in universities, large hospitals, government agencies and large • This mode is useful in a rapidly changing environment and where it is
corporations crucial to build consensus and develop needed resources before
committing an entire organization to a specific strategy.
• EXAMPLE: Encyclopedia Britannica Inc. operated successfully for many
years in this mode, but it continued to rely on the door-to-door selling of • EXAMPLE: In the petroleum industry, corporate headquarters established
its prestigious books long after dual-career couples made that marketing the mission and objectives but allowed the business units to propose
approach obsolete. Only after it was acquired in 1996 did the company strategies to achieve them.
change its door-to-door sales to television advertising and Internet
marketing.

Planning mode INDUSTRY ANALYSIS: ANALYZING THE TASK ENVIRONMENT

Involves systematic gathering of appropriate information for:

• Situation analysis

• Generation of feasible alternative strategies

• Rational selection of the most appropriate strategy

• Includes both proactive search for new opportunities and the reactive
solution of existing problems

• EXAMPLE: IBM under CEO Louis Gerstner is a great example of the

planning mode. When Gerstner accepted the position of CEO in 1993, he
realized that IBM was in serious difficulty. Mainframe computers, the
company’s primary product line, were suffering a rapid decline both in
sales and market share. An in-depth analysis of IBM’s product lines DEFINING AN INDUSTRY
revealed that the only part of the company that was growing were services,
but it was a relatively small segment and not very profitable. Rather than EMPLOY TWO KEY DIMENSIONS
focusing on making and selling its own computer hardware, IBM made the
strategic decision to invest in services that integrated information 1. Scope of the products or services
technology.
2. Geographic scope
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a. Barriers to Entry – Economies of Scale

refers to an advantage experienced by a business organization when more units of

goods and services are manufactured at a lower cost of inputs.

Here, the cost of production starts decreasing when the production becomes more
efficient, and the number of units produced starts increasing.

b. Barriers to entry – differentiated product

If the product being sold by the existing company or companies is highly

differentiated or enjoys strong brand loyalty, then this can act as a strong barrier to
entry.

c. Barriers to entry – High capital Costs

If an industry requires huge capital investments at the onset, then this will act as a
barrier to entry for many of the potential entrants.

d. Barriers to entry – other cost advantages

It includes access to the best suppliers, an understanding of existing materials and

knowledge of their quality, possession of any necessary and important patents, and
proprietary information and technological knowledge.

There could also be learning advantages, achieved over years of business and
experience

e. Barriers to entry – cost of switching

The cost associated with a consumer’s move from one company or product, or
another is called the switching cost.

If there are significant switching costs, then a new entrant may not be able to create
means of removing these.
1. THREAT OF ENTRY
Or, they may have to offer significant advantage to counter these switching costs at
their own expense.

f. Barriers to entry - Distribution Network

Often, distribution relationships are well established and may prove to be a strong
barrier to entry for a new company.

A new entrant will obviously need access to these distribution channels but will need
to invest extra in order to engage distributors who have established relations with
existing competitors.

g. Barriers to entry – suppliers

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As with distributors, suppliers may be vital to the operations of a new business. • Proprietary technology is not an issue
Existing suppliers may have contracts or loyalties with existing companies and may
prove to be difficult to form relationships with. • Proprietary materials are not an issue

h. Barriers to entry - Legal and Government Created Barriers • Government policy is not an issue

The government can limit or even foreclose entry to industries with such controls as • Expected retaliation of existing firms is not an issue
license requirements and limits on access to raw materials. The government also can
play a major indirect role by affecting entry barriers through controls or there may
THREAT OF NEW ENTRY IS LOW IF:
also be laws governing ways to conduct business that may conflict with a company’s
practices in other countries. • Profitability requires economies of scale
i. Barriers to entry – barriers to exit • Products are differentiated
If a company is unable to easily leave a competitive environment in case business • Brand names are well-known
does not work out, then it will have to stay and compete even if that is a detrimental
business practice. • Initial capital investment is high
In this case, the company may choose to not enter the market in the first place. • Consumer switching costs are high
MEANS OF ENTRY INTO A MARKET • Accessing distribution channels is difficult
1. Take over • Location is an issue
2. Diversification • Proprietary technology is an issue
3. Competitive advantage • Proprietary materials is an issue
4. Demand • Government policy is an issue
5. Control • Expected retaliation of existing firms is an issue

REDUCING THE TREAT OF NEW ENTRANTS

High Threat of Entry of New Competitors When:
• Increase minimum efficient scales of operations
• Profitability does not require economies of scale
• Create a marketing / brand image (loyalty as a barrier)
• Products are undifferentiated
• Patents, protection of intellectual property
• Brand names are not well-known
• Alliances with linked products / services
• Initial capital investment is low
• Tie up with suppliers
• Consumer switching costs are low
• Tie up with distributors
• Accessing distribution channels is easy
• Retaliation tactics
• Location is not an issue
2. RIVALRY AMONG EXISTING FIRMS
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REDUCING THE COMPETITIVE RIVALRY BETWEEN EXISTING THE THREAT OF SUBSTITUTES PORTER PLACES HIGH RISK ON:
PLAYERS
 Substitute product is cheaper than industry product
• Avoid price competition  Consumer switching costs are low
 Substitute product quality is equal or superior to industry product quality
• Differentiate your product
 Substitute performance is equal or superior to industry
• Buy out competition product performance

• Reduce industry over-capacity THE PORTER THREAT OF SUBSTITUTES LOW RISK SITUATION:

• Focus on different segments • Consumer switching costs are high

• Substitute product is more expensive than industry product
• Communicate with competitors • Consumer switching costs are high
• Substitute product quality is inferior to industry product quality
3. THREAT OF SUBSTITUTE PRODUCTS OR SERVICES • Substitute performance is inferior to industry product performance
• No substitute product is available
Though not foolproof, there are steps to take in order to prevent customers from
needing to explore alternates or substitutes. These include: REDUCING THE THREAT OF SUBSTITUTES
• Differentiation • Legal actions
• Customer value • Increase switching costs
• Brand loyalty • Alliances

• Customer surveys to learn about their preferences

• Enter substitute market and influence from within

• Accentuate differences (real or perceived)

4. Bargaining Power of Buyers

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DIFFERENT GROUPS OF BUYERS • Purchases of large volumes

1. Innovators • Switching to another (competitive) product is simple

2. Adopters • The product is not extremely important to the buyer, they can do without it
for a period of time.
3. Early majority
• Customers are price sensitive
4. Late majority
• Buyer concentration to firm concentration ratio
5. Excessive traditionalists
• Bargaining leverage

• Buyer volume

• Buyer switching costs relative to firm switching costs

• Buyer information availability

• Ability to backward integrate

• Availability of existing substitute products

• Buyer price sensitivity

• Price of total purchase

BUYER’S BARGAINING POWER IS GENERALLY WEAKER.

MITIGATING BUYER BARGAINING POWER
• When a buyer depends on the seller because of the fact that the brand
reputation of the seller is very important to the buyer. Here are some recommendations that can help:

• When there is a high demand for the seller’s products in the market and as • Offering differentiated value: Of course, customer retention always
a result, a seller’s market prevails in the industry. starts with a good product. If well-developed, your product should be
responsible for a good part of sales and retention. In a B2B context you
• When the cost of procuring products from alternative sources is very high. may hit a sweet spot if your products stand out with qualities that are
critical for the quality or performance of buyers’ final products and
• When a buyer purchases a particular product from the seller in a small services.
quantity or does not purchase frequently.
• Increasing switching costs: Creating an environment that your buyers
would miss if they switched to a different vendor. Manufacturers of health
This is how much pressure customers can place on a business. If one customer monitor bands, for example, usually build a companion website to store
has a large enough impact to affect a company’s margins and volumes, then users’ historical health data in the cloud. Users would think twice about
they hold substantial power. Here are a few reasons that customers might have switching to another vendor and leaving their data behind.
power
• Increasing the social costs of using other solutions: Promote your
• Small number of buyers products among influential people in the buyers’ circles, getting key
endorsements when appropriate.
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• Using pricing strategies to increase retention: For example, lower prices • When buyer-firms have the capacity to integrate back into the business of
for current customers or long-term membership deals. the supplier and thus can satisfy the customer’s own requirements.

• Offering complementary services: You can trap customers into your • When the customers have ample opportunities to develop strategic
business model by offering after-sale services they find valuable. alliances with other suppliers, and thus can have win-win gain.

• Personalizing customers’ experience: An extension of the previous point • When continued large purchases on the part of the customers are important
is to personalize your customers’ interaction with the product and the for the suppliers.
company. The more personalized their use of your product is, the harder it
is for them to switch over to a different solution. This is how much pressure suppliers can place on a business. If one supplier has
a large enough impact to affect a company’s margins and volumes, then they
• Offering attractive “upgrades” at the end of contracts: If an agreement hold substantial power. Here are a few reasons that suppliers might have
is coming to an end, you may offer an attractive upgrade if customers power:
renew. Think about how phone companies offer free upgrades to the latest
smartphone every two years. • There are very few suppliers of a particular product

You must mitigate powerful buyers even if your relationships with them are in • There are no substitutes
good standing. Remember that the real threat is them being able to use their
• The product is extremely important to the buyer, they cannot do without it
power, not whether they use it at the moment or not.
• The supplying industry has a higher profitability than the buying industry
5. BARGAINING POWER OF SUPPLIERS
• Supplier switching costs relative to firm switching costs
A supplier or supplier group is powerful if some of the following factors apply:
• Degree of differentiation of inputs
• The supplier industry is dominated by a few companies, but it sells to
many. • Presence of substitute inputs
• Its products or service is unique and/or it has built up switching cost. • Supplier concentration to firm concentration ratio
• Substitutes are not readily available • Threat of forward integration by suppliers relative to the threat of
backward integration by firms
• Suppliers are able to integrate forward and compete directly with their
present customers. • Cost of inputs relative to selling price of the product
• A purchasing industry buys only a small portion of the supplier group’s
goods and services and is thus unimportant to the supplier MITIGATING SUPPLIER BARGAINING POWER

The power of vendors can be mitigated through a combination of the following:

The bargaining power of suppliers is weaker under the following circumstances
in the industry. • Incentivizing competition between vendors: A company is always in a
better negotiation position when it has multiple vendors to choose from.
• When substitute products acceptable to the buyers are easily available. For an online retailer like Amazon, for example, it would be in their best
interest to help the US Postal Service to become a competitive player
• When huge quantity of products is available in the market.
against FedEx. At the end of the day, the customer (in this case us) always
• When buyers can buy from alternative suppliers at a low cost. benefits from rivalry among vendors.

• Integrating backwards: Some companies may be well-positioned to start

producing key inputs themselves as a way to reduce reliance on another
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company’s strategy. Apple, for example, has started creating its own
processor chips to avoid being choked by powerful vendors like AMD and
Intel.

• Competing with vendors: A variation of the previous point is what

Walmart, Aldi, Target, Costco, and other retail players are doing:
having their own in-house brands compete with vendors’. That move
will keep vendors at bay, minimizing any threat of price increase or
scarcity.

INTERNAL SCANNING AND ORGANIZATIONAL ANALYSIS

 Organizational Competencies
 Business Models
 Value Chain Analysis
 Scanning Functional Resources and Capabilities

Resource based approach to organizational analysis

RESOURCES

• Are the source of a firm’s capabilities

• Are broad in scope Two critical assumptions in RBV

• Cover a spectrum of individual, social, and organizational
phenomena

• Represent inputs into a firm’s production process HETEROGENEUS IMMOBILE

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CAPABILITIES

• Capability is a feature, faculty or process that can be developed or

improved. Capability is a collaborative process that can be deployed and
through which individual competences can be applied and exploited.

• Capabilities are the firm’s capacity to deploy resources that have been
purposely integrated to achieve a desired end state

• Capabilities can be tangible, like a business process that is automated, but

most of them tend to be tacit and intangible.

• The foundation of many capabilities lies in the skills and knowledge of a

firm’s employees and, often, their functional expertise.

• Are activities that a firm performs exceptionally well relative to rivals

• Are activities through which the firm adds unique value to its goods or
• Resource Based View (RBV) defines capability as the ability of a bundle
services over an extended period of time.
of resources to perform an activity. It is a way of combining assets, people,
• Exist when resources have been purposely integrated to achieve a specific and processes to transform inputs into output. Physical assets, financial
task or set of tasks resources, human skills are of no use unless these are put to good use, in
order to produce results. This can be represented mathematically thus:
• Global business leaders increasingly support the view that the knowledge
possessed by human capital is among the most significant of an C= F (TA, IA, S)
organization’s capabilities and may ultimately be at the root of all
• Where C= capability TA = Tangible assets, IA = intangible assets and S =
competitive advantages.
Skills
• A capability is usually considered a “bundle” of assets or resources to

Capability vs Competency

Competencies vs. Core Competencies vs. Distinctive Competencies

• A competency is an internal capability that a company performs better

than other internal capabilities.

• A core competency is a well-performed internal capability that is central,

not peripheral, to a company’s strategy, competitiveness, and profitability.

• A distinctive competence is a competitively valuable capability that a

company performs better than its rivals.
perform a business process.
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 Leading direct marketing skills - database management; direct-mailing

campaigns; call center sales conversion
 Skills in customer relationship management

Criteria 2: Why have Tesco been so successful in capturing leadership of the

market for online grocery shopping?

CORE COMPETENCIES: A VALUABLE COMPANY RESOURCE

Core competencies that mean customers value the Tesco.com experience so highly:
• The core competency of any business is a strategic, competitive advantage
it holds over its competitors. • Designing and implementing supply systems that effectively link existing
shops with the Tesco.com web site
• They are centered on what the company does for the client, or how the
company’s services and product benefit the customer. • Ability to design and deliver a "customer interface" that personalizes
online shopping and makes it more efficient
• The core competency isn’t something your closest competitors can rush
right out and copy, at least not without a great deal of effort and time. • Reliable and efficient delivery infrastructure (product picking, distribution,
customer satisfaction handling)
Conditions for core competence
Criteria 3: Why does Dell have such a strong position in the personal computer
1. Competitor differentiation market?
2. Customer value Core competencies that are difficult for the competition to imitate:
3. Application of competencies • Online customer "bespoking" of each computer built
Criteria for Determining Core Competencies • Minimization of working capital in the production process
1. A core competency can lead to the development of new products and • High manufacturing and distribution quality - reliable products at
services and must provide potential access to a wide variety of markets. competitive prices
2. It must make a significant contribution to the perceived benefits of the end • Core competencies help create competitive advantage. Even good markets
product. will not make a ‘me too’ firm competitive in the long – run.
3. It should be difficult for competitors to imitate. In many industries, such • It helps pave way for above – average performance over the long – run.
competencies are likely to be unique.
• It improves chances for long – term success as competencies are enhanced
EXAMPLES ON THE 3 CRITERIA FOR DETERMINING CORE with time.
COMPETENCIES
• Core competencies lead to the development of core products. These core
Criteria 1: Why has Saga established such a strong leadership in supplying products are used to build a larger number of ends – user products.
financial services (e.g. insurance) and holidays to the older generation?

Core Competencies that enable Saga to enter apparently different markets:

 Clear distinctive brand proposition that focuses solely on a closely defined

customer group
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Functional Areas Key Components

Finance Asset management, capital budgeting, capital structure, financial

analysis and planning, financial control and budgeting, asset
valuation.

Marketing Product development, promotional activities, distribution, pricing,

internal marketing, external marketing, communications, public
relations, market research.

Human Resources Organizational behavior, labor relations, hiring, developing,

compensating, leadership, educating, high performance work
practice systems.

Administration Accounting management information systems, strategic planning,

legal, risk/insurance, communications, process improvement
• The matching of market opportunities with a firm’s core competencies
forms the basis for launching new products or entering new markets. Operations Cost control systems, production systems, production management,
quality control, process improvement
• Constantly improving competencies provides for new integrated
technologies. Research and New business opportunities, competitive intelligence, product
Development testing, feasibility studies, business valuation.
• Competencies provide focus for long – term goals.
• Fast development of new products
IMPORTANCE OF CORE COMPETENCIES
• Better after-sale service capability
• Allows you to determine how to best allocate your resources in the most
productive and beneficial way • Superior know-how in selecting good retail locations
• Enables you to identify the best projects and opportunities to pursue that • Innovativeness in developing popular product features
align with your core competencies
• Merchandising and product display skills
• Gives you an idea of where you should provide training to enhance your
employees’ ability to maximize your company’s core competencies • Expertise in an important technology

• Provides you with information regarding what services or tasks you can • Expertise in integrating multiple technologies to create whole families of
outsource to save time and resources in-house new products

• Acts as a foundation for how you should go about marketing and branding
your company
Functional Areas for Core Competencies Development
EXAMPLES OF CORE COMPETENCIES

• Skills in manufacturing a high-quality product.

EXAMPLE OF CORE COMPETENCIES OF DIFFERENT COMPANIES
• System to fill customer orders accurately and swiftly
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• At Sony – benefit is pocketability- Core competence is miniaturization. What makes them distinctive is their uniqueness or lack of substitutability,
Expertise in electronic technology and ability to translate this technology rarity among competitors
into developing and manufacturing innovative products – miniaturized or collaborators, difficulty of imitation, value in terms of exploiting
radios and video camera and LEDs and DVDs with unique feature. opportunities or warding off threats, and the resulting provision of
competitive or collaborative advantage
• At Federal Express – benefit is on time delivery - Core competence is
logistics management. DISTINCTIVE COMPETENCE CAN BE BUILT IN A NUMBER OF WAYS.

• At Motorola – benefit is untethered communication - Core competence is • Firms can hire more qualified professionals than those employed by
wireless communication. competitors;

• Honda has a core competence in small engine design and manufacturing. • they can find and exploit previously neglected market niches;

• Federal Express has a core competence in logistics and customer service. • and they can be especially innovative or can gain advantage over
competitors through sheer strength of management.
• Microsoft has the core competence of designing office software products
that are user-friendly. Discovering distinctive competencies

• PepsiCo has a core competence of mass production and distribution of First step in discovering distinctive competencies is CONCEPTUAL
bottled drinks. ANALYSIS to corporate documents concerning the company's products and
services. Competences are a means to maintain and support products or services
• Polaroid has a core competence in manufacturing immediately self- provided by the company. We should use both explicit and confidential documents to
developing film. perform the analysis. The analysis should include:
• Ernst & Young has the core competence of performing audit functions for • Business statements within annual reports of the last two to three years;
Fortune 500 corporations. Current corporate profiles in social media; Product overviews; Product
catalogs; Research laboratory agendas and reports; Technical briefs and
• One of Wal-Marts core competencies is their massive real-time white papers;
information system.
If it is possible, we should also use documents from external sources, such as press
• Intel – design of complex chips for computers. articles, interviews, feature articles and anything similar to the described company.
A DISTINCTIVE COMPETENCE – A COMPETITIVELY SUPERIOR Next step is VERIFYING DISTINCTIVE COMPETENCE BREADTH AND
RESOURCE DYNAMIC by combining competence breadth findings in order to depict the
• Distinctive competence refers to some characteristic of a business that it iterative interactions across them. Here we can see how singular skills are combine
does better than its competitors. Because the business is able to do into an integrated one. It is very important to understand in these steps which
something better than other businesses, that business has a competitive competencies are basic, which can be easily replaced, and which are optional but
advantage over other businesses. useful.

• Companies with a distinctive competence are ones that have an advantage

that is difficult for other businesses to copy. In order for a company to
develop a distinctive competence, it must do a very thorough internal and
external review of its corporate environments.

• Distinctive competencies are competencies that are very difficult for

others to replicate and therefore are a source of enduring advantage. They
“are the features of the organization that underpin long-term success”
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Last step is ENHANCING UNDERSTANDING OF COMPETENCE • Market niche creation for highly specialized products
DYNAMIC AND ELEMENTS by interviews with the intellectual leaders of the
corporation, whether executives leading large divisions or individual scientists and • Superior R and D skills
engineers. We can identify them use criteria like their intellectual diversity and their
• Possessing large number of equity share holders
reputation within the firm for being knowledgeable and thoughtful concerning the
firm's intellectual strengths. During the interview, we should ask them about the • Marketing skills
competences used in their area and present them the results of their research so far. It
is a good practice to conduct interviews using the method "tree and branch" where • Managerial skills
tree trunk is core topic, and the branches is main question. Then we can explore
every branch in different degree of depth. • Synergistic work force

• Supportive union and what not.

Examples of Distinctive Competencies

• Toyota, Honda, Nissan - Low-cost, high-quality manufacturing capability

and short design-to-market cycles

• Intel - Ability to design and manufacture ever more powerful

microprocessors for PCs

• Motorola - Defect-free manufacture (six-sigma quality) of cell phones

• Sharp - Expertise in flat-panel display technology.

• Superior product quality in a particular attribute like fuel efficiency.

• Creation of a market niche of highly specialized products to a particular

market segment.
Distinctive competence can be in the form of
• Differential advantages based on superior R&D.
• Patents
• Access to low-cost financial source like shareholders.
• Exclusive access to natural resources

• Government licenses
DISTINCTIVE VS. CORE COMPETENCIES
• Superior product
EXAMPLE OF A CORE AND DISTINCTIVE COMPETENCY
• Pioneer efforts
Core Competency
• Product quality
• The core competence of Toyota Motor Corporation is its ability to produce
• Competitive price automobiles of great quality at best prices, thereby providing a value for
• Unmatched promotional offers, such as discounts and prize coupons money to the customers. This core competence of quality can be attributed
to its innovative production practices. The quality aspect of Toyota’s
• Particular attribute of a product-say, highly fuel-efficient four-wheeler products have revolutionized the automobiles in the past and almost all the
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automobile companies had to try and better the quality of their products. It lower costs of production, a unique or exclusive contract with a customer, or other
is a cornerstone of the cost leadership strategy that the company pursues. positive factor or recognition, then it is valuable.

Distinctive Competency It should be noted that in many cases the value of a resource declines as competitors
copies or develop their own resources.
• Toyota’s distinctive competence is its production system known as the
“Toyota Production System” or TPS. TPS is based on the Lean It may be helpful to leadership to put a time frame for how long the resource will
Manufacturing concept. This concept also includes innovative practices hold value. In some cases, this is easy. For example, if you have an exclusive five-
like Just in Time, Kaizen, and Six Sigma and so on. Toyota has worked year contract with a customer, the value is five years. In other cases, you may need
tirelessly over the years to establish this distinctive competence. No other to determine how long it will take before others gain a similar or substitute resource,
automobile manufacturer can do it as well as Toyota does. This distinct which will decrease the value of your resource.
competence has led to a competitive advantage that has given Toyota a
sustainable brand name and a market leader position. Rarity:

The tangible and intangible resources that very few organizations can only acquire
are rare resources.

A firm with these rare skill sets in its closet can reap the competitive benefits and
stand out in the market.

In contrast, companies that possess the same set of resources and skills face
competitive parity.

A resource is rare if it not easily purchased on the open market by competitors or

there is a limited supply of that resource, and your organization controls the largest
share.

It can also be rare if there are many competitors in the marketplace and only a few of
the competitors have this resource.

An example of this could be a certification or ranking where only a certain amount

of the certifications is awarded.
VRIO Framework Lenses
Other examples would include a large number of employees with a particular
Value: background where there is a limited supply of workers containing this background in
the larger market.
It states that the resources are only valuable to organizations if they contribute to
their goal in terms of products or services. It should be noted that over time, some resources become rarer as scarcity increases
because of demand, while others become less rare because high demand for
Besides transforming inputs to outputs, value-addition also occurs when your something in short supply tends to increase production or availability.
resources successfully exploit profitable ventures or bring down external costs.
Imitability:
For a resource to be valuable, it has to create a strength for the organization in
relation to other organizations. The key to competitive sustainability is the decrease in the rare or valuable
resources’ imitability rate for the long-term.
If the company has a better process, stronger access to a supply of raw material, a
better supply chain, a stronger brand recognition, a better reputation that is It can only be achieved when the compensation is higher than the cost offered by
recognized in the industry, better trained or skilled employees, a unique location, other companies to mimic these resources and capabilities.
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A resource to be inimitable if there is no substitute at a reasonable price or it is not Using Resources to Gain Competitive Advantage
easy and quickly duplicable by others. Proposing that a company’s sustained competitive advantage is primarily
determined by its resource endowments, Grant proposes a five-step, resource-based
Intellectual property falls into this category. approach to strategy analysis.
A prime location or a revolutionary manufacturing process that would be difficult to • Identify and classify the firm’s resources in terms of strengths and
duplicate are also examples. weaknesses.
A strong and respected brand or reputation, along with a great culture can also be • Combine the firm’s strengths into specific capabilities and core
included here. competencies.
For example, let’s assume a company, because of the reputation and culture of the • Appraise the profit potential of these capabilities and competencies in
organization has a strong applicant pool and low turnover rate. terms of their potential for sustainable competitive advantage and the
ability to harvest the profits resulting from their use. Are there any
It has 100 applicants for every job opening when the industry average is 30 and it
distinctive competency?
has a turnover rate of 10 percent went the industry average is 15 percent.
• Select the strategy that best exploits the firm’s capabilities and
It is not likely that competitors will be able to duplicate this resource quickly or
competencies relative to external opportunities.
easily. This creates a strong competitive advantage and an inimitable resource for
the organization. • Identify resource gaps and invest in upgrading weaknesses.
Organization: Characteristics of a sustainable competitive advantage are as follows:
For a resource to exhibit competitive advantage, the organization, its processes, and • It cannot be copied or replaced by competitors
systems must be designed in a way that supports a resource for maximum
productivity. • It continues to add value year after year

It includes having the right resource management system to ensure all the critical • It can be renewed over time
resource KPIs are optimized and balanced.
• It has better value, in some manner, than the alternative(s)
The organized lens forces leadership to ask the question, “Are we set up to take full
advantage of our resources that are valuable, rare, or inimitable?” If the policies, Where do these competencies come from? A corporation can gain access to a
processes, and environment are not structured in such a way to capitalize on the distinctive competency in four ways.
resources then the organization will effectively maximize the value of the resources
it possesses. • It may be an asset endowment, such as key patent, coming from the
founding of the company. Ex. Xerox grew on the basis of its original
In this case, the organization will need to change its focus in order to take full copying patent.
advantage of the resources.
• It may be acquired from someone else. Ex. Whirlpool bought a worldwide
For example, an organization may have a patent on a product but have an expensive distribution system when it purchased Philips’s appliance division.
manufacturing process or a poorly developed supply chain or the organization has an
exclusive contact but is unable to meet contractual requirements because of internal • It may be shared with another business unit or alliance partner. Ex. Apple
processes. computer worked with a design firm to create a special appeal of its
personal computers and iPods.
In both these cases, the organization possesses key resources, but cannot execute
effectively. • It may be carefully built and accumulated over time within the company.
Ex. Honda carefully extended its expertise in small motor manufacturing
from motorcycles to autos and lawnmowers.
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Resource-based approaches to the theory of competitive advantage point towards • Linked set of value-creating activities beginning with basic raw materials
four characteristics of resources and capabilities which are likely to be particularly coming from suppliers, moving on to a series of value-added activities
important determinants of the sustainability of competitive advantage: involved in producing and marketing product or service, and ending with
distributors getting the final goods into the hands of the ultimate
1. Durability-In the absence of competition, the longevity of a firm's competitive consumer.
advantage depends upon the rate at which the underlying resources and capabilities
depreciate or become obsolete.

2. Transparency-The firm's ability to sustain its competitive advantage over time The Center of Activity
depends upon the speed with which other firms can imitate its strategy.
The component or a process is considered the most important to the
• Imitation requires that a competitor overcomes two problems. company or the activity central to the existence of the business itself. It is that aspect
First is the information problem: What is the competitive advantage of the or point where its greatest expertise and capabilities lie its core competencies. It is
successful rival, and how is it being achieved? implied that center of activity is usually the point at which the company started. It is
• Second is the strategy duplication problem: How can the would-be also considered the area where the so-called trade secrets of the company lie upon.
competitor amass the resources and capabilities required to imitate the
successful strategy of the rival?
General Components of a Value Chain
3. Transferability- Once the established firm or potential entrant has established the
sources of the superior performance, imitation then requires amassing the resources
and capabilities necessary for a competitive challenge.
2 Major components/categories
Imperfections In Transferability Arise from Several Sources:
(1) Primary Activities - those that are directly concerned with creating and
- Geographical immobility - Firm-specific resources.
delivering a product (e.g. component assembly); and
- Imperfect information - The immobility of capabilities
(2) Support Activities, which whilst they are not directly involved in production,
4. Replicability- imperfect transferability of resources and capabilities limits the may increase effectiveness or efficiency (e.g. human resource management). It is
ability of a firm to buy in the means to imitate success. The second track by which a rare for a business to undertake all primary and support activities.
firm can acquire a resource or capability is by internal investment.

Value chain Linking Value Chain Analysis to Competitive Advantage

• Refers to the processes involved in converting a product from raw

materials to its finished, sealable, and consumable stage. Broadly, it
involves a way of organizing the activities of a business so that each
activity adds value or productivity to the total operation of the business.

• It covers all the areas directly and indirectly involved in doing the business
of value creation from the stage of procuring the basic raw material all the
way to the delivery of the finished product to the customer including the
aspect of maintaining a meaningful and continuing relationship between
the business organization and its markets.

• Can be viewed as the sum total of the supply and distribution chain.
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What activities a business undertakes is directly linked to achieving competitive

advantage. For example, a business which wishes to outperform its competitors
through differentiating itself through higher quality will have to perform its value
chain activities better than the opposition. By contrast, a strategy based on seeking
cost leadership will require a reduction in the costs associated with the value chain
activities, or a reduction in the total amount of resources used.

Porter's Value Chain

The idea of the value chain is based on the process view of organisations, the idea of
seeing a manufacturing (or service) organisation as a system, made up of subsystems
each with inputs, transformation processes and outputs. Inputs, transformation
processes, and outputs involve the acquisition and consumption of resources -
money, labor, materials, equipment, buildings, land, administration, and
management. How value chain activities are carried out determines costs and affects
profits.

Most organizations engage in hundreds, even thousands, of activities in the process

of converting inputs to outputs. These activities can be classified generally as either
primary or support activities that all businesses must undertake in some form.
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ACCORDING TO PORTER (1985), THE PRIMARY ACTIVITIES ARE:

1. Inbound Logistics - involve relationships with suppliers and include all the
activities required to receive, store, and disseminate inputs.
2. Operations - are all the activities required to transform inputs into outputs
(products and services).
3. Outbound Logistics - include all the activities required to collect, store, and
distribute the output.
4. Marketing and Sales - activities inform buyers about products and services,
induce buyers to purchase them, and facilitate their purchase.
5. Service - includes all the activities required to keep the product or service
working effectively for the buyer after it is sold and delivered.

Secondary activities are:

1. Procurement - is the acquisition of inputs, or resources, for the firm.

2. Human Resource management - consists of all activities involved in FACTORS TO CONSIDER IN ASSESSING THE PRIMARY ACTIVITIES
recruiting, hiring, training, developing, compensating and (if necessary)
dismissing or laying off personnel. Inbound Logistics:
3. Technological Development - pertains to the equipment, hardware, software,
procedures, and technical knowledge brought to bear in the firm's • Location of distribution facilities to minimize shipping times.
transformation of inputs into outputs.
4. Infrastructure - serves the company's needs and ties its various parts together, • Excellent material and inventory control systems.
it consists of functions or departments such as accounting, legal, finance, • Systems to reduce time to send “returns” to suppliers.
planning, public affairs, government relations, quality assurance and general
management. • Warehouse layout and designs to increase efficiency of operations for
incoming materials. Operations:

• Efficient plant operations to minimize costs.

• Appropriate level of automation in manufacturing.

• Quality production control systems to reduce costs and enhance quality.

• Efficient plant layout and workflow design.

Outbound Logistics:

• Effective shipping process to provide quick delivery and minimize

damages. Efficient finished goods warehousing process.

• Shipping of goods in large lot sizes to minimize transportations costs.

• Quality material handling equipment to increase order picking.

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Marketing and Sales: • Quality work environment to maximize overall employee performance and
minimize absenteeism.
• Highly motivated and competent sales force.
• Reward and incentive programs to motivate all employees.
• Innovative approaches to promotion and advertising.
Technology Development:
• Selection of most appropriate distribution channels.
• Effective research and development activities for process and product
• Proper identification of customer segments. initiatives.
• Effective pricing strategies. • Positive collaborative relationships between R&D and other departments.
State-of-the art activities and equipment.
Service:
• Culture to enhance creativity and innovation.
• Effective use of procedures to solicit customer feedback and to act on
information. • Excellent professional qualifications of personnel. •Ability to meet critical
deadlines.
• Quick response to customer needs and emergencies.
Procurement:
• Ability to furnish replacement parts as required.
• Procurement of raw material inputs to optimize quality, and speed and to
• Effective management of parts and equipment inventory.
minimize the associated costs.
• Quality of service and personnel and ongoing training.
• Development of collaborative “win-win” relationships with suppliers.
• Appropriate warranty and guarantee policies.
• Effective procedures to purchase advertising and media services.
General Administration:
• Analysis and selection of alternate sources of inputs to minimize
• Effective planning systems to attain overall goals and objectives. dependence on one supplier.

• Ability of top management to anticipate and act on key environmental • Ability to make proper lease versus buy decisions.
trends and events.
Scanning Functional Resources and Capabilities
• Ability to obtain low-cost funds for capital expenditures and working
capital.
The simplest way to begin analysis of a corporation’s value chain is by carefully
• Excellent relationships with diverse stakeholder groups. examining its traditional functional areas for potential strengths and weaknesses.
Functional resources and capabilities include not only the financial, physical and
• Ability to coordinate and integrate activities across the “value system”. human assets in each area but also the ability of the people in each area to formulate
and implement the necessary functional objectives, strategies and policies.
• Highly visible to inculcate organizational culture, reputation, and values.
BASIC ORGANIZATIONAL STRUCTURES
Human Resource Management:
• Simple structure – has no functional or product categories and is
• Effective recruiting, development, and retention mechanisms for appropriate for a small entrepreneur-dominated company with one or two
employees. product lines that operates in a reasonably small, easily identifiable market
niche.
• Quality relations with trade unions.
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• Functional structure – is appropriate for a medium sized firm with • Employees in an intensive culture tend to exhibit consistent behavior –
several product lines in one industry. Employees tend to be specialists in tend to act similarly over time.
the business, functions that are important to the industry, such as
manufacturing, marketing, finance, and human resources. 2. Cultural integration – extent to which units throughout an organization share a
common culture. This is the culture breadth.
• Divisional structure – appropriate for a large corporation with many
product lines in several related industries. Employees tend to be functional • Organizations with a pervasive dominant culture may be hierarchically
specialists organized according to product/market distinctions. controlled and power oriented, ex. Military unit.

• Strategic business units (SBUs) – are modification of the divisional • All employees tend to hold the same cultural norms and values.
structure. Strategic business units are divisions or groups of divisions
• In contrast, companies that is structured into diverse units by
composed of independent product-market segments that are given primary
functions/divisions tend to exhibit some strong subculture and less
responsibility and authority for the management of their own functional
integrated corporate culture.
areas.
CORPORATE CULTURE FULFILS SEVERAL IMPORTANT FUNCTIONS
• Conglomerate structure – is appropriate for a large corporation with
IN AN ORGANIZATION.
many product lines in several unrelated industries.
1. Conveys a sense of identity for employees
CORPORATE CULTURE: THE COMPANY
2. Helps generate employee commitment to something greater than
In most organizations, the company way is derived from the corporations culture.
themselves

3. Adds to the stability of the organization as a social system.

Corporate culture – the collection of beliefs, expectations and values learned and
4. Serves as a frame of reference for employees to use to make sense of
shared by a corporation’s members and transmitted from one generation of
organizational activities and to use as a guide for appropriate behavior.
employees to another.
Corporate cultures shape the behavior of people in a corporation, thus affecting
FUNCTIONS OF CORPORATE CULTURE
corporate performances.
• Conveys sense of identity for employees.

• Generates employee commitment.

BUSINESS MODEL
• Adds to the stability of the organization as a social system.

• Serves as a frame or reference for employees to understand organizational

activities and as a guide for behavior. What is a business model?
 At its core, your business model is a description of how your business makes
TWO DISTINCT ATTRIBUTES
money. It’s an explanation of how you deliver value to your customers at an
1. Cultural intensity – the degree to which members of a unit accept the norms, appropriate cost.
values, or other culture content associated with unit. This shows the culture’s depth.
 According to Joan Magretta in “Why Business Models Matter,” the term
• New firms have weaker, less intensive culture compared to those with business model came into wide use with the advent of the personal computer
strong norms. and the spreadsheet.
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 These tools let entrepreneurs experiment, test, and, well, model different ways
that they could structure their costs and revenue streams. Spreadsheets let
entrepreneurs make quick, hypothetical changes to their business model and
immediately see how the change might impact their business now and in the
future.

In their simplest forms, business models can be broken into three parts:
1. Everything it takes to make something: design, raw materials,
manufacturing, labor, and so on.
2. Everything it takes to sell that thing: marketing, distribution, delivering a
service, and processing the sale.
3. How and what the customer pays: pricing strategy, payment methods,
payment timing, and so on.

Business models aren’t just about income—you also need to consider production
costs and other factors in order to see the full picture. So, what goes into creating a
business model? Here are the 10 components you’ll want to keep in mind:

1. Value proposition: A feature that makes your product attractive to your

customers.  Key partners
2. Target market: A specific group of consumers who would be interested in your o Who are our key partners?
product. o Who are our key suppliers?
3. Competitive advantage: A unique feature of your product or service that can’t
easily be copied by competitors.
o Which key resources are we acquiring from partners?
4. Cost structure: A list of the fixed and variable expenses your business requires o Which key activities do partners perform?
to function, and how they affect pricing. o Motivations for partnerships: optimization and economy;
5. Key metrics: The ways your company measures success. reduction of risk and uncertainty; acquisition of particular
6. Resources: The physical, financial, and intellectual assets of your company. resources and activities
7. Problem and solution: Your target customers’ pain points, and how your  Key activities
company intends to meet them. o What key activities do our value propositions require?
8. Revenue model: A framework that identifies viable income sources to pursue. o Our distribution channels.
9. Revenue streams: The multiple ways your company can generate income. o Customer relationships?
10. Profit margin: The amount your revenue exceeds your business costs. o Revenue streams?
o Categories: production; problem-solving; platform/network
 Key resources
The following elements of the Business Model Canvas were taken, with permission,
o What key resources do our value propositions require?
from http://www.businessmodelgeneration.com.
o Our distribution channels.
o Customer relationships?
o Revenue streams?
o Types of resources: physical; intellectual (brand patents,
copyrights, data); human; financial
 Value propositions
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o What value do we deliver to the customer? o For what value are our customers really willing to pay?
o Which one of our customer’s problems are we helping to solve? o For what do they currently pay?
o What bundles of products and services are we offering to each o How are they currently paying?
customer segment? o How would they prefer to pay?
o Which customer needs are we satisfying?
o Characteristics: newness; performance; customization; “getting
the job done”; design; brand/status; price; cost reduction; risk
reduction; accessibility; convenience/usability
 Customer relationships
o What type of relationship does each of our customer segments
expect us to establish and maintain with them?
o Which ones have we established?
o How are they integrated with the rest of our business model?
o How costly are they?
o Examples: personal assistance; dedicated personal assistance;
self-service; automated services; communities; co-creation
 Customer segments
o For whom are we creating value?
o Who are our most important customers?
o Mass market; niche market; segmented; diversified; multi-sided
platform.
 Channels
o Through which channels do our customer segments want to be
o How much does each revenue stream contribute to overall
reached?
revenues?
o How are we reaching them now?
o Types: asset sale; usage fee; subscription fees;
o How are our channels integrated?
lending/renting/leasing; licensing; brokerage fees; advertising
o Which ones work best? o Fixed pricing: list price; product feature dependent; customer
o Which ones are most cost-efficient? segment dependent; volume dependent
o How are we integrating them with customer routines? o Dynamic pricing: negotiation (bargaining); yield management;
o Channel phases: real-time-market
 Awareness – How do we raise awareness about our  Cost structure
company’s products and services? o What are the most important costs inherent in our business
 Evaluation – How do we help customers evaluate our model?
organization’s value proposition? o Which key resources are most expensive?
 Purchase – How do we allow customers to purchase o Which key activities are most expensive?
specific products and services?
o Is your business more: cost driven (leanest cost structure, low
 Delivery – How do we deliver a value proposition to
price value proposition, maximum automation, extensive
customers?
outsourcing); value driven (focused on value creation, premium
 After sales – How do we provide post-purchase value proposition).
customer support?
o Sample characteristics: fixed costs (salaries, rents, utilities);
 Revenue streams variable costs; economies of scale; economies of scope
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