Internal Models of Competitive Advantage
Distinct, and complementary theories that suggest the differences in long-term performance outcomes across firms within the same industry come from different levels of internal sources of competitive advantage.
1. Fundamental differences in the resources
Strategic Leadership
Value input into strategy.
Strategic leadership --> resources and capabilities --> strategy --> competitive advantage/disadvantage --> performance
Resources
Inputs used by firms to create products and services.
Undifferentiated: land, unskilled labor, debt financing, commodity-like inventory/inputs, etc. Generally available to most firms.
Firm Specific: managerial judgement, intellectual property, trade secre
Capabilities
Also called competencies.
A firm's skill at using its resources to create goods and services
Combination of procedures and expertise on which a firm relies to engage in distinct activities to produce goods and services.
May be possessed by individuals or
Value Chain
(Capabilities)
Total of primary and support value-adding activities by which a firm produces, distributes, and markets a product.
Outsourcing
(Capabilities)
Activity performed for a company by people other than its full-time employees.
Such activities are part of the value chain, but are typically the not-so-important parts.
Distinctive Competences
(Capabilities)
Capability that sets a firm apart from other firms - something that the firm can do that competitors cannot.
Core Competences
(Capabilities)
Capability which is central to a firm's main business operations and which allow it to generate new products and services.
VRINE Model
Analytical framework suggesting that a firm with resources and capabilities which are valuable, rare, inimitable, nonsubstitutable, and exploitable will gain a competitive advantage.
Resources and capabilities contribute to competitive advantage to the ex
Value
(VRINE Model)
A resource or capability is valuable if it enables a firm to take advantage of opportunities or to fend off threats in its environment.
Potential to contribute to normal profits
[competitive parity]
Rarity
(VRINE Model)
Scarcity relative to demand.
Exclusive, or non exclusive ownership in the sense that a handful of firms can have resource and still be considered scarce (just as long as it is not readily available to everyone).
Contributes to above-normal profits
[tempor
Inimitability & Nonsubstitutability
(VRINE Model)
Inimitability: competitors cannot acquire the valuable and rare resource quickly or if they face a cost disadvantage.
Nonsubstitutability: competitors cannot achieve the same benefit using different combinations of resources and capabilities.
Reasons for
Casual Ambiguity
Condition whereby the difficulty of identifying or understanding a resource or capability makes it valuable, rate and inimitable.
Exploitability
(VRINE Model)
A firm must be able to exploit it; the firm must be able to nurture and take advantage of the resources and capabilities it possesses.
Implemented strategy must utilize the resource or capability.
[what maintains previous 5 factors]
Where Do Resources Come From?
Some can be purchased, many others cannot.
Example: brand equity, reputation, innovative capabilities which have all resulted from policies and strategies that have been implemented over extended periods of time.
Resources as Stocks and Flows
A firm's stock of resources and capabilities is what is possesses at any given point in time.
At any given time stock can rise and fall:
Increased: development of activities, sustained investments
Reduced: divestiture of business units, loss of key person
Dynamic Capabilities
A firm's ability to modify, reconfigure, and upgrade resources and capabilities in order to strategically respond to or generate environmental changes.
Critical in markets that change quickly, time to market is crucial, technological change is rapid, futu
The Value Chain
Management can make decisions about value-chain arenas they want to participate in (what to emphasize, deemphasize, and outsource).
Primary Activities: outbound logistics, operations, inbound logistics, marketing and sales, and service.
Support Activities
Tradeoff Protection
When a firm reconfigures the value chain configuration, causes there to be a tradeoff.
Adding or dropping certain activities may cause elimination or addition of activities.
Want to organize value chain activities in way that is hard to imitate e.g. inter
Innovation and Integration in the Value Chain
Key is to develop a value-chain activities that differ from those of rivals but also configuring them so they are integrally related and can't be imitated without significant tradeoffs.
Value-chain fit: important because it is as strong as its strongest l
DUPONT Formula
Breaks down the determinants of a firm's profitability based on the equation:
ROA = Net profit margin x asset turnover
Integrates the income statement and balance sheet to show how a firm's return on assets can be disaggregated into two components:
1. ass
Outsourcing
sourcing the function, product, or service of a value chain activity from another company.
lower direct costs and overhead.
Offshoring
Taking that activity from a high-cost country to a low-cost country.
lower direct costs and overhead.
3 Successful Common Criteria Between Outsourcing and Offshoring
1. Commit time and effort to quality control and training to keep activity competitive and efficient
2. Treat outsourcing partners as partners to learn new things about product and process innovations
3. Involve middle management to bridge the offshored a
Importance of Managers
Scan internal and external environments.
Decide how to use resources and capabilities.
Decide how to configure value chain activities based on assessments of changing environments.
Decide when to change a firm's mix of resources, capabilities and targeted
Senior Managers
Set context that determines how frontline and middle managers can add value.
Create three processes
1. Entrepreneurial Process
2. Renewal Process
3. Capability-Building Process
Entrepreneurial Process
Encourages middle managers to be externally oriented - to seek out opportunities and run their part of the business as if their owned it.
Renewal Process
Senior manager's way of shaking things up and challenging its historic way of operating.
Based on information learned through current business activities performed elsewhere in the firm.
Capability-Building Process
Looks to middle managers to identify, grow, and protect new ways to create value for the organization and its key stakeholders.
Middle Managers
Play a key role in what the firm is doing and what it may be adept at doing in the future.
Four areas where middle managers are better than senior managers:
1. Entrepreneur
2. Communicator
3. Psychoanalyst
4. Balancing continuity and radical change