Chapters 5 & 6 – Organizational Analysis and Strategy Formulation February 5 1

Chapter 5: Organizational analysis and competitive advantage

5-1: A RESOURCE-BASED APPROACH TO ORGANIZATIONAL ANALYSIS – VRIO

Organizational analysis: concerned with identifying, developing, and taking advantage of an organization’s resource and
competencies

CORE AND DISTINCTIVE COMPETENCIES

Resources
 an organization’s assets and are thus the basic building blocks of the organization
 Tangible, intangible
Capabilities
 Refer to a corporation’s ability to exploit its resources.
 Consist of business processes and routines that manage the interaction among resources to turn inputs into
outputs
 A competency is a cross-functional integration and coordination of capabilities
Core Competency
 A collection of competencies that cross divisional boundaries, is wide-spread throughout the corporation an is
something the corporation does exceedingly well.
 This, new product development is a core competency if it goes beyond one division
 Very valuable – does not “wear out” with use. In general, the more core competencies are used, the more refined
they get, and the more valuable they become.
Distinctive Competency
 Core competencies that are superior to those of the competition
 General Electric is well known for its distinctive competency in management development. Its executives are
sought out by other companies hiring top managers

Resources and capabilities are only of value if they provide the organization an ability to make extraordinary returns. The
resource-based approach is a well-researched, very effective means of analyzing resources and capabilities in order to
determine which might provide the organization with real competitive advantages

VRIO FRAMEWORK OF ANALYSIS

 Wernerfelt in 1984 followed by an effective operationalization by Jay Barney who first proposed a VRIN
framework that he later developed into the VRIO framework
 It is an analysis to evaluate a firm’s key resources in terms of value, rareness, imitability, and organization
1. Valuable: does it provide customer value and competitive advantage?
2. Rareness: do no other competitors possess it at the same level?
3. Imitability: do the competitors have the financial ability to imitate?
 Transparency: the speed with which other firms can understand the relationship of resources and
capabilities supporting a successful firm’s strategy
 Transferability: the ability of competitors to gather the resources and capabilities necessary to support a
competitive challenge
 Replicability: the ability of competitors to duplicate resources and imitate another firm’s success
 Explicit knowledge: knowledge ht can be easily articulated and communicated
 Tacit knowledge: knowledge that is not easily communicated because it is deeply rooted in employee
experience or in a corporation’s culture
 Tacit knowledge is more valuable, and more likely to lead to a sustainable competitive advantage
that is explicit knowledge because it is much harder for competitors to imitate
4. Organization: is the firm organized to exploit the resource?
 Organizational capabiliaty is rooted in the policies, procedures, culture, and norms of the organization

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 If the answer is YES for all questions, it is considered to be a strength and thus a distinctive competency

ACCESS TO A DISTINCTIVE COMPETENCY

Clusters
 Geographic concentrations of interconnected companies and industries
Access to:
 Employees
 Suppliers
 Specialized information
 Complementary products

5-2: BUSINESS MODELS

BUSINESS MODELS
Business Model: the mix of activities a company performs to earn a profit
A business model is usually composed of five elements:
 Who it serves
 What it provides
 How it makes money
 How it differentiates and sustains competitive advantage
 How it provides its product/service

Customer Solutions Model: IBM uses this model by selling its expertise to improve its customers’ operations. This is a
consulting model
Profit Pyramid Model: GM offers a full line of automobiles in order to close out any niche where a competitor might find a
position. The key is to get customers to buy in at a low-priced, low-margin entry point and move them up to high-priced,
high-margin products where the company makes its model.
Multicomponent System/Installed Base Model: Gillette invented this classic model to sell razors at break-even pricing in
order to make money on higher-margin razor blades. HP does the same thing with printers and printer cartridges. The
product is this a system, not just one product, with one component providing most of the profits.
Advertising Model: similar to the multicomponent system/installed base model, this model offers its basic product free in
order to make money on advertising. This model is heavily used in commercial radio and television. Many web-based
firms offer freemium versions to users in order to expose them to the basics and then hope to sell premium features to a
smaller set of customers.
Switchboard Model: A firm acts as an intermediary to connect multiple sellers to multiple buyers, Financial planners juggle
a wide range of products for sale to multiple customers with different needs. This model has been successfully used by
eBay and Amazon.com
Time Model: Product R&D and speed are the keys to success in the time model. Being the first to market with a new
innovation allows a pioneer such as Google to earn extraordinary returns. By the time the rest of the industry catches up,
Google has moved on to a newer, more innovative approach to keep people coming back.
Efficiency Model: In this model, a company waits until a product becomes standardized and then enters the market with a
low-priced, low-margin approach that appeals to the mass market. This model is used by Spirit Airlines, KIA Motors, and
Vanguard.
Blockbuster Model: in some industries, such as pharmaceuticals and motion picture studios, profitability is driven by a few
key products. The focus is on high investment in a few products with high potential payoffs – especially if they can be
protected by patents.
Profit Multiplier Model: the idea of this model is to develop a concept that may or may not make money on its own but,
through synergy, can spin off many profitable products. Walt Disney invented this concept by using cartoon characters to
develop high-margin theme parks, merchandise, and licensing opportunities.
Entrepreneurial Model: a company offers specialized products/ services to market niches that are too small to be
worthwhile to large competitors but have the potential to grow quickly. Small, local brew pubs have been very successful
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in a mature industry dominated by AB InBev and MillerCoors. This model has often been used by small high-tech firms
that develop innovative prototypes in order to sell off the companies (without ever selling a product) to bigger players.
De Facto Industry Standard Model: a company offers products free or at a very low price in order to saturate the market
and become the industry standard. Once users re locked in, the company offers higher-margin products using this
standard. LinkedIn has used this approach very successfully while TurboTax makes its most basic program free.

5-3: VALUE-CHAIN ANALYSIS

Value Chain: a linked set of value-creating activities that begins with basic raw materials coming from suppliers and ends
with distributors getting the final goods into the hands of the ultimate consumer.
 Works for every type of business regardless of whether they provide a service or manufacture a product.
 Can usually be split into two segments, upstream and downstream
 A company’s center of gravity: the part of the chain where the company’s greatest expertise and capabilities lie –
its core competencies.

FIGURE 5-2: A CORPORATION’S VALUE CHAIN

5-4: BASIC ORGANIZATIONAL STRUCTURES

Organizational Structure: the formal setup of a business corporation’s value chain components in terms of work
flow, communication channels, and hierarchy.
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Simple Structure: a structure for new entrepreneurial firms in which the employees tend to be generalists and
jacks-of-all-trades
Financial Structure: an organizational structure in which employees tend to be specialists in the business
functions important to that industry, such as manufacturing, sales, or finance
Divisional Structure: an organizational structure in which employees tend to be functional specialists organized
according to product/market distinctions
Strategic Business Units (SBUs): a division or group of divisions composed of independent product-market
segments that are given primary authority for the management of their own functions
 Stage III Company – divisional structure
 An SBU may be of any size or level, but it must have:
1. A unique mission
2. Identifiable competitors
3. Control of its business functions
 The idea is to decentralize the basis of strategic elements rather than on the basis of size,
product characteristics, or span of control and to create horizontal linkages among previously
kept separate
Conglomerate Structure: an assemblage of legally independents firms (subsidiaries) operating under one
corporate umbrella but controlled through the subsidiaries’ board of directors.
 Stage III company – divisional structure

5-5: CULTURE

Corporate Culture
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 The collection of beliefs, expectations, and values learned and shared by a corporation’s members and
transmitted from one generation of employees to another
 Cultural intensity: the degree to which members of a unit accept the norms, values, or other cultural content
associated with the unit.
o Shows the cultures depth.
o Organizations with strong norms promoting a particular value, have intense cultures, whereas new firms
(or those in transition) have weaker, less intensive cultures.
o Employees in intensive cultures tend to exhibit consistent behaviour – that is, they tend to act similarly
over time.
 Cultural integration: the extent to which units throughout an organization share a common culture. A culutres
breadth.
o Organizations with a pervasive dominant culture may be hierarchically controlled and power-oriented,
such as a military unit, and have highly-integrated cultures.
o All employees tend to hold the same cultural values and norms

FUNCTIONS OF CORPORATE CULTURE

1. Conveys a sense of identity for employees
2. Generates employee commitment
3. Adds to the stability of the organization as a social system
4. Serves as a frame of reference for employees to understand organizational activities and as a guide for behaviour

INCREASING USE OF TEAMS

Autonomous (self-managing)
 A group of people work together without a supervisor to plan, coordinate, and evaluate their work

Cross-functional work teams

 Various disciplines are involved in a project from the beginning
Concurrent engineering
 Specialists work side-by-side and compare notes constantly to design cost-effective products with features
customers want
Virtual teams
 Groups of geographically and/or organizationally dispersed co-workers that are assembled using a combination of
telecommunications and information technologies to accomplish an organizational task

TABLE 5-1: MARKETING MIX VARIABLES

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PRODUCT LIFE CYCLE AND EXPERIENCE CURVE

Chapter 6: Strategy Formulation – Business Strategy

6-1: A FRAMEWORK TO EXAMINING BUSINESS STRATEGY

Strategy Formulation: development of long-range plans for the effective management of environmental opportunities and
threats in light of corporate strengths and weaknesses
SWOT: analysis of Strengths, Weaknesses, Opportunities, and Threats.
SFAS: Strategic Factors Analysis Summary is a chart that summarizes an organization’s strategic factors by combing the
external factors from an EFAS table with the internal factors from an IFAS table
 The SFAS matrix requires a strategic decision maker to condense these SWOTS into 10 strategic factors.
 Strategic Factor Analysis Summary (SFAS) Matrix:
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
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 *The most important external and internal factors are identified in the EFAS and IFAS Tables as shown here by shading these factors.

6-2: MISSION AND OBJECTIVES

 An effective mission statement not only needs to be specific to that organization; it must enable a common
thread – a unifying theme for the whole organization to rally around and provide focus for organizational efforts
 A well-crafted mission statement has five common elements.
1. It must be short so that every employee can remember the statement.
2. The design must be simple so that everyone in the company can understand what the senior leadership
team desires.
3. It has to provide direction to the activities of company employees.
4. The statement should enable employees knowing exactly what the company does and what it does not
do.
5. The statement should be measurable so that the company can visibly see progress.

6-3: BUSINESS STRATEGIES

 Business Strategy: competitive and cooperative strategies that emphasize improvement of the
competitive position of a corporation’s products or services in a specific industry or market segment
 A business strategy is important because research shows that business unit effects have double the
impact on overall company performance than do either corporate or industry effects.
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PORTER’S COMPETITIVE STRATEGIES

Competitive strategy raises the following questions:
 Should we compete on the basis of lower cost (and thus price), or should we differentiate our products or
services on some basis other than cost, such as quality or service?
 Should we compete head-to-head with our major competitors for the biggest but most sought-after share of the
market, or should we focus on a niche in which we can satisfy a less sought-after but also the profitable segment
of the market?
 Porter proposed that a firm’s competitive advantage is determined by its competitive scope – that is, the breadth
of the company’s or business unit’s target market
Cost leadership
 Ability of a company or a business unit to design, produce, and market a comparable product more efficiently
than its competitors
 Lower-cost competitive strategy that aims at the broad mass market and requires “aggressive construction of
efficient scale facilities, vigorous pursuit of cost reductions from experience, tight cost and overhead control,
avoidance of marginal customer accounts, and cost minimization.
o Provides a defense against rivals
o Provides a barrier to entry
o Generates increased market share
Differentiation
 Ability of a company to provide unique and superior value to the buyer in terms of a product quality, special
features, or after-sale service
 Involves the creation of a product or service that is perceived throughout its industry as having passed through
the elements of VRIO
o Lowers customers sensitivity to price
o Increases buyer loyalty
o Can generate higher profits
Focus
 Ability of a company to provide unique and superior value to a particular buyer group, segment of the market
line, or geographic market
 Cost focus
o Low-cost competitive strategy that focuses on a particular buyer group or geographic market and
attempts to serve only this niche to the exclusion of others.
 Differentiation Focus
o Concentrates on a particular buyer group, product line segment, or a geographic market to serve the
needs of a narrow strategic market more effectively than its competitors

6-4: STRATGEC ALLIANCES

 Strategic alliance: a partnership of two or more corporations or business units to achieve strategically
significant objectives that are mutually beneficial

REASONS TO FORM AN ALLIANCE

 Obtain or learn new capabilities
 Obtain access to specific markets
 Reduce financial risk
 Reduce political risk
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Continuum of Strategic Alliances

 Mutual Service Consortium: a partnership of similar companies in similar industries that pool their resources to
gain a benefit that is too expensive to develop alone, such as access to advanced technology.
o The mutual service consortia is a fairly weak and distant alliance—appropriate for partners that wish to
work together but not share their core competencies.
o There is very little interaction or communication among the partners.
 Joint Venture: a “cooperative business activity, formed by two or more separate organizations for strategic
purposes, that creates an independent business entity and allocates ownership, operational responsibilities, and
financial risks and rewards to each member, while preserving their separate identity/autonomy.
o Joint ventures are the most popular form of strategic alliance. They often occur because the companies
involved do not want to or cannot legally merge permanently.
o Extremely popular in international undertakings because of financial and political–legal constraints,
forming joint ventures is a convenient way for corporations to work together without losing their
independence.
o Joint ventures are often meant to be temporary, especially by some companies that may view them as a
way to rectify a competitive weakness until they can achieve long-term dominance in the partnership.
o Research indicates, however, that joint ventures tend to be more successful when both partners have
equal ownership in the venture and are mutually dependent on each other for results.
 Licensing Arrangements: an agreement in which the licensing firm grants rights to another firm in another country
or market to produce and/or sell a product.
o The licensee pays compensation to the licensing firm in return for technical expertise. Licensing is an
especially useful strategy if the trademark or brand name is well known but the MNC does not have
sufficient funds to finance its entering the country directly.
o This strategy also becomes important if the country makes entry via investment either difficult or
impossible.
 Value-Chain Partnership: a strong and close alliance in which one company or unit forms a long-term arrangement
with a key supplier or distributor for mutual advantage.
o Research suggests that suppliers that engage in long-term relationships are more profitable than
suppliers with multiple short-term contracts.

Strategic Alliance Success Factors

 Have a clear strategic purpose. Integrate the alliance with each partner’s strategy. Ensure that mutual value is
created for all partners.
 Find a fitting partner with compatible goals and complementary capabilities.
 Identify likely partnering risks and deal with them when the alliance is formed.
 Allocate tasks and responsibilities so that each partner can specialize in what it does best.
 Create incentives for cooperation to minimize differences in corporate culture or organization fit.
 Minimize conflicts among the partners by clarifying objectives and avoiding direct competition in the
marketplace.
 In an international alliance, ensure that those managing it have comprehensive cross-cultural knowledge