Strategy: Building and Sustaining Competitive Advantage RESOURCES AND CORPORATE STRATEGY Workbook

RESOURCES AND CORPORATE STRATEGY

The following exercises move managers beyond the business unit as the level of analysis, to the larger corporation. Because so many business units work in the context of multibusiness-unit systems, it can be helpful to think about strategy from this perspective. Your team can work together on these exercises or you can work individually and then compare results. Whether you are a business-unit manager eager to understand how you interact with a larger corporate system (What are you getting from the relationship? How is being a part of the corporation affecting your day-to-day life and the success of your business?), or a corporate strategist thinking critically about the system you are creating and how it supports individual business units, you can adapt the questions to correspond with your intent. Part 1 presents the Framework for Corporate Strategy, and includes guiding questions to help managers examine five key elements of their firms corporate-level strategy, and determine if, taken together, they produce corporate advantage. Part 2 focuses on one key aspect of the framework: resources. A series of questions helps managers identify and evaluate their resources and recraft their strategy to build one that is more resource based.

PART 1: Corporate Strategy Framework

The purpose of corporate strategy is value creation. Corporate strategy is the way a company creates value through the configuration and coordination of its multimarket activities. An effective corporate strategy contains five elements: vision, goals and objectives, resources, businesses, and organization.

The three sides of the triangleresources, businesses, and organizationwork together as a system. They enable you to realize a vision and are motivated by certain goals and objectives. When the system is working well, it can be a powerful model for creating corporate advantage. This advantage makes a whole that is meaningfully more than the sum of its parts: the firm creates greater economic value, with its individual business units performing even better in their respective businesses.

1
Copyright 2005 1

RESOURCES AND CORPORATE STRATEGY

Test whether your firm has corporate advantage by answering these three questions:1 1. Are benefits created through the firms ownership of the business? 2. Are those benefits greater than the cost of corporate overhead? 3. Does the corporation create more value with the business than any other possible corporate parent or alternative governance structure would? To get a better understanding of the determinants of corporate advantage in your firm, assemble a team of colleagues and examine your five elements. The definitions and questions below provide guidance.

Vision
Successful corporations have coherent, ambitious visions. Effective visions provide direction for the firm. They challenge and motivate employees, and define the boundaries in which a firm will and will not compete. Vision statements are clear, ambitious, compelling, and simple. For example, in 1983, Jack Welch stated General Electrics vision: A decade from now, I would like General Electric to be perceived as a unique, high-spirited, entrepreneurial enterprise . . . the most profitable, highly diversified company on earth, with worldquality leadership in every one of its product lines. What is the vision of your company? Write it in the space provided.

Goals and Objectives

Goals and objectives, unlike vision, are shorter term and provide immediate challenges to employees. They become incentives that support a formal reward structure. Objectives are specific short- and medium-term quantitative targets. For example: Sustain a 40 percent debt/equity ratio, or Achieve Six Sigma quality within four years. Goals are qualitative intentions to be met in the same time frame as objectives. For example: Improve new product development capabilities, or Become a global organization. State your corporate goals and objectives in the space provided. Goals:

1 Michael Goold, Andrew Campbell, and Marcus Alexander, Corporate-Level Strategy: Creating Value in the Multibusiness Company (New York: John Wiley & Sons, 1994).

2
Copyright 2005 2

RESOURCES AND CORPORATE STRATEGY

Objectives:

Resources
Resources are critical for strategy because they determine not simply what a firm wants to do, but what it can do. They are the essence of value creation, both within and across businesses. Identifying, evaluating, building, and deploying valuable resources are critical for corporate-level and business unit-level competitive strategy. For this reason, there is a longer section dedicated to resources, outlined in Part 2 of the workbook. (See Part 2.)

Businesses
Businesses refer to the industries or business segments in which a firm operates and the competitive strategy the firm chooses for each. Firms must examine their portfolio of businesses carefully to assess the following: 1. How attractive is/are the industry(ies) in which the firm operates? 2. Can the firm share resources across the industries in which it operates? 3. Does the competitive strategy the firm pursues within each industry earn superior returns in the long run? Is the business a more effective competitor because its a part of the group? Why? How does it help you? How much of a help can it be? Note: Refer to Workbook: Scan the Environment and Workbook: Position Your Business for Advantage, for more detailed questions about how to evaluate industry attractiveness and competitive positioning.

Structure, Systems, and Processes

These are the formal and informal ways an organization implements its activities. They should support the firms strategy. Structure: This is the way an organization is divided into discrete units. It describes the firms formal organizational chart, and outlines the allocation of authority inside the corporate hierarchy. What is the structure of your firm?

3
Copyright 2005 3

RESOURCES AND CORPORATE STRATEGY

Systems: These are the formal policies, rules, routines, and procedures that define how tasks (e.g., strategic planning, personnel evaluation) get done. List the key systems in your firm:

Processes: These are the informal elements of an organizations activities, such as the network of personal relationships that accompany the flow of work inside a company, which can be as influential as any formal procedures. What are some of the processes in your organization? Name them:

Taken together, do the structures, systems, and processes in your organization help or hinder you from accomplishing your goals and objectives, realizing your vision, competing successfully in your chosen businesses, and making the most of your resources? Now that you have taken inventory of all five key elements of your corporate strategy, ask the following questions: How is the corporate system affecting the competitiveness in your business unit? Is the system really helping you as a business-unit manager? What are you getting from the relationship? Is the system working to produce corporate advantage? Is the whole greater than the sum of its parts? If not, where are the weak links and what will it take for you to create that advantage?

PART 2: Building a Resource-Based Strategy

The following exercises allow you to identify and evaluate your firms resources. Once the diagnosis is complete, you can recraft your strategy to build a more resource-based strategy.

Step 1: Take inventory of the firms resources. 4

Copyright 2005 4

RESOURCES AND CORPORATE STRATEGY

Gather a team of senior executives together to brainstorm the firms core competencies and key sources of competitive advantage. Categorize your most important resources (not all of them!) into the following chart:

Tangible Assets
Balance-sheet items, such as real estate, production facilities, raw materials

Intangible Assets
Such as company reputations, brand name, culture, technology knowledge, patents, trademarks, and accumulated learning and experience

Organizational Capabilities
Such as abilities to be faster, more responsive, higher quality, which stem from a combination of organizational activities

Be clear about which resources are in your control in your business unit, and which are obtained from corporate. What are you not getting that you need?

Step 2: Assess the value of each of the resources.

Determine the value according to the three tests of competitive superiority, scarcity, and appropriability. List the resource in the left-hand column. Remember, this is not a laundry list of resources, or a list of what you do best. Rather, it is a rigorous competitive evaluation of

5
Copyright 2005 5

RESOURCES AND CORPORATE STRATEGY

resources that you deem to play an important role in value creation. Check the boxes to the right where the resource passes the test of demand, scarcity, and appropriability.

Resource

Demand
Does the resource produce something customers desire, and for which they have a high willingness to pay? Does the resource contribute to competitive advantage in the product market? Are there alternative products or resources that provide more value for the customer?

Scarcity
Is the resource rare? Is the resource hard to copy?

Appropriability
Can the firm capture the value created by the resource?

6
Copyright 2005 6

RESOURCES AND CORPORATE STRATEGY

Step 3: Determine which resources are most strategically important.

By knowing the resources you will need for your future strategy, and the gaps that are between your current resources and those youll need in the future, you can determine which resources to prioritize and where to make investments. A. What resources will be needed to fulfill future strategic goals set for the organization? (Conduct a five forces industry analysis for five to seven years from now to answer this question.)

B. Map the current position of the firm (disadvantaged, competitively equal, or valuable) against the strategic importance of each resource (critical to competitive advantage, necessary to compete, required but not competitively important). An example is provided below. 2 In the matrix, indicate with a check mark where investments for new resources need to be made, and with a dash where expenditures for current resources need to be maintained.

Example: Current Position of the Firm Disadvantaged Competitively Equal Critical for competitive advantage Frequent, reliable departures Location of airports Necessary for competition Friendly customer service On-time arrival Required but not competitively important Electronic ticketing system Extensive network = invest, = maintain Note: Resources in which the firm is currently disadvantaged, but which are critical to success or necessary to compete, require investment, as do with those valuable resources that must underpin future competitive advantage. __ Valuable

__

__

2 David J. Collis and Cynthia A. Montgomery, Corporate Strategy: A Resource-Based Approach, 2nd Ed., (New York: McGraw-Hill, 2005). p. 47, Figure 2.6.

7
Copyright 2005 7

RESOURCES AND CORPORATE STRATEGY

Your assessment of resource value: Current Position of the Firm Disadvantaged Competitively Valuable Equal Critical to competitive advantage

Necessary to compete

Required but not competitively important

X = invest, O = maintain

Answer the following questions to ensure that you have conducted a thorough evaluation: 1. Do any existing resources need to be strengthened? 2. Do you need to add any complementary resources that enhance the firms position in its existing markets? 3. Do you need to develop new resources that enable the firm to enter new, more attractive industries? 4. Are you employing all of your valuable resources in your existing markets? If not, are you leveraging them into new segments or industries where they can create value? Now you are ready to recraft your strategy, based on your analysis.

8
Copyright 2005 8