3 Corporate Strategy Analysing resources basics

Key Corporate Strategy Questions

What key industry factors deliver the objectives of the organisation? How do resources add value to the organisation? How can value added be improved? What are the main ways resources deliver competitive advantage? How can competitive advantage be enhanced?
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Key Learning Outcomes

What are the KFS of an industry? How do I explain the concept of value added? How do I analyse the value chain? How do resources deliver SCA to an organisation? What are the 7 main concepts of SCA?
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CORPORATE STRATEGY

Third edition

Richard Lynch

Chapter 6.1

Analysing resources - basics

Learning outcomes
When you have worked through this chapter, you will be able to:
1. 2. 3. 4.

Identify the key factors for success in an industry; Explore the main resources of an organisation and the strategic decision on whether to make or buy; Explain the concept of value added; Analyse the value chain and value system of an organisation and comment on their strategic significance;

Analyse the role of resources

Options Environment

Purpose

Options

Choice

Implement

Resources Options

This session
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Analysing resources 2 routes

Industry key factors for success Value added: Value added: How? Where? How? Where?
Value chain Value system Hierarchy of resources

Route 1 Value added

Individual Individual organisations organisations resources: resources: make or buy? make or buy?

Value added can contribute to SCA and vice versa

Route 2
SCA - Concept Of economic rent

Sustainable Sustainable Competitive Competitive Advantage Advantage (SCA) (SCA)

The seven main concepts of SCA

Figure 6.1 6

Prescriptive v Emergent Approach

Prescriptive Approach: Use resources efficiently and focus on resource strength. E.g. GSK merger lead to Economic gains of US$750m p.a. Emergent Approach: Question certainties of prescriptive approach E.g. the human resource impact of GSK merger, could job cuts cause bad feeling? Is this a hindrance to the implementation of the strategic change?
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Prescriptive v Emergent Approach

Emergent Approach: Question certainties of prescriptive approach E.g. How valuable are patents as part of a SCA in the fast changing drug market? Prescriptive approach implies resources give a definite advantage to organisation Emergent approach sees a much more fluid relationship between resources and strategies
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Key Factors for Success

Those resources, skills and attributes of the organisations in an industry that are essential to deliver success in the market place Different organisations will have different resources Well established product range Gillette, PG, Unilever Exceptional leadership Anglo Irish Bank, Ryan Air New patented technology Apple, Glaxo Smithkline..

1.

2.

3.

Key Factors for Success Academic support

Ohmae, K (1983) Three Cs: Customers, Competitors & Corporation. Porter, M E (1985) There are factors that determine the relative competitive position of a firm within an industry, such as the firms strategy Kay, J (1993) It is important to concentrate resources on the specific areas of the business which are most likely to be successful All agree that identifying these key factors is not an easy task.
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Key factors for success in an industry 2

Key factors can be found in any area of the organisation and relate to the following:
Skills Competitive advantage Competitive resources of an organisation in the industry Special technologies Customer contacts.

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The 3 Cs
Those resources, skills and attributes of the organisations in an industry that are essential to deliver success in the market place Three principal areas to be analysed: Ohmaes three Cs:
Customers: Wants? Segments? Strategy directed to segments? Competitors: How survive? And beat? What resources? Comparison on price, quality, etc? Distribution network? Corporation: Any special resources essential? Cost comparison? Technologies? Human resources? Financial issues?
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Key Factors for Success

Customers: Wants? Segments? Strategy directed to segments? Look at Price: high/medium/economy pricing? Airline tickets Service: do customers want service? Aldi v M&S Product or service reliability: how important is reliability? Heart pacemaker v pharmaceuticals Quality: perceived or actual quality? Organic veg. Technical specifications: specialist financial bonds Branding: how important is it? Coca-Cola v Pepsi

1. 2. 3.

4. 5. 6.

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Key Factors for Success

Competitors: How survive? And beat? What resources? Comparison on price, quality, etc? Distribution network? Cost comparisons: which company? E.g. Dell Price comparisons: which company has high prices? Porsche, BMW etc. Quality issues: which company have highest quality? Why? How? Market dominance: which company dominates? Nestle in coffee production Service: which company offers superior service? Distributors: which company has fastest most extensive distribution?
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1. 2.

3.

4.

5. 6.

Key Factors for Success

Corporation: Any special resources essential? Cost comparison? Technologies? Human resources? Financial issues? Low-cost operation: are these important? Tesco(UK) Economies of scale: are these important? Shell Labour costs: and our SCA? Phillips (Netherlands) have moved manufacturing to Singapore & Malaysia Production output levels: Heavy fixed cost? Quality operations: are high/consistent quality levels important? McDonalds Innovative abiity: is innovation important? Apple Labour/management relations: EU Steel companies Technologies/copyright: are these important? Skills: are specialist skills required?
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1. 2. 3. 4. 5. 6. 7. 8. 9.

Key Factors for Success - criticism

1. 2.

3.

4.

Identification - difficult Causality of relationships identified but cant identify relationship between factors Dangers of generalising to find one companys SCA, we need more than industry wide KFS Disregard of emergent perspective change may lead to SCA
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Analysing the resources of an individual organisation

Key factors for success in an industry represent a starting point for exploring the resources of the individual organisation. Value added and sustainable competitive advantage can come from beyond industry solutions. Individual resources must be identified for the organisation itself. The make-or-buy decision is the choice every organisation has of either making its own products or services or buying them from outside. Regular reappraisal of activities is important.

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To Make or Buy?
Make if the costs of using the market are greater than the benefits. Companies like Benetton and IKEA use outsourcing very effectively to reduce costs and increase their SCA

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To Make or Buy? Reappraise regularly

1. 2.

Benefits Outside supplier can access Economies of Scale Outside supplier must be competitive, innovative and efficient Costs May compromise production flows Intellectual property rights and SCA may be threatened Extra costs which could be avoided
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1. 2. 3.

Value added
1. 2. 3.

Consider 3 main costs Labour see a/cs Materials see a/cs Capital must look at: Value of land and machinery, stocks and WIPs Replacement costs Costs of capital
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Value added
Kay, J (1993, p24), says that a commercial organisation that adds no value to its inputs has no long term reason for existence. Some organisations can actually lose value if they cannot recover their costs.

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Value added by a pharmaceutical company such as Glaxo plc

Inputs to Inputs to organisation organisation
Raw materials delivered to the factory gate, e.g. basic chemicals, electricity, water, steel piping, plastic packaging, advertising agency, accountancy audit

Organisations Organisations resources resources

Invents and patents new drugs Manufactures its products and packs them. Markets them to doctors and health authorities

Outputs Outputs
Range of drugs sent to distributors for onward distribution to customers

Figure 6.3

Organisation adds its value here

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Value added
Value added can be increased by: Raising the value of outputs increasing quantity sold and/or price Reducing the cost of inputs this may require investment
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Resource analysis and adding value 3

In companies with more than one product range:

Added value is best analysed by considering each group separately. Some groups may subsidise others in terms of added value. Not all groups are likely to perform equally.

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Value Chain
Value according to Porter is that which is left after all the costs involved in undertaking to develop and market a product/service are deducted from the revenue it generates He also states that competitive advantage cannot be understood by looking at a company as a whole. It stems from the many discrete activities that a firm performs in designing, producing, marketing, delivering and supporting its product.
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The Value Chain is used for

1.

2.

3.

4.

Identification & diagnoses of value creating activities and the integration of these activities Identification of cost drivers which contribute to differentiation or cost leadership. By knowing the value chain of suppliers and buyers it becomes possible to outsource to cost leaders Identification of competitive advantage potentials which will contribute to sustainability
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Value Chain where does value added come from?

A cost advantage may stem from a low cost physical distribution system, a highly efficient assembly process or superior sales force utilisation. Differentiation can stem from procurement of high quality raw materials, a responsive order processing system or superior product design. The Value Chain is the basic tool for examining all of the firms activities and how they interact.
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Value Chain
Support Activities

Firm Infrastructure Human Resource Management Technology Development Procurement Inbound Logistics

Margin

Outbound Marketing Service Operations Logistics & Sales

Primary Activities
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Value Chain - Five generic categories of primary activities

1. Inbound Logistics: Activities include: Receiving, storing and disseminating inputs to the product such as 1. Materials handling, 2. Warehousing, 3. Inventory control, 4. Vehicle scheduling, 5. Returns to suppliers

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Value Chain - Five generic categories of primary activities

2. Operations: Transforming inputs into the final product form, such as: 1. Machining, 2. Packaging, 3. Assembly, 4. Maintenance, etc

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Value Chain - Five generic categories of primary activities

3. Outbound Logistics: 1. Storing, 2. Distribution and 3. Delivery of finished goods

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Value Chain - Five generic categories of primary activities

4. Marketing & Sales: Activities focusing on the means by which buyers are made aware of product/service offerings and by which they purchase such as: 1. Advertising, 2. Sales promotion, 3. Quoting, 4. Channel selection, 5. Pricing etc

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Value Chain - Five generic categories of primary activities

5. Service: Activities associated with providing service to enhance or maintain the value of the product/service such as: 1. Installation, 2. Commissioning, 3. Training, 4. Support, 5. Repairs etc
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Value Chain Four Support Activities

1. Procurement: Refers to purchasing inputs and can relate to all primary and support activities, such as: Raw materials for ops, Temp sales people for Mkt & Sales or Lab equipment for R&D. The dispersion of procurement throughout the firm often obscures the magnitude of total purchases.

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Value Chain Four Support Activities

2. Technology Development: All technological developments in a firm such as technologies used in 1. administration (MIS) 2. transportation 3. in the product or process. Note: Technology can be the key to SCA for example, commodity production where a firms process technology is the single biggest factor in its competitive advantage.

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Value Chain Four Support Activities

3. Human Resource Management: Activities such as 1. Recruiting, 2. Training, 3. Compensation. Supports the entire value chain (Labour Relations)
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Value Chain Four Support Activities

4. Firm Infrastructure: Activities such as 1. General management, 2. Planning finance, 3. Accounting, 4. Legal, It can often be a source of competitive advantage.

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Value System - Porter

Value system. The wider routes in an industry that add value to incoming supplies and outgoing distributors and customers. It links the industry value chain to that of other industries. Real competitive advantage can be developed by using the best suppliers and distributors.
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Competitive advantage through linkages between the value chain and value system Figure 6.6 Company
Lowcost source
Own company Own company supply supply source A source A Own company Own company supply supply source B source B

Lowcost source

Outside Outside supplier A supplier A More expensive, branded ingredient Outside Outside supplier B supplier B Competitor
Major ownMajor ownExceptionally company company low cost supply source supply source

COMPANY COMPANY VALUE VALUE CHAIN CHAIN

Strong distributor Distributor Distributor A A

Customers in market place

Strong distributor Distributor Distributor B B

Distributor Distributor C C
COMPETITOR COMPETITOR VALUE VALUE CHAIN CHAIN

Outside Outside supplier C supplier C Highquality products Outside Outside supplier D supplier D

Distributor Distributor D D Distributor Distributor E E

Three weaker distributors

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Analysis of value chain and system

Can be costly and time consuming process Can use KFS to help focus on certain areas within the value chain and/or system. The KFS will often direct you towards the areas where value is added

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Comments on value chains and the value system

Weaknesses in the practical application of value added include the following: a lack of precision in identifying areas of resource advantage an inability to value clearly major assets like specialist knowledge and company leadership.
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Value analysis and GSK

1. 2. 3.

1. 2.

KFS R&D Marketing Product performance Strategy in 1990s Invest heavily in R&D Acquire companies with complementary drug pipelines Wellcome in 1995 Note that the value chain focuses on existing relationships only
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Resource-based view of strategy development

Focuses on the individual resources of the organisation, rather than strategies common to all companies in an industry. Basic argument: important to understand the competitive forces in an industry, but organisations should seek their individual solutions within this context. Competitive advantage: derives from the exploitation of the relevant resources of the individual organisation when compared to others in the industry.

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Identifying the resources that deliver SCA

Figure 6.11 Identifying the resources that deliver SCA

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Analysing the resources of the organisation

Useful to divide into three broad areas: Tangible resources: the physical resources of the organisation e.g. plant and equipment. Intangible resources: those resources that have no physical presence but represent real benefit to the organisation e.g. brand names, service levels and technology. Organisational capability: the skills, routines and leadership of the organisation e.g. special skills related to speed of new product development or customer service.

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Improving competitive advantage

Three main ways of improving competitive advantage are as follows:

1.

2. 3.

Benchmarking: a comparison of practice with another organisation considered to display best-practice in its field of operation. Leveraging: exploiting existing resources. Upgrading resources: through developing new resources, enhancing those threatened by competition and adding complementary resources.

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Case web links for chapter 6

Case 6.1 Resource strategy at GSK: negotiating a merger and making it work. GlaxoSmithKline (http://www.gsk.com/index.htm) Case 6.2 How three European companies attempt to utilise their resources GlaxoSmithKline (http://www.gsk.com/index.htm) Nederlandse Spoorwegen http://www.ns.nl/domestic/index.cgi Bouygues Group http://www.bouygues.fr/english/index.html Case 6.3 Xbox the strategic battle for the home entertainment market has just begun Xbox Official web site http://www.xbox.com

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Related web links for chapter 6

For an up-to-date review of how firms are tackling the issue of managing their value chains see the Industry Week 2002 Value Chain Survey: http://www.industryweek.com/iwinprint/vcreport/

A very hot topic in debates about competitive advantage these days is something called 'knowledge management'. This is briefly discussed in this chapter but if you wish to find out more, read this article from CIO magazine: http://www.cio.com/research/knowledge/edit/kmabcs.html

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Further Reading
Ohmae, K (1983), The Mind of the Strategist, Penguin, Harmondsworth, chapter 3. Porter, M E (1985), Competitive Advantage, The New Press, NY, chapter 7. Kay, J (1993), Foundations of Corporate Success, Oxford University Press, Oxford, Chapter 5 to 8. Banerjee, Parthasarathi, (2003), Resources, capability and coordination: strategic management of information in Indian information sector firms. International Journal of Information Management; Aug2003, Vol. 23 Issue 4,
p303, Lieberman, Marvin B Assessing the Resource Base of Japanese and U.S. Auto Producers: A Stochastic Frontier Production Function Approach. Management Science; Jul2005, Vol. 51 Issue 7, p1060-1075
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