Strategic Management – Part 2

Resource based approach

⚫ The Resource-Based View (RBV) is a
model that sees resources as key to superior
firm performance.
⚫ It emphasizes the internal capabilities of the
organization in formulating strategy to
achieve sustainable competitive advantage
in its markets.
Types of Resources
1. Physical resources (plant – equipment –
location – technology – raw material -
…etc. )
2. Human resources (employees –
Competencies- knowledge- skills –abilities
- …etc. )
3. Organizational resources (structure
–systems- policies ----etc. )
Types of Resources
Relatively easy to identify, and
include physical and financial assets
used to create value for customers
⚫ Financial resources
⚫ Physical resources
⚫ Modern plant and facilities
⚫ Favorable manufacturing
locations
⚫ State-of-the-art machinery and
equipment
Types of Resources
Intangible Difficult for competitors to
Resources account for or imitate, typically
embedded in unique routines and
practices that have evolved over
time
⚫ Human
⚫ Competencies
⚫ Experience and capabilities of
employees
⚫ Managerial skills
Types of Resources

Intangible ⚫ Innovation and creativity

Resources ⚫ Innovation capacities
⚫ Reputation
⚫ Goodwill
Types of Resources
⚫ Technological resources
Intangible
Resources ⚫ Innovative production
processes
⚫ Patents, copyrights,
trademarks
⚫ Organizational resources
⚫ Effective strategic planning
processes
⚫ Excellent evaluation and
control systems
⚫ Culture
Organizational Competencies that a firm employs
Capabilities to transform inputs to outputs, and
capacity to use tangible and
intangible resources to attain
desired end
⚫ Outstanding customer service
⚫ Excellent product development
capabilities
⚫ Innovativeness of products and
services
⚫ Ability to hire, motivate, and
retain human capital
Firm Resources and Sustainable
Competitive Advantage
Is the resource …
▪ Valuable

▪ Rare

▪ Difficult to imitate

▪ Difficult to substitute
Is the Resource Valuable?
Organizational resources can be a source of
competitive advantage only when they are
valuable
⚫ Enable a firm to formulate and implement
strategies that improve its efficiency or
effectiveness
Is the Resource Rare?
Organizational resources also possessed by
competitors are not sources of competitive
advantage
⚫ Common strategies based on similar
resources give no one firm an advantage
⚫ Competitive advantages are gained only
from uncommon resources, resources that
are rare to other competitors
Can the Resource be Imitated?
Difficulty in imitating resources is key to
value creation because it constrains
competition
⚫ Profits generated from inimitable resources
are more likely to be sustainable
Are Substitutes Readily Available?
There must be no strategically equivalent
valuable resources that are themselves not rare
or inimitable
Distinctive (core) competencies
A firm’s strengths that cannot be easily
matched or imitated by competitors.
 Scanning Management and Functional
resources
⚫ Management capabilities
⚫ Financial capabilities
⚫ Marketing capabilities
⚫ HR capabilities
⚫ Operations capabilities
⚫ Information management capabilities
● Information from:
● Management
● Marketing
● HR
● Finance/accounting
● Production/operations
● Research & Development
● Management Information Systems
Management
Stage When Most
Function Important
Planning Strategy Formulation

Organizing Strategy Implementation

Motivating Strategy Implementation

Staffing Strategy Implementation

Controlling Strategy Evaluation

Managerial Questions Checklist
⚫ Are company objectives and goals measurable
and well communicated?
⚫ Is the organization’s structure appropriate?
⚫ What is the leadership style?
⚫ What is the span of control?
⚫ Do managers at all hierarchical levels plan
effectively?
⚫ Do managers delegate authority well?
HR
⚫ Are job descriptions and specifications
clear?
⚫ Is employee morale high?
⚫ Are employee turnover and absenteeism
low?
⚫ Are HR systems effective?
⚫ Are employees competent?
⚫ Are employees engaged?
Marketing Audit Checklist
⚫ Are markets segmented effectively?
⚫ Is the organization positioned well among competitors?
⚫ Has the firm’s market share been increasing?
⚫ Are present channels of distribution reliable and
cost-effective?
⚫ Does the firm have an effective sales organization?
⚫ Does the firm conduct market research?
⚫ Are product quality and customer service good?
⚫ Are the firm’s products and services priced
appropriately?
⚫ Does the firm have an effective promotion strategy?
⚫ Are marketing planning and budgeting effective?
⚫ Do the firm’s marketing managers have adequate
experience and out-of box thinking?
Finance Audit Checklist
⚫ Where is the firm financially strong and weak as
indicated by financial ratio analysis?
⚫ Can the firm raise needed long-term capital
through debt and/or equity?
⚫ Does the firm have sufficient working capital?
⚫ Are capital budgeting procedures effective?
⚫ Are dividend payout policies reasonable?
⚫ Does the firm have good relations with its
investors and stockholders?
⚫ Are the firm’s financial managers experienced
and well trained?
Financial Ratios
⚫ How has each ratio changed over time?
⚫ How does each ratio compare to industry
norms?
⚫ How does each ratio compare with key
competitors?
 Production/Operations Audit Checklist
⚫ Are suppliers of raw materials, parts, and
subassemblies reliable and reasonable?
⚫ Are facilities, equipment, machinery, and offices in
good condition?
⚫ Are inventory-control policies and procedures
effective?
⚫ Are quality-control policies and procedures
effective?
⚫ Are facilities, resources, and markets strategically
located?
⚫ Whether the production processes are effective?
R&D Audit Checklist
⚫ Does the firm have R&D facilities? Are they
adequate?
⚫ Are the organization’s R&D personnel competent?
⚫ Are R&D resources allocated effectively?
⚫ Is communication between R&D and other
organizational units effective?
⚫ Are present products technologically competitive?
 Information Systems Audit Checklist
⚫ Do all managers in the firm use the information system to
make decisions?
⚫ Are data in the information system updated regularly?
⚫ Do managers from all functional areas of the firm contribute
input to the information system?
⚫ Is the information system user friendly?
⚫ Do all users of the information system understand the
competitive advantages that information can provide firms?
⚫ Are computer training workshops provided for users of the
information system?
⚫ Is the firm’s information system continually being improved
in content and user-friendliness?
 Organizational Capability Profile (OCP)
⚫ The strategists are required to systematically assess
the various functional areas and assign values to
the different factors and sub factors along a scale
ranging from values of -5 to + 5.
⚫ After completion of the chart, the strategists are in
a position to assess the relative strengths and
weaknesses of an organization in each of the
functional areas and identify the gaps.
 Organizational capability profile
Capability factors Weakness Normal Strength
-5 0 +5
Financial capability factors
a.Sources of funds
b.Usage of funds
Marketing capability factors
a.Product related
b.Price related
c.Promotion related
HR related factors
a.HR policies
b.Industrial relations
Operations capability factors
a. Production systems
b. Operations and control system
Information management capability factors
a.Acquisition and processing of information
b.Transmission and dissemination of information
General management capability factors
a.Organizational climate
b.General management systems
Strategic Advantages Profile
(SAP)
⚫ SAP provides a picture of the more critical
areas which can have a relationship with the
strategic posture of the firm in the future.
⚫ The SAP indicates that strategists initiate
action to cover the gaps and use the
company’s strengths in the light of the
environmental threats and opportunities
 Strategic Advantage Profile - Example

Capability factor Nature of Competitive strength or weakness

Impact
Finance High cost of capital, reserves and surplus position
unsatisfactory
Marketing Fierce competition in industry, company’s
position secure at present
Operations Plant and machinery in excellent condition, good
systems
HR Quality of managers and comparable with that in
competitor companies
Information Advanced management information systems in
place, payroll and accounting computerized
General High quality and experienced top management
Management having a proactive attitude
 Evaluating Capabilities
• Assessment of resource capabilities, strengths
and weaknesses enables managers to have a
realistic understanding of where their
company stands in the marketplace
• Three common methods of assessment
Strength-Weaknesses-Opportunities-Threats
(SWOT) analysis
Internal Factor Evaluation (IFE)
Value Chain Analysis (VCA)
THE VALUE CHAIN ANALYSIS
A value chain is a chain of activities that a
firm operating in a specific industry
performs in order to deliver valuable product
or service for the market.
Value chain analysis is a tool to analyze a
company's business activities to see how the
company can create a competitive advantage
for itself. It is developed by Dr. Michael
porter of Harvard business school.
 VALUE
⚫ The VALUE is the total amount(i.e. Total
revenue) that buyers are willing to pay for a
firm’s products.

⚫ The difference between the total value (or

revenue) and the total cost of performing all of
the firm’s activities provides the margin
 TYPES OF FIRM ACTIVITIES

1. PRIMARY
- Those that are involved in the creation, sale and transfer
of products (including after-sales service)
2. SUPPORT
- Those that merely support the primary activities
 PRIMARY ACTIVITIES
1. INBOUND LOGISTICS
- Concerned with receiving, storing, distributing
inputs (Eg. Handling of raw materials,
warehousing, inventory control).
2. OPERATIONS
- Comprise the transformation of the inputs into the
final product form (eg. Production, assembly, and
packaging)
 PRIMARY ACTIVITIES

3. OUTBOUND LOGISTICS
- Involve the collecting, storing, and
distributing the product to the buyers
(eg. Processing of orders, warehousing of
finished goods, and delivery)
 PRIMARY ACTIVITIES

4. MARKETING AND SALES

- How buyers can be convinced to purchase
the product? (eg. Advertising, promotion)
5. SERVICE
- Involves how to maintain the value of the
product after it is purchased
(eg. Installation, repair, maintenance,
and training)
 SUPPORT ACTIVITIES

1. PROCUREMENT
- Concerned with the tasks of purchasing
inputs such as raw materials, equipment,
and even labor
2. TECHNOLOGY DEVELOPMENT
- These are intended to improve the product
activities and the process.
 SUPPORT ACTIVITIES

3. HUMAN RESOURCE MANAGEMENT

- Involved in recruiting, training,
development and compensation
4. FIRM INFRASTRUCTURE
- The activities which are not specific to
any activity area such as general
management, planning, finance, and
accounting are categorized under firm
infrastructure.
USES OF VALUE CHAIN ANALYSIS

⚫ A firm gains a competitive advantage by

performing these activities better or at
lower cost than competitors.
⚫ The sources of the competitive advantage
of a firm can be seen from its activities and
how they interact with one another.
 MICHAEL PORTERS GENERIC
STRATEGIES
⚫ According to Porter, strategies allow
organizations to gain sustainable
competitive advantage from three different
bases:
Cost leadership,
Differentiation and
Focus.
GENERIC BUSINESS
STRATEGIES
 Porter’s Generic Strategy Framework –
Business strategies
Low cost Differentiation
d
Broa

Cost leadership Differentiation

Scope
Strategic

Cost focus Differentiation

w
Narro

focus
 Cost Leadership

Some Keys to Success:

⚫ High Capacity Utilization
⚫ Economies of Scale
⚫ Technological Advances
⚫ Outsourcing
⚫ Learning / Experience Effects
 Cost Leadership Strategy: Advantages
⚫ Higher profits resulting from charging prices below
that of competitors, because unit costs are lower
⚫ Increase market share and sales by reducing the price
below that charged by competitors (assuming price
elasticity of demand)
⚫ Ability to enter new markets by charging lower prices
⚫ Is a barrier to entry for competitors trying to enter the
industry
 Cost Leadership and the Value Chain
⚫ With a cost leadership strategy, the value chain
must be organized to:
⚫ Reduce per unit costs by using cheaper
resources, reducing labor costs and increasing
labor productivity
⚫ Achieve economies of scale by high-volume
sales
⚫ Using high-volume purchasing to get discounts
⚫ Locating where costs are low.
Cost leadership strategy is best used in a
 Differentiation Strategy: Advantages
⚫ Products will get a premium price

⚫ Demand for products is less price elastic

than that for competitor’s products

⚫ It is an additional barrier to entry for

competitors to enter the industry

 Differentiation Strategy and the Value
Chain
⚫ Analysis of the value chain identifies in what
parts of the chain and through which links
superior products can be created and customer
perception may be changed
⚫ Create products that are superior to
competitors’ products in design, technology,
performance, etc.
⚫ Offer superior after-sales service
⚫ Create a strong brand name
Differentiation Strategy and Price Elasticity of
Demand
Differentiation strategy, properly used, can:
⚫ reduce price elasticity of demand for the
product
⚫ lead to the ability to charge higher prices
than competitors, without reducing sales
volume
⚫ lead to above average profits
Focus Strategy
⚫ Focus strategy – targets a segment of the
product market, rather than the whole
market or many markets
⚫ Segment is determined by the bases for
segmentation, i.e., geographic, demographic,
etc.
⚫ Within the segment, either cost leadership
or differentiation strategy is used
Focus Strategy: Advantages
⚫ Lower investment costs required compared
to a strategy aimed at the entire market or
many markets
⚫ It allows for specialization and greater
knowledge
⚫ It makes entry into a new market more
simple
 Generic Strategy Framework
Low cost Differentiation

Cost leadership Differentiation

d
Broa

Walmart, Nirma McDonalds,

Johnson
Scope
Strategic

&Johnson
Titan watches

Cost focus Differentiation

w
Narro

Chik, Ayur herbal focus

shampoo Titan Jewellery,
Rolls Royce
The GE/ McKinsey Matrix
⚫ This is a form of portfolio analysis used for
classifying product lines or strategic
business units within a large company
⚫ It was developed by McKinsey for the US
General Electric Company
⚫ It assesses areas of the business in terms of
two criteria:
⚫ The attractiveness of the industry/market
concerned
⚫ The strength of the business
Industry attractiveness
⚫ The vertical axis of the matrix is industry
attractiveness
⚫ This concerns the attractiveness to a firm of
entering, or remaining, in a particular
industry
⚫ Industry attractiveness is assessed by
considering a range of factors
 Criteria which makes a market attractive

⚫ Market size ⚫ Variability of demand

⚫ Growth rate ⚫ Rate of technological
⚫ Overall returns in the change
industry ⚫ Volatility
⚫ Industry profitability ⚫ Availability of market
⚫ Intensity of competition intelligence
⚫ Industry fluctuations ⚫ Availability of work force
⚫ Customer/supplier ⚫ Global opportunities
relations ⚫ PEST factors
⚫ Entry and exit barrier
Business unit strength
⚫ The horizontal axis of the matrix is the
strength of the business unit
⚫ This refers to how strong the firm or SBU is
in terms of the market
⚫ A market might be very attractive but the
firm lacks strengths in terms of supplying
the market
⚫ Market growth is an element of industry
attractive and market share is an element in
business strength
 Assessing internal strengths
⚫ Production capacity
⚫ Production flexibility
⚫ Unit costs
⚫ R and D capabilities
⚫ Quality
⚫ Reliability
⚫ Company image
⚫ Product uniqueness
⚫ Cost and profitability
⚫ Profit margins relative to
competitors
⚫ Manufacturing capability
⚫ Organisational skills
⚫ Market share
⚫ Growth in market share
⚫ Marketing capabilities
⚫ Management competence
⚫ Skills of workforce
⚫ Distribution network
⚫ Size and quality of sales
force
⚫ Service quality
⚫ Customer loyalty
⚫ Brand recognition
The matrix
⚫ Arranges the company’s SBUs in three bands and
nine boxes
⚫ Band X - Successful SBUs – in which the
business is strong and the industry is attractive
⚫ Band Y - Mediocre SBUs – in which either the
industry is less attractive and/or the business is
lacks strengths
⚫ Band Z - Disappointing SBUs - in which the
business is weak and the industry unattractive
 The GE/ McKinsey Matrix
High strength Medium strength Low strength

High
attractiveness

Medium
attractiveness

Low
attractiveness
 Types of strategies
⚫ Grow and build
⚫ Product development
⚫ Market development
⚫ Market penetration
⚫ Integration
⚫ Diversification
⚫ Selective investment(Hold)
⚫ Product development
⚫ Related diversification
⚫ Harvest
⚫ Divest
⚫ Retrench
 Recommended strategies
Grow -strong business units in attractive industries
-average business units in attractive industries
-strong units in average industries
Hold -average business units in average industries
-strong units in weak industries
-weak units in attractive industries
Harvest -weak units in unattractive industries
-average units in unattractive industries
-weak units in average industries
Shells’ Directional Policy Matrix
⚫ Shell – one of the world’s largest petrochemical
companies, developed a matrix, which came to be
known as the Shell directional policy matrix.
Shells’ Directional Policy Matrix
• Leader - major resources are focused upon the SBU.
Try harder – put more efforts. the product can be moved
towards the leadership box by judicious application of resource
⚫ Double or quit -those with the best prospects should be
selected for full backing and development; the rest should be
abandoned
⚫ Growth - grow the market by focusing just enough resources
here.
⚫ Custodial - just like a cash cow, milk it and do not commit any
more resources.
⚫ Cash Generator - Even more like a cash cow, milk here for
expansion elsewhere.
⚫ Phased withdrawal - move cash to SBU's with greater
potential.
BALANCED SCORECARD
“Measurement is the first step that leads to control and
eventually to improvement.
If you can’t measure something, you can’t understand
it.
If you can’t understand it, you can’t control it.
If you can’t control it, you can’t improve it”.
– H. James Harrington

“You can’t manage what you can’t measure”.

 Evolution of Balanced Scorecard (BSC)

⚫ Prior to late 1980s – emphasis was on financial measures

such as profits, sales, etc.

⚫ In the late 1980s - measuring and managing non-financial

measures in addition to the traditional financial measures

was considered important.
Who coined the term BSC and developed it?

⚫ The term ‘Balanced Scorecard’ was coined by Art

Schneiderman in 1987. BSC became a popular term when
Kaplan and Norton worked extensively on scorecards.
 BALANCED
SCORECARD

A Performance
Measurement
System?
A Performance
Management
System?
 What is Balanced Scorecard
?
“Balanced Scorecard is a performance measurement system that
translates an organization’s strategy into clear objectives, measures,
targets, and initiatives.”
(Kaplan and Norton, Harvard Business Review, 1996)

Balanced Scorecard emerged as a performance management system and over a period of time it has
come to be known as a strategy management system, to align business activities to the vision and
strategy of the organization, and monitor organization performance against strategic goals.
 Concept of Balanced
Scorecard
The concept of Balanced Scorecard was explained by Kaplan and Norton (1996) as:
Balanced Scorecard complements financial measures of past performance with
the drivers of future performance.
The objectives and measures of the scorecard are derived from an organization’s
vision and strategy.
The objectives and measures view organizational performance from four
perspectives: financial, customer, internal business processes, and learning and
growth. These four perspectives provide the framework for the balanced scorecard.
Balanced Scorecard
 Linking the Balanced Scorecard Perspectives

Increase in sales,
profits,
Financial Return on
Capital Employed
On-time delivery,
quality products
Customer
customer
satisfaction
Internal Process

Learning & Growth Employee Skills,

Innovation
Commonly Used Financial Measures

⚫ Total assets ⚫ Net Income

⚫ Total assets per ⚫ Profit as a % of sales
employee ⚫ Profit per employee
⚫ Profits ⚫ Revenue
⚫ Return on total assets ⚫ Revenue from new
⚫ Revenues/total assets products
⚫ Gross Margin ⚫ ROE
⚫ ROI
Commonly Used Customer
Measures

⚫ Customer Satisfaction ⚫ Price relative to

⚫ Customer Loyalty competition
⚫ Market Share ⚫ Customers lost
⚫ Customer Complaints ⚫ Customer retention
⚫ Return rates ⚫ Customer acquisition
⚫ Response time costs
⚫ Number of customers
Commonly Used Internal Process
Measures

⚫ On-time delivery ⚫ Response time to

⚫ Patents pending requests
⚫ Stockouts ⚫ Defect percentage
⚫ Labor utilization rates ⚫ Breakeven time
⚫ Cycle time
⚫ Waste reduction
Commonly Used Learning and Growth
Measures

⚫ Employee ⚫ Motivation index

participation ⚫ Diversity rates
⚫ Training investment ⚫ Quality of work
⚫ Average years of environment
service ⚫ Training hours
⚫ Turnover rate ⚫ Reportable accidents
⚫ Employee suggestions
Balance in the Scorecard
⚫ Balance between financial
and non-financial measures.
⚫ Balance between external
and internal measures.
⚫ Balance between short-term
and long-term objectives.
⚫ Balance between different
stakeholders.
⚫ Balance between lag and
lead measures.
Benefits of Balanced Scorecard
⚫ Aligns key performance indicators with the overall
strategy of the organization
⚫ Provides holistic picture of business results
⚫ Makes performance management process more
scientific
⚫ Makes performance assessment process more
transparent
⚫ Brings in a positive work culture in the organization
⚫ It makes available strategic feedback
⚫ Management can take the corrective actions on a real
time basis to make good the performance gaps.
 Balanced Scorecard in a
nutshell
The Balanced Scorecard is a management tool that provides
stakeholders with a comprehensive measure of how the
organization is progressing towards the achievement of its
strategic goals.
BSC of Philips Electronics