Strategic Management

Session 7

Chapter 4
Organization Analysis & Competitive Advantage
Learning Objectives (1 of 2)
1. Apply the resource-based view of the firm and the VRIO framework to determine
core
2. and distinctive competencies
3. Understand a company business models and how they can be imitated
4. Use value chain to assess the activities of an industry and of an organization
5. Explain why different organizational structures are utilized in business
6. Assess a company’s corporate culture and how it might affect a proposed strategy
7. Construct an IFAS Table that summarizes internal factors

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Resource-Based Approach to Organizational Analysis—VRIO Framework

• Scanning and analyzing the external environment for opportunities and threats is necessary
for the firm to be able to understand its competitive environment and its place in that
environment.
• In order for the organization to thrive, the senior leadership team must look within the
corporation itself to identify internal strategic factors —critical strengths and weaknesses that
are likely to determine whether a firm will be able to take advantage of opportunities while
avoiding threats.
• This internal scanning, often referred to as organizational analysis , is concerned with
identifying, developing, and taking advantage of an organization’s resources and
competencies.
• A resource-based view of the firm and the VRIO framework to determine core and distinctive
competencies.
Figure 1-3: Environmental Variables

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A Resource-Based Approach to Organizational Analysis

Organizational analysis
➔ concerned with identifying and developing an organization’s
resources and competencies
➔ Scan and understand competitive environment, your current position
➔ Identify internal strategic factors – Strengths & weaknesses (Organization
analysis)
➔ OA concerned with identifying, developing, and taking advantage of an
organization’s resources/competencies

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Resource-Based Approach to Organizational Analysis—VRIO Framework

➔ Resources are an organization’s assets and are thus the basic building blocks of the
organization. They include tangible assets, human assets, and intangible assets.
➔ Capabilities refer to a corporation’s ability to exploit its resources. They consist of
business processes and routines that manage the interaction among resources to turn
inputs into output. A capability is functionally based and is resident in a particular
function.
➔ A competency is a cross-functional integration and coordination of capabilities.
➔ A core competency is a collection of competencies that crosses divisional boundaries,
is widespread within the corporation, and is something that the corporation can do
exceedingly well.
➔ When unique resources and/or core competencies are superior to those of the
competition, they are called distinctive competencies
 Core and Distinctive Competencies (1 of 5)

➔ Resources
➔ An organization’s assets and are thus the basic building blocks of the organization.
➔ Tangible, intangible, human

➔ Capabilities (functional / dynamic)

➔ Corporation’s ability to exploit its resources.
➔ Consist of business processes and routines that manage the interaction among
resources to turn inputs into outputs

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Core and Distinctive Competencies (2 of 5)

➔ Core competency
➔ a collection of competencies that cross divisional boundaries, is wide-spread
throughout the corporation and is something the corporation does exceedingly well

➔ Distinctive Competency - DC
➔ core competencies that are superior to those of the competition –
➔ Distinctive competencies are highly specific and difficult to imitate aspects of a company that
provides the business with an advantage over its competitors.
➔ Competitive advantage is a much broader term compared to DC that describes anything that gives
a business the edge over its competitors.

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Resource-Based Approach to Organizational Analysis—VRIO Framework

➔ Resources and capabilities are of value - if they give 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.
➔ The approach used today has its roots in works by Wernerfelt in 1984
followed by an effective operationalization by Jay Barney who first
proposed a VRIN framework [Valuable, Rare, Imperfectly imitable, Not
substitutable resources] that he later developed into the VRIO framework
of analysis.
VRIO Framework of Analysis to Determine Firm’s Competencies
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?
4. Organization: Is the firm organized to exploit the resource?

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VRIO Framework of Analysis

Valuable Yes
Rareness Yes You have
Competitive
Imitability No Advantage
Organization Yes

Each aspect is taken one by one and moved through above analysis.

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VRIO Framework of Analysis
Valuable Able to offer value Then Yes
and command
premium?
TESLA/i-Phone
Rareness You have, others Then Yes
don’t have
WALMART
Imitability Complex to imitate? Then Yes
Biscuit/Amazon
Firestick
Organization Functional integration Then Yes

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Core and Distinctive Competencies (3 of 5)

➔ Imitability
➔ the rate at which a firm’s underlying resources, capabilities,
or core competencies can be duplicated by others

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Core and Distinctive Competencies (4 of 5)

Imitation depends on;

➔ Transparency
➔ the speed at which other firms under the relationship of resources and capabilities
support a successful strategy – Gillette
➔ Transferability
➔ the ability of competitors to gather the resources and capabilities necessary to
support a competitive challenge – Wine maker, Shrewsberry Biscuits from
Kayani,Pune
➔ Replicability
➔ the ability of competitors to use duplicated resources and capabilities to imitate
the other firm’s success – Hiring from P&G, Infosys but person may still fail!

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Core and Distinctive Competencies (5 of 5)

➔ Explicit knowledge
➔ knowledge that can be easily articulated and communicated

➔ Tacit (implicit, implied, unstated) knowledge

➔ knowledge that is not easily communicated because it is deeply rooted
in employee experience or in the company’s culture
➔ For the company to be successful and grow, its tacit knowledge must be
identified, codified if the knowledge needs to spread throughout the
organization

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Core and Distinctive Competencies (5 of 5) – Managing DC

➔ Safeguard – Security, Legal, Patent, Copyright, brand, manufacturing

➔ Make such resources and capabilities become distinctive competencies
as they provide a sustainable competitive advantage – Gillette
➔ Increase speed – from lab to the market
➔ What will it take for the competitor to match R/C
➔ Org capability are rooted in policies, procedures, culture and norms

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Core and Distinctive Competencies (5 of 5) – Managing DC

➔ Evaluate the importance of company’s R/C/C;

➔ Past performance
➔ Key Competitors
➔ Industry as a whole

➔ Distinctive competencies can be your key strength but vice a versa

may not be true

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 LET’S REWIND

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Let’s Rewind – Session 4

• A resource-based approach to organization analysis covers 4 aspects

namely______.
o Resource, capabilities, core competency, distinctive competency

• Framework for organization analysis includes ___.

o Valuable, Rareness, Imitability, Organization (VRIO)

• Imitability depends on which four aspects?

o Transparency, Transferability, Replicability, Tacit knowledge

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Let’s Rewind – Session 4

• Managing distinctive competencies requires what?

o safeguards, increase speed, competitive evaluation, evaluate the importance of organization’s R/C/C

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Resource-Based Approach to Organizational Analysis—VRIO Framework

The Four Questions To Evaluate A Firm’s Competencies:

1. Valuable: Does it provide customer value and competitive advantage?

2. Rareness: Does only one other competitor or preferably do no
competitors possess it at relatively the same level?
3. Imitability: Do the competitors have the financial ability to imitate?
4. Organization: Is the firm organized to exploit the resource?
Using Resources/Capabilities To Gain Competitive Advantage
A corporation can gain access to a distinctive competency in four ways:

➔ Asset endowment, such as a key patent. E.g. Xerox, which grew on the basis
of its original copying patent.
➔ Acquired from someone else. E.g. Disney bought Pixar in order to
reestablish itself in the animated movie market.
➔ Shared with another business unit or alliance partner. E.g. LG has taken its
electronics and production expertise into appliances with astonishing success
in the market.
➔ Carefully built and nurtured over time within the company. E.g. , Honda’s
expertise in making small engines extended the application of this from
motorcycles to autos, boat engines, generators, and lawnmowers.
Access to a Distinctive Competency (2 of 2)

Clusters
➔ Are geographic concentrations of interconnected companies and industries
➔ Clusters provide Access to:
➔ Employees
➔ Suppliers
➔ specialized information
➔ complementary products
➔ Combined together they can drive distinctive competency

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Examples of Clusters in India

➔ Chemical Belt – Baroda to Vapi in Gujarat

➔ IT – Bangalore / Hyderabad / Pune
➔ ITES – Gurgaon / Mumbai / Pune
➔ Hosiery – Tirupur
➔ Automobile / Light Engineering – Chennai, Coimbatore, Pune, Delhi

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Business Models
➔ A business model is a company’s method for making money in the current
business environment.
➔ It includes the key structural and operational characteristics of a firm—how
it earns revenue and makes 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.
Types of Business Models
➔ Customer Solutions Model: e.g. IBM sells its expertise to improve its customers’ operations –
which included hardware / software / implementation / AMC. This is a consulting model.
➔ Profit Pyramid Model: Maruti Suzuki + Nexa offers a full line of automobiles in order to
close out any niches where a competitor might find a position. The key is to get customers to
buy in at the low-priced, low-margin entry point (Alto) and move them up to high-priced,
high-margin products (Brezzia, Ciaz) where the company makes its money.
➔ 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 with printers and printer cartridges.
➔ The product is thus a system, not just one product, with one component providing most of
the profits.
Business Models
➔ Advertising Model: Similar to the multicomponent system/installed base model, this model
offers its basic product free in order to make money on advertising. Many web-based firms
selling online services 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: In this model, a firm acts as an intermediary to connect multiple sellers
to multiple buyers. E.g. eBay, Amazon.com, Uber
➔ 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.
 BUSINESS MODELS
• 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.
 BUSINESS MODELS

• Entrepreneurial model: In this 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 brewpubs have been very successful in mature
industries dominated by national and international brands. 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: In this 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 are 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.
Value-Chain Analysis
Value chain
– a linked set of value-creating activities that begin with basic raw
materials coming from suppliers moving on to a series of value-added
activities involved in producing and marketing a product or service, and
ending with distributors getting the final goods into the hands of the
ultimate consumer.

Figure 4-1: Typical Value Chain for a Manufactured Product

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Industry Value Chain Analysis
Value chain segments include:
➔ Upstream
➔ Downstream

➔ Center of gravity
➔ the part of the chain that is most important to the company and
the point where its core competencies lie

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Figure 4-2: A Corporation’s Value Chain

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Corporate Value Chain Analysis (1 of 2)

Primary Activities Support Activities

• Inbound logistics • Procurement
• Operations • Technology development
• Outbound logistics • Human resource
management
• Firm infrastructure

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Corporate Value Chain Analysis (2 of 2)
1. Examine each product line’s value chain in terms of the various activities
involved in producing the product or service – VRIO Test
2. Examine the linkages within each product line’s value chain
3. Examine the potential synergies among the value chains of different product
lines or business units – Same manufacturing facility or marketing channels,
suppliers

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Basic Organizational Structure
Three basic organizational structures
1. Simple Structure
➔ has no functional or product categories
➔ is appropriate for a small, entrepreneur-dominated company with one or two
product lines that operates in a reasonably small, easily identifiable market niche.
➔ Employees tend to be generalists and jacks-of-all-trades.

2. Functional Structure
➔ appropriate for a medium-sized firm with several product lines in one industry.
➔ Employees tend to be specialists in the business functions - manufacturing,
marketing, finance, human resources.
Basic Organizational Structure
Three basic organizational structures

3. Divisional Structure
➔ appropriate for a large corporation with many product lines in several related
industries.
➔ Employees tend to be functional specialists organized according to product/market
distinctions.
Basic Organizational Structure

Stage ONE Companies

Stage TWO Companies

Stage THREE Companies

Basic Organizational Structure
Divisional Structure Modifications:

Strategic Business Units (SBUs) – modification of divisional structure

➔ SBUs are divisions or groups of divisions composed of independent product-market
segments that are given primary responsibility & authority for the management of
their own functional areas.

➔ Conglomerate Structure - is also a variant of the divisional structure

➔ appropriate for a large corporation with many product lines in several unrelated
industries.
➔ The conglomerate structure (sometimes called a holding company) is typically an
assemblage of legally independent firms (subsidiaries) operating under one
corporate umbrella but controlled through the subsidiaries’ boards of directors.
What is SBU?
➔ Independent product-market to cater to
a) A unique mission
b) Identifiable competitors
c) An external market focus
d) Control of its business function

E.g. – General Foods: Moved away from packaging technology based

classification – Frozen, Canned, Bagged to Consumer-oriented classification -
Breakfast, beverages, main meal, dessert

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What is SBU?
➔ SBUs were earlier product defined. Now it is market defined.

E.g. of Product & Market Definitions

Company Product Definition Market Definition

Emerson We make UPS Systems We offer Power Solutions
Carrier Aircon We make air-conditioners We provide climate
& furnaces control in the home
Encyclopedia Britannica We sell encyclopedias We distribute knowledge

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SBU Structure (Under Divisional Structure)

Divisions

SBU

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Conglomerate

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 LET’S REWIND

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Let’s Rewind – Session 4

➔ How could you get the access to a distinctive competencies?

➔ Asset endowment, Acquired from someone else, Shared with another business, Built and accumulated
within the company and Clusters

➔ List any three business models

➔ Customer solution model, Profit pyramid model, Multi-component systems, Entrepreneurial model and
6 more

➔ List 5 types of Basic Organization Structure

➔ Simple, functions, divisional, SBU, Conglomerate

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 Culture

• Corporate culture is the collection of beliefs, expectations, and values

learned and shared by a corporation’s members and transmitted from one
generation of employees to another. The corporate culture generally reflects
the values of the founder(s) and the mission of the firm. It gives a company a
sense of identity: “This is who we are. This is what we do. This is what we
stand for.”

• “There are three ways to do any job—the right way, the wrong way, and the
company way. Around here, we always do things the company way.” In most
organizations, the “company way” is derived from the corporation’s culture
Culture

Corporate Culture
— the collection of beliefs, expectations, and values learned
and shared by a corporation’s members and transmitted from
one generation of employees to another
— Corporate culture has two distinct attributes, Intensity and
Integration.
Culture

➔ Cultural intensity is the degree to which members of a unit accept the

norms, values, or other cultural content associated with the unit. This shows
the culture’s depth.

➔ Cultural integration is the extent to which units throughout an organization

share a common culture.
➔ This is the culture’s breadth.
➔ Organizations with a pervasive dominant culture may be hierarchically
controlled and power-oriented, such as a military unit, and have highly
integrated cultures.
➔ All employees tend to hold the same cultural values and norms.
Functions of Corporate Culture

Corporate culture fulfills several important functions in an organization:

1. Conveys a sense of identity for employees

2. Helps generate employee commitment to something greater than
themselves
3. Adds to the stability of the organization as a social system
4. Serves as a frame of reference for employees to use to make sense of
organizational activities and to use as a guide for appropriate behavior.
Strategic Marketing Issues

➔ Market position
– refers to the selection of specific areas for marketing
concentration and can be expressed regarding market, product,
and geographic locations.

➔ Marketing mix
– the particular combination of key variables under a
corporation’s control that can be used to affect demand and to
gain competitive advantage
Table 4-1: Marketing Mix Variables
Product Life Cycle

Product life cycle

A graph showing time
plotted against the sales
of a product as it moves
from introduction through
growth and maturity to
decline.
Brand and Corporate Reputation
Brand
A name given to a company’s product which identifies that item in the mind
of the consumer
Corporate brand
A type of brand in which the company’s name serves as the brand
Corporate reputation
A widely held perception of a company by the general public
Consists of two attributes:
• Stakeholders’ perceptions of quality
• Corporation’s prominence in the minds of stakeholders
Strategic Financial Issues

➔ Financial leverage
– ratio of total debt to total assets
– describes how debt is used to increase earnings
available to common shareholders
➔ Capital budgeting
– analyzing and ranking of possible investments in fixed
assets regarding additional outlays and receipts that
will result from each investment
– hurdle rate
Strategic Research & Development Issues

➔ R&D intensity
– spending on R&D as a percentage of sales revenue
– principal means of gaining market share in global
competition
➔ Technology Transfer
– the process of taking new technology from the laboratory to
the marketplace
R&D Mix
➔ Basic R&D
– focuses on theoretical problems
➔ Product R&D
– concentrates on marketing and is concerned with product or
product packaging improvements
➔ Engineering R&D
– concerned with engineering, concentrating on quality control, and
the development of design specifications and improved
production equipment
Impact of Technological Discontinuity on Strategy

➔ Technology discontinuity
— when a new technology cannot be used to enhance
current technology but substitutes for the technology to
yield better performance
— Innovator’s Dilemma – e.g. Nokia
Strategic Operations Issues

➔ Intermittent Systems
– item is normally processed sequentially, but the work and
sequence of the process vary
➔ Continuous Systems
– work is laid out in lines on which products can be continuously
assembled or processed
➔ Operating Leverage
– impact of a specific change in sales volume on net operating
income
Experience Curve

Experience Curve
— unit production costs decline by some fixed percentage each
time the total accumulated volume of production units doubles
Strategic HR Issues - 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
Five Trends Driving Virtual Teams

1. Flatter organizational structures

2. Turbulent environments
3. Increased employee autonomy
4. Higher knowledge requirements
5. Increasing globalization
Quality of Work Life and Human Diversity

Quality of work life includes improvements in:

1. Introducing participative problem solving
2. Restructuring work
3. Introducing innovative reward systems
4. Improving the work environment

Human Diversity
– the mix in the workplace of people from different races,
cultures and backgrounds
– human resources may be a key to competitive advantage
Strategic Information Systems/Technology Issues
Information systems/technology contributions to performance:
➔ Automation of back office processes
➔ Automation of individual tasks
➔ Enhancement of key business functions
➔ Development of a competitive advantage
➔ Supply chain management: The forming of networks for sourcing raw
materials, manufacturing products or creating services, storing and
distributing the goods, and delivering them to customers and consumers.
Synthesis of Internal Factors (IFAS)
➔ The IFAS (Internal Factor Analysis Summary) Table
➔ one way to organize the internal factors into the generally accepted
categories of strengths and weaknesses
➔ examines how well a particular company’s management is responding
to these specific factors in light of the perceived importance of these
factors.

➔ Use the VRIO framework (Value, Rareness, Imitability, and Organization) to

➔ assess the importance of each of the factors that might be considered
strengths.
The Strategic Audit: A Checklist for Organizational Analysis
Table 4-2: Synthesis of Internal Factors (IFAS)
Strategic Management