The Strategic Position 3: Strategic Capabilities

Slide 3.
The Strategic Position

3: Strategic Capabilities
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.2
Learning outcomes
• Identify what comprises strategic capabilities in terms of

organisational resources and competences and how
these relate to the strategies of organisations.
• Analyse how strategic capabilities might provide
sustainable competitive advantage on the basis of their
value, rarity, inimitability and non-substitutability (VRIN).
• Diagnose strategic capability by means of
benchmarking, value chain analysis, activity mapping and
SWOT analysis.
• Consider how managers can develop strategic
capabilities for their organisations.
Slide 3.3
Strategic capabilities: the key issues
Figure 3.1 Strategic capabilities: the key issues
Slide 3.4
Resource-based strategy
The resource-based view (RBV) of strategy

asserts that the competitive advantage and
superior performance of an organisation is
explained by the distinctiveness of its
capabilities.
Slide 3.5
Resources and competences
• Resources are the assets that organisations

have or can call upon (e.g. from partners or
suppliers),that is, ‘what we have’ .
• Competences are the ways those assets are
used or deployed effectively, that is, ‘what we
do well’.
Slide 3.6
Components of strategic capabilities
Table 3.1 Components of strategic capabilities
Slide 3.7
Components of strategic capabilities

Distinctive capability can also be a process
knowledge:
– quicker time-to-Market than rivals
Slide 3.8
Redundant capabilities
• Capabilities, however effective in the past, can

become less relevant as industries evolve and
change.
• Such ‘capabilities’ can become ‘rigidities’ that
inhibit change and become a weakness.
Slide 3.9
Dynamic capabilities
Dynamic capability is the ability of an organisation to
renew and recreate its strategic capabilities to meet the
needs of changing environments. That can be achieved
trough Organic Organizational Structure (Demise of
Scottish Electronic Manufacturing sector after the WWII).
Slide 3.10
Threshold and distinctive

capabilities (1)
• Threshold capabilities are those needed for

an organisation to meet the necessary
requirements to compete in a given market
and achieve parity with competitors in that
market – ‘qualifiers’.
• Distinctive capabilities are those that
critically underpin competitive advantage and
that others cannot imitate or obtain –
‘winners’.
Slide 3.11
Threshold and distinctive capabilities

Table 3.2 Threshold and distinctive capabilities
These capabilities are transformed into product

characteristics as ‘order winners’ and ‘order qualifiers’ (see
the next slides):
Slide 3.12

capabilities (1)
Slide 3.13

capabilities (1)
Customer expectations are changing continuously:
Mobile Phones: Face Recognition Technology

Taxi Services: Ordering, Tracking, Payment App.
Hotel Booking Services: Overview, Price Comparison.
Slide 3.14

capabilities (1)
Product life cycle affects product characteristics:
Slide 3.15

capabilities (1)
Order winners depend not only on product class, but also
on a customer segment:
Slide 3.16
Core competences
Core competences1 are the linked set of

skills, activities and resources that, together:
• deliver customer value
• differentiate a business from its competitors
• potentially, can be extended and developed as
markets change or new opportunities arise.
1
G. Hamel and C.K. Prahalad, ‘The core competence of the
corporation’, Harvard Business Review, vol. 68, no. 3 (1990),
pp. 79–91.
Slide 3.17
Strategic capabilities and

competitive advantage
The four key criteria by which capabilities can

be assessed in terms of providing a basis for
achieving sustainable competitive advantage
are:
• value,
• rarity,
1
• inimitability and VRIN
• non-substitutability
Jay Barney: ‘Firm resources and sustained competitive advantage’,

1
Journal of Management, vol. 17 (1991), no. 1, pp. 99–120.
Slide 3.18
VRIN (1)
V – Value of strategic capabilities

Strategic capabilities are of value when they:
• take advantage of opportunities and
neutralise threats,
• provide value to customers
• provide potential competitive advantage
• at a cost that allows an organisation to
realise acceptable levels of return
Slide 3.19
VRIN (2)
R – Rarity
• Rare capabilities are those possessed uniquely
by one organisation or by a few others only.
(E.g. a company may have patented products,
have supremely talented people or a powerful
brand.)
• Rarity could be temporary.
(Eg: Patents expire, key individuals can leave
or brands can be de-valued by adverse
publicity.)
Slide 3.20
VRIN (3)
I – Inimitability
Inimitable capabilities are those that competitors
find difficult to imitate or obtain.
• Competitive advantage can be built on unique
resources (a key individual or IT system) but
these may not be sustainable (key people leave
or others acquire the same systems).
• Sustainable advantage is more often found in
competences (the way resources are managed,
developed and deployed) and the way
competences are linked together and integrated.
Slide 3.21
Criteria for the inimitability of strategic

capabilities
Figure 3.2 Criteria for the inimitability of strategic capabilities
Slide 3.22
VRIN (4)
N - Non-substitutability
Competitive advantage may not be sustainable
if there is a threat of substitution.
• Product or service substitution from a different
industry/market. For example, postal services
partly substituted by e-mail.
• Competence substitution. For example, a skill
substituted by expert systems or IT solutions
Slide 3.23
Criteria for the inimitability of

strategic capabilities
Figure 3.3 VRIN
Slide 3.24
Organisational knowledge
Organisational knowledge is the collective

intelligence, specific to an organisation,
accumulated through both formal systems and
the shared experience of people in that
organisation.
Some of this knowledge is ‘Tacit’ knowledge

that is, more personal, context-specific and
hard to formalise and communicate – so it is
difficult to imitate, for example, the knowledge
and relationships in a top R&D team.
Slide 3.25
Historical development of
Organisational Behaviour
1.Scientific Management
• Frederick Winslow Taylor (Taylorism)
• In 1909 published "The Principles of Scientific Management."
• Founded on Precision
• The organization was viewed as a machine
• Aim: to develop “the one best way” of organizing
Slide 3.26
1.Scientific Management (Continued)
• Frank Gilbreth
• Bricklaying System
• Speed up a task
Slide 3.27
• The rising interest in “scientific management” coincided
with the idea of a moving assembly line (but it is likely
that the methods at Ford were evolved independently):
• Ford’s 1912 Model T production was 170,000 cars. By

1914 it was 308,000, and by 1916 735,000, allowing Henry
Ford to keep reducing the price.
• When Model T production ceased in 1927, more than 15
million had been built.
Slide 3.28
• Many viewed the Taylorism as the source of
distinctive capabilities and the basis for global
competitiveness of American Manufacturing Industry.
• However, after the strike by the trade union members
in the factory at the Watertown Arsenal, Taylor (and
Taylorism) became a subject of the congressional
investigations in 1911.
• Later, some blamed the occurrence of General
Economic Depression in 1930s on Taylorism.
• None was true.
Slide 3.29
Organisational Behavior
2. The Human Relations School
• Hawthorne Studies (Mayo)
– investigations into
productivity and social
relations
• It rested more on human
behavior/less on
mechanical efficiency
Slide 3.30
3. Socio-Technical Theories
• Merger of the last two
• Focus: relationship between technology and workgroup
• 2 predominant elements in any organization: Social and
Technical
• Developments in Coal Mining in the UK (1951 studies)
• Miners grouped together in Autonomous Working Groups
(AWG) – SAAB, VOLVO
4. Organizational Behavior
• Examines human behavior in a work environment
• Determines its impact on job structure, performance,
communication, motivation, leadership, etc.
Slide 3.31
Benchmarking
Benchmarking is a means of understanding
how an organisation compares with others –
typically competitors.
Two approaches to benchmarking:
• Industry/sector benchmarking - comparing
performance against other organisations in the
same industry/sector against a set of
performance indicators.
• Best-in-class benchmarking - comparing an
organisation’s performance or capabilities
against ‘best-in-class’ performance – wherever
that is found even in a very different industry.
(E.g. BA benchmarked its refuelling operations
against Formula 1).
Slide 3.32
The value chain
• The value chain describes the categories of

activities within an organisation which,
together, create a product or service.
• The value chain invites the strategist to think of
an organisation in terms of sets of activities,
which can become the sources of competitive
advantage.
Slide 3.33
The value chain
Figure 3.4 The value chain within an organisation

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved
Slide 3.34
The value chain
Slide 3.35
The value chain
Slide 3.36
The value chain
Slide 3.37
Uses of the value chain

• A generic description of activities –
understanding the discrete activities and how
they contribute to consumer benefit and how
they add to cost.
• Identifying activities where the organisation
has particular strengths or weaknesses
• Analysing the competitive position of the
organisation using the VRIN criteria – thus
identifying sources of sustainable advantage.
• Looking for ways to enhance value or
decrease cost in value activities (e.g.
outsourcing)
Slide 3.38
The value network
• The value network comprises the set of

inter-organisational links and relationships that
are necessary to create a product or service.
• Competitive advantage can be derived from
linkages within the value network.
Slide 3.39
The value network
Figure 3.5 The value network

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance
by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved
Slide 3.40
Uses of the value network
• Understanding cost/price structures across

the value network – analysing the best area
of focus and the best business model.
• Identifying ‘profit pools’ within the value
network and seek to exploit these.
• The ‘make or buy’ decision: deciding which
activities to do ‘in-house’ and which to
outsource.
• Partnering and relationships – deciding who
to work with and the nature of these
relationships.
Slide 3.41
Mapping activity systems (1)
• Identify ‘higher order strategic themes’ that is,

how the organisation meets the critical success
factors in the market.
• Identify the clusters of activities that underpin
these themes and how they fit together.
• Map this in terms of how activity systems are
interrelated.
Slide 3.42
Mapping activity systems (2)
Illustration 3.5 Activity systems at Geelmuyden.Kiese
Slide 3.43
Using activity system maps
• A means of identifying strategic capabilities in

terms of linkages of activities
• Internal and external links are identified (e.g. in
terms of the needs of customers).
• Therefore helps identify bases of competitive
advantage.
• And sustainable advantage for example, in
terms of bases of inimitability.
Slide 3.44
The Internal Factor Evaluation (IFE)

Matrix
• This strategy-formulation tool summarizes and evaluates the

major strengths and weaknesses in the functional areas of a
business.
• It also provides a basis for identifying and evaluating
relationships among those areas.
• Intuitive judgments are required in developing an IFE Matrix
(so the appearance of a scientific approach should not be
interpreted to mean this is an all-powerful technique).
• A thorough understanding of the factors included is more
important than the actual numbers.
Slide 3.45

Matrix
1. List key internal factors as identified in the internal-audit
process (see also the next slide)
2. Assign a weight that ranges from 0 (not important) to 1.0
(all-important) to each factor (see also the next slides)
3. Assign a 1 to 4 rating to each factor to indicate whether that
factor represents a strength or weakness (see also the next
slides)
4. Multiply each factor’s weight by its rating to determine a
weighted score for each variable
5. Sum the weighted scores for each variable to determine the
total weighted score for the organization
Slide 3.46

Matrix
1. List key internal factors as identified in the internal-audit
process
– Use a total of up to 20 internal factors, including both strengths and
weaknesses.
– List strengths first and then weaknesses.
– Be as specific as possible, using percentages, ratios, and
comparative numbers.
– Include “actionable” factors that can provide insight regarding
strategies to pursue.
– Do not allow more than 30 percent of the key factors to be financial
ratios, because financial ratios are generally the result of many other
factors.
– When a key internal factor is both a strength and a weakness, the
factor may be included twice in the IFE Matrix, and a weight and
rating assigned to each statement.
Slide 3.47

Matrix
2. Assign a weight that ranges from 0* (not important) to 1**
(all-important) to each factor
– The weight assigned to a given factor indicates the relative
importance of the factor in the firm’s industry.
– Regardless of whether a key factor is an internal strength or
weakness, factors considered to have the greatest effect on
organizational performance should be assigned the highest weights.
– * Weight value should not be 0 (in such case the factor should not be
included into the IFE Matrix).
– **Weight value could not be 1 (in such case the other factors could
not be included into the IFE Matrix).
– Weight value > 0.1 indicates a very important role.
– Weight value < 0.1 indicates less important role.
– The sum of all weights must equal to 1.
Slide 3.48

Matrix
3. Assign a 1 to 4 rating to each factor to indicate whether that
factor represents a strength or weakness.
– When the factor represents a major weakness (rating = 1).
– When the factor represents a minor weakness (rating = 2).
– When the factor represents a minor strength (rating = 3).
– When the factor represents a major strength (rating = 4).
– Remember, the ratings are company-based (whereas the weights in
step 2 are industry-based).
Slide 3.49

Matrix
5. Sum the weighted scores for each variable to determine the
total weighted score for the organization
– Regardless of how many factors are included in an IFE Matrix, the
total weighted score can range theoretically from a low of 2.0* to a
high of 3.0*.
– The average value of total weighted scores equals to 2.5.
– Total weighted scores well below 2.5 characterize organizations that
are weak internally.
– Total weighted scores significantly above 2.5 indicate a strong internal
position.
* If the sum of weights assigned to strengths and weaknesses equals to

0.5 each.
Slide 3.50

Matrix
Slide 3.51

Matrix
• The IFE Matrix provides important information for strategy

formulation.
• For example, this retail computer store might want to hire
another checkout person and repair its carpet paint.
• Also, the store may want to increase advertising for its
repair/services, because that is a really important (weight
0.15) factor to being successful in this business.
Slide 3.52
SWOT analysis
SWOT summarises the Strengths, Weaknesses,
Opportunities and Threats that are likely to
impact on strategy development.
INTERNAL STRENGTHS WEAKNESSES

ANAYSIS
EXTERNAL OPPORTUNITIES THREATS

ANALYSIS
Slide 3.53
Uses of SWOT analysis
• Key environmental impacts are identified using the

analytical tools explained in Chapter 2.
• Major strengths and weaknesses are identified
using the analytic tools explained in Chapter 3.
• Scoring (e.g. + 5 to - 5) can be used to assess the
interrelationship between environmental impacts
and the strengths and weaknesses.
• SWOT can be used to examine strengths,
weaknesses, opportunities and threats in relation
to competitors.
• SWOT can be used to generate strategic options–
using a TOWS matrix.
Slide 3.54
The TOWS matrix
Figure 3.6 The TOWS matrix
Slide 3.55
The TOWS matrix
Note that in the presented Table the first, second, third, and
fourth strategies are SO, WO, ST, and WT strategies,
respectively.
Slide 3.56
The TOWS matrix for a Retail

Computer Store
Slide 3.57
The TOWS matrix for a Retail

Computer Store
Slide 3.58
Dangers in a SWOT analysis
• Long lists with no attempt at prioritisation.

• Over generalisation – sweeping statements
often based on biased and unsupported
opinions.
• SWOT is used as a substitute for analysis – it
should result from detailed analysis using the
frameworks in Chapters 2 and 3.
• SWOT is not used to guide strategy – it is
seen as an end in itself.
Slide 3.59
Developing strategic capabilities (1)
Internal capability development:

• Leveraging capabilities – identifying capabilities
in one part of the organisation and transferring
them to other parts (sharing best practice).
• Stretching capabilities - building new products
or services out of existing capabilities.
Slide 3.60
Developing strategic capabilities (2)
• External capability development – adding

capabilities through mergers, acquisitions or
alliances.
• Ceasing activities – non-core activities can be
stopped, outsourced or reduced in cost.
• Monitor outputs and benefits – to understand
sources of consumer benefit and enhance
anything that contributes to this.
• Managing the capabilities of people – training,
development and organisation learning.
Slide 3.61
Chapter summary (1)
• Strategic capabilities comprise both resources and

competences.
• The concept of dynamic capabilities highlights that
strategic capabilities need to change as the market
and environmental context of an organisation changes.
• Sustainability of competitive advantage is likely to
depend on an organisation’s capabilities being of at
least threshold value in a market but also being
valuable, relatively rare, intimable and
non-substitutable.
Slide 3.62
Chapter summary (2)
Ways of diagnosing organisational capabilities

include:
• Benchmarking as a means of understanding the
relative performance of organisations.
• Analysing an organisation’s value chain and
value network as a basis for understanding how
value to a customer is created and can be
developed.
• Activity mapping as a means of identifying more
detailed activities which underpin strategic
capabilities.
• SWOT analysis as a way of drawing together an
understanding of strengths, weaknesses,
opportunities and threats an organisation faces.

The Strategic Position 3: Strategic Capabilities

Uploaded by

Copyright:

Available Formats

You might also like

The Strategic Position 3: Strategic Capabilities

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Strategic Position 3: Strategic Capabilities

Uploaded by

Copyright:

Available Formats

Slide 3.

The Strategic Position

• Identify what comprises strategic capabilities in terms of

Strategic capabilities: the key issues

Figure 3.1 Strategic capabilities: the key issues

The resource-based view (RBV) of strategy

Resources and competences

• Resources are the assets that organisations

Components of strategic capabilities

Table 3.1 Components of strategic capabilities

Components of strategic capabilities

• Capabilities, however effective in the past, can

Threshold and distinctive

• Threshold capabilities are those needed for

Threshold and distinctive capabilities

These capabilities are transformed into product

Threshold and distinctive

Threshold and distinctive

Mobile Phones: Face Recognition Technology

Threshold and distinctive

Threshold and distinctive

Core competences1 are the linked set of

Strategic capabilities and

The four key criteria by which capabilities can

Jay Barney: ‘Firm resources and sustained competitive advantage’,

V – Value of strategic capabilities

Criteria for the inimitability of strategic

Figure 3.2 Criteria for the inimitability of strategic capabilities

Criteria for the inimitability of

Figure 3.3 VRIN

Organisational knowledge is the collective

Some of this knowledge is ‘Tacit’ knowledge

• Ford’s 1912 Model T production was 170,000 cars. By

The value chain

• The value chain describes the categories of

The value chain

Figure 3.4 The value chain within an organisation

The value chain

The value chain

The value chain

Uses of the value chain

The value network

• The value network comprises the set of

The value network

Figure 3.5 The value network

Uses of the value network

• Understanding cost/price structures across

Mapping activity systems (1)

• Identify ‘higher order strategic themes’ that is,

Mapping activity systems (2)

Illustration 3.5 Activity systems at Geelmuyden.Kiese

Using activity system maps

• A means of identifying strategic capabilities in

The Internal Factor Evaluation (IFE)

• This strategy-formulation tool summarizes and evaluates the

The Internal Factor Evaluation (IFE)

The Internal Factor Evaluation (IFE)

The Internal Factor Evaluation (IFE)