Technology & Strategy

GEST-D-484 Manuel Hensmans

Last week
Lessons from the past for company
Sources, types/patterns, standards, timing Emphasise more in case-study

This class
Part III: Setting the strategic direction
Importance strategic capability Analyse internal resources and competences
Apply VRIN framework

Quiz! If we have the time

Fit external position and internal capability
5 steps

Google: customer-led vs resources and competences

Customer-led mission?
- to organize the world's information and make it universally accessible and useful - Dont be evil

- Do all products map on this mission?

- Original search engine, Google Book Search / Maps / Scholar - Yet: sales advertising space, GoogleDocs, Gmail, Android, Chrome,
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Customer-led in fast changing environment?

Why has Google been playing catch up with display/banner ads?
Although it owns the biggest information database of all internet players

Mission vs resources & competences!

Founders distrust of cookies CEO Schmidt less coy about exploiting resources & competencies indiscriminately

When are internal resources and competences most important?

When the external environment is subject to rapid change, internal resources and competences offer a more secure basis for strategy than market focus. In such cases, internal resources and competences are the primary sources of profitability

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
tangible and intangible assets of a firm
tangible: factories, products intangible: reputation

Four Categories of Resources

Financial (cash, retained earnings)

Physical (plant & equipment, geographic location)

Human-intellectual (skills & abilities, patents)

Organizational (culture and reputation; collective experience through systems, routines & activities)

Firms with the Highest Ratios of Market value to Book Value (December 2006)
Company Valuation Country ratio 72.0 20.8 13.4 Japan US UK Company Valuation ratio 7.8 7.4 7.3 Country Yahoo! Japan Colgate-Palmolive Glaxo Smith Kline Anheuser-Busch eBay SAP Yahoo! Dell Computer Sumitomo Mitsui Financial Procter & Gamble Qualcomm Schlumberger Unilever PepsiCo Coca-Cola Diageo 3M US UK US

6.7 CHECK12.6 US MARKET Nokia BOOK VALUE Finland TO 11.2 US FOR YOUR Sanofi-Aventis COMPANY! 6.3 France 10.8 10.7 10.0 8.8 8.4 8.3 8.2 8.1 8.0 Germany US US Japan US US US Neth/UK US AstraZeneca Johnson & Johnson Boeing Eli Lily Cisco Systems Roche Holding LOreal Altria Novartis 5.9 5.7 5.7 5.6 5.5 5.5 5.3 5.2 5.1 UK US US US US Switz. France US Switz.

Resources and competences

Competences are the ways those assets are used or deployed effectively, that is, what we do well.
E.g. product design skill, cooperative relationships

Resources and Competences

Firm Assets: Machinery Are these resources or competences? ?

Collective Product Design Skill

Recruiting Skill Engineering Skill of Individuals Mineral Deposits

?
? ? ?

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Google: resources?
User base. With about 60% of the worlds internet searches, the Google.com website is the worlds 2nd most visited website gives it a massive potential for market access. Similarly its dominance of online advertising (>30% of US online adverting revenue) gives it a powerful position in the entire advertising sector. Financial resources. With its cash reserves, huge cash flow from advertising and massive capacity for raising debt and equity capital as a result of it huge market capitalization, Google is well able to broaden its product range through acquisition.

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Google: resources?
Human resources. Google is committed to hiring the best and brightest. Its technical staffsoftware engineers in particularare considered among the best in the industry. Culture. The Google vibrant, entrepreneurial culture combines informality with a huge emphasis on innovation, creativity, and initiative

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Google: competences?
Software development. Googles search engine was based upon the technical brilliance of its founders in creating new search algorithms. Google continues to build depth and breadth to its software engineering capability. Product design. The dominance of the Google search engine over its early rival can be attributed primarily to its ease of use. Google continues to develop products that are easy to use even by the users with few computer skills. Entrepreneurship and innovation. As a result of its culture, systems and people, Google shows a tremendous capacity to generate new product ideas and new business initiatives.

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Bundles of resources and competences make up strategic capabilities

Threshold and distinctive capabilities

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.

Threshold and distinctive capabilities

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 VRIN framework inimitability non-substitutability

Criteria for the sustainability of strategic capabilities

Applying VRIN
V Value of strategic capabilities
in theory: Does the resource or competence provide customer value? distinctive or threshold? the practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two?

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Exploring for crude oil

Substantial financial resources Access to land

Drilling for crude oil

Scientific & technical knowledge (human-intellectual) Organizational commitment to risktaking and exploration

Pumping for crude oil

Shipping crude oil Selling refined products to final customers

Buying crude oil

Refining crude oil

Shipping refined products

Selling refined products to distributors

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Uses of the value chain

A generic description of activities understanding the discrete activities and how they both contribute to consumer benefit and how they add to cost. Identifying 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)

Value chain

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Applying VRIN
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

E.g. patents expire, key individuals can leave or brands can be de-valued by adverse publicity

Applying VRIN
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.

Inimitability Criteria
Social Complexity History

Inimitability strategic capability

Causal ambiguity
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Applying VRIN
The Question of Inimitability
Social Complexity
(Monsanto & government lobbying)

the social relationships entailed in resources may be so complex that managers cannot really manage them or replicate them

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Applying VRIN
The Question of Inimitability
Unique Historical Conditions
first mover advantages
e.g. Caterpillar

path dependence
e.g. Qwerty standard for typewriters

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Applying VRIN
The Question of Inimitability
Causal Ambiguity
(Apple, Steve Jobs & product design)

causal links between strategic capability and competitive advantage understood? bundles of resources and competences fog these causal links
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Applying VRIN
The Question of Inimitability
Patents
patents may be a two-edged sword
offer a period of protection if the firm is able to defend its patent rights required disclosure may actually decrease the cost of imitation, and the timing
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Non-substitutability
Product or service substitution
E.g. e-mail systems vs postal systems No matter how VRI postal services were!

Competence substitution
Over-reliance on particular competences
E.g. Kodak & chemical vs digital processes But Rolex vs Casio ?

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Case Dyson
Analyse the strategic capabilities of Dyson in terms of threshold & distinctive resources and competences Can of any of these capabilities be imitated by competitors? Effect of Sir Dyson leaving company?

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Dyson: threshold resources?

engineering design equipment product supplies manufacturing space offices and facilities appropriate personnel sufficient customers (installed base)

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Dyson: threshold competences

general mgmt skills including distribution & marketing engineering design skills cost control through manufacturing in low-cost locations quality assurance and control the ability to attract customers sufficiently inspired by design to pay premium prices across different markets

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Dyson: distinctive resources

James Dyson himself the Dyson brand and strategy of high-end products in an otherwise staid market an HQ building and related laboratories designed to foster innovation product portfolio and associated patents high R&D budget possibly through being privately owned history company used extensively in PR & advertising ownership of the manufacturing facilities and hence control over the working conditions of the employees versus other companies that contract out their manufacturing and can be accused of supporting poor labour conditions

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Dyson: distinctive competences

inspirational leadership around the value of engineering design engineering skills that transform ideas into viable products competence to make engineering aesthetically attractive seamless value chain despite design and manufacturing being in different locations being one step ahead of competitors attracting early adopter customers and subsequent followers including premium pricing never being boring; always being surprising

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Q2: Can Dysons capabilities be imitated?

Focus on truly distinctive!
Apply VRIN
V: Many valuable capabilities (even threshold) R: Not products themselves
Competitors have imitated products But: innovative culture, hands-on mgt style

I: linked activities within Dyson / path-dependence

What explains Dysons price premium?

N: none in sight, but innovative culture could help to protect in the future
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Q3: departure Sir Dyson?

Compare to Apple & Steve Jobs!
Hands-on mgt style without Dyson? Aura of company that commands price premium without Dyson? Ultimate source competitive advantage
Bring exclusivity to market
customers willing to pay more to be different and ahead of the crowd even regarding an object as mundane as a vacuum cleaner

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Core Competencies
Most important distinctive competences!

Core Competences
A set of integrated and harmonized abilities that distinguish the firm in the marketplace and that are hard to imitate or obtain
Result of collective learning in the organisation, especially how to co-ordinate diverse production skills and integrate multiple streams of technologies. Competence that several business units draw on
Market focus << core competency in tech innovation

The evolution of Honda Motor Company

Honda Technical Research Institute founded Competes in Isle of Man TT motorcycle races 4-cylinder 1st gasoline-powered 750cc car to meet US Low motorcycle Emission Vehicle Standard Power products: ground tillers, marine engines, generators, pumps, chainsaws snowblowers Civic Hybrid (dual gasoline/ electric)

1st motorcycle: 98cc, 2-cycle Dream D

Portable generator 405cc motor cycle

Civic GS (natural gas powered)

Honda wins Indy Champ ionship

1946 1950

1955

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1965

1970

1975

1980

1985

1990

1995

2000 2006
Home cogeneration system

4 cycle engine

The 50cc Supercub

N360 mini car

Acura Car division 1000cc Goldwing touring motor cycle

Honda Civic

First product: Model A clip-on engine for bicycles

Enters Formula 1 Gran Prix racing

Enters Indy car racing Begins production of diesel engines

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Canon: Products and Core Technical Capabilities

Precision Mechanics Fine Optics
35mm SLR camera Compact fashion camera Plain-paper copier EOS autofocus camera Color copier Digital camera Color laser copier Video still camera Laser copier Video security systems Camcorders Basic fax Binoculars Mask aligners Laser fax Inkjet printer Excimer laser aligners Scanners Laser printer Stepper aligners Color video printer Calculator Digital commercial Notebook computer printer

MicroElectronics

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Group assignment
List threshold & distinctive capabilities of your company Do any of the most distinctive capabilities qualify as core competences?

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Quiz
You get 10 minutes!

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