Mgmt 494BI Chapter 4

Internal firm differences and competitive advantages
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What are core competencies
- Unique strengths.
- Embedded deep within a firm.
- Allows the firm to differentiate from rivals.
•Results in creating higher value for the customer or
•Results in products and services offered at lower cost.
Expressed through structures, processes, routines.

Honda clearly defined core competency. Its life began with a small two-cycle motorbike engine. Through continuous learning over several decades, and often from lessons learned from failure, Honda built the core competency to design and manufacture small but powerful and highly reliable engines for which it now is famous. This core competency results from superior engineering know-how and skills carefully nurtured and honed over several decades. Honda's business model is to find a place to put its engines. Today, Honda engines can be found everywhere: in cars, SUVs, vans, trucks, motorcycles, ATVs, boats, generators, snow blowers, lawn mowers and other yard equipment, and even small airplanes. Due to their superior performance, Honda engines have been the most popular in the Indy Racing League (IRL) since 2006. Not coincidentally, this was also the first year in its long history that the Indy 500 was run without a single engine problem.

Examples of Core Competencies
Five Guys
- Offers highest quality ingredients, wide range of free toppings, simple menu.
- Chose not to have drive throughs or an expanded menu.
Beats Electronics
- Perception of coolness marketing.
- Engineering expertise in designing battery powered motors and power trains.
- Creates proprietary algorithms-based on individual customer preferences.
Distinct and fine-grained business processes (order-taking, invoicing, etc.).

Key point:
- core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. And second, in analyzing a company's success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as superior products or services.
- While these are the outward manifestation of core competencies, what is even more important is to understand the invisible part of core competencies.
- This model aids in identifying core competencies.
•Resources are key to superior firm performance.

•Assets, capabilities, and competencies.

Resources fall into two categories:
•Tangible resources have physical attributes and are visible.
•Intangible resources do not have physical attributes and are invisible.

- Note that the resource-based view of the firm uses the term resource much more broadly than previously defined.
- In the resource-based view of the firm, a resource includes any assets as well as any capabilities and competencies that a firm can draw upon when formulating and implementing strategy.
- Resource Heterogeneity.
•A firm is a unique bundle of resources, capabilities and competencies.
•These bundles differ across firms.

- Resource Immobility.
•Resources are "sticky," and don't move easily from firm to firm.
•Resources are difficult to replicate.
•Resources can last for a long time.

Resource Heterogeneity Example:
- Southwest Airlines (SWA) and Alaska Airlines both compete in the same strategic group (low-cost, point-to-point airlines). But they draw on different resource bundles.
- SWA's employee productivity tends to be higher than that of Alaska Airlines, because the two companies differ along human and organizational resources.
- At SWA, job descriptions are informal and employees pitch in to "get the job done." Pilots may help load luggage to ensure an on-time departure; flight attendants clean airplanes to help turn them around at the gate within 15 minutes from arrival to departure.
- This allows SWA to keep its planes flying for longer and lowers its cost structure, savings that SWA passes on to passengers in lower ticket prices.

Resource Immobility Example:

Continental and Delta both attempted to copy SWA, with Continental Lite and Song airline offerings, respectively. Neither airline, however, was able to successfully imitate the resource bundles and firm capabilities that make SWA unique.
VRIO is a tool for evaluating firm resource endowments.
- To be the basis of a competitive advantage, a resource must be:
•Costly to Imitate.
•Organized to capture the value of the resource.

- Jay Barney was a pioneer of this framework.
- According to this model, a firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria.
- Barriers to imitation.
- Helps sustain a competitive advantage.
•Better expectations of future resource value.
•Path dependence: past decisions limit current options.
•Causal ambiguity: cause and effect are vague.
•Social complexity: social and business systems interact.
•Intellectual property (IP) protection.
Core rigidity- A former core competency turned into a liability. - Result of an environmental change. - No longer fits the external environment. - Turns a resource from an asset to a liability. - Causes loss of competitive advantage. -The firm may even go out of business.dynamic capabilities abilities and goalA firm's ability to: - Adapt resources over time. - Create, deploy, modify, reconfigure, upgrade, leverage. The goal: - Create long-term competitive advantage. - Develop resources, capabilities and competencies. - Create a strategic fit with the firm's environment. -Change in a dynamic fashion. Apple's dynamic capabilities allowed it to redefine the markets for mobile devices and computing, in particular in music, smartphones, and media content. -- For the portable music market through its iPod and iTunes store, Apple generated environmental change to which Sony and others had to respond. With its iPhone, Apple redefined the market for smartphones, again creating environmental change to which competitors such as Samsung, BlackBerry, Google (with its Motorola Mobility unit), or Microsoft (with its Nokia unit) must respond. - Apple's introduction of the iPad redefined the media and tablet computing market, forcing competitors such as Amazon and Microsoft to respond. With the introduction of the Apple Watch it is attempting to shape the market for computer wearables in its favor.Value Chain- Internal activities a firm engages in when transforming •inputs into outputs. •Through primary and support activities. - Each activity adds incremental value. •Raw materials -> components -> products •Each activity also adds incremental costsPrimary activities- Firm activities add value directly. - Transform inputs into outputs. - Focused on moving from raw materials, through production phases, to sales and marketing, and finally customer service. •Supply chain management. •Operations. •Distribution. •Marketing and sales. •After-sales service.Support Activities- Firm activities that add value indirectly. - Necessary to sustain primary activities. •Research and development (R&D). •Information systems. •Human resources. •Accounting and finance. •Firm infrastructure including processes, policies, and procedures.Strategic activity system Characteristics?- A network of interconnected activities: •Can be the foundation of competitive advantage. •Socially complex and causally ambiguous. •Enhance likelihood of sustained competitive advantage. - Characteristics: •One or more elements can be easily observed. •How activities are managed is not as easily observed. •Difficult to imitate. Strategic Activity Systems Must Evolve - External environment changes. - Competitors develop their activity systems. - How activity systems are updated: •Add new activities. •Remove activities that are no longer relevant. •Upgrade activities that have become stale or somewhat obsolete.