THE SEARCH FOR VALUE AND SUSTAINABLE COMPETITIVE ADVANTAGE - PowerPoint PPT Presentation

Loading...

PPT – THE SEARCH FOR VALUE AND SUSTAINABLE COMPETITIVE ADVANTAGE PowerPoint presentation | free to download - id: 145e93-ODJiY



Loading


The Adobe Flash plugin is needed to view this content

Get the plugin now

View by Category
About This Presentation
Title:

THE SEARCH FOR VALUE AND SUSTAINABLE COMPETITIVE ADVANTAGE

Description:

Porter's approach to business performance:: competitive advantage. ... Porter's recipe. If it is possible for Michael Porter to describe how to create and sustain ... – PowerPoint PPT presentation

Number of Views:101
Avg rating:3.0/5.0
Slides: 48
Provided by: vanderh
Category:

less

Write a Comment
User Comments (0)
Transcript and Presenter's Notes

Title: THE SEARCH FOR VALUE AND SUSTAINABLE COMPETITIVE ADVANTAGE


1
Session 8
  • THE SEARCH FOR VALUE AND SUSTAINABLE COMPETITIVE
    ADVANTAGE

2
Sustainable competitive advantage
  • The ultimate determinants of success and failure
    in the firms search for value.
  • Are there any useful generalisations to be made
    which can help to guide the strategy process?

3
Sustainable competitive advantage and resource
based theory
  • Introduction an examination of the sources of
    sustainability of profits
  • Why are some firms able to sustain success over a
    long period?
  • Porters approach to business performance
    competitive advantage.
  • The capabilities approach to firm performance
  • The nature and significance of capabilities
  • Architecture, reputation, and innovation
  • The value of capabilities
  • A resource based theory of firm performance
    Peterafs model.
  • Conclusions

4
Part 1 Porters approach
  • Porters five forces approach (industry
    attractiveness) sees industry performance as a
    function of industry structure/conduct. (PS,
    table 10.1)
  • BUT within industries firm performance varies,
  • So what determines relative firm performance?
  • In Competitive Advantage he tried to answer
    this ?

5
Porter, cont.
  • Competitive advantage argues that it depends on
    the firms ability to manage the cost drivers/
    differentiation drivers so as to produce a cost
    advantage or a differentiation advantage.
  • But this approach has problems and is incomplete.

6
Some questions about Porter
  • Why does the successful firm not buy the
    unsuccessful and teach it how to minimise costs?
  • Why does the successful firm not sell its
    expertise in cost reducing to less successful
    firms?
  • Why does the successful firm not cut its prices
    and drive its competitors out of business?
  • Why does the unsuccessful firm not bid for the
    executive(s) in charge of cost drivers from the
    successful firm?
  • These do happen e.g. battle between General
    Motors and Volkswagen for the services of cost
    guru Mr. Lopez.

7
Porters recipe
  • If it is possible for Michael Porter to describe
    how to create and sustain competitive advantage
    then surely all firms have equal access to this
    knowledge once Porter has codified it. So can it
    be a source of SCA? Beware recipes!
  • Finally, low cost/differentiation cant be the
    ultimate source. The ultimate source is surely
    who or what produces the low cost/differentiation
    advantage.

8
Beyond Porter
  • Does anyone offer a better explanation of the
    roots of business performance?
  • In the 90s a capabilities approach emerged as a
    new orthodoxy leading to a distinctive
    resource based view of the firm and strategy.

9
Part 2 The capabilities approach
  • Question What could give a particular firm a
    sustainable edge over its rivals?
  • A series of influential articles in the HBR
    during the 90s suggested a new approach
    (although it turned out its origins were much
    earlier)

10
Prahalad and Hamel (1990) core competencies
  • Managements ability to consolidate technology
    and production skills into competencies so the
    business can adapt quickly to changing
    opportunities/circumstances.
  • Core competencies collective learning of the
    organisation about prod/tech/markets. e.g. Sonys
    miniaturisation skills.
  • Competencies have to be built over a long
    period.
  • They are difficult to identify precisely and hard
    to imitate.
  • Many firms fail to identify their own core
    competencies and so fail to nurture them properly
    or exploit them fully.

11
Stalk, Evans, and Shulman (1992) capabilities
  • Competitive advantage is based on the ability to
    respond to evolving opportunities which depends
    on business processes or capabilities. Business
    success involves choosing the right capabilities
    to build, managing them carefully, and exploiting
    them fully. e.g. Honda, Canon.

12
Chandler (1990) initial risky investments
  • Chandler (1990) successful giants such as IBM
    and Bayer derive from the initial heavy and risky
    investments in building organisational knowledge
    and capabilities which allowed them to exploit
    the opportunities available to exploit scale and
    scope economies.

13
Collis and Montgomery (1995) competing on
resources
  • Competitive advantage derives ultimately from the
    ownership of a valuable resource.
  • Superior performance derives from developing a
    competitively distinct set of resources and
    deploying them in a well conceived strategy.
  • Resources can be physical, intangible, or
    organisational capabilities.
  • Example Marks and Spencer (poor timing!)

14
John Kay (1993) Distinctive capabilities.
  • In his best seller, The foundations of corporate
    success Kay argues that the source of
    competitive advantage is the creation and
    exploitation of distinctive capabilities.
  • The value of any advantage created depends on its
    sustainability and its appropriability.
  • Kay provides a detailed analysis of this (see
    also PS)

15
Distinctive capabilities
  • Kay identifies only three basic types of
    distinctive capability
  • Corporate Architecture
  • Innovation
  • Reputation.

16
Distinctive capabilities
  • What is it about these things in particular?
  • Difficult to build and maintain.
  • Difficult to codify/ make into recipes.
  • Difficult to copy/ emulate.
  • Cant simply be bought off the shelf.

17
Strategic assets
  • He also discusses market dominance (monopoly)
    based on the ownership of strategic assets as a
    source of success.
  • Natural monopolies such as utility networks, or
    licensed monopolies such as the national lottery.
  • And those based on heavy sunk costs which
    discourage challengers for the first mover.
  • But he argues that in these case it is
    essentially structural factors that count not
    distinctive capabilities.
  • There may of course be room for debate in some
    cases.

18
Architecture as a distinctive capability
  • Concerns organisational effectiveness in the
    search for value.
  • Connects back to the discussion of corporate
    objectives and the co-operation needed to get
    things done in PS chap 4.
  • How to focus individuals on achieving
    organisational goals.

19
Architecture
  • The network of contractual relationships which
    defines the firm. The capacity of organisations
    to
  • 1. Create and store organisational knowledge and
    routines
  • 2. Promote more effective co-operation between
    the members.
  • 3. Achieve an open and easy flow of information
    between members.
  • 4. Adapt rapidly and flexibly
  • .

20
Architecture
  • Architecture is largely about how you organise to
    get things done as effectively as possible.
  • But NB it also influences what you choose to do
    (strategy) in the first place. Because?
  • Architecture is about organisational form,
    incentive mechanisms, work organisation,
    performance evaluation, and governance.

21
Architecture
  • e.g. IBM in its heyday, Marks and Spencer (back
    when!), Liverpool Football Club.
  • e.g. Many Japanese firms the Japanese employment
    system, its supplier networks, the close
    relations between industry and finance, the great
    emphasis on co-operation and collaboration, the
    development of long term commercial
    relationships, and the generally higher level of
    trust which encourages co-operation

22
Architecture
  • Now a specialised study area.
  • See for example, Brickley, Smith, and Zimmerman
    Economics and Organisational Architecture.

23
Reputation as a distinctive capability
  • This is about conveying information to consumers
    about quality. But it isnt equally important
    for all goods and services. It applies to a
    particular category of goods called,
  • Long term experience goods.
  • These are goods where product quality is vital to
    the consumer but where it is difficult for the
    consumer to establish quality except through time
    and experience.

24
Reputation
  • Kay mentions car hire services, legal services,
    accountancy services, funeral services (?),
    consumer durables. Add vitamin pills, roofing
    services, pension funds, and ……
  • All students are very familiar with the problem
    involved.

25
Reputation
  • Problem is that you want quality, but that
    quality takes time to manifest itself.
  • All suppliers will guarantee satisfaction.
  • How can you distinguish between them?
  • If difficult then consumers will assume low
    quality and pay only low prices.
  • If you can convince them you can obtain a premium
    price for quality assurance.

26
Reputation
  • Selling on reputation is saying we have made an
    investment in an asset so we have a lot to lose
    if we fail to satisfy. So you can trust us, but
    not the hit and run suppliers who sell on (low)
    price alone.
  • How might it be done. Longevity (est.1768 sort
    of thing). Warranties.
  • Advertising?

27
Advertising and reputation
  • Heavy advertising may be a way.
  • Adv is a sunk cost which implies commitment to
    the service. There is something to lose.
  • Evidence is that long term experience goods do
    have the highest adv/sales ratio(5). (B.S.R.
    1992).

28
Reputation and diversification
  • Note for later,
  • Reputation might be a basis for growth through
    diversification but Kay notes that an expensively
    created reputation can be damaged by unwise
    diversification when firms stray into areas they
    dont fully understand.

29
Innovation as a distinctive capability
  • A capacity for lowering costs or improving its
    products or introducing new products ahead of its
    competitors.
  • Innovation by itself as a source of competitive
    advantage is actually quite rare.
  • Innovation is very difficult. It is uncertain,
    and it is hard to manage properly. There are no
    recipes. It can be difficult for firms which
    invest in RD to secure or appropriate all the
    returns. So being able to do it well will
    undoubtedly give you a good edge.
  • However many firms which seek competitive
    advantage by this route fail.
  • Often what appears to be competitive advantage
    based on a capability for innovation is actually
    based ultimately on architecture. e.g. Sony and
    Glaxo

30
The Value of Capabilities
  • Distinctive capabilities generate success which
    attracts competitors.
  • Their value depends on their sustainability and
    the appropriability of the value they generate.
    (see also Collis et al HBR 95)
  • These in turn depend on the following factors

31
The Value of Capabilities
  • Transparency how easy is it to identify and
    understand? J. management techniques?
  • Replicability how easy to imitate/replicate? A
    team formation such as 4-4-2 is easy, but German
    efficiency or Brazilian flair is more
    difficult.
  • Substitutability How easy to find a substitute
    for. Sony o/m of innovation, MS supply chain
    organisation.

32
The Value of Capabilities
  • Who captures the income stream from the
    capability? The organisation or the underlying
    resources. This is the issue of appropriability.
  • To be valuable to the organisation the capability
    has to be immobile/ organisationally specific.
    Not able to walk!

33
Appropriability
  • Resources such as people are marketable and can
    capture their full market value.
  • So the organisations capability has to be more
    than the sum of its (marketable) parts.
  • Take Manchester United and the Roy Keane effect
    (50,000 per week!).
  • To be a valuable business MU must produce a team
    capability beyond the market value of its
    expensive players and coaches.

34
To sum up
  • The value of the organisations capability
    requires that the competition
  • Cant see it easily.
  • Cant imitate it.
  • Cant find a sub for it.
  • Cant just buy it.

35
Isolating mechanisms
  • Name given to barriers preventing the replication
    of organisations capabilities.
  • Causal ambiguity.
  • Time compression diseconomies. Extra costs of
    accumulating resources and capabilities quickly
    to take on a first mover.

36
PART 3 RESOURCE BASED THEORY OF THE FIRM
  • A distinctive resource based theory of the
    firm has emerged trying to formalise the
    capabilities approach.
  • The resource-based approach is concerned with
    the nature of the firms resources and how these
    resources are combined into capabilities.
  • Key example is Peteraf (1993). Her approach is
    outlined below and summed up in this figure.
    Note she uses the term RENT common in US writing
    to connote the result of sustainable competitive
    advantage. The Linn example is from a student
    case study.

37
Peteraf model
38
Peterafs model - Linn Products
Ex-post limits to competition
Heterogeneity
The industry is made of firms with access to
different resources and skills. Linn has
particular distinctive competencies.
Specialist knowledge and reputation
Competitive Advantage
Ex-ante limits to competition
Imperfect Mobility
Linn has demonstrated an ability to leverage the
potential of existing technologies
Shared specialist knowledge and reputation
ALL THESE LEAD TO SUSTAINABLE COMPETITIVE
ADVANTAGE THROUGH DIFFERENTATION
39
Competitive Advantage a la Peteraf
  • A firm is said to have a competitive advantage
    when it can
  • achieve rents which requires resource
    heterogeneity between firms (some better bundles
    than others).
  • enjoy rents that are not offset by the costs of
    achieving a superior set of resources which
    requires ex ante limits to competition for those
    resources.
  • appropriate those rents for the firm which
    requires imperfect resource mobility.
  • sustain those rents which requires ex-post
    limits to competition.

40
Heterogeneity
  • Bundles of resources and capabilities are
    heterogeneous across firms. Heterogeneity implies
    that firms with superior resources/ capabilities
    will earn superior returns.
  • An important class of resources are those which
    are limited in the short run but may be renewed
    and expanded within firms that use them. Prahalad
    and Hamel (1990) argue that core competencies -
    particularly knowledge-based resources - are
    enhanced as they are used because of learning.

41
Ex-post limits to competition
  • Forces which limit competition from imitators.
    These arise from sources already discussed
  • Imperfect imitability, replicability, and
    substitutabilityof resources/ capabilities
    isolating the firm from challengers.

42
Ex ante limits to competition
  • The source of a firms rents is a superior
    resource position.
  • But imagine the situation before any firm has
    achieved this position.
  • If many firms recognised its potential, a
    competitive struggle would ensue to obtain the
    resources and build the capabilities to occupy
    that position.
  • This process would compete away all rents that
    could be obtained from occupying the position.
    For example,
  • North Sea Oil fields.
  • Manchester United team!
  • National Lottery licence.
  • Sony licence for transistor.
  • The script for Four weddings and a Funeral

43
Entrepreneurship and rent
  • So a firm needs the foresight to acquire
    resources and build capabilities in the absence
    of such competition. This requires the presence
    of uncertainty and incomplete information and a
    willingness to take risks.
  • The essence of successful ENTREPRENEURSHIP is of
    course foresight and taking advantage of
    uncertainty and incomplete information before
    someone else does.
  • So what Peteraf seems to be saying here is simply
    that all rents begin with an entrepreneurial act.
    Which seems inherently sensible.

44
Imperfect resource mobility
  • This refers to the marketability or otherwise of
    the underlying resources and capabilities.
  • See discussion above of appropriability.
  • Thus good high street locations are important for
    retailers but competition means the rental costs
    reflect this fact. The value of the location is
    captured by the property owner not the retailer
    per se.

45
Summing up on SCA
  • The ultimate determinants of success and failure?
  • No recipes but the starting point is being
    cheaper, or better, or faster to market.
  • The capabilities approach developed in the 90s
    looks to the development and deployment of a
    distinctive set of resources and capabilities.

46
Summing up
  • The value of distinctive capabilities lies in the
    fact that they are hard to create and maintain,
    hard to codify or make into recipes, hard to copy
    or emulate, and cant simply be bought off the
    shelf.
  • Organisational architecture is a fundamental
    source of advantage. Strategy and structure are
    closely connected as determinants of success.

47
TEAM TASKS 8
  • What is competitive advantage and how according
    to Porter might it be achieved?
  • What according to Kay are the ultimate sources of
    superior business performance?
  • What is it about the nature of things like
    innovation and corporate architecture which make
    them fundamental to business success?
  • Evaluate the extent to which your case enterprise
    has Sustainable competitive advantage.
  • If it has it how did it get it, on what is it
    based?
  • If it hasnt, how might it go about achieving
    better performance?
  • Evaluate the key capabilities of your main
    competitor.
About PowerShow.com