2. Assessing Organizational Ability
to Make Strategy
Analyze historical and current financial
performance
Review strategic assets – resources and
competencies
Breakdown and evaluate the internal value chain
3. Historical Financial Performance
Sales, market share, and profits
Free cash flow
External capital sources
Capital project hurdle rate
Other capital demands
Shareholder value
4. Increasing Shareholder Value
Achieve existing profits with less capital
Increase profits with no additional capital
Decrease the cost of equity capital
Invest more capital in strategic projects that earn
above average rates of return
5. Current Financial Performance
Balance sheet
Operating or income statement
Cash flow statement
Statement of changes in owners’ equity (for-
profit) or net assets (not-for-profit)
6. Ratio Analysis of Financial Statements
- Liquidity
Currentratio
Average collection period
Days cash-on-hand, short-term sources
Average payment period
7. Ratio Analysis of Financial Statements
- Profitability
Operating margin
Total margin
Return on net assets
8. Ratio Analysis of Financial Statements
– Operating Efficiency
Totalasset turnover
Fixed asset turnover
Inventory turnover
9. Ratio Analysis of Financial Statements
– Capital Structure
Netassets (or equity) to total assets
Long-term debt to net assets (or equity)
Debt service coverage
10. Non-Financial Operating Indicators for
a Hospital Organization
Average length of stay
Occupancy rate
Outpatient revenue as % of total revenue
FTE employees per occupied bed
11. External and Internal Analyses
Environment
Sociocultural By studying the external
environment, firms identify
mo eral
ic
Ge omiic
Ge
Ec
ph
Eco
Industry
what they might choose to do
ner c
ner
n
gra
ono
Ge
Environment
n m
all
a
De
me al
Opportunities and threats
g
nt
/Le
En
En
Gll nmen
Go
Competitor
viir
vr
cal
oba ent
ball
Environment
on
on
l iti
o
v ir
m
Po
En
Technological
t
General
11
12. External and Internal Analyses
By studying the internal
environment, firms identify
what they can do
Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)
12
13. Value Creation
V-P
V=Value to Consumer
V P-C P=Price
C=Costs of Production
P V-P=Consumer Surplus
P-C=Profit Margin
C C
13
14. Components of Value Creation
Internal Analysis
Competitive
Core Discovering Core Advantage
Competencies Competencies
Capabilities
Four Criteria Value
Resources of Sustainable Chain
• Tangible
• Intangible Advantages Analysis
• Valuable • Outsource
• Rare
• Costly to Imitate
• Nonsubstitutable
14
15. Challenge of Internal Analysis
How do we effectively manage current core
competencies while simultaneously developing
new ones?
How do we assemble bundles of resources,
capabilities and core competencies to create value
for customers?
How do we learn to change rapidly?
15
16. Discovering Core
Competencies
Resources
• Tangible
• Intangible
Resources are what an Resources represent inputs into an
organization has to work organization’s production
with--its assets--including process... such as capital
its people and the value of equipment, skills of employees,
its brand name brand names, finances and
talented managers
16
18. Discovering Core
Competencies
Capabilities
Capabilities become important when they are
combined in unique combinations which create core
competencies which have strategic value and can
lead to competitive advantage
18
20. Discovering Core
Competencies
Capabilities
Capabilities are what an organization does, and
represent the organization’s capacity to deploy
resources that have been purposely integrated to
achieve a desired end state
20
21. Discovering Core
Competencies
Core
Competencies
Core competencies are resources and capabilities that serve as
a source of competitive advantage over rivals
Core competencies distinguish a company competitively and
make it distinctive
McKinsey and Co. recommends using three to four
competencies when framing strategic actions
21
22. Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable
Valuable: Capabilities that help an organization
neutralize threats or exploit opportunities
22
23. Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable
Rare: Capabilities that are not possessed by many
others
23
24. Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable
Costly to imitate: capabilities that other organizations
cannot develop easily, usually due to
• Unique historical conditions
• Causal ambiguity
• Social complexity
24
25. Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable
Nonsubstitutable: capabilities that do not have strategic
equivalents
• Invisible to competitors
• Firm specific knowledge
• Trust-based working relationships between
managers and nonmanagerial personnel 25
27. Competencies Leading to Sustainable
Competitive Advantage
Valuable to the organization
Unique among competitors
Difficult or impossible to imitate
No substitute competencies
28. Strategic Uses of
Resources and Competencies
Discovery (did not know we had them)
Creation (make or acquire new ones)
Combination (use them together)
Preservation (maintain them)
Concentration (use them for the right purpose)
29. Ma
Ma
t r
rgii
gn
iit n
of
of
Pr
Pr
Porter’s Generic Internal Value Chain
ce
ce
rvi
rvi
Se
Se
g
ng
tn
etii
Human Resource Management
rke s
rk s
Ma Sa e
Ma Salle
Technology Development
&
&
Procurement
Procurement
nd
nd
Primary Activities
ou
ou
tb t cs
tb tiics
Ou g s
Ou giis
Lo
Lo
ss
on
ion
ati
at
er
er
Op
Op
d
nd
un s
ou cs
bo tiic
nb g st
IIn giis
Lo
Lo
A
C
V
E
S
T
T
I
I
I
O
U
R
S
P
P
T
31. Support Activities
Hospital
Firm Infrastructure
Value Chain
Human Resource Mgmt.
M
ar
Technological Development
gin
Procurement
M
ar
gin
Pre-Service
After-Service
Point-of-Service
Service Activities
31
34. How Resources and Competencies
Become Competitive advantage
Resources and Competencies
↓
are the basis of
↓
Individual Activities
↓
that can be managed to
↓
Reduce Costs or Provide Additional Value
↓
in order to gain
↓
Competitive Advantage
Discovering Core Competencies Tangible vs. Intangible Resources (pp. 108–111) Resources are what a firm has to work with—its assets—including its people and the value of its brand name. Tangible resources are in essence those things that you can put your hands on such as property, plant and equipment, personnel, raw materials, and so on. One highly illustrative example of tangible resources and how the strategic utilization/manipulation of them can have a great impact on a firm’s profits are diamonds. Cartier owns or controls over 95% of the world’s diamond mines. If the entire supply of diamonds were to be released onto the world market the gems would devalue to 10% of the current market price or less. Cartier controls the amount, timing, quality, grade (size), and destination point of virtually every batch of diamonds that is released on the world market. In doing so Cartier is able to control the market price of the gems and therefore are able to manipulate profits. While the concept of tangible resources is easy to imagine, the idea of intangibles can be elusive. If tangibles are that which we can put our hands on, intangibles are everything else. Some examples are goodwill, reputation, and brand value. For example, the late Robert Goizeuta, former CEO of Coca-Cola, once explained intangibles and their value in this way. (Continued on next slide.)
Discovering Core Competencies (cont.) Tangible vs. Intangible Resources (pp. 108–111) (cont.) Goizeuta said if everything tangible that Coke owns were to be destroyed in some bizarre accident, if a fire were to burn down each and every factory, office building and bottling plant right down to a total loss of every desk, chair, and pencil, the intangible resources that Coke owns would be those things that the company still possesses, namely, brand value, the secret recipe, its distribution channels, and business relationships that it has developed over the years. These would allow Coke to go to a bank and borrow billions of uncollateralized dollars to rebuild its infrastructure. The textbook suggests that intangible resources can be categorized: • Human Resources: Knowledge, Trust, Managerial capabilities, Organizational routines • Innovation Resources: Ideas, Scientific capabilities, Capacity to innovate, Intellectual property • Reputational Resources: Reputation with customers, Brand name, Reputation with suppliers, Perceived product quality, durability, and reliability Similar to the Coca-Cola example, the Harley-Davidson brand name has such cachet that it adorns a limited-edition Barbie doll, a popular restaurant in New York City, and a line of L’Oreal cologne. Moreover, Harley-Davidson MotorClothes annually generates over $100 million in revenue for the firm and offers a broad range of clothing items, from black leather jackets to fashions for tots. In sum, because reputation is difficult to imitate and substitute, it can garner competitive advantage.
Discovering Core Competencies (cont.) Core Competencies (pp. 112–114) A firm’s core competencies are those things that it does that give it a competitive advantage over another firm. They are generally valuable, rare, costly to imitate, and nonsubstitutable. They may or may not be unique to the firm. They may simply be an industry practice that a firm does better, or a set of industry practices that the firm does in a specific combination or sequence that allows the firm to be more efficient than its competitors. Using the Cartier example, to be able to manipulate the supply of gems in the market, Cartier must be very efficient and competent at predicting the demand for gems. If they were not very skilled at this, there would be fluctuations in the supply and demand curve and, therefore, market price that would leave an opportunity for arbitrage. The value of this arbitrage represents lost profits for Cartier. It was this ability to predict demand that allowed Cartier to see higher profits than its competitors in the 1800s, eventually eroding the market share and profitability of these competitors. Cartier subsequently acquired these firms to create the monopoly it now holds on the world’s diamond market. As noted in the textbook, an important question is “How many core competencies are required for the firm to have a sustained competitive advantage?” While responses to this question vary, McKinsey & Co. recommends that its clients identify no more than three or four competencies. Recent actions by Starbucks demonstrate this point. (Continued on next slide.)
Discovering Core Competencies (cont.) Core Competencies (discussed on pp. 112-114) Growing rapidly, Starbucks decided that it could use the Internet as a distribution channel to achieve additional growth. However, the firm quickly realized that it lacked the capabilities required to successfully distribute its products through this channel—and that its unique coffee, not the delivery of that product, is its competitive advantage. In part, this recognition forced Starbucks to renew its emphasis on existing capabilities to create more value through its supply chain. To do so, the firm trimmed the number of its milk suppliers from 65 to fewer than 25 and negotiated long-term contracts with coffee-bean growers. The firm also decided to place automated espresso machines in its busy units. These machines reduced Starbucks’ cost while providing improved service to its customers, who can now move through the line much faster. Using its supply chain and service capabilities in these ways allows Starbucks to strengthen its competitive advantages of coffee and the unique venue in which on-site customers experience it. When capabilities are valuable, rare, costly to imitate, and nonsubstitutable, they are effectively called core competencies. Alternatively, every core competence is a capability, but not every capability is a core competence. Operationally, one could argue that for a capability to be a core competence, it must be valuable and nonsubstitutable from a customer’s point of view, but unique and inimitable from a competitor’s point of view. As discussed in the textbook, an important key to success occurs when the link between the firm’s capabilities and its competitive advantage is causally ambiguous, where rivals can’t tell how a firm uses its capabilities as the foundation for competitive advantage. Gordon Forward, CEO of Chaparral Steel, allows rivals to tour his firm’s facilities and see almost everything. In Chaparral Steel’s causally ambiguous operations, workers use the concept of mentalfacturing , by which manufacturing steel is done by using their minds instead of their hands.