3 Corporate Strategy

Analysing resources – basics

1
Key Corporate Strategy Questions

What key industry factors deliver
the objectives of the organisation?

How do resources add value to the
organisation?

How can value added be improved?

What are the main ways resources
deliver competitive advantage?

How can competitive advantage be
enhanced?

2
Key Learning Outcomes

What are the KFS of an industry?

How do I explain the concept of
value added?

How do I analyse the value chain?

How do resources deliver SCA to an
organisation?

What are the 7 main concepts of
SCA?

3
 CORPORATE STRATEGY Third edition

Richard Lynch

Chapter 6.1 Analysing resources - basics

Learning outcomes

When you have worked through this chapter, you will be able to:

1. Identify the key factors for success in an industry;

2. Explore the main resources of an organisation and the strategic decision on whether to make
or buy;
3. Explain the concept of value added;
4. Analyse the value chain and value system of an organisation and comment on their strategic
significance;

4
 Analyse the role of resources

Options
Environment

Purpose Options
Choice Implement

Resources
Options

This session
5
 Analysing resources – 2 routes
Industry key
factors for
success
Value
chain
Value
Value added:
added:
Route 1 How?
How? Where?
Where? Value
Hierarchy
Value added system
of resources
Value added can contribute to
SCA and vice versa
Individual
Individual
organisation’s
organisation’s
Route 2 The
resources:
resources:
SCA - Concept Sustainable seven
make
make or or buy?
buy? Sustainable
Of economic Competitive main
Competitive concepts
rent
Advantage
Advantage of SCA
(SCA)
(SCA)

Figure 6.1
6
 Prescriptive v Emergent Approach

Prescriptive Approach:
Use resources efficiently and focus on
resource strength.
E.g. GSK merger – lead to Economic gains of
US$750m p.a.
Emergent Approach:
Question certainties of prescriptive
approach – E.g. the human resource
impact of GSK merger, could job cuts cause
bad feeling? Is this a hindrance to the
implementation of the strategic change?
7
 Prescriptive v Emergent Approach

Emergent Approach:
Question certainties of prescriptive approach
– E.g. How valuable are patents as part of a
SCA in the fast changing drug market?

Prescriptive approach implies resources

give a definite advantage to organisation

Emergent approach sees a much more

fluid relationship between resources and
strategies
8
 Key Factors for Success

“Those resources, skills and attributes of the

organisations in an industry that are essential to
deliver success in the market place”

Different organisations will have different resources

1. Well established product range – Gillette, PG,
Unilever…
2. Exceptional leadership – Anglo Irish Bank, Ryan
Air…
3. New patented technology – Apple, Glaxo
Smithkline..

9
 Key Factors for Success – Academic support

Ohmae, K (1983)

Three “Cs”: Customers, Competitors & Corporation.

Porter, M E (1985)

There are factors that determine the relative
competitive position of a firm within an industry,
such as the firm’s strategy

Kay, J (1993)

It is important to concentrate resources on the
specific areas of the business which are most likely to
be successful

All agree that identifying these key factors is
not an easy task.

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Key factors for success in an industry – 2

Key factors can be found in any area of the

organisation and relate to the following:

Skills

Competitive advantage

Competitive resources of an organisation in the
industry

Special technologies

Customer contacts.

11
 “The 3 C’s”

“Those resources, skills and attributes of the

organisations in an industry that are essential to
deliver success in the market place”

Three principal areas to be analysed:

Ohmae’s three “Cs”:
 Customers: Wants? Segments? Strategy directed to
segments?
 Competitors: How survive? And beat? What
resources? Comparison on price, quality, etc?
Distribution network?
 Corporation: Any special resources essential? Cost
comparison? Technologies? Human resources? Financial
issues?

12
 Key Factors for Success

Customers: Wants? Segments? Strategy directed
to segments?

Look at
1. Price: high/medium/economy pricing? Airline tickets
2. Service: do customers want service? Aldi v M&S
3. Product or service reliability: how important is
reliability? Heart pacemaker v pharmaceuticals
4. Quality: perceived or actual quality? Organic veg.
5. Technical specifications: specialist financial bonds
6. Branding: how important is it? Coca-Cola v Pepsi

13
 Key Factors for Success

Competitors: How survive? And beat? What

resources? Comparison on price, quality, etc?
Distribution network?
1. Cost comparisons: which company? E.g. Dell
2. Price comparisons: which company has high prices?
Porsche, BMW etc.
3. Quality issues: which company have highest
quality? Why? How?
4. Market dominance: which company dominates?
Nestle in coffee production
5. Service: which company offers superior service?
6. Distributors: which company has fastest most
extensive distribution?
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 Key Factors for Success
Corporation: Any special resources essential? Cost
comparison? Technologies? Human resources?
Financial issues?
1. Low-cost operation: are these important?
Tesco(UK)
2. Economies of scale: are these important? Shell
3. Labour costs: and our SCA? Phillips (Netherlands)
have moved manufacturing to Singapore & Malaysia
4. Production output levels: Heavy fixed cost?
5. Quality operations: are high/consistent quality
levels important? McDonalds
6. Innovative abiity: is innovation important? Apple
7. Labour/management relations: EU Steel companies
8. Technologies/copyright: are these important?
9. Skills: are specialist skills required?
15
 Key Factors for Success - criticism

1. Identification - difficult
2. Causality of relationships –
identified but can’t identify
relationship between factors
3. Dangers of generalising – to find
one company’s SCA, we need more
than industry wide KFS
4. Disregard of emergent
perspective – change may lead to
SCA
16
 Analysing the resources
of an individual organisation

Key factors for success in an industry represent a

starting point for exploring the resources of the
individual organisation.

Value added and sustainable competitive
advantage can come from beyond industry solutions.

Individual resources must be identified for the
organisation itself.

The make-or-buy decision is the choice every
organisation has of either making its own products or
services or buying them from outside.

Regular reappraisal of activities is important.

17
To Make or Buy?

Make if the costs of using the

market are greater than the
benefits.

Companies like Benetton and IKEA
use outsourcing very effectively to
reduce costs and increase their SCA

18
To Make or Buy? Reappraise regularly

Benefits
1. Outside supplier can access Economies
of Scale
2. Outside supplier must be competitive,
innovative and efficient

Costs
1. May compromise production flows
2. Intellectual property rights and SCA may
be threatened
3. Extra costs which could be avoided

19
Value added

Consider 3 main costs
1. Labour – see a/c’s
2. Materials – see a/c’s
3. Capital – must look at:

Value of land and machinery,
stocks and WIPs

Replacement costs

Costs of capital

20
Value added

Kay, J (1993, p24), says that a

commercial organisation that adds
no value to its inputs has no long
term reason for existence.

Some organisations can actually

lose value – if they cannot recover
their costs.

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 Value added by a pharmaceutical
company such as Glaxo plc

Inputs
Inputs to
to Organisation’s
Organisation’s Outputs
Outputs
organisation
organisation resources
resources
Raw materials • Invents and Range of drugs
delivered to the patents new drugs sent to distributors
factory gate, e.g. • Manufactures its for onward
basic chemicals, products and packs distribution
electricity, water, them. to customers
steel piping, plastic • Markets them to
packaging, doctors and health
advertising agency, authorities
accountancy audit

Organisation adds
Figure 6.3 its value here
22
Value added

Value added can be increased by:

Raising the value of outputs –

increasing quantity sold and/or
price

Reducing the cost of inputs – this

may require investment

23
Resource analysis and adding value – 3

In companies with more than one product

range:

Added value is best analysed by considering each

group separately.

Some groups may subsidise others in terms of added
value.

Not all groups are likely to perform equally.

24
 Value Chain

Value according to Porter is that which is left
after all the costs involved in undertaking to
develop and market a product/service are
deducted from the revenue it generates

He also states that competitive advantage
cannot be understood by looking at a
company as a whole.

It stems from the many discrete activities
that a firm performs in designing, producing,
marketing, delivering and supporting its
product.

25
The Value Chain is used for
1. Identification & diagnoses of value
creating activities and the integration
of these activities
2. Identification of cost drivers which
contribute to differentiation or cost
leadership.
3. By knowing the value chain of suppliers
and buyers it becomes possible to
outsource to cost leaders
4. Identification of competitive
advantage potentials which will
contribute to sustainability
26
Value Chain – where does value added
come from?

A cost advantage may stem from a low

cost physical distribution system, a highly
efficient assembly process or superior
sales force utilisation.

Differentiation can stem from
procurement of high quality raw
materials, a responsive order processing
system or superior product design.

The Value Chain is the basic tool for
examining all of the firms activities and
how they interact.

27
 Value Chain

Support Firm Infrastructure

Margin
Human Resource Management
Activities
Technology Development
Procurement

Inbound Outbound Marketing Service

Logistics Operations Logistics & Sales

Primary Activities
28
Value Chain - Five generic categories
of primary activities

1. Inbound Logistics: Activities include:

Receiving, storing and disseminating
inputs to the product such as
1. Materials handling,

2. Warehousing,

3. Inventory control,

4. Vehicle scheduling,

5. Returns to suppliers

29
Value Chain - Five generic categories
of primary activities

2. Operations:

Transforming inputs into the final
product form, such as:
1. Machining,

2. Packaging,

3. Assembly,

4. Maintenance, etc

30
Value Chain - Five generic categories
of primary activities

3. Outbound Logistics:
1. Storing,

2. Distribution and

3. Delivery of finished goods

31
Value Chain - Five generic categories
of primary activities

4. Marketing & Sales: Activities focusing

on the means by which buyers are made
aware of product/service offerings and
by which they purchase such as:
1. Advertising,

2. Sales promotion,

3. Quoting,

4. Channel selection,

5. Pricing etc

32
Value Chain - Five generic categories
of primary activities

5. Service: Activities associated with

providing service to enhance or
maintain the value of the
product/service such as:
1. Installation,
2. Commissioning,
3. Training,
4. Support,
5. Repairs etc

33
Value Chain – Four Support Activities

1. Procurement: Refers to purchasing

inputs and can relate to all primary and
support activities, such as:

Raw materials for ops,

Temp sales people for Mkt & Sales or

Lab equipment for R&D.
The dispersion of procurement
throughout the firm often obscures the
magnitude of total purchases.

34
Value Chain – Four Support Activities
2. Technology Development: All technological
developments in a firm such as technologies
used in
1. administration (MIS)
2. transportation
3. in the product or process.

Note: Technology can be the key to SCA for

example, commodity production where a firms
process technology is the single biggest factor in
it’s competitive advantage.

35
Value Chain – Four Support Activities

3. Human Resource Management:

Activities such as
1. Recruiting,

2. Training,

3. Compensation.

Supports the entire value chain

(Labour Relations)

36
Value Chain – Four Support Activities

4. Firm Infrastructure: Activities such as

1. General management,

2. Planning finance,

3. Accounting,

4. Legal,

It can often be a source of competitive

advantage.

37
Value System - Porter

Value system. The wider routes in
an industry that add value to
incoming supplies and outgoing
distributors and customers.

It links the industry value chain to
that of other industries.

Real competitive advantage can
be developed by using the best
suppliers and distributors.

38
Competitive advantage through linkages between the
value chain and value system
Company
Figure 6.6
Low-
Own
Own company
company
cost supply
supply
source source
source A
A
Low- Own
Own company
company
cost supply
supply Strong

Customers in market place

source source
source B
B COMPANY
COMPANY distributor Distributor
VALUE
VALUE
Distributor
Outside CHAIN
CHAIN A
A
Outside
supplier
supplier A
A Strong
More distributor
expensive, Outside
Outside Distributor
Distributor
branded supplier
supplier B
B B
B
ingredient
Competitor
Exceptionally Major
Major own-
own-
company
Distributor
Distributor
company
low cost supply C
C
supply source
source

Outside COMPETITOR
COMPETITOR
Outside Distributor
Distributor
VALUE
VALUE
supplier
supplier C
C CHAIN D
D
CHAIN
Three
High- Outside
Outside weaker Distributor
Distributor
quality supplier
supplier D
D distributors E
E
products
39
Analysis of value chain and system

Can be costly and time consuming

process

Can use KFS to help focus on
certain areas within the value chain
and/or system.

The KFS will often direct you
towards the areas where value is
added

40
 Comments on value chains
and the value system

Weaknesses in the practical

application of value added include
the following:
– a lack of precision in identifying
areas of resource advantage
– an inability to value clearly
major assets like specialist
knowledge and company
leadership.
41
Value analysis and GSK

KFS
1. R&D
2. Marketing
3. Product performance

Strategy in 1990’s
1. Invest heavily in R&D
2. Acquire companies with complementary
drug pipelines – Wellcome in 1995
Note that the value chain focuses on
existing relationships only

42
 Resource-based view
of strategy development

Focuses on the individual resources of the

organisation, rather than strategies common to all
companies in an industry.

Basic argument: important to understand the
competitive forces in an industry, but organisations
should seek their individual solutions within this
context.

Competitive advantage: derives from the exploitation
of the relevant resources of the individual organisation
when compared to others in the industry.

43
 Identifying the resources that deliver SCA

Figure 6.11 Identifying the resources that deliver SCA

44
 Analysing the resources of
the organisation

Useful to divide into three broad areas:

Tangible resources: the physical resources of the
organisation – e.g. plant and equipment.

Intangible resources: those resources that have no
physical presence but represent real benefit to the
organisation – e.g. brand names, service levels and
technology.

Organisational capability: the skills, routines and
leadership of the organisation – e.g. special skills related
to speed of new product development or customer
service.

45
 Improving competitive advantage

Three main ways of improving competitive

advantage are as follows:

1. Benchmarking: a comparison of practice with another

organisation considered to display best-practice in its
field of operation.
2. Leveraging: exploiting existing resources.
3. Upgrading resources: through developing new
resources, enhancing those threatened by competition
and adding complementary resources.

46
 Case web links for chapter 6
Case 6.1 Resource strategy at GSK: negotiating a merger and making it work.

GlaxoSmithKline
(http://www.gsk.com/index.htm)

Case 6.2 How three European companies attempt to utilise their resources

GlaxoSmithKline
(http://www.gsk.com/index.htm)

Nederlandse Spoorwegen
http://www.ns.nl/domestic/index.cgi

Bouygues Group
http://www.bouygues.fr/english/index.html

Case 6.3 Xbox – the strategic battle for the home entertainment market has just begun
Xbox Official web site
http://www.xbox.com

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Related web links for chapter 6

For an up-to-date review of how firms are tackling the issue of

managing their value chains see the Industry Week 2002 Value
Chain Survey:
http://www.industryweek.com/iwinprint/vcreport/

A very hot topic in debates about competitive advantage these

days is something called 'knowledge management'. This is
briefly discussed in this chapter but if you wish to find out
more, read this article from CIO magazine:
http://www.cio.com/research/knowledge/edit/kmabcs.html

48
 Further Reading

Ohmae, K (1983), The Mind of the Strategist,
Penguin, Harmondsworth, chapter 3.

Porter, M E (1985), Competitive Advantage, The New
Press, NY, chapter 7.

Kay, J (1993), Foundations of Corporate Success,
Oxford University Press, Oxford, Chapter 5 to 8.

Banerjee, Parthasarathi, (2003), “Resources, capability
and coordination: strategic management of information
in Indian information sector firms.” International Journal
of Information Management; Aug2003, Vol. 23 Issue 4,
p303,

Lieberman, Marvin B “Assessing the Resource Base of
Japanese and U.S. Auto Producers: A Stochastic Frontier
Production Function Approach.” Management Science;
Jul2005, Vol. 51 Issue 7, p1060-1075 49