CHAPTER 6 Defining the Organization s Strategic Direction SYNOPSIS OF CHAPTER The chapter begins by highlighting the importance of conducting both internal and external (Porter s Five Forces and Stakeholder) analyses in order to lay the foundation for selecting a firm s strategic direction. An internal analysis begins with an assessment of the firms strengths and weaknesses. Each strength is then evaluated in order to determine whether it is a core competency (i.e. differentiates the firm from the competition) and whether it is the basis of a sustainable competitive advantage. Core competencies strategically differentiate a firm from its competition, transcend a single business, and/or are difficult to imitate. Gallon, et al. suggests that firms take an inventory of capabilities by type, strength, importance, and criticality to firm operations and then compare their inventory to the inventory of their competitor s competencies. Dynamic capabilities enable a firm to reconfigure its organizational structure and routines in response to new opportunities and are not related to specific products or technologies. The chapter moves on to describe the importance of a firm s strategic intent (e.g. ambitious, long-term goals) to its ability to innovate (i.e. achieve more than incremental improvements). A firm s strategic intent focuses the company on future markets and customer requirements and diminishes the risk that core competencies will become core rigidities. The chapter closes by investigating how performance measures affect how a firm pursues its strategic objectives. By considering the financial, customer, internal, and innovation and learning perspectives included in the Balanced Scorecard a firm is more likely to recognize the multidimensional impact of its strategies. LEARNING OBJECTIVES 1. Explain the importance of conducting both an internal and external analysis of firms capabilities to the formation of a technology strategy. Use the basic tools necessary to analyze a company s positioning and strategies. 2. Distinguish between strengths, core competencies and sustainable competitive advantages in order to better understand a firm s competitive position and establish its priorities for investment. 3. Explain the importance to a firm of articulating a strategic intent (e.g. an overall direction with ambitious, forward looking goals).
CHAPTER OUTLINE I. Overview II. A. Formulating a company's technological innovation strategy requires the firm to assess its current position (e.g. strengths, weaknesses, core competencies, sources of sustainable competitive advantage), and define its strategic direction (e.g. how should the value proposition evolve overtime, resource needs). B. A company s strategic intent should be ambitious (i.e. create a gap between existing resources and capabilities and those needed to achieve its intent). Strategic intent development begins with an evaluation of the firm s capabilities and ideally ends in a plan that cohesively leverages all of the firm s resources to create a sustainable competitive advantage. Assessing the Firm s Current Position A. External analysis is frequently conducted by applying Porter s Five Force Model (degree of rivalry, the likelihood of new firms entering the industry, the power of buyers and suppliers and the availability of substitutes) and/or a stakeholder analysis. B. Porter s Five Forces 1. Degree of rivalry in an industry is a function of 1) how many firms there are and their relative size, (i.e. many firms of equal size leads to greater rivalry but so can a few large competitors that engage in price wars), 2) how different each firm (or its product) is from the others (e.g. the lack of significant differences between Visor and its competitors led to vigorous price competition), 3) product demand, and 4) height of exit barriers. 2. Threat of potential entrants is high when the industry is attractive and entry barriers are low and vice versa. A good example to discuss with your students here is the smartphone market. On the one hand the industry is likely to be attractive because of high growth potential and visibility, but the presence of powerful competitors such as Nokia and Ericsson may act as a deterrent. It is important to emphasize to students to evaluate whether the industry is attractive before turning to barriers; if the industry is unattractive, barriers become unimportant. 3. Bargaining power of suppliers is a function of the number of suppliers, product differentiation, amount purchased, switching costs and the ability of buyers and suppliers to vertically integrate. For example, a. Intel has supplier power over its customers power because its products have very high brand image (product differentiation), and because other software and hardware has been optimized for Intel s microprocessors (switching costs). b. Wal-Mart has power over its suppliers because of the high volume it purchases.
III. 4. Bargaining power of buyers (like bargaining power of suppliers) is also a function of the number of buyers, level of product differentiation, among purchased, switching costs and whether the buyer or supplier can effectively threaten to vertically integrate. 5. Threat of substitutes is a function of the number of potential substitutes, their closeness in functionality, and their relative price. For example, a. Bus and train travel are typically not close substitutes for plane travel because their lower costs are offset by greater traveling time. It is important to emphasize that a substitute is not the same as a competitor. If there is ambiguity about whether a product is a substitute or a competitor then students have not yet defined their industry. 6. Porter has acknowledged a sixth force: the availability, quality and the price of complements. C. Stakeholder analysis begins with the identification of all parties impacted by the firm, what their interests (and claims) are and what resources they contribute to the firm. Stakeholders include (but are not limited to) stockholders, employees, customers, suppliers, lenders, the local community, government, and rivals. An analysis focusing on how stakeholders will impact firm performance is referred to as a strategic stakeholder analysis while a normative stakeholder analysis emphasizes issues the firm ought to attend to due to their ethical or moral implications. D. Internal analyses begin with an assessment of a firm s strengths and weaknesses in each part of the company s value chain. The value chain activities are often organized according whether they are primary (e.g. inbound and outbound logistics, operations, marketing, sales and service) or secondary (e.g. procurement, human resource management and infrastructure) activities. The firm then identifies which strengths have the potential to be a source of sustainable competitive advantage (i.e. are rare, valuable, durable, and inimitable). Path dependent (e.g. first mover advantages), socially complex resources (e.g., a particularly effective group) or causally ambiguous (e.g. talent) resources that are valuable can provide the basis of a sustainable competitive advantage because they are difficult to imitate. 1. For example, Take2 Interactive Software (the producers of Grand Theft Auto ) would consider R&D a primary activity while technology development is not considered because the console manufacturers also manufacture the actual game. Identifying Core Competencies and Capabilities A. The terms competency and capability are used interchangeably in the text because they are semantically equivalent (though some researchers have attempted to distinguish between them) and our focus is on emphasizing what makes a competency a core competency and on demonstrating how core
competencies or capabilities are achieved by integrating a variety of more basic or rudimentary capabilities. B. Core competencies differentiate a company strategically from its competitors and are usually a combination of different kinds of abilities (e.g. advertising, distribution, information systems, logistics management, applied science, process design). It is the harmonious combination of abilities that makes core competencies difficult to imitate. 1. For example, Sony s core competency in miniaturization is the result of the firm s ability to harmonize the use of multiple technologies including liquid crystal displays, semiconductors, etc. Sony is then able to utilize this competency in multiple markets including televisions, radios, personal digital assistants, etc. C. Prahalad and Hamel view firms core competencies as the roots of a tree that sustain many branches and therefore argue that the organization's structure and incentives must encourage cooperation and exchange of resources across strategic business units. They offer the following tests to identify a firm's core competencies: 1. Is the competency a significant source of competitive differentiation? Does it provide a unique signature to the organization? Does it make a significant contribution to the value a customer perceives in the end product? For example, Sony's skills in miniaturization have an immediate impact on the utility customers reap from its portable products. 2. Does the competency transcend a single business? Does it cover a range of businesses, both current and new? For example, Honda's core competence in engines enables the company to be successful in businesses as diverse as automobiles, motorcycles, lawn mowers, and generators. 3. Is the competency hard for competitors to imitate? In general, competencies that arise from the complex harmonization of multiple technologies will be difficult to imitate because these competencies usually take years to build and are path dependent. D. Prahalad and Hamel go so far as to argue that strategic business units should be expected to bid for people because individuals should be considered corporate assets that can be redeployed across the organization. E. Gallon, Stillman & Coates suggest a six-step approach for identifying and cultivating a firm s core competencies: 1. Starting the program begins with the formation of a steering committee, the appointment of a program manager, and the communication of the overall goals to all team members. The program manager should organize teams that will be responsible for circulating throughout the firm to compile an exhaustive inventory of capabilities.
IV. 2. Constructing an inventory of capabilities is done by categorizing the capabilities identified in step one by type, strength, importance, and criticality to firm operations. 3. Assessing capabilities proceeds by evaluating the criticality of each competency followed by an evaluation of the organizations current level of expertise in each competency. 4. Identifying candidate competencies culls the list of capabilities to those the firm should focus on and grow. 5. Testing the candidate core competencies using Prahalad and Hamel's original criteria is the next step (see above). 6. Evaluating the core competency position of the firm to determine whether competitors have similar competencies and to identify areas in which the organization needs to improve. F. The Risk of Core Rigidities is faced by firms when they focus on current capabilities and do not develop new ones. Sometimes the very things that a firm excels at can enslave it, making the firm rigid and overly committed to inappropriate skills and resources. 1. For example, a firm's emphasis on a scientific discipline that is central to its core competency can make the firm less attractive to individuals from other disciplines. In addition, the rewards for engaging in activities related to the organization s core competencies can discourage employees from pursuing more exploratory activities. Firms that have well-developed knowledge sets along a particular trajectory may find it difficult to assimilate or utilize knowledge that appears unrelated to that trajectory thereby limiting the firm s opportunities. G. Dynamic Capabilities enable a firm to quickly reconfigure its organizational structure and routines in response to new opportunities and are not related to specific products or technologies. 1. Corning is a company that invested heavily in its dynamic capabilities by heavily investing in research in areas likely to provide scientific breakthroughs, building pilot plants and managing its relations with other firms as an integrative and flexible system of capabilities that extended the boundaries of the firm. Strategic Intent A. A firm s strategic intent is an ambitious long-term term goal (i.e. 10 to 20 years in the future) that requires all levels of the organization to build on and stretch the firm's existing core competencies. A firm s strategic intent takes the focus away from current markets and meeting current customer requirements so that the organization can focus on future markets and customer requirements. Articulating the company's strategic intent thus enables the company to focus its development efforts and choose the investments necessary to develop strategic technologies and incorporate them into the company's new products.
1. Canon s obsession with overtaking Xerox in copiers, Apple s mission of ensuring that every individual has a personal computer, and Yahoo s goal of becoming the world s largest internet shopping mall are all examples of strategic intent. V. The Balanced Scorecard A. Kaplan & Norton make the case for including measures of performance that go beyond the balance sheet because the measures used strongly influences how the firm pursues its strategic objectives. They argue that in addition to the financial perspective a firm s performance should be evaluated from the customer, internal, and innovation and learning perspectives. Many firms including nearly 50% of the Fortune 1,000 companies in the U.S. and 40% in Europe have effectively adapted the Balanced Scorecard approach to their businesses and industry. 1. The financial perspective considers goals such as meet shareholder s expectations or double our corporate value in seven years. Measures include return on capital, net cash flow, and earning s growth. 2. The customer perspective considers goals such as improve customer loyalty, offer best-in-class customer service, or increase customer satisfaction. Measures include market share, percent of repeat purchases, customer satisfaction surveys, etc. 3. The internal perspective considers goals such as reduce internal safety incidents, build best-in-class franchise teams, or improve inventory management. Measures include the number of safety incidents per month, franchise quality ratings, stock-out rates, inventory costs, etc. 4. The innovation and learning perspective considers goals such as accelerate and improve new product development, or improve employee skills. Measures include the percentage of sales from products developed within last five years, average length of the new product development cycle, employee training targets, etc.