MGT 247 Exam 2

Core competency

A unique strength embedded deep within a firm that lets it differentiate its products and services from rivals

Prahalad and Hamel (1990) core competency test

A core competency must make a disproportionate contribution to ultimate customer value and provide a basis for entering new markets.

Resources

Any assets a firm can draw on when formulating and implementing strategy

Capabilities

Organizational and managerial skills needed to orchestrate and deploy a diverse set of resources strategically; expressed in structure

Activities

Distinct and fine-grained business processes

Tangible resources

Visible, physical attributes (labor, capital, land)

Intangible resources

Invisible, non-physical attributes (culture, knowledge, intellectual property)

Characteristics of Capability

• Cannot be readily observed

• Not tradable separately from whole unit

• Contribute to higher value, lower cost, or both

• Developed by people through coordinated action

• Less stable than a resource

Human resources (skills)

The skills and efforts of people that drive success; they cannot be owned by the firm but are required for success.

Resource-based view (RBV)

A model that sees a firm's resources as the key to superior performance

RBV Objectives

Identify core competencies, know the strengths and weaknesses of your own team, highlights the importance of the Internal Environment

Two Critical Assumptions of the RBV

1. Resource heterogeneity

2. Resource Immobility

Resource heterogeneity

A firm is a unique bundle of resources and capabilities. These bundles differ across firms

55% of success is attributed to

The firm and it’s resources and capabilities

Resource immobility

Resources don't move easily from firm to firm, are difficult to replicate, and can last for a long time

Strategy objective

To match a firm’s resources and capabilities (internal) to opportunities in the external environment

Strategic fit

Alignment of a firm's resources

VRIO framework

A tool for evaluating firm resource endowments: a resource must be Valuable, Rare, Costly to Imitate, and Organized to capture value

Valuable (VRIO)

The resource helps the firm exploit an opportunity or offset a threat.

Rare (VRIO)

Only one or a few firms possess the resource.

Costly to imitate / Inimitable (VRIO)

Competitors can't develop the resource at a reasonable price

Organized to capture value (VRIO)

The firm is organized to capture value through effective organizational structure and coordinating systems.

VRIO decision tree

A sequence of four yes/no questions (valuable, rare, imitation costly, organized to capture value

Dynamic capabilities

A firm’s ability to adapt resources over time, modify and leverage its resource base, and gain and sustain competitive advantage in a constantly changing environment

Dynamic capabilities objectives

1. Develop resources, capabilities, and competencies

2. Create a strategic fit with the firm’s environment

3. Change in a dynamic fashion

4 factors of dynamic markets

1. Technological change

2. Deregulation

3. Globalization

4. Demographic shifts

Value chain

A template firms use to determine which activities or capabilities are truly fundamental for adding value and which are not

Two components of a value chain

1. Primary activities

2. Support activities

Primary activities

Direct: making & selling goods or services

Support activities

Indirect: infrastructure and everything else

Value chain function

1. Shows how a product moves from raw-material stages to the final customer along with the necessary support functions

2. Shows which parts of operations create value and which do not

3. Helps the firm understand which activities contribute most to cost and value (margin)

4. Identify multiple means for implementing a chosen business-level strategy

Types of Primary Activities

1. Inbound logistics

2. Operations

3. Outbound logistics

4. Marketing and sales

5. Service

Primary activties objective

Transform inputs into outputs as the firm moves a product or service horizontally along the internal value chain

Competitive disadvantage

Outcome when a resource is not rare, valuable, costly to imitate, or organized for value creation

Competitive parity

Outcome when a resource is valuable but not rare.

Temporary competitive advantage

Outcome when a resource is valuable and rare but not costly to imitate, or when a resource is valuable, rare, and costly to imitate but not organized for value creation

Sustained competitive advantage

Outcome when a resource is valuable, rare, costly to imitate, and organized for effective deployment

Isolating mechanisms

Barriers to imitation that prevent rivals from competing away a firm's advantage.

Better expectations of future resource value

Isolating mechanism: acquiring resources cheaply because the firm forecast their future value more accurately

Path dependence

Isolating mechanism: the options in a current situation are limited by decisions made in the past

Causal ambiguity

Isolating mechanism: the cause and effect of a phenomenon are not readily apparent

Social complexity

Isolating mechanism: different business and social systems interact in ways that are hard to copy

Intellectual property (IP) protection patents

Isolating mechanism: designs, copyrights, trademarks, trade secrets

Resource stocks

The firm's current level of intangible resources (ex. new product development, engineering expertise, innovation capability, reputation for quality, etc.)

Resource flows

The firm's level of investment to maintain or build a resource.

Bathtub metaphor

Model in which water level is an intangible resource stock with inflows and outflows. Inflows contributing to the stock are investments in resources. Outflows taking away from the stock are forgetting, or “leakage” (the resource is no longer private to the firm).

Inbound logistics

Activities used to receive, store, and disseminate inputs

Operations

Activities necessary to convert inputs into the final products

Outbound logistics

Activities involved with collecting, storing, and physically distributing product

Marketing and sales

Activities that facilitate purchase of products and induce consumers to do so

Service

Activities designed to enhance or maintain a product's value

Types of Support Activities

1. Procurement

2. Technology development

3. Human resources

4. Firm infrastructure

Support activities objective

Necessary to sustain primary activities

Procurement

Activities completed to purchase inputs.

Technology development

Activities completed to improve the product and the processes used to manufacture it

Human resources (value chain)

Activities involved with recruiting, hiring, training, developing, and compensating personnel

Firm infrastructure

Activities that support the entire value chain: identifying external opportunities and threats, identifying resources and capabilities, supporting core competencies

Value system

The larger system of suppliers' value chains

SWOT analysis

A framework assessing internal factors (strengths, weaknesses, opportunities, threats)

Strengths

Internal factors that allow a firm to compete effectively and are unique or valuable.

• What allows us to compete effectively?

• How are we unique?

• What do we have that few others have that provides value?

Weaknesses

Internal factors that hold a firm back from competing effectively; what it lacks.

• What holds us back from competing effectively?

• What do we lack?

Opportunities

External factors that might change in the firm's favor and allow growth or higher profit.

• What external factors might change in our favor that may allow us to grow the business or become more profitable?

Threats

External factors that might hinder the firm's growth or profitability.

• What external factors might hinder our growth or profitability?

Core rigidity

A former core competency that has become a liability because the environment changed and it no longer fits

Characteristics of a core rigidity

1. A former core competency turned into a liability

2. This occurred as a result of an environment change

3. The former competency no longer fits in the external environment

4. Turns a resource from an asset to a liability (ex. 35 MM film and Kodak)

VRIO Framework

To be the basis of a competitive advantage, resources must be valuable, rare, costly to imitate, and the firms must be organized to capture the value of the resource.

Competitive advantage

When two or more firms compete in the same market, a firm possesses a competitive advantage over its rivals when it earns a higher rate of profit

Cost advantage

Competitive advantage from using core competencies and capabilities to produce standardized products at lower cost than competitors.

Differentiation advantage

Competitive advantage from producing unique products that differ from competitors' products.

Three Standard Performance Dimensions of a Firm

1. What is the firm’s accounting profitability

2. How much shareholder value does the firm create

3. How much economic value does the firm generate

Accounting profitability

A performance measure using standardized accounting metrics (GAAP)

GAAP

Generally Accepted Accounting Principles; standardized accounting rules.

FASB

Financial Accounting Standards Board; sets the accounting standards behind GAAP.

Form 10-K and 10-Q

Annual (10-K) and quarterly (10-Q) financial statements public companies file.

Return on invested capital (ROIC)

Net profits divided by invested capital; measures how effectively a firm uses its total invested capital (shareholders' equity plus interest-bearing debt).

Invested capital

Shareholders' equity from selling shares plus interest-bearing debt from lenders and bondholders.

Net operating profit after tax (NOPAT)

A profitability measure of operating profit after taxes.

Return on equity (ROE)

A profitability ratio measuring profit relative to shareholders' equity.

Return on assets (ROA)

A profitability ratio measuring profit relative to total assets.

Return on revenue (ROR)

Net profits divided by revenue; how much of each sales dollar becomes profit

Working capital turnover

An ROIC element showing how effectively capital is used to generate revenue.

COGS / revenue

Cost of goods sold divided by revenue; how efficiently a company produces a good.

R&D expense / revenue

How much of each dollar earned is invested in research and development.

SG&A expense / revenue

How much of each dollar earned is invested in selling

Working capital / revenue

How much working capital the firm has tied up in its operations.

PPE / revenue

The share of revenue dedicated to plant

Book value

Accounting measure of the firm's actual cost of assets minus depreciation.

Market valuation

Value based on future expectations of a firm's growth potential and performance.

Intangibles (accounting limits)

Items such as innovation

Off-balance-sheet items

Obligations not shown in standard accounting data

Shareholders

Owners of shares of stock; the legal owners of the firm.

Risk capital

Money provided to a firm in exchange for an equity share.

Total return to shareholders

Stock price appreciation plus dividends.

Market capitalization

Dollar value of total shares outstanding: number of outstanding shares times share price.

Shareholder value creation

Performance measured by total return to shareholders; limited by stock price volatility

Economic value creation

The difference between a buyer's willingness to pay for a product or service and the firm's total cost to produce it (V minus C).

Risk capital

Money provided for an equity share

Total return to shareholders

Stock price appreciation + dividends

Market capitalization

Number of outstanding shares * share price

Limitations of shareholder value creation

1. Stock prices can be volatile

2. Macroeconomic factors affect stock prices

3. Stock prices can reflect the mood of investors