Internal Capabilities and Competitive Advantage

1. Session 6 INTERNAL CAPABILITY

2. Competitive advantage is critically influenced by internal capabilities. • Exploiting internal capabilities is known as the ‘resource based view’ of the firm. • Critical capability exists at the strategic and organisational level. • Key strategic capabilities involve identifying market position and creating new products. • Key organisational capabilities include innovation, productivity, human resources, quality and information. Session 6

3. Market Leadership • Business history contains numerous examples of successful firms that subsequently failed (e.g. the US airlines, Pan Am and TWA). • Sometimes leading successful firms decline and are reconstituted as smaller niche businesses. • Some texts propose that most failures are caused by a new, more innovative product entering the market. • Tellis and Golder concluded the more common reason is market share erosion due to failure of a leader to continue to emphasise ongoing operational improvement and innovation. Session 6

4. Static orientation due to excessive focus on maximising sales to sustain current market share. • Failure to allocate resources to investment in improving operations, despite evidence that other firms are becoming successful. • Example of Ford and GM, who permitted Toyota and Honda to catch up and then overtake them in the car industry. • This type of market leadership decline often occurs in international markets as one country’s market dominance lost to another nation. Session 6

5. Resource-Based View • Being overtaken often occurs without any fundamental shift in customer need. • It merely reflects incumbent firm not exploiting opportunities to upgrade internal capabilities. • Outcome is competitor acquires superior internal capability that permits delivery of greater customer satisfaction. • Managerial philosophy based on exploiting superior capability is known as the ‘resource-based view’ (RBV) of the firm. Session 6

6. RBV offers two strategic options: • Develop and launch improved products (e.g. Toyota Prius Electric Hybrid) • Use superior operational capability to support price based competition (e.g. Wal-Mart logistics in retailing) • RBV theory has not been widely applied to SME sector. • Alternative reasons proposed for SME success include a marketing-orientated or superior niche-based strategy. Session 6

7. Sanchez and Sanchez have recently sought to promote wider support for RBV in SME sector. • They posit that internal capability provides the basis for a superior strategy. • They examined the Spanish SME sector and concluded the strategy is reflective of internal capability. • Other research supports the of application of RBV, but with greater emphasis on entrepreneurial abilities of owner/manager or senior management. Session 6

8. Leadership • Examples of strong leadership and performance are evident in the large firm sector. • Examples include Jack Welch at GE Corporation, Lou Gerstner at IBM and Stuart Rose at M&S (the leading UK retailer). • In the large firm sector, poor or weak leaders are soon removed from office through pressure from major shareholders. • In the SME sector, however, business leaders are more able to resist shareholder pressure. Session 6

9. In many cases, lifestyle SME leaders have a majority interest in business. • Stoner’s research identified the vital importance of knowledge/experience the of owner/managers. • Small firms in Illinois accepted the importance of the leader exhibiting a ‘distinctive competence’. • Distinctive competence is perceived as an ability to identify and create some form of competitive advantage for the business. Session 6

10. A common distinctive competence is to differentiate a firm from its competition by delivering superior service quality. • This is achieved through nearness to customers and a detailed understanding of all aspects of the firm’s internal operation. • Leadership is also a critical competence in growing a business from start-up into larger, successful operation. • Other studies support the critical role of leadership in contributing to superior market performance and implementing growth strategies. Session 6

11. Midas Touch • A successful entrepreneur can expect to be lionised by the media. • This risks the individual begining to believe they are infallible. • In the UK, Sir Clive Sinclair launched the highly successful Sinclair PC in late 1970s. • He forecasted repeat successes for his plans for pocket television, wristwatch radios and electric cars. • Converting his ideas into commercial reality failed - the most publicised disaster being his electric car, the C5. Session 6

12. Leadership Style • The entrepreneur as business founder needs to be able to lead innovation and business growth. • The style of the entrepreneur has influence across the entire organisation. • Some research suggests a participative leadership style is more effective than an autocratic orientation in creating an entrepreneurial culture. • Ojasolo has proposed the way entrepreneurs are portrayed in the media influences the general public’s perception of image, personality and behaviour of entrepreneurs. Session 6

13. For much of 20th century, the left-wing media tended to characterise entrepreneurs as individuals who built business empires by exploiting their workers. • In the late 20th century, the media became more positive towards highly successful entrepreneurs. • The image portrayed tends to be of aggressive, fast-talking, hard-headed, autocratic individuals. • Research has failed to confirm the existence of this single image. • There is evidence that some entrepreneurs are autocratic, while others are great believers in collaborative cultures. • Conclusion is that entrepreneurs are as varied as leaders in large companies. Session 6

14. The Dark Side • Beaver and Jennings have examined the claim that small businesses fail due to owner/manager incompetence. • In some cases, behaviour goes beyond incompetence and is morally indefensible. • Case of 3 sons who inherited business and drained it of cash to support lavish lifestyles. • Other researchers have also commented on the highly questionable behaviour of some entrepreneurs whose businesses failed. Session 6

15. One cause is the insatiable drive to be better and more successful than the competition. • The entrepreneur may feel that even greater success can be achieved. • When increased expenditure fails to stimulate business growth, they may borrow more money to support even greater spending. • They may reach the point where they commit questionable or fraudulent acts to raise money. • Example of UK media mogul Robert Maxwell who, after his death, was found to have created a company debt burden of almost £2 billion. Session 6

16. Identification of Market Opportunities Appropriate Strategy Strategic Competencies New Product management Effective Business Plan to Exploit Opportunities Financial Resource Competencies Financial resources to Support Business operations Continuous innovation approach to improving products and services Workforce with appropriate skills Information systems providing real time data Operational Competencies Quality meets expectations of customers Productivity supportive of operations Figure 6.1 A qualitative model of organisational competencies to support and deliver an entrepreneurial strategy Session 6

17. Strategic Capability • Entry into the competence model is the ability to identify opportunities and evolve an appropriate strategy. • Often demands an ability to read very weak environmental signals ahead of competition. • Exploiting and sustaining the strategy requires the capability to develop and launch new products. • This requires a leader who provides visionary direction and support for the innovation process. • Success can only be achieved if the firm has the financial resources to support strategy implementation. Session 6

18. New products can often achieve lower than forecasted sales or incur higher than expected development costs. • Without financial resources, a new product programme can cripple ongoing operations. • Source of funds can be from profits generated by trading, borrowing and/or new equity. • Research studies suggest the most successful entrepreneurs are orientated towards building high levels of reserves using retained profits. • These firms can continue to operate even when lending sources such as banks are unwilling to support the SME sector. Session 6

19. Innovation • A firm’s innovation capability needs to extend further than just new product development. • Requirement that all aspects of the business operation are continually under review to identify opportunities for improvement. • Process innovation can often make a significant contribution towards increased profitability. • In some cases process innovation can provide new source of competitive advantage. • The entrepreneur needs to create an innovation culture, where every employee is orientated towards examining new ways of enhancing operational performance. Session 6

20. Network • SMEs often lack resources and may collaborate to enhance innovation. • Harvest Industries Australia believe innovation is a strategic approach to achieving differentiation. • Company skills are marketing and distribution. • They created a vertical network of growers and suppliers. • Growers are licensed to use Harvest Industries’ seedless fruit technology. • The network interacts to maximise product and process benefits to achieve differentiation. Session 6

21. Chaganti & Chaganti’s study found the highest profitability came from having a broad product range, frequent product updates and a proactive willingness to customise products. • Added benefits from process innovation in areas of: • Cost reduction • Improved productivity • Faster response • UK research supports the view that reliance on internal process innovation assists business growth. • It is probable that process innovation, critical in mature industries, is more critical in new and emerging industrial sectors. Session 6

22. Collaboration • Boers Industry Australia develops specialist machine tools. • In the face of increasing competition, the company moved to work more closely with clients in complex technologies (e.g. Aerospace Engineering). • Its usual approach is to work in structured, sequential steps. • The company has the flexibility to try radical solutions in the face of time pressures from clients. • It expanded its collaborative orientation to work with other entrepreneurial machine tool firms to enter overseas markets. Session 6

23. Productivity • Profit is generated by sales revenue exceeding costs. • Profit represents the ‘added value’ generated from the creation and marketing of output. • Productivity is measured in terms of profit (or added value) per employee. • The productivity measurement permits comparisons between firms of different size, in different industries and between nations. • Governments perceive productivity as a critical measure of country’s economic performance. Session 6

24. Small firms are perceived as responsive, flexible and rapid responders to new opportunities. • Small firms tend to achieve lower productivity than larger competitors. • Large firms can exploit economies of scale and also fund training of staff. • Small firms possibly place insufficient emphasis on improving productivity. • In some cases, the strategic focus should be on making internal processes more efficient. • Process automation can also provide productivity enhancement. Session 6

25. New Technology • New technology can improve productivity and permit entrepreneurs to develop higher-quality, customised products. • Peerless Saw Company in the USA faced price competition from lower-priced imports. • Its owner identified the opportunity to use laser cutting to manufacture blades. • Battelle Laboratories developed computer-operated cutting tools using lasers. • Company can now produce much smaller production runs. • Also now able to develop customised products to solve unique problems faced by different customers. Session 6

26. Human Resources • It is a frequent service industry claim that employees provide the most effective mechanism for achieving differentiation. • Example of Singapore Airlines achieving superior service delivery in international airline market. • Small firms tend to be able to optimise employee performance because they have a small work force. • Nevertheless, smaller firms tend to have an informal, unstructured approach to human resource management (HRM) practices. Session 6

27. This attitude reflects the owner/manager view of being personally qualified to manage HRM issues. • Owner/managers often perceive a personnel manager as an expensive overhead. • Such attitudes can result in missed opportunities to optimise employee job satisfaction and further development of employees’ skills. • Evidence that close relationships with customers can increase customer loyalty. • Building a workforce capable of optimising working with customers usually requires a more structured approach to HRM practices. Session 6

28. Interacting Problems • Tri-Seal is a US plastic extrusion company founded by John Dukess who invented a triple-layer seal for bottle tops. • The company was acquired by Atlantic Research Corporation but, with the departure of Dukess, innovation ceased and business declined. • New CEO Harvey Finkelstein managed to turn the business around, eventually organising a leveraged management buyout (LBO). • The plan was to consolidate 4 different sites into one single operation before Atlantic Research sold business. Session 6

29. Consolidation still incomplete at time of LBO. • New site strategy was to operate 7 days a week, manufacturing using split-shift workforce. • On introduction, 30% of staff rejected new work pattern: the only solution was to invest in new engineering processes. • The Vice President was not able to manage this change and eventually had to be fired. • By this time, revenue was falling, while costs continued to rise. • No US banks were prepared to increase the level of loans to company. Session 6

30. Dukess was still receiving loyalties for his patents. • Dukess made contact with a Danish bank an, with his intervention, new funds were raised to invest in process changes. • Company growth led to achieving a 70% share of the bottle sealing cap market in the USA. • Finkelstein recognised importance of building closer relationships with key major customers. • He also recognised the basis of company’s original success was innovation, so invested heavily in R&D. • First success was a new fold-over, re-sealable pull tab - immediately adopted by Minute Maid, one of the largest orange juice producers in the USA. Session 6

31. Quality • During the 1970s, Western firms fighting inflation placed reduced their emphasis on quality to sustain profit margins. • Pacific Rim countries recognised the importance of using superior quality to successfully enter Western national markets. • The Japanese introduced concepts such as total quality management (TQM) and just-in time (JIT) to achieve these superiority goals. • Small Western firms’ closeness to their customers made them more aware of the need to use quality to avoid price-based competition. Session 6

32. Success of large Western firms adopting structured accreditation quality schemes (e.g. ISO 9000) caused governments to fund similar schemes for small firms. • Unfortunately, small firms found the high costs of these systems could not be recovered by raising prices. • Smaller firms returned to the less-structured, informal approach of focusing on meeting customer quality specifications. • Nevertheless, small entrepreneurial firms still rely heavily on using quality to differentiate the products from the competition. • To be effective, small firms do need internal capabilities to measure quality, identify problems and implement improved promotional processes. Session 6

33. Global Quality • Portec Flowmaster in the USA has only 125 employees, but a global reputation in the design of specialist conveyor systems. • The company’s first key contract was a baggage handling system for American Airlines. • Portec’s differentiates itself on the basis of its outstanding commitment to quality and its ability to solve complex materials handling problems. • All new staff participate in an extensive training and skills certification scheme. • Employees are empowered to take personal responsibility to deliver quality and participate in regular exchange of ideas for enhancing processes. Session 6

34. Information • Data stored in a person’s mind is known as ‘tacit’ information. • Access to tacit knowledge usually requires 1:1 interaction between employees. • Data stored in accessible form (e.g. company manuals) known as ‘explicit’ information. • Large firms recognise the critical importance of maximising explicit information and reducing reliance on tacit information. • Smaller firms often permit key data to remain in a tacit form. Session 6

35. The advent of low-cost computer systems has had a significant impact in creating explicit systems in smaller firms. • Unfortunately, owner/managers often only use these systems to collect data for administrative or statutory purposes. • Enlightened entrepreneurs tend to emphasise the importance of exploiting data storage and access capability on modern PC-based systems. • Researchers have shown that small firms which focus on minimising tacit data are more capable of rapidly responding to both problems and new opportunities. Session 6

36. On-Line Goldmine • On-line retailers have access to a huge volume of real-time data about customers’ buying behaviour. • Getz, a Michigan-based retailer founded in 1898, specialises in selling outdoor clothing. • Retail sales had been flat for some years, so they moved on-line in 1997 with aim of creating a national ‘footprint’ for the business. • Website successfully attracted new customers, but of even greater benefit was data on customer’s buying behaviour generated by site. Session 6

37. They found that none of the on-line orders were from customers within 20 miles of retail store. • They also found large a percentage of site visitors were seeking the Carhatt brand of clothing, and company actions to increase hits for this brand name on search engines increased visitor levels. • On-line banner advertising had minimal impact on site visitor levels. • Also, conventional terrestrial advertising such as newspapers, had no influence on Website visitor levels. • 60% of customers arrived via AOL, hence they put more emphasis on on-line advertising via this internet provider. • Data was also generated on customer socio-demographics and product needs, which permitted more accurate targeting of promotional campaigns. Session 6

38. A review of search behaviour on the actual Getz site revealed limited use of this facility. • Analysis revealed most customers were re-ordering same products on regular basis. • 80% of customers were ordering about 20% of products offered by Getz. • This led to further promotion customisation and improved product forecasting, which lowered the company’s inventory costs. • Improved forecasting reduced out-of-stocks and reduced customer order-delivery cycle time. • It identified need for new strategies to increase cross-selling and attract new customers. Session 6