Positioning the Heart of Strategy

shoul4 M Eng Strategic & Change Management

Session 3 - Approaches to the Search for Sustainable Competitive Advantage

Why is Durham considered a successful university?

Why does it attract students?

Lots of factors might be identified, from the collegiate system to the sports facilities, but factors like reputation and the quality of its teaching and research are also likely to feature. In summary, the University’s success depends upon the resources to which it has access, the competences it possesses in undertaking particular functions and, above all, its ability to put these all together – its strategic capability.

Business strategy is an on-going process. It is a process that involves constant revision in the face of changing circumstances. Thus, to understand the capability of the organisation to meet these challenges, we need to identify the resources at its disposal and its competence in using these resources.

The Resources of the Organisation

Using the classification of resources outlined in Johnson and Scholes, the main resources of an organisation like the University of Durham might be identified as:

• Physical - the departmental buildings and equipment in which teaching takes place; college facilities for accommodation of students; the books and information contained in the libraries.
• Human - the teaching and research staff; support staff like laboratory technicians and administrators; and the most visible output of the University, its students.
• Financial - government grants; student fees; research income.
• Intangible - publications and patents; the reputation of the University.

Many of these resources will also be available to other universities, that is to say they are necessary resources for any academic institution. However, the unique resources on which Durham is likely to build a successful strategy might rest largely with the quality of its teaching/research staff and, particularly, its reputation.

Intangible resources, like reputation, are frequently the most important assets that an organisation can possess because their very nature is difficult to copy by a competitor. One framework for the identification of intangible resources that links them to particular capabilities has been outlined by Professor Richard Hall, who works at Durham (R Hall, “A Framework for Identifying the Intangible Sources of Sustainable Competitive Advantage”, in Competence-Based Competition, G Hamel & A Heene (eds.), 1994, John Wiley & Sons). The diagram below summarises this framework.

Intangible Assets and Resources

• Trade Marks
• Patents
• Copyright
• Registered Designs
• Contracts and licences
• Trade Secrets

Regulatory Capabilities

• Information in the public domain
• Reputation
• Organisational and personal networks

Positional Capabilities

• Employee know-how
• Supplier know-how
• Distributor know-how
• Servicer’s know-how e.g. advertising agencies

Functional Capabilities

• Perception of quality standards
• Perception of customer service
• Ability to manage change
• Ability to innovate

• Team-working ability

Cultural Capabilities

Understanding Competences - The Value Chain

Whilst the resources available to an organisation are important, the ways in which these resources are utilised by the organisation is also critical to strategic success. Michael Porter (in “Competitive Strategies”) outlines the use of value chain analysis as a means of understanding how an organisation could create competitive advantage.

The value chain provides a systematic basis for analysing the activities that an organisation performs. Through these activities the organisation creates value. The organisation gains competitive advantage through reducing costs or increasing revenue more efficiently or more effectively than its rivals.

An organisation's value chain is embedded in a value system.

Suppliers have value chains (upstream value) that create and deliver the purchased inputs used in a organisation's chain. Suppliers not only deliver a product but also can influence an organisation's performance in many other ways e.g. through quality control, meeting delivery dates and price. In addition, many products pass through distribution channels on their way to the buyer. Channels perform additional activities that affect the buyer (e.g. a dealer network in the case of automobiles), as well as influence the organisation's own activities. An organisation's product eventually becomes part of its buyer's value chain.

Gaining and sustaining competitive advantage depends on understanding not only an organisation's value chain but also how the organisation fits in the overall value system of suppliers and buyers.

The value chains of firms in an industry differ. The difference reflects their histories, strategies, and success at implementation. A firm's value chain may differ in scope from that of its rivals, representing a potential source of competitive advantage.

Competitive scope describes the range over which a firm competes. There are at least four dimensions to this range:

• Segment scope - the product varieties produced and buyers served through differentiation;

• Vertical scope - the extent to which activities are performed in-house instead of by independent firms, through vertical integration;

• Geographical scope - the range of regions, countries or groups of countries in which a firm competes with a co-ordinated strategy;

• Industry scope - the range of related industries in which the firm competes with a co-ordinated strategy to gain scope economies.

The Value Chain of an organisation can be broken down into various value activities that can be divided into two broad types.

• Primary Activities - the activities involved in the physical creation of the product and its sale and transfer to the buyer as well as after sale assistance. The five primary activities are divided into inbound logistics, operations, outbound logistics, marketing and sales, and service.

• Support Activities - primary activities are supported by purchased inputs, technology, human resources, and various organisation-wide functions. The dotted lines reflect the fact that procurement, technology development and human resource management can be associated with specific primary activities as well as support the entire chain. Firm infrastructure in particular supports the entire chain.

Illustration

CREATING CORE COMPETENCES AT BRASSERIES KRONENBOURG

In the mid-1990s, Brasseries Kronenbourg was the main company within Kronenbourg SA, the beer division of the French food and packaging group, Danone. Along with Heineken and Carlsberg, Kronenbourg SA was one of the three largest brewers in Europe.

Brasseries Kronenbourg, formed from the merger of Kronenbourg and Kanterbraü in the 1970s, aimed to become one of the most productive brewers in the world. Production facilities, along with human resources, finance and administration functions, were combined by the mid-1980s. There then followed a restructuring programme that reduced staffing by 570 jobs, mainly through voluntary redundancies. At the same time a major investment programme created larger, more efficient breweries capable of serving larger geographical areas, up to 1,000km2 for mass market brands. The distribution system in France was also developed through the acquisition of 60 warehouses via its subsidiary, Elidis.

By merging the sales forces of Kronenbourg and Kanterbräu, the company brought together a unified product range of 28 brands. As product image and brand name are critical in this market, the company made key investments in this area. The company strengthened its links with its customers, particularly the retail chains, by introducing a merchandising system called “Pluton”, that improved the presentation of beers, adapting it to each retail chain, region and season. Kronenbourg also developed and launched a series of beers, to meet the needs of emerging customer segments, including: Tourtel Brune (1989); Tourtel Ambrée (1990) and Tourtel 100% malt (1994). Working with the packaging division of Danone Group it also developed new packaging for its products, winning awards for one bottle and developing a label that changed colour once the bottle was at the right temperature for its Kronenbourg 1664 brand. From 1993, the Loi Evin restricted beer advertising, so the company concentrated on the promotion of its products in cafés and the sponsorship of the Paris Saint Germain and Strasbourg football teams.

As well as developing in its home market, Kronenbourg also sought to develop its international presence through a range of acquisitions and licensing agreements. For example it entered into a production agreement with Courage in the UK, as well as entering into agreement with local breweries in Italy, Belgium, Spain and Greece. Its strategy was to develop Kronenbourg 1664 and Tourtel as international brands brewed in each local market alongside the strongest brands of its partner.

Source: based on R Calori & P Monin, “Brasseries Kronenbourg” in G Johnson & K Scholes, Exploring Corporate Strategy, Prentice Hall, 1999.

To illustrate how the value chain can be used in practice, we can plot the key value activities within Brasseries Kronenbourg:

A key aspect of organisations is the interdependence or linkages between their various activities. Whilst value activities are the building blocks of competitive advantage, linkages also can lead to competitive advantage in two ways:

• Co-ordination of linked activities such as procurement and assembly can reduce the need for inventory, for example. Reducing inventory is made possible by managing linkages better.

• Integration of activities can create the opportunity to lower the total cost of the linked activities or increases the value added. In copier manufacturing, for example, the quality of purchased parts is linked to the adjustment of copiers after assembly. Canon found it could virtually eliminate the need for adjustment in its personal copier line by purchasing higher precision parts.

Managing the linkages in an organisation is therefore a key management task. Three kinds of linkages are considered:

• Linkages within the value chain of a strategic business unit (e.g. the Pluton merchandising system within Brasseries Kronenbourg);

• Linkages between the value chains of separate business units within the same firm (e.g. the support for Brasseries Kronenbourg on packaging developments by the Danone packaging division);

• Linkages between the value chains of different firms (e.g. sports sponsorship with football teams like PSG and Strasbourg, along with the production agreement in the UK with Courage).

Positioning – One Approach to Creating and Sustaining Competitive Advantage

In the last two weeks we have seen how a variety of tools and frameworks can be used to analyse the internal and external environments of the organisation. But how can these tools and frameworks be used to underpin viable strategies for the organisation - to allow it to find sustainable competitive advantage?

One approach to this challenge is that associated particularly with Michael Porter, which has become known as the Positioning Approach. Porter argues that a company needs to understand the structure of its industry, in order to change its strategy (its position within the industry) in order to achieve improved performance by outperforming its competitors. This is referred to as sustainable competitive advantage. As originally outlined in the mid-1980s, this was essentially an outside-in approach to strategy, which stressed the positioning of the organisation within its environment – shaping the organisation to meet the externally imposed pressures.

Once the company understands where competition comes from and why, using tools like the five forces framework and strategic group analysis (both tools outlined by Porter) it can look to position itself against these forces:

• by using its capabilities to provide best defence against force(s),
• by influencing the balance of forces through improved company position,
• by anticipating shifts in forces and reacting to exploit them quicker than the competition.

Generic Strategies and Positioning

Porter argued that positioning determined whether a firm's profitability was above or below the industry average. A firm that positions itself well may earn high rates of return even though industry structure is unfavourable and the average profitability of the industry is modest.

Porter went on to argue that, in essence, competitive advantage came in only two types - low cost or differentiation. Usually, Porter argued, a company cannot do both; it needs to make a choice. The company also needs to make a choice over the scope of activities over which it seeks advantage - many segments of the industry or just one or two.

When the type of advantage and scope are combined, three generic strategies can be identified - cost leadership, differentiation or focus (low cost or differentiation).

Porter argued that a firm that engages in each generic strategy but fails to achieve any of them will become “stuck in the middle”, possessing no advantage. This is “a recipe for strategic mediocrity”, as it will be out competed by companies following clearer strategies, be it cost leadership, differentiation or focus.

Finally, he made the point that the chosen generic strategy needs to be sustainable. The company's competitive advantage must be able to resist erosion from competitors' behaviour or industry evolution. Sometimes this will mean that one or other of the generic strategies are not feasible in some industries.

Using the Sources of Competitive Advantage to Achieve a Generic Strategy

Porter argued that competitive advantage is the result of finding ways to lower costs or increase revenues more than the competition. The activities that the organisation undertakes, and the ways in which they are linked, as highlighted by the value chain, can all contribute to the strategy if they exploit the sources of cost efficiency or value added available.

• Efficient operations
• Low cost logistics & distribution
• Process Design - efficient processes
• Product Design - easy to make products
• HRM - good labour supervision

• Product design - innovative products
• Marketing - brand image promotion
• Service - quality customer service
• HRM - staff training
• Operations - quality assurance

• Economies of scale
• Economies of scope
• Experience curve
• Supply costs

• Service quality and levels
• Product features
• Delivery times
• Image

Cost Drivers

Economies of scale arise for a number of reasons. Large-scale output levels often allow firms to utilise more efficient, capital-intensive methods - e.g. computer-controlled assembly lines, flexible manufacturing systems (FMS) and robotics. Methods of production that involve very high set-up, or fixed costs are uneconomic for small-scale production but large-scale production enables them to be spread over more units of output.

Scale economies can be attained anywhere in the value chain, where there are costs which do not increase proportionally with output. These are often referred to as “indivisibilities” (an example is overheads) and can occur in any of the functional areas. For example, the film footage used for Coca-Cola advertisements is produced in one location, and then dubbed in several languages for distribution all over the world.

Economies of scale do not exist in all industries. Where they do exist, however, they tend to result in an increase in concentration - that is, an increase in the market share of the largest firms, as has been the case in steel manufacturing, bulk chemicals and automobiles.

Economies of Scope - In addition to economies from the size or scale of a firm's production of a single product, there is also the possibility that cost savings can result from the simultaneous production of several different outputs in a single enterprise, as opposed to their production in isolation each by its own specialised firm. Such costs savings are referred to as “economies of scope”. They occur when the joint costs of two or more products are less than the costs of producing them separately.

The Experience Curve - The experience curve relates the cost per unit output to the cumulative volume of output since the production process was first started. Costs per unit tend to decline as the cumulative volume of output rises. As the production process is repeated, the firm learns from experience, and is able to adjust production process in accordance with this acquired knowledge, reducing costs. Empirical studies indicate that unit costs tend to decline at a relatively stable percentage each time cumulative volume is doubled.

Differentiation Drivers

Reducing costs are important to most organisations, but for many organisations competitive advantage comes from adding value to their products and services, for which customers are willing to pay more. This is best achieved if the customer perceives the product to be different from others on offer - this is achieved through differentiation.

As with cost efficiency, the creation of value added depends upon the activities within the value chain and the ways in which they are linked. Illustration 10.3 in Johnson and Scholes outlines the way in which Marks and Spencer achieve this creation of added value.

The Classical Positioning Approach Summarised

As his article “Competitive Strategies” outlines, Porter’s approach involves using the five forces framework and strategic group analysis to understand the nature of competition within an industry and identify a sustainable position for the organisation to achieve within it. Achieving a sustainable position means making choices about the generic strategy to be followed in order to exploit the sources of advantage available to it. This means using the value chain to understand how the organisation creates value through the activities it performs and then identifying how these activities need to be restructured in order to achieve the desired strategy.

However, this approach was increasingly critiqued during the 1990s, with much of the debate centring upon the need to make a choice between low cost and differentiation. The outside-in nature of the approach was also questioned - with critics arguing that this was too reactive in the modern business context. From this critique, a number of similar approaches emerged, which stressed the importance of understanding and exploiting the resources of the organisation.