Resources Are the Assets, Capabilities, Processes, Information, and Knowledge That An

1SustainableCompetitiveAdvantage

Resources are the assets, capabilities, processes, information, and knowledge that an organization controls. Firms use their resources to improve organizational effectiveness and efficiency. Resources are critical to organizational strategy because they can help companies create and sustain an advantage over competitors.3

Organizationscanachieveacompetitive advantagebyusingtheirresourcestoprovidegreatervalueforcustomersthancompetitorscan.Forexample,iTunesandiPodcreatedcompetitiveadvantageforAppleandvalueforitscustomersbycombiningelementsofdesign,price,andcapabilityinauniqueway.Butthemostimportantadvantagewasbeingthefirstcompanytomakeiteasytolegallydownloadmusictodigitaldevices.(PriortotheiTunesstore,theonlymeansofacquiringdigitalmusicwasillegalfileswapping.)Applenegotiatedagreementswithvirtuallyallofthemajorrecordlabelstodistributetheirsongsfromacentralonlinelibrary,andiTunesquicklybecamethepremierplatformformusicdownloading.Theeasy-to-understandsitecamewithfreedownloadablesoftwarecustomerscouldusetoorganizeandmanagetheirdigitalmusiclibrary.4

Thegoalofmostorganizationalstrategiesistocreateandthensustainacompetitiveadvantage.Acompetitiveadvantagebecomesasustainable competitive advantagewhenothercompaniescannotduplicatethevalueafirmisprovidingtocustomers.Sustainablecompetitiveadvantageisnotthesameasalong-lastingcompetitiveadvantage,thoughcompaniesobviouslywantacompetitiveadvantagetolastalongtime.Instead,acompetitive advantage is sustained if competitors have tried unsuccessfully to duplicatetheadvantageandhave,forthemoment,stoppedtryingtoduplicateit.It’sthecorporateequivalentofyourcompetitorssaying,“Wegiveup.Youwin.Wecan’tdowhatyoudo,andwe’renotevengoingtotrytodoitanymore.”AsExhibit5.1shows,fourconditionsmustbemetifafirm’sresourcesaretobeusedtoachieveasustainablecompetitiveadvantage.Theresourcesmustbevaluable,rare,imperfectlyimitable,andnonsubstitutable.

Valuable resourcesallowcompaniestoimprovetheirefficiencyandeffectiveness.Unfortunately,changesincustomerdemandandpreferences,competitors’actions,andtechnologycanmakeonce-valuableresourcesmuchlessvaluable.5

Forsustainedcompetitiveadvantage,valuableresourcesmustalsoberareresources.Thinkaboutit:Howcanacompanysustainacompetitiveadvantageifallofitscompetitorshavesimilarresourcesandcapabilities?Consequently,rare resources,resourcesthatarenotcontrolledorpossessedbymanycompetingfirms,arenecessarytosustainacompetitiveadvantage.WhenAppleintroducedtheiPod,nootherportablemusicplayersonthemarketusedexistinghard-drivetechnologyintheirdesign.TheiPodgainedanimmediateadvantageovercompetitorsbecauseitwasabletosatisfythedesireofconsumerstocarrylargenumbersofsongsinaportabledevice,somethingthenewerMP3systemsandolderindividualCDplayerscouldnotdo.OneofApple’strulyrareresourcesisitsabilitytoreconfigureexistingtechnologyintoapackagethatiseasytouse,elegantlydesigned,andthereforehighlydesiredbycustomers.

Astheexampleshows,valuableandrareresourcescancreatetemporarycompetitiveadvantage.Forsustainedcompetitiveadvantage,however,otherfirmsmustbeunabletoimitateorfindsubstitutesforthosevaluable,rareresources.Imperfectly imitable resourcesarethoseresourcesthatareimpossibleorextremelycostlyordifficulttoduplicate.Forexample,despitenumerousattemptsbycompetitorstoimitateit,iTuneshasretaineditscompetitivelockonthemusicdownloadbusiness.Inadditiontoitscustomerfriendlysoftwareanditsextensivemedialibrary,ApplehasdevelopedaclosedsystemforitsiTunesandiPod.iPodownerscannotdownloadmusicfromsourcesotherthanApple’siTunesstore,butformanythisisnotaproblem.Manydevoteeswon’tevenconsideranotherbrand.KellyMoore,asalesrepresentativeforaTexassoftwarecompany,saysofheriPodmini,“OnceIfindsomethingIlike,Idon’tswitchbrands.”6She’snotalone:SinceiTuneswaslaunched,customershavedownloadedoverabillionsongs.Noothercompetitorcomesclosetothosenumbers.

Valuable,rare,imperfectlyimitableresourcescanproducesustainablecompetitiveadvantageonlyiftheyarealsononsubstitutable resources,meaningthatnootherresourcescanreplacethemandproducesimilarvalueorcompetitiveadvantage.TocompeteeffectivelyagainstiTunes,competitorsmayneedtochangetheirbusinessmodel.Thatis,competitorsneedtoproposesubstitutesforiTunesthatconsumerswillaccept.Forexample,NapsterfoundersShawnFanningandWayneRossohavecreatedasubscription-basedservicecalledMashboxxthatcharges$15amonthforunlimiteddownloads.Yahoo! Musicusesasimilarmodelbutchargesaslittleas$6permonthforcompleteaccesstoitsentirelibraryof2millionsongs.7Inadditiontostraightsubscriptionmodels,somecompaniesareexperimentingwithprice.WhereiTunescharges99centspersong,period,Amazon’sonlinestorewillallowtherecordcompaniestochargedifferentamountsfordifferentsongsbaseduponpopularity.AtAmieStreet,anewlypostedtrackcanbedownloadedforfree,butasthenumberofdownloadsincreases,sodoesthesong’sprice,untilitreachesthemaximumof98cents.8Inresponsetocompetitors’experimentation,Applehasstatedthatitsone-flat-pricemodelhasbeenbotheffectiveandlucrativeandhasnoplanstochange.ItwilltakeyearstofindoutwhetherthesenewmeansofpurchasewillconstituteaneffectivesubstitutetoiTunes.9

Insummary,ApplehasreapedtherewardsofafirstmoveradvantagefromitsinterdependentiPodandiTunes.Thecompany’shistoryofdevelopingcustomer-friendlysoftware,theinnovativecapabilitiesoftheiPod,thesimple99-cent-pay-as-you-gosalesmodelofiTunes,andtheunmatchedlistofmusicandmoviesavailablefordownloadprovidecustomerswithaservicethathasbeenvaluable,rare,relativelynonsubstitutable,and,inthepast,imperfectlyimitable.Pastsuccessis,however,noguaranteeoffuturesuccess:Appleneedstocontinuallychangeanddevelopitsofferingsorriskbeingunseatedbyamorenimblecompetitorwhoseproductsaremorerelevantandhavehigherperceivedvaluetotheconsumer.

Review 1

SUSTAINABLE COMPETITIVE ADVANTAGE

Firmscanusetheirresourcestocreateandsustainacompetitiveadvantage,thatis,toprovidegreatervalueforcustomersthancompetitorscan.Acompetitiveadvantagebecomessustainablewhenothercompaniescannotduplicatethebenefitsitprovidesandhave,fornow,stoppedtrying.Toprovideasustainablecompetitiveadvantage,thefirm’sresourcesmustbevaluable(capableofimprovingefficiencyandeffectiveness),rare(notpossessedbymanycompetingfirms),imperfectlyimitable(extremelycostlyordifficulttoduplicate),andnonsubstitutable(competitorscannotsubstituteotherresourcestoproducesimilarvalue).

2Strategy-MakingProcess

Companiesuseastrategy-makingprocesstocreatestrategiesthatproducesustainablecompetitiveadvantage.10Exhibit5.2displaysthethreestepsofthestrategy-makingprocess:2.1 assess the need for strategic change, 2.2 conduct a situational analysis,andthen2.3 choose strategic alternatives.Let’sexamineeachofthesestepsinmoredetail.

Review 2

STRATEGY-MAKING PROCESS

Thefirststepinstrategymakingisdeterminingwhetherastrategyneedstobechangedtosustainacompetitiveadvantage.Becauseuncertaintyandcompetitiveinertiamakethisdifficulttodetermine,managerscanimprovethespeedandaccuracyofthisstepbylookingfordifferencesbetweentopmanagement’sintendedstrategyandthestrategyactuallyimplementedbylower-levelmanagers(thatis,lookingforstrategicdissonance).Thesecondstepistoconductasituationalanalysisthatexaminesinternalstrengthsandweaknesses(distinctivecompetenciesandcorecapabilities),aswellasexternalthreatsandopportunities(environmentalscanning,strategicgroups,andshadow-strategytaskforces).Inthethirdstepofstrategymaking,strategicreferencepointtheorysuggeststhatwhencompaniesareperformingbetterthantheirstrategicreferencepoints,topmanagementwilltypicallychoosearisk-aversestrategy.Whenperformanceisbelowstrategicreferencepoints,risk-seekingstrategiesaremorelikelytobechosen.Importantly,however,managerscaninfluencethechoiceofstrategicalternativesbyactivelychangingandadjustingthestrategicreferencepointstheyusetojudgestrategicperformance.

Corporate-LevelStrategies

Corporate-level strategyistheoverall organizational strategy that addresses the question “What business or businesses are we in or should we be in?”

Exhibit5.4showsthetwomajorapproachestocorporate-levelstrategythatcompaniesusetodecidewhichbusinessestheyshouldbein:3.1 portfolio strategy33and3.2 grand strategies.

Review3

CORPORATE-LEVEL STRATEGIES

Corporate-levelstrategies,suchasportfoliostrategyandgrandstrategies,helpmanagersdeterminewhatbusinessestheyshouldbein.Portfoliostrategyfocusesonloweringbusinessriskbybeinginmultiple,unrelatedbusinessesandbyinvestingthecashflowsfromslow-growthbusinessesintofaster-growingbusinesses.Oneportfoliostrategy,theBCGmatrix,suggeststhatcashflowsfromcashcowsshouldbereinvestedinstarsandincarefullychosenquestionmarks.Dogsshouldbesoldorliquidated.Portfoliostrategyhasseveralproblems,however.Acquiringunrelatedbusinessesactuallyincreasesriskratherthanloweringit.TheBCGmatrixisoftenwrongwhenpredictingcompanies’futures(asdogsorcashcows,forexample).Andredirectingcashflowscanseriouslyweakencashcows.Themostsuccessfulwaytousetheportfolioapproachtocorporatestrategyistoreduceriskthroughrelateddiversification.

Thethreekindsofgrandstrategiesaregrowth,stability,andretrenchment/recovery.Companiescangrowexternallybymergingwithoracquiringothercompanies,ortheycangrowinternallythroughdirectexpansion or creating new businesses. Companies choose a stability strategy—selling the same products or services to the samecustomers—when their external environment changes very little or after they have dealt with periods of explosive growth. Retrenchment strategy, shrinking the size or scope of a business, is used to turn around poor performance. If retrenchment works, it is often followed by a recovery strategy that focuses on growing the business again.

4Industry-LevelStrategies

Industry-level strategy addresses the question “How should we compete in this industry?”

Let’sfindoutmoreaboutindustry-levelstrategiesbydiscussing4.1 the five industry forces that determine overall levels of competition in an industry and 4.2 the positioning strategies and 4.3 adaptive strategies that companies can use to achieve sustained competitive advantage and above-average profits.

Review4

INDUSTRY-LEVEL STRATEGIES

Industry-levelstrategiesfocusonhowcompanieschoosetocompeteintheirindustry.Fiveindustryforcesdetermineanindustry’soverallattractivenesstocorporateinvestorsanditspotentialforlong-termprofitability.Together,ahighlevelofnewentrants,substituteproductsorservices,bargainingpowerofsuppliers,bargainingpowerofbuyers,andrivalrybetweencompetitorscombinetoincreasecompetitionanddecreaseprofits.Threepositioningstrategiescanhelpcompaniesprotectthemselvesfromthenegativeeffectsofindustry-widecompetition.Underacostleadershipstrategy,firmstrytokeepproductioncostslowsothattheycansellproductsatpriceslowerthancompetitors’.Differentiationisastrategyaimedatmakingaproductorservicesufficientlydifferentfromcompetitors’thatitcancommandapremiumprice.Usingafocusstrategy,firmsseektoproduceaspecializedproductorserviceforalimited,speciallytargetedgroupofcustomers.Thefouradaptivestrategieshelpcompaniesadapttochangesintheexternalenvironment.Defenderswantto“defend”theircurrentstrategicpositions.Prospectorslookfornewmarketopportunitiesbybringinginnovativenewproductstomarket.Analyzersminimizeriskbyfollowingtheprovensuccessesofprospectors.Reactorsdonotfollowaconsistentstrategy,butinsteadreacttochangesintheirexternalenvironmentaftertheyoccur.

5Firm-LevelStrategies

MicrosoftbringsoutitsXbox360video-gameconsole;SonycounterswithitsPlayStation3.SprintNexteldropspricesandincreasesmonthlycellphoneminutes;Verizonstrikesbackwithbetterreceptionandevenlowerpricesandmoreminutes.StarbucksCoffeeopensastore,andnearbylocallyruncoffeehousesrespondbyimprovingservice,increasingportions,andholdingthelineonprices.Attackandrespond,respondandattack.Firm-level strategyaddressesthequestion“Howshouldwecompeteagainstaparticularfirm?”

Let’sfindoutmoreaboutthefirm-levelstrategies(directcompetitionbetweencompanies)byreadingabout5.1 the basics of direct competitionand5.2 the strategic moves involved in direct competition between companies.

Review 5

FIRM-LEVEL STRATEGIES

Firm-levelstrategiesareconcernedwithdirectcompetitionbetweenfirms.Marketcommonalityandresourcesimilaritydeterminewhetherfirmsareindirectcompetitionandthuslikelytoattackeachotherorrespondtoeachother’sattacks.Ingeneral,themoremarketsinwhichthereisproduct,service,orcustomeroverlap,andthegreatertheresourcesimilaritybetweentwofirms,themoreintensethedirectcompetitionbetweenthem.Whenfirmsaredirectcompetitorsinalargenumberofmarkets,attacksarelesslikelybecauserespondingfirmsarehighlymotivatedtoquicklyandforcefullydefendtheirprofitsandmarketshare.Bycontrast,resourcesimilarityaffectsresponsecapability,meaninghowquicklyandforcefullyacompanyrespondstoanattack.Whenresourcesimilarityisstrong,attacksaremuchlesslikelytoproduceasustainedadvantagebecausetherespondingfirmiscapableofstrikingbackwithequalforce.

EMAN – ch05 - 1