Chapter 2 internal environmental analysis

Editor's Notes

• #14: 5
• #17: Discovering Core Competencies Tangible vs. Intangible Resources (pp. 108–111) Resources are what a firm has to work with—its assets—including its people and the value of its brand name. Tangible resources are in essence those things that you can put your hands on such as property, plant and equipment, personnel, raw materials, and so on. One highly illustrative example of tangible resources and how the strategic utilization/manipulation of them can have a great impact on a firm’s profits are diamonds. Cartier owns or controls over 95% of the world’s diamond mines. If the entire supply of diamonds were to be released onto the world market the gems would devalue to 10% of the current market price or less. Cartier controls the amount, timing, quality, grade (size), and destination point of virtually every batch of diamonds that is released on the world market. In doing so Cartier is able to control the market price of the gems and therefore are able to manipulate profits. While the concept of tangible resources is easy to imagine, the idea of intangibles can be elusive. If tangibles are that which we can put our hands on, intangibles are everything else. Some examples are goodwill, reputation, and brand value. For example, the late Robert Goizeuta, former CEO of Coca-Cola, once explained intangibles and their value in this way. (Continued on next slide.)
• #18: Discovering Core Competencies (cont.) Tangible vs. Intangible Resources (pp. 108–111) (cont.) Goizeuta said if everything tangible that Coke owns were to be destroyed in some bizarre accident, if a fire were to burn down each and every factory, office building and bottling plant right down to a total loss of every desk, chair, and pencil, the intangible resources that Coke owns would be those things that the company still possesses, namely, brand value, the secret recipe, its distribution channels, and business relationships that it has developed over the years. These would allow Coke to go to a bank and borrow billions of uncollateralized dollars to rebuild its infrastructure. The textbook suggests that intangible resources can be categorized: • Human Resources: Knowledge, Trust, Managerial capabilities, Organizational routines • Innovation Resources: Ideas, Scientific capabilities, Capacity to innovate, Intellectual property • Reputational Resources: Reputation with customers, Brand name, Reputation with suppliers, Perceived product quality, durability, and reliability Similar to the Coca-Cola example, the Harley-Davidson brand name has such cachet that it adorns a limited-edition Barbie doll, a popular restaurant in New York City, and a line of L’Oreal cologne. Moreover, Harley-Davidson MotorClothes annually generates over $100 million in revenue for the firm and offers a broad range of clothing items, from black leather jackets to fashions for tots. In sum, because reputation is difficult to imitate and substitute, it can garner competitive advantage.
• #22: Discovering Core Competencies (cont.) Core Competencies (pp. 112–114) A firm’s core competencies are those things that it does that give it a competitive advantage over another firm. They are generally valuable, rare, costly to imitate, and nonsubstitutable. They may or may not be unique to the firm. They may simply be an industry practice that a firm does better, or a set of industry practices that the firm does in a specific combination or sequence that allows the firm to be more efficient than its competitors. Using the Cartier example, to be able to manipulate the supply of gems in the market, Cartier must be very efficient and competent at predicting the demand for gems. If they were not very skilled at this, there would be fluctuations in the supply and demand curve and, therefore, market price that would leave an opportunity for arbitrage. The value of this arbitrage represents lost profits for Cartier. It was this ability to predict demand that allowed Cartier to see higher profits than its competitors in the 1800s, eventually eroding the market share and profitability of these competitors. Cartier subsequently acquired these firms to create the monopoly it now holds on the world’s diamond market. As noted in the textbook, an important question is “How many core competencies are required for the firm to have a sustained competitive advantage?” While responses to this question vary, McKinsey & Co. recommends that its clients identify no more than three or four competencies. Recent actions by Starbucks demonstrate this point. (Continued on next slide.)
• #23: Discovering Core Competencies (cont.) Core Competencies (discussed on pp. 112-114) Growing rapidly, Starbucks decided that it could use the Internet as a distribution channel to achieve additional growth. However, the firm quickly realized that it lacked the capabilities required to successfully distribute its products through this channel—and that its unique coffee, not the delivery of that product, is its competitive advantage. In part, this recognition forced Starbucks to renew its emphasis on existing capabilities to create more value through its supply chain. To do so, the firm trimmed the number of its milk suppliers from 65 to fewer than 25 and negotiated long-term contracts with coffee-bean growers. The firm also decided to place automated espresso machines in its busy units. These machines reduced Starbucks’ cost while providing improved service to its customers, who can now move through the line much faster. Using its supply chain and service capabilities in these ways allows Starbucks to strengthen its competitive advantages of coffee and the unique venue in which on-site customers experience it. When capabilities are valuable, rare, costly to imitate, and nonsubstitutable, they are effectively called core competencies. Alternatively, every core competence is a capability, but not every capability is a core competence. Operationally, one could argue that for a capability to be a core competence, it must be valuable and nonsubstitutable from a customer’s point of view, but unique and inimitable from a competitor’s point of view. As discussed in the textbook, an important key to success occurs when the link between the firm’s capabilities and its competitive advantage is causally ambiguous, where rivals can’t tell how a firm uses its capabilities as the foundation for competitive advantage. Gordon Forward, CEO of Chaparral Steel, allows rivals to tour his firm’s facilities and see almost everything. In Chaparral Steel’s causally ambiguous operations, workers use the concept of mentalfacturing , by which manufacturing steel is done by using their minds instead of their hands.