Chapter 4 StratMan
Chapter 4 StratMan
Chapter 4 StratMan
MANAGEMENT
CHAPTER 4: ORGANIZATIONAL RESOURCES AND
COMPETITIVE ADVANTAGE
INTRODUCTION
• Resources and capabilities are the bread and butter of organizational success. Better resources
and capabilities lead to higher levels of success. Poor resources and capabilities lead to failure.
• However, not all resources and capabilities are equal in their ability to help an organization
achieve sustainable performance. Because of its relentless focus on cost containment.
• A single resource does not create a competitive advantage; instead, resources must work
together to create a firm’s capabilities. Capabilities taken together are the source of a firm’s
core competencies. These core competencies form the basis of a competitive advantage.
INTERNAL ANALYSIS AND COMPETITIVE
ADVANTAGE
• Matching a firm’s resources and capabilities to emerging opportunities in the broad
environment is the basis of strategy formulation. In Chapter 2, we explored how to
examine external and market forces; we now turn to the role that internal resources
play in securing a firm’s strategy. When a firm earns a persistently higher level of
profit than its competitors, it is believed to possess a competitive advantage
SUSTAINABLE COMPETITIVE ADVANTAGE
A competitive advantage exists when a firm has a long-lasting business advantage
compared to rival firms that is a significant edge over the competition. Usually this means
that the firm can do something competitors can’t do, or has something competitors lack
• One way to think about organizational resources and capabilities is to visualize the
activities and processes of an organization and determine how they add value to the
services that the organization provides in the marketplace. Michael Porter developed a
framework, called the value chain, that is a useful tool in identifying potential sources
of competitive advantage. The value chain divides organizational processes into
distinct activities that create value for the customer.
THE VALUE CHAINS OF WINEMAKERS
• Firms in the same industry may have similar value chains, but they often differ. New
World winemakers, for example, do not engage in the same activities as Old World
producers, which may give them a competitive advantage over these European
competitors. Australian growers for years have innovated in growing and grape-
making activities using drip irrigation, new trellis systems and techniques, and other
developments in viticulture.
FIGURE 4.2 VALUE CHAIN FOR THE WINE INDUSTRY
G rowing Wine
Distribution Marketing R etailing
M aking
• Tangible resources can be seen, touched, and/or quantified. These resources tend to be easy
to imitate. Conversely, some of the most important resources and capabilities are intangible,
such as the brand, employee trust, knowledge, and reputation of the firm. These intangibles
are more difficult to quantify and the most difficult resources and capabilities to imitate.
• Other intangibles include good relationships with external stakeholders, a high-performing
culture, and a well-known corporate brand. One of the reasons that intangible capabilities are
difficult for competitors to imitate is that it is difficult to determine exactly how the source of
capability was created (sometimes called causal ambiguity). Whereas a new product can be
imitated, the processes used over time to hire, develop, retain, and build loyalty and shared
values within the workforce are difficult to observe and even more difficult to imitate.
FIGURE 4.5 FIRM RESOURCES AND CAPABILITIES
Financial H um an
Excellent cash flow Superior CEO characteristics
Strong balance sheet Experienced managers
Superior past performance W e ll-train e d , m o tiv a ted, loyal
Strong links to financiers employees
H ig h-pe rfo rm an ce structure
or culture
Knowledge and Learning
S uperior tec hnology
development
E x c elle n t innovation
processes and
organizational
entrepreneurship
Physical O utstanding learning General Organizational
processes
S ta te -o f-the -art p lan t or E x c ellen t re p utatio n or brand
machinery name
S up erio rity in a value-adding Patents
process or function Exclusive contracts
S up erio r lo ca tio ns or S u perior link a g e s with
raw materials stakeholders
O u tsta nd in g prod u cts and/or
services
RESOURCES AND CAPABILITIES
• The five sections are financial resources, physical resources, human-based resources, knowledge-
based resources, and general organizational resources.
• To be successful over the longer term, companies need to pay attention to all five resource areas.
Lack of attention to any of the five areas can remove a firm from the loop. A solid investment
strategy should focus on human-resource development and superior physical assets and processes.
• If financial resources are misused, they will not result in better human resources or superior
physical assets and processes. Eventually, the organization will no longer be com-petitive. Human
resources need to be managed effectively so that learning and innovation are the result. If human-
resource development is neglected or misguided, learning and innovation will cease, and the
organization will eventually wear down, thus breaking out of the loop
FINANCIAL RESOURCES
• Profitability ratios are a common measure of overall financial success. They provide a
barometer for management with regard to how well strategies are working, and they may
also provide warning of downward trends and thus the need for more-dramatic changes.
• Liquidity ratios help an organization determine its ability to pay short-term obligations.
Financiers are especially interested in these ratios, because lack of liquidity can lead to
immediate insolvency during downturns.
• Leverage is a common measure of financial risk, which often takes the form of a loan or
other borrowing (debt) to allow for greater potential gain, but also can lead to greater loss
PHYSICAL RESOURCES
• These are the resources people see when they observe the organization. Superior
physical resources such as prime locations and outstanding facilities are obvious
sources of competitive advantage. The importance of design is reflected in the role
physical space plays in delivery of service.
HUMAN-BASED RESOURCES
• The humans that make up an organization are its lifeblood—its unique and most valuable
asset. Most of the other factors of production—such as properties and even special
knowledge—may be duplicated over the long term, but every human being is totally
unique. This section deals with the internal stakeholders of the firm, which include
managers, employees, and owners. It begins by highlighting the importance of the CEO
in creating organizational success, followed by a general discussion of effective strategic
leadership.
• Analysis of the human-based resources of a firm can provide an indication of future
competitiveness, as well as highlighting areas that need attention.
STRATEGIC LEADERSHIP
• The highest-ranking officer in a large organization can be called by many titles, but the most common
is chief executive officer, or CEO. Most of the research evidence indicates that CEOs have a
significant impact on the strategies and performance of their organizations. In fact, in some cases, a
CEO can be a source of sustainable competitive advantage.
• The CEO has primary responsibility for setting the strategic direction of the firm, but other executives
and managers are expected to show leadership qualities and participate in strategic management
activities. Many effective CEOs assemble a heterogeneous group of three to ten top executives that
make up the top management team (TMT).
• Each member of the TMT brings a unique set of skills and a unique perspective of how the
organization should respond to demands from a diverse set of stakeholders. CEOs work with TMT
members to tap their skills, knowledge, and insights.
However, most scholars would agree on five important responsibilities of strategic
leadership that seem to be evident in most successful organizations. They are:
1. Creating organizational vision
2. Establishing core values for the organization
3. Developing strategies and a management structure
4. Fostering an environment that is conducive to organizational learning and development
5. Serving as a steward for the organization
DEVELOPING STRATEGIES AND STRUCTURE
• Strategic leaders are directly responsible for overseeing the development of strategies
the organization should follow. When CEOs fail to deliver on these expectations,
powerful stakeholders often step in.
• In small organizations, the entrepreneur typically serves as the sole strategist. As
organizations grow, the top-management team is assembled for the same purpose.
Furthermore, as companies grow, they tend to have more managers and more levels of
management. The variety and number of these other managers are as varied as the
businesses themselves
FOSTERING ORGANIZATIONAL LEARNING
• Many organizational scholars believe that the true role of a leader is to harness the
creative energy of the individual, so that the organization as a whole learns over time.
Leaders should create an environment for organizational learning by serving as a coach,
teacher, and facilitator.
• A learning environment is created by helping organizational members question their
assumptions about the business and its environment: what customers want, what
competitors are likely to do, which technology choices work best, and how to solve a
problem. For learn- ing to take place, members must understand that the organization is
an interdependent net- work of people and activities.
SERVING AS A STEWARD
• Finally, effective leaders are stewards for their firms: they care about the company and
the society in which it operates, both voluntary and involuntary stakeholders. Leaders
must feel and convey a passion for the organization, its contribution to society, and its
purpose. They should feel that “they are part of changing the way businesses operate,
not from a vague philanthropic urge, but from a conviction that their efforts will
produce more productive organizations, capable of achieving higher levels of
organization success and personal satisfaction than more traditional organizations.”
LEADERSHIP APPROACHES AND
ORGANIZATIONAL FIT
There are many ways to lead, depending on the circumstances and the personality of the individual.
Bourgeois and Brodwin identified five distinct leadership approaches or styles:
• Commander. The CEO formulates strategy and then directs top managers to implement it.
• Change. The CEO formulates strategy, then plans the changes in structure, personnel, information
systems, and administration required to implement it.
• Collaborative. The CEO initiates a planning session with executive and division managers. After
each participant presents ideas, the group discusses and agrees to a strategy. Participants are then
responsible for implementing strategy in their areas.
• Cultural. After formulating a vision and strategy for the company, the CEO and other top-level
managers mold the organization’s culture so that all organizational members make decisions that are
consistent with the vision. In this approach, the culture inculcates organizational members into unity
of purpose and action.
• Crescive. Under this leadership model, lower-level managers are encouraged to formulate and
implement their own strategic plans.The CEO’s role is to encourage innovation while filtering out
inappropriate programs.
OWNERSHIP AND MANAGEMENT
• In sole proprietorships, the owner and top manager is the same individual. Therefore,
no owner–manager conflicts of interest exist. This is also the case in privately held or
closely held companies in which all of the stock is owned by a few individuals, often
within the same family. In these cases, the owners have direct control over their firms.
• However, as soon as ownership and management are separated, the potential for
conflicts of interest exists. In this case, top managers become agents for the owners of
the firm—they have a fiduciary duty to act in the owners’ best interests.
EXECUTIVE COMPENSATION
• Agency problems often arise because of the way executives are compensated. For
example, an executive who is compensated according to year-end profitability may use
his or her power to maximize year-end profits at the expense of long-range
investments such as research and development.
• To help overcome problems with excessive compensation of some CEOs, top
management compensation should probably be linked to corporate performance. One
risk in relating compensation to performance is that a lot of these schemes tie annual
compensation to annual, as opposed to long-term, performance.
BOARDS OF DIRECTORS
• Perhaps the greatest agency problems occur when top managers serve on the board of
directors. In fact, it is not uncommon to find the CEO in the position of chairperson of
the board. This condition is known as CEO duality. As chairperson of the board of
directors, the CEO is in a strong position to ensure that personal interests are served
even if the other stakeholders’ interests are not.
EMPLOYEES
• Labor is the single greatest cost item in most hospitality businesses, which is why employees and the
way they are managed can be important sources of competitive advantage. Unfortunately, many
hospitality firms fail to realize the strategic importance of the human resource area. Research has
shown that more-sophisticated human-resource planning, recruitment, and selection strategies are
associated with higher labor productivity, especially in capital-intensive organizations.
• Labor productivity and employee turnover are important outcomes that are worthy of assessment.
Labor productivity is a good indication of how well managed employees are and their levels of
experience and training. For example, hotels often track how many rooms a housekeeper can clean in
an hour. Restaurants look at how many meals can be served at various times and with various personnel
configurations.Turnover is at least partially an indication of how employees feel about their jobs and
the organization, including their satisfaction with compensation and the way they are managed.
STRUCTURE AND CULTURE
• We live in what is sometimes called a knowledge economy, meaning that knowledge is used to produce
economic value. A knowledge economy is driven by the importance of intangible people skills and intellectual
assets. More than 50 percent of the gross domestic product (GDP) in developed economies is knowledge-based,
which means that the GDP is based on intangible people skills and intellectual assets. Consequently, wealth is
increasingly being created through the management of knowledge workers instead of physical assets.
• Knowledge is an intangible asset. Intangible assets differ from physical assets in fundamen- tal ways. First,
physical assets can be used only by one party at a time, whereas knowledge can be used by several parties
simultaneously. Second, physical assets wear out over time and are depreciated accordingly. While knowledge
does not wear out, its value depreciates rapidly as new knowledge is created. Third, it is relatively easy to set a
price based on how much of a physical asset is sold or transferred, but it is difficult to measure the amount of
knowledge transferred or its value. Finally, rights to tangible property are fairly clear and easy to enforce,
whereas it is difficult to protect and enforce protection of intellectual property.
INTERNAL KNOWLEDGE CREATION AND
ORGANIZATIONAL LEARNING
• Some organizations are clearly more innovative than others. They consistently create greater
numbers of successful products or services. Other organizations may not develop a lot of products
or services, but they are adept at creating more-efficient ways of creating or delivering them. The
distinction here is between product or service development and process development. Still other
organizations seem better at both types of innovation. Knowledge creation is at the center of both
product or service development and process development.
• One of the most important managerial tasks is facilitating knowledge (1) creation, (2) retention, (3)
sharing, and (4) utilization. Each of the four knowledge facilitation tasks requires different
management skills and organizational arrangements. Outstanding execution of these tasks can lead
to superior performance.
• KNOWLEDGE CREATION- requires systems that encourage innovative thinking
throughout the firm. Most organizations tap only a fraction of the creative potential of
employees and managers. An organization that wants to create knowledge will select
employees and managers who contribute innovative ideas and will reward those
employees and managers through salary increases, recognition, bonuses, and promotions.
• KNOWLEDGE RETENTION- A lot of knowledge exists in an organization. Only part of
that knowledge is shared, but very little of that sharing gets recorded unless it is
associated with an actual research or development project
• KNOWLEDGE SHARING- Sharing of knowledge is as important as creating it. For
example, Marriott has used knowledge gained in the lodging industry in its time-share
business
• KNOWLEDGE UTILIZATION- an organization has to clear the way for knowledge
to be translated into new processes and programs. This sometimes means eliminating
barriers to innovation.
RELATIONAL ABILITY
Relational ability, defined as the ability to interact with other companies, can increase a
firm’s ability to obtain and transfer knowledge. Firms can enhance their relational ability
through practice (e.g., increasing the use of interorganizational relationships) or through
hiring managers who have already developed relational skills. Often CEOs develop
excellent relational skills.
TABLE 4.4 TASKS
ASSOCIATED WITH
INTERNAL KNOWLEDGE
CREATION AND
UTILIZATION
GENERAL ORGANIZATIONAL RESOURCES
• The identity of a good or service is often captured in the brand, defined as the name,
term, symbol, and/or design associated with the product. Brands are viewed as a key
value-creating resource, because they are firm specific and difficult to imitate
SUPERIOR RELATIONSHIPS WITH
STAKEHOLDERS
• Stakeholder relationships were described in detail in the previous chapter.
Furthermore, the chapter demonstrated how strong relationships with stakeholders can
lead to sustainable com- petitive advantage.
• Relationships with external stakeholders can also be described as an organizational
resource. The fact is that all five areas of resources and capabilities described in this
chapter are closely linked to external stakeholders.
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