Chapter 6
Defining the Organization’s Strategic Direction
SYNOPSIS OF CHAPTER
The chapter begins by highlighting the importance of conducting both internal and external
(Porter’s Five Forces and Stakeholder) analyses in order to lay the foundation for selecting a
firm’s strategic direction. An internal analysis begins with an assessment of the firms’ strengths
and weaknesses. Each strength is then evaluated in order to determine whether it is a core
competency (i.e. differentiates the firm from the competition) and whether it is the basis of a
sustainable competitive advantage.
Core competencies strategically differentiate a firm from its competition, transcend a single
business, and/or are difficult to imitate. Gallon, et al. suggests that firms take an inventory of
capabilities by type, strength, importance, and criticality to firm operations and then compare
their inventory to the inventory of their competitor’s competencies.
Dynamic capabilities enable a firm to reconfigure its organizational structure and routines in
response to new opportunities and are not related to specific products or technologies.
The chapter moves on to describe the importance of a firm’s strategic intent (e.g. ambitious,
long-term goals) to its ability to innovate (i.e. achieve more than incremental improvements). A
firm’s strategic intent focuses the company on future markets and customer requirements and
diminishes the risk that core competencies will become core rigidities.
The chapter closes by investigating how performance measures affect how a firm pursues its
strategic objectives. By considering the financial, customer, internal, and innovation and
learning perspectives included in the Balanced Scorecard a firm is more likely to recognize the
multidimensional impact of its strategies.
TEACHING OBJECTIVES
1. Emphasize the importance of conducting both an internal and external analysis of firms’
capabilities to the formation of a technology strategy. Give students that have not had a
strategic management course the basic tools necessary to analyze a company’s positioning and
strategies.
2. Enable students to distinguish between strengths, core competencies and sustainable
competitive advantages in order to better understand a firm’s competitive position and
establish its priorities for investment.
3. Establish the importance to a firm of articulating a strategic intent (e.g. an overall direction
with ambitious, forward looking goals).
LECTURE OUTLINE
I. Overview
a. Formulating a company’s technological innovation strategy requires the firm to assess its
current position (e.g. strengths, weaknesses, core competencies, sources of sustainable
competitive advantage), and define its strategic direction (e.g. how should the value
proposition evolve overtime, resource needs).
b. A company’s strategic intent should be ambitious (i.e. create a gap between existing
resources and capabilities and those needed to achieve its intent). Strategic intent development
begins with an evaluation of the firm’s capabilities and ideally ends in a plan that
cohesively leverages all of the firm’s resources to create a sustainable competitive
advantage.
II. Assessing the Firm’s Current Position
a. External analysis is frequently conducted by applying Porter’s Five Force Model (degree of
rivalry, the likelihood of new firms entering the industry, the power of buyers and suppliers
and the availability of substitutes) and/or a stakeholder analysis.
Show Figure 6.1
b. Porter’s Five Forces
1. Degree of rivalry in an industry is a function of 1) how many firms there are and
their relative size, (i.e. many firms of equal size leads to greater rivalry but so can
a few large competitors that engage in price wars), 2) how different each firm (or
its product) is from the others (e.g. the lack of significant differences between
Visor and its competitors led to vigorous price competition), 3) product demand,
and 4) height of exit barriers.
2. Threat of potential entrants is high when the industry is attractive and entry
barriers are low and vice versa. A good example to discuss with your students
here is the smartphone market. On the one hand the industry is likely to be
attractive because of high growth potential and visibility, but the presence of
powerful competitors such as Nokia and Ericsson may act as a deterrent. It is
important to emphasize to students to evaluate whether the industry is attractive
before turning to barriers; if the industry is unattractive, barriers become
unimportant.
3. Bargaining power of suppliers is a function of the number of suppliers,
product differentiation, amount purchased, switching costs and the ability of
buyers and suppliers to vertically integrate. For example,
a. Intel has supplier power over its customers’ power because its products
have very high brand image (product differentiation), and because other
software and hardware has been optimized for Intel’s microprocessors
(switching costs).
b. Wal-Mart has power over its suppliers because of the high volume it
purchases.
4. Bargaining power of buyers (like bargaining power of suppliers) is also a
function of the number of buyers, level of product differentiation, amoung
purchased, switching costs and whether the buyer or supplier can effectively
threaten to vertically integrate.
5. Threat of substitutes is a function of the number of potential substitutes, their
closeness in functionality, and their relative price. For example,
A. Bus and train travel are typically not close substitutes for plane travel
because their lower costs are offset by greater traveling time.
It is important to emphasize that a substitute is not the same as a competitor. If
there is ambiguity about whether a product is a substitute or a competitor then
students have not yet defined their industry.
6. Porter has acknowledged a sixth force: the availability, quality and the price of
complements.
c. Stakeholder analysis begins with the identification of all parties impacted by the firm, what
their interests (and claims) are and what resources they contribute to the firm. Stakeholders
include (but are not limited to) stockholders, employees, customers, suppliers, lenders, the
local community, government, and rivals. An analysis focusing on how stakeholders will
impact firm performance is referred to as a strategic stakeholder analysis while a normative
stakeholder analysis emphasizes issues the firm ought to attend to due to their ethical or
moral implications.
Show Figure 6.2
D. Internal analyses begin with an assessment of a firm’s strengths and weaknesses in each
part of the company’s value chain. The value chain activities are often organized according
whether they are primary (e.g. inbound and outbound logistics, operations, marketing, sales
and service) or secondary (e.g. procurement, human resource management and
infrastructure) activities. The firm then identifies which strengths have the potential to be a
source of sustainable competitive advantage (i.e. are rare, valuable, durable, and
inimitable). Path dependent (e.g. first mover advantages), socially complex resources (e.g., a
particularly effective group) or causally ambiguous (e.g. talent) resources that are valuable
can provide the basis of a sustainable competitive advantage because they are difficult to
imitate.
Show Figure 6.3
i. For example, Take2 Interactive Software (the producers of “Grand Theft Auto”) would
consider R&D a primary activity while technology development is not considered because
the console manufacturers also manufacture the actual game.
Show Figure 6.4
III. Identifying Core Competencies and Capabilities
a. The terms “competency” and “capability” are used interchangeably in the text because they
are semantically equivalent (though some researchers have attempted to distinguish between
them) and our focus is on emphasizing what makes a competency a core competency and on
demonstrating how core competencies or capabilities are achieved by integrating a variety of
more basic or rudimentary capabilities.
b. Core competencies differentiate a company strategically from its competitors and are
usually a combination of different kinds of abilities (e.g. advertising, distribution, information
systems, logistics management, applied science, process design). It is the harmonious
combination of abilities that makes core competencies difficult to imitate.
i. For example, Sony’s core competency in miniaturization is the result of the
firm’s ability to harmonize the use of multiple technologies including liquid crystal
displays, semiconductors, etc. Sony is then able to utilize this competency in
multiple markets including televisions, radios, personal digital assistants, etc.
Show Figure 6.5
c. Prahalad and Hamel view firms’ core competencies as the roots of a tree that sustain many
branches and therefore argue that the organization’s structure and incentives must encourage
cooperation and exchange of resources across strategic business units. They offer the
following tests to identify a firm’s core competencies:
i. Is the competency a significant source of competitive differentiation? Does it
provide a unique signature to the organization? Does it make a significant
contribution to the value a customer perceives in the end product? For example,
Sony’s skills in miniaturization have an immediate impact on the utility customers
reap from its portable products.
ii. Does the competency transcend a single business? Does it cover a range of
businesses, both current and new? For example, Honda’s core competence in
engines enables the company to be successful in businesses as diverse as
automobiles, motorcycles, lawn mowers, and generators.
iii. Is the competency hard for competitors to imitate? In general, competencies
that arise from the complex harmonization of multiple technologies will be
difficult to imitate because these competencies usually take years to build and are
path dependent.
d. Prahalad and Hamel go so far as to argue that strategic business units should be expected to
bid for people because individuals should be considered corporate assets that can be
redeployed across the organization.
e. Gallon, Stillman & Coates suggest a six-step approach for identifying and cultivating a
firm’s core competencies:
i. Starting the program begins with the formation of a steering committee, the
appointment of a program manager, and the communication of the overall goals
to all team members. The program manager should organize teams that will be
responsible for circulating throughout the firm to compile an exhaustive
inventory of capabilities.
ii. Constructing an inventory of capabilities is done by categorizing the capabilities
identified in step one by type, strength, importance, and criticality to firm
operations.
iii. Assessing capabilities proceeds by evaluating the criticality of each competency
followed by an evaluation of the organizations current level of expertise in each
competency.
iv. Identifying candidate competencies culls the list of capabilities to those the firm
should focus on and grow.
v. Testing the candidate core competencies using Prahalad and Hamel’s original
criteria is the next step (see above).
vi. Evaluating the core competency position of the firm to determine whether
competitors have similar competencies and to identify areas in which the
organization needs to improve.
f. The Risk of Core Rigidities is faced by firms when they focus on current capabilities and do
not develop new ones. Sometimes the very things that a firm excels at can enslave it, making
the firm rigid and overly committed to inappropriate skills and resources.
i. For example, a firm’s emphasis on a scientific discipline that is central to its core
competency can make the firm less attractive to individuals from other
disciplines. In addition, the rewards for engaging in activities related to the
organization’s core competencies can discourage employees from pursuing more
exploratory activities. Firms that have well-developed knowledge sets along a
particular trajectory may find it difficult to assimilate or utilize knowledge that
appears unrelated to that trajectory thereby limiting the firm’s opportunities.
g. Dynamic Capabilities enable a firm to quickly reconfigure its organizational structure
and routines in response to new opportunities and are not related to specific products or
technologies.
i. Corning is a company that invested heavily in its dynamic capabilities by heavily
investing in research in areas likely to provide scientific breakthroughs, building
pilot plants and managing its relations with other firms as an integrative and
flexible system of capabilities that extended the boundaries of the firm.
IV. Strategic Intent
a. A firm’s strategic intent is an ambitious long-term term goal (i.e. 10 to 20 years in the
future) that requires all levels of the organization to build on and stretch the firm’s existing
core competencies. A firm’s strategic intent takes the focus away from current markets
and meeting current customer requirements so that the organization can focus on future
markets and customer requirements. Articulating the company’s strategic intent thus enables
the company to focus its development efforts and choose the investments necessary to
develop strategic technologies and incorporate them into the company’s new products.
i. Canon’s obsession with overtaking Xerox in copiers, Apple’s mission of
ensuring that every individual has a personal computer, and Yahoo’s goal of
becoming the world’s largest internet shopping mall are all examples of strategic
intent.
Show Figure 6.6
V. The Balanced Scorecard
a. Kaplan & Norton make the case for including measures of performance that go beyond the
balance sheet because the measures used strongly influences how the firm pursues its
strategic objectives. They argue that in addition to the financial perspective a firm’s
performance should be evaluated from the customer, internal, and innovation and learning
perspectives. Many firms including nearly 50% of the Fortune 1,000 companies in the U.S.
and 40% in Europe have effectively adapted the Balanced Scorecard approach to their
businesses and industry.
i. The financial perspective considers goals such as “meet shareholder’s
expectations” or “double our corporate value in seven years.” Measures include
return on capital, net cash flow, and earning’s growth.
ii. The customer perspective considers goals such as “improve customer loyalty,”
“offer best-in-class customer service,” or “increase customer satisfaction.”
Measures include market share, percent of repeat purchases, customer satisfaction
surveys, etc.
iii. The internal perspective considers goals such as “reduce internal safety
incidents,” “build best-in-class franchise teams,” or “improve inventory
management.” Measures include the number of safety incidents per month,
franchise quality ratings, stock-out rates, inventory costs, etc.
iv. The innovation and learning perspective considers goals such as “accelerate
and improve new product development,” or “improve employee skills.” Measures
include the percentage of sales from products developed within last five years,
average length of the new product development cycle, employee training target