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Strategic Management 3
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4.2 The Resource-Based View LO 4-5
POWERPOINT SLIDES 22–23
Strategy Highlight 4.1
POWERPOINT SLIDE 22: GROUPON
END OF CHAPTER SMALL GROUP EXERCISE 2
POWERPOINT SLIDES 56–57
Strategy Highlight 4.1 explains the rise and fall of Groupon. The company’s strategic vision was to be a global leader in local
commerce, based on a core competency that could be described as “local market-making.” Numerous competitors took
advantage of low barriers to entry and the easy imitation of Groupon’s combined competency of some technology skills with
sales skills, so that Groupon found that its competitive advantage was only temporary. Groupon continues to compete but
needs your advice on how to build dynamic capabilities that might help it pursue the vision of becoming a global leader in
local commerce. How might Groupon reinvest or upgrade its technology and sales skills so it builds a global customer base?
For example, are there new products or services that would meet the needs of global clients in each of the local markets where
the client does business? Brainstorm ways that Groupon might add value for its customers. How might Groupon build
relationships with clients that are more socially complex, making Groupon’s competencies more difficult to imitate? After the
creatively
“Groupon and its ‘Weird’ CEO” 1/31/12 The Wall Street Journal and an accompanying video offer the opportunity for
enhancement of this discussion. If you need to assess critical reasoning skills, you might show the video and ask students
whether they agree or disagree with the statement from the strategy highlight: “Groupon’s ability to facilitate local commerce
is neither valuable nor rare.” They should be asked to justify their view by (1) identifying relevant facts from the textbook and
EXAMPLES
There are four conditions above and beyond core competencies that can help a firm protect and sustain a competitive
advantage. If one of any of these four is present, the firm can strengthen its basis for competitive advantage, increasing its
chance to be sustainable over a longer period of time. We find students generally “get” the ideas behind the first two ways to
protect competitive advantage (better expectations and path dependence); however, some students may need some additional
their financial goals by being the world’s highest-value provider of investment products and services.” Vanguard pursues its
mission through its unique set of interconnected activities: strict cost control, direct distribution, low expenses with savings
passed on to clients, offering of a broad array of mutual funds, efficient investment management approach, straightforward
client communication and education, and customer segmentation. Vanguard is now one of the largest investment-
management companies. This allows Vanguard to benefit from economies of scale (e.g., cost savings accomplished through a
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larger number of customers served and a greater amount of assets managed), further driving down cost. In turn, by lowering
lucky to be enrolled in Lakeside School, an exclusive preparatory school in Seattle. In 1968, when Bill was in eighth grade,
the Mothers Club at Lakeside School used proceeds of a rummage sale to buy a computer terminal along with time-share
programming from GE. Suddenly, Lakeside School had more computer power than many premier research universities at that
time. Bill fell in love with programming and spent every free minute he had on the computer, writing software programs. In
1973, he enrolled at Harvard, where he met Steve Ballmer, who later became Microsoft’s CEO. The first mini-computer, the
MITS Altair 8800, appeared on the cover of Popular Electronics magazine in January 1975. Paul Allen and Bill Gates wrote
the Altair BASIC program and sold it to MITS of Albuquerque, New Mexico. In the same year, 19-year-old Bill Gates
dropped out of Harvard and founded Microsoft with 22-year-old Paul Allen, a Washington State University college dropout.
gallons, and so on was established in the 1820s. Today, the United States is the only industrial nation in the world not using
the metric system as the official method of measurement, putting it at a disadvantage in some cross-border transactions and
negotiations.
DISCUSSION TOPICS
POWERPOINT SLIDE 23
Chipotle offers a good example for a discussion of barriers to imitation. You can assign this article, “Inside Chipotle’s
kitchen: What’s really handmade?” S Nassauer 2/24/15 The Wall Street Journal or show the associated video. Take the
discussion through stages starting with identification of resources and capabilities, then VRIO analysis, and finally barriers to
imitation.
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END OF CHAPTER ETHICAL/SOCIAL ISSUES 1
It is legal to take apart publicly available products and services and try to replicate them and even develop work-
arounds for relevant patents. But is it ethical? If a key capability protected by patents or trademarks in your firm is
being reverse-engineered by the competition, what are your options for a response? Also, how do you evaluate
Google’s decision to move its servers to Hong Kong? For Google’s values, see Values.
It is legal to take apart publicly available products and services to replicate or produce similar products. However, many
students will find it isn’t ethical. It is a common business practice across many developed and emerging countries around the
4.3 The Dynamic Capabilities Perspective
LO 4-6
POWERPOINT SLIDES 24–30
EXAMPLES
NEWER FACULTY: For a firm to sustain advantage over time, any fit between its internal strengths and the external
environment must be dynamic. The firm must be able to change its resource base and activity system as the external
environment changes. Dynamic capabilities are essential in order to gain and sustain competitive advantage.
The capabilities critical to success in an industry change over time in response to changes in both the firm and the industry, as
suggested in many examples in Chapter 3. An example to illustrate this concept is the importance of big data now in baseball.
You can refer students either to the 2011 film, Moneyball, or the more recent example of the hacking of the Astros database
(see “The Astros hacking case: Baseball’s battle over brainpower” B Costa 6/17/15 The Wall Street Journal).
POWERPOINT SLIDE 30
NEWER FACULTY: In Exhibit 4.6, the investments can be several different types. It could be money, but it could also be
people or time invested in building intangible resource stocks. The outflow can be key employees that leave the organization
or the lack of organizational memory, causing the same lesson to be learned several times.
POWERPOINT SLIDE 30
A firm that has been successful in implementing a strategic shift in response to industry change was AT&T, which started off
as a landline phone company. This declining part of their business has been replaced with additional business such as mobile
telephone infrastructure, television, and Internet packages. A firm that has been less successful in developing dynamic
capabilities that would enable it to transform itself in response to industry conditions is Dell. They have decided to take the
firm private to try to make the necessary changes without the pressure for positive earnings of a public company, but the fact
remains that they are highly dependent on earnings from their PC business. The profitability of the PC business is under
pressure from substitutes (tablets and smartphones), low cost Asian manufacturers, and rivals who are better resourced to
compete by bundling servers with high-margin services. How has Dell attempted to respond to the current industry
environment? What are some of the challenges they will face? How likely are they to succeed? See “Dell’s profits fall 72%;
Sales flat” 8/16/13 The Wall Street Journal.
The changing face of the tech industry offers a good example of resource heterogeneity, see “Tech’s rust belt takes shape”
4/19/13 The Wall Street Journal. Challenge students to contrast the resources and capabilities of the “rust belt” firms with the
growing firms. AACSB 2015 Standard 9 Making sound decisions and exercising good judgment under uncertainty
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If all of these tech industry examples lead students to think that technology competencies are the only ones that need to be
able to respond dynamically to changes in the environment, consider the example of Coca-Cola, who switched from a
carbonated soft drinks portfolio to one diversified into water, juice, and energy drinks to respond to a consumer trend toward
healthier beverages.
Strategy Highlight 4.2
POWERPOINT SLIDES 26–27: DYNAMIC CAPABILITIES AT IBM
An example of dynamic capabilities in action is IBM’s success at transforming itself multiple times over the years. IBM—
nicknamed Big Blue—helped kick-start the PC revolution in 1981 by setting an open standard in the computer industry with
the introduction of the IBM PC running on an Intel 8088 chip and a Microsoft operating system (MS-DOS). Ironically, in the
years following, IBM nearly vanished after experiencing the full force of that revolution, because its executives believed that
accompany this discussion.
END OF CHAPTER ETHICAL/SOCIAL ISSUES 2
POWERPOINT SLIDE 29
The chapter mentions that one type of resource flow is the loss of key personnel who move to another firm. Assume that the
human resources department of your firm has started running ads and billboards for open positions near the office of your top
competitor. Your firm is also running Google ads on a keyword search for this same competitor. Is there anything unethical
about this activity? Would your view change if this key competitor had just announced a major layoff?
on the situation. Some of the most ardent in favor of an ethical violation in the first question now see it has a bridge to a fresh
employment option for employees who did, or may be about to, lose their jobs. AACSB 2015 Standard 9 Ethical
understanding and reasoning
Research Update
Karna, A., Richter, A., and Riesenkampff, E. (2015), Revisiting the role of the environment in the capabilities–
financial performance relationship: A meta-analysis. Strat. Mgmt. J. doi: 10.1002/smj.2379
EXPERIENCED FACULTY: This meta-analysis of 115 studies of static and dynamic capabilities finds that, contrary to some
common thinking, both types of capabilities are about equally impactful in their positive effects on financial performance
and both increase in importance in more volatile environments. Use this research to engage students in a discussion of
why financial performance in volatile environments might be relatively better for firms with stronger capabilities than
their rivals.
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Extended Discussion
You may want to offer the students some contrasting examples of firms within the same industry that have either
responded successfully or failed to respond successfully to changes in their competitive environment. We expect most
students have shopped in a Circuit City store and they also have probably been in a Best Buy and have purchased
products online through firms such as Amazon. We can also draw parallels here to Borders and Barnes & Nobles,
though Borders never reached the “great” status of a Circuit City. Blockbuster can be compared with Netflix also. One
key point we like to bring out in class discussion is that though Best Buy (and Barnes & Noble) survived thus far, their
future success is far from certain. We use these points to have a class discussion about shopping online versus in brick
and mortar stores. What do brick and mortar stores need to do to be successful in this retail environment? What skills
and resources do they need for success going forward? Students often find this an engaging discussion and many will
have extensive ideas on how brick stores can survive and even thrive.
activities that the firm excels at) that enabled it to create a higher economic value than its competitors. In particular,
Circuit City created world-class competencies in efficient and effective logistics expertise: It deployed sophisticated
point-of-sale and inventory-tracking technology, supported by IT investments that enabled the firm to connect the flow
of information among geographically dispersed stores. This expertise in turn allowed detailed tracking of customer
preferences and thus enabled Circuit City to respond quickly to changing trends. The company also relied on highly
motivated, well-trained sales personnel to provide superior service and thus build and maintain customer loyalty. These
core competencies enabled Circuit City to implement a “4S business model”—service, selection, savings, and
Circuit City’s core competencies lost value because the firm neglected to upgrade and protect them and was thus
outflanked by Best Buy and online retailers like Amazon. Moreover, Circuit City’s top-management team was also
distracted by alternatives to video rentals through its proprietary DivX DVD player and an attempted merger with
Blockbuster (which filed for bankruptcy in 2010). Perhaps the biggest blunder that Circuit City’s top-management team
committed was to lay off 3,000 of the firm’s highest-paid sales personnel. The layoff was done to become more cost-
competitive with Best Buy and, in particular, the burgeoning online retailers. The problem was that the highest-paid
“customer-centricity” model, based on a set of skills that allowed its store employees to identify and more effectively
serve specific customer segments.
Why did Circuit City lose its competitive advantage? Circuit City failed to upgrade and protect their competencies,
which resulted in their losing customers to firms such as Best Buy and Amazon. It may be that the senior leaders of
Circuit City were distracted with other (newer) businesses like CarMax. What could Circuit City’s management have
What is the future of Best Buy as the leader in big-box electronic retailing? What resources and capabilities will
positively impact its future? The future of Best Buy is uncertain since it faces competition with online retailers like
Amazon, even with the development of the innovative “customer-centricity” model. Through the recruitment of
previous Circuit City employees with extensive strategic knowledge, Best Buy has a great base of resources and
capabilities that may provide a basis for competitive advantage, but they will need to continue evolving to compete
with online commerce.
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DISCUSSION TOPICS
POWERPOINT SLIDE 25
Invite the students to work in small groups to decide which resources and capabilities were critical to Microsoft’s success in
desktop computer operating systems. Which of these competencies have continued to be important as the industry has been
displaced by operating systems for mobile devices?
4.4 Value Chain Analysis LO 4-7
POWERPOINT SLIDES 31–35
EXAMPLE
POWERPOINT SLIDE 32
NEWER FACULTY: The value chain describes the internal activities a firm engages in when transforming inputs into outputs.
The concept is general enough to be applied to basically any firm, from those in old-line manufacturing industries to those in
high-tech ones or even service firms. We find that fewer students today have actually seen something “made.” This can create
some confusion regarding the differences between primary and support activities. You may ask if any of the students have
Research Update
Peteraf, M., Di Stefano, G., and Verona, G. (2013), The elephant in the room of dynamic capabilities: Bringing two diverging
conversations together. Strat. Mgmt. J. doi: 10.1002/smj.2078
EXPERIENCED FACULTY: The two most commonly cited scholarly articles on dynamic capabilities have each developed into
separate streams of research that are based on contradictory assumptions, evolved using different logic, and reach different
conclusions.
Teece DJ, Pisano G, Shuen A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal 18(7):
509–533.
Teece et al. applies dynamic capabilities to conditions of rapid technological change, argues that dynamic capabilities can be
a source of competitive advantage, and concludes that the ability to sustain a competitive advantage depends upon how
readily the dynamic capability can be imitated.
Eisenhardt KM, Martin J. 2000. Dynamic capabilities: what are they? Strategic Management Journal 21(10–11): 1105–1121.
Eisenhardt and Martin assume that high velocity markets create a boundary condition for dynamic capabilities, argue that
dynamic capabilities offer little potential for competitive advantage, and conclude that such competitive advantage is not
sustainable under any conditions due to the instability and substitutability.
Peteraf et al. use author co-citation analysis to analyze how these two different versions of the theory have been socially
constructed through two separate conversations. They find some differences in training between the two groups of authors
and offer an intriguing analysis of the knowledge network. They also make some suggestions on how the two theories might
be reconciled. This article could be used as a basis for a more detailed discussion of the assumptions of dynamic capabilities
and the resource-based view. Alternatively, you might assign all three articles and design a debate with different groups of
students representing each perspective.
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DISCUSSION TOPICS
Activity systems can be an effective way to show the level of “fit” of the firm’s activities. Strategic activity systems are
socially complex. While one can observe several elements of a strategic activity system, the capabilities necessary to
orchestrate and manage the network of activities cannot be so easily observed and therefore are difficult to imitate. Hong
Kong’s subway system has global expansion aspirations and is succeeding against the local firms. What makes resources and
capabilities enable MTR to capture bids for subways outside their home country? Which links in the value chain of MTR are
superior to those of other subway operators? In the politically sensitive area of public transportation and subways, how is it
advantageous or disadvantageous for a firm like MTR to be based in Hong Kong? See “Hong Kong’s subway system wants
to run the world” 9/19/13 The Wall Street Journal. AACSB 2015 Standard 9 Systems and processes in organizations,
including planning and design, production/operations, supply chains, marketing, and distribution
END OF CHAPTER DISCUSSION QUESTION 2
POWERPOINT SLIDE 33
Conduct a value chain analysis for McDonald’s. What are its primary activities? What are its support activities? Identify the
activities that add the most value for the customer. Why? Which activities help McDonald’s to contain cost? Why? AACSB
2015 Standard 9 Systems and processes in organizations, including planning and design, production/operations, supply
chains, marketing, and distribution and Financial theories, analysis, reporting, and markets
Draw the students’ attention to Exhibit 4.8. Ask them to identify at least one activity in each category. Taking the consumers’
critically important.
In the last few years, McDonald’s has made a lot of changes to its menu, adding more healthy choices and more
higher-priced items, such as those offered in McCafé (e.g., premium roast coffee, frappé, and fruit smoothies), and has
also enhanced its in-restaurant services (e.g., free, unlimited Wi-Fi, newer interiors). Did McDonald’s new priorities—
in terms of a broader, healthier menu and an improved in-restaurant experience—require changes to its traditional
value chain activities? If so, how? Try to be as specific as possible in comparing the McDonald’s from the recent past
(focusing on low-cost burgers) to the McDonald’s today.
4.5 Implications for Strategists LO 4-8
POWERPOINT SLIDES 36–41
SMART STRATEGY VIDEO LECTURE
POWERPOINT SLIDE 65
This lecture on SWOT analysis by Caroline Cummings, VP Business Development at Palo Alto Software can be used to
introduce the topic with a business spin.
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DISCUSSION TOPICS
POWERPOINT SLIDES 39
NEWER FACULTY: We bring together the concepts of this chapter’s internal analysis with those of Chapter 3 about outside
the firm in the SWOT analysis. In addition to simply using the SWOT analysis appropriately, an additional step is required to
make it a truly useful tool in the strategic management process: making decisions about how to create competitive advantage
from the elements listed in the SWOT categories. It is for this reason we bring in the SWOT matrix tool here. The matrix
adds alternatives, which are developed from the SWOT elements. Alternatives build plans that match the organization’s
strengths to its opportunities, minimize or address its weaknesses, and compete in the face of its threats. Exhibit 4.9 provides
key questions for managers to consider as they construct a SWOT analysis. You may want to use one of the MiniCases in the
text as a basis for inviting students to brainstorm alternatives for each box in the diagram.
EXAMPLES
Applying SWOT: Hypothetical Example for Quick Service Restaurant
Opportunities
Threats
1. Growth in emerging
economies
2. Health consciousness of U.S.
population
3. Low supplier power in
fragmented global agriculture
industry
1. Possible increase in minimum
wage
2. Popularity of easy-to-prepare
grocery items
3. High rivalry in U.S. market
Strengths
Strategic Alternatives
1. Financial resources
2. Recognized brand name
3. Consistent operating processes
Weaknesses
1. Market share decline
2. Dependence on fried foods
1. Launch new locations in China and Mexico (S1, S2, O1, T3)
2. Express to-go order option (W1, T2)
3. Launch frozen foods in grocery outlets (S2, S3, T2)
4. Develop and emphasize more healthy food menu items (W1, W2,
O2)
1. By combining its internal strengths in financial resources (S1) and brand name (S2) with external opportunities due to
2. By combining an internal weakness due to market share decline and thus a loss of market power (W1) with the external
3. The third strategic option is to leverage internal strengths in brand name (S2) and consistency (S3) to minimize the
4. The final strategic alternative is to overcome internal weaknesses due to market share decline (W1) and dependence on
fried foods on its menu (W2) with a differentiated business-level strategy to develop and market more healthy food items.
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Strategy Term Project: Mission, Goals, and the
Strategic Management Process
Term Project Module 4
In this section, students will study the business strategy of the firm they have previously selected for this project. Be sure to
instruct the students to focus only on ONE business unit if they have selected a larger firm with several operations. The
following are some general thoughts on the type of information students would have in response to the questions for this
module of the project. AACSB 2015 Standard 9 Application of knowledge (able to translate knowledge of business and
management into practice)
A good place to start with an internal firm analysis is to catalog the assets a firm has. Make a list of the firm’s tangible
assets. Then, make a separate list of the intangible assets you can identify. Refer to Exhibit 4.4.
Now extend beyond the asset base and use the VRIO framework to identify the competitive position held by your
firm. Which, if any, of these resources are helpful in sustaining the firm’s competitive advantage?
The competitive position held by your firm could be a temporary competitive advantage with some level of valuable and rare
Identify the core competencies that are at the heart of the firm’s competitive advantage. (Remember, a firm will have
only one, or at most a few, core competencies, by definition.)
Following Exhibit 4.4, take the list of resources from question 1 earlier and review them in the context of capabilities either
are in alignment is a rich location for core competencies.
Perform a SWOT analysis for your firm. Remember that strengths and weaknesses (S, W) are internal to the firm,
and opportunities and threats (O, T) are external.
How dynamic is the industry in which your company is based? Is there evidence that the industry structure is
reshaping competition, or has done so in the recent past?
INTEGRATION
Interactive Sequential Labeling: SWOT Matrix: Beats Electronics
This analysis and interactive click and drag activity uses a brief case on the SWOT of Beats Electronics as envisioned
before it was purchased by Apple. It complements the book’s discussion about SWOT analysis. The student must read the
textbook and also the brief information provided here. Then, the student will drag the elements to the correct locations.
The exercise includes both SWOT elements and the strategic alternatives for students to more fully digest the appropriate
use of this tool. Difficulty: Medium Blooms: Apply AACSB: Analytic
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my
Strategy
POWERPOINT SLIDE 54: LOOKING INSIDE YOURSELF: WHAT IS MY COMPETITIVE ADVANTAGE?
Here, we encourage the student to take what he/she has learned about competitive advantage and apply it to his/her personal
career. Encourage students to spend a few minutes looking at themselves to discover their own competitive advantages.
AACSB 2015 Standard 9 Reflective thinking (able to understand oneself in the context of society)
1. Write down your own personal strengths and weaknesses. What sort of organization will permit you to really
leverage your strengths and keep you highly engaged in your work (person–organization fit)? Do some of your
weaknesses need to be mitigated through additional training or mentoring from a more seasoned professional?
2. Personal capabilities also need to be evaluated over time. Are your strengths and weaknesses different today from
what they were five years ago? What are you doing to make sure your capabilities are dynamic? Are you upgrading
skills, modifying behaviors, or otherwise seeking to change your future strengths and weaknesses?
3. Are some of your strengths valuable, rare, and costly to imitate? How can you organize your work to help capture
the value of your key strengths (or mitigate your weaknesses)?
4. In this chapter, we discussed that the strategic activity system happening inside the firm can be a vital source of
sustainable competitive advantage. If you are currently or previously employed, consider how your professional
activities can help reinforce the key value added activities in your department or organization.
INTEGRATION
HP Running Case: Module 4
While offering each student the opportunity to explore and analyze the company of his/her choice can add interest to the
exercise, there are many advantages for an instructor when the entire class works on the same firm. Connect allows you to
do this with a running case for a single firm that encompasses every chapter in the textbook and tracks the Strategy Term
Project. Hewlett-Packard is provided as an example firm your students can use to see what information and analysis
would be helpful to cover this portion of the term project.
