Download Chapter 3: Types and Patterns of Innovation

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.
LEARNING OBJECTIVES
1.
Be able to describe the importance of conducting both an internal and external analysis
of firms’ capabilities to the formation of a technology strategy. Provide the basic tools
necessary to analyze a company’s positioning and strategies.
2.
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).
CHAPTER OUTLINE
I.
II.
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.
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.
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,
among 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.
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.
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.
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.
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.
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:
1.
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.
2.
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.
3.
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:
1.
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.
F.
2.
Constructing an inventory of capabilities is done by categorizing the
capabilities identified in step one by type, strength, importance, and
criticality to firm operations.
3.
Assessing capabilities proceeds by evaluating the criticality of each
competency followed by an evaluation of the organizations current level
of expertise in each competency.
4.
Identifying candidate competencies culls the list of capabilities to those
the firm should focus on and grow.
5.
Testing the candidate core competencies using Prahalad and Hamel's
original criteria is the next step (see above).
6.
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.
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.
1.
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.
1.
IV.
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.
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.
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.
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.
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.
1.
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.
2.
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.
3.
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.
4.
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 targets, etc.