Module 3 - Organizational Resources and Competitive Advantage

LEARNING OBJECTIVES:

At the end of this lesson, students should be familiar with:

• The characteristics of resources and capabilities that create a foundation for competitive
advantage.
• How human resources can lead to competitive advantage.
• The characteristics that make physical resources more valuable.
• How financial resources are linked to other resources and the ability of the firm to generate
competitive advantage.
• The role of knowledge and learning resources in obtaining and/or creating valuable resources
leading.
• The importance of general organizational resources.
• The usefulness of the value chain in understanding sources of competitive advantage.

CHAPTER TOPICS:

This module addresses the resources that comprise the internal environment of business. The lesson
focuses on how human resources, physical resources, financial resources, knowledge and learning
resources, and general organizational resources can be used to obtain competitive advantage. Value
chain analysis is also discussed.

LECTURE OUTLINE:

I. Opening Vignette—AMAZON.COM

Amazon.com, Inc., opened its virtual doors on the World Wide Web in July 1995. The company seeks
to be the “Earth’s most customer-centric company,” focusing on three primary customer groups: online
retail consumers, sellers, and developers. The company also generates revenue through cobranded
credit cards and online advertising. In 2008 the company started shipping Kindle, a wireless reading
device that offers hundreds of thousands of titles. Sales of Kindle have exceeded the company’s
expectations. Amazon’s focus on customer satisfaction earned it first place on Business Week’s list of
the top companies for customer service in 2009.

Behind the scenes at Amazon are complex operating systems and a myriad of contractual
agreements. The company runs its own fulfillment centers, warehouses, and customer service centers
around the world, as well as creating outsourcing agreements with other companies to provide these
services. Amazon also provides e-commerce services for other businesses that may include
technology development; fulfillment services; inventory management; tax collection; payment
processing; engaging third parties to perform hosting and other services; and licensing of third-party
software, hardware, and content. The company takes a long-term, customer-oriented approach to
developing new business opportunities.

II. The Strategic Value of Internal Resources and Capabilities

A. The internal resources and capabilities that lead to competitive advantage are different in each
industry and can also change over time. Organizational resources result in a competitive advantage
only if they are uniquely valuable in the external environment.
1. Internal resources and capabilities fall into five general categories: financial, physical, human,
general organizational, and knowledge and learning.

2. Capabilities and resources can become strengths leading to a competitive advantage when two
conditions are met:

a. The resources or capabilities are valuable.

b. The resources or capabilities are unique.

c. For a firm to realize an advantage from unique and valuable resources, the firm must also be aware
of them and organized to take advantage of them.

d. In addition, the competitive advantage becomes sustainable over time if the resources or
capabilities are difficult or expensive to imitate and there are no readily available substitutes.

e. If a resource or capability is valuable, unique, hard to imitate, and it can also be applied to more
than one business area, it is called a core competency or distinctive competence.

f. Often, the key to competitive advantage is to combine resources and develop capabilities that are
hard to imitate. These integrated resources and capabilities are particularly difficult for competitors to
observe and imitate. Some resources may be tangible, such as cash, whereas others are intangible,
such as reputation.

g. Organizational reputation and a well-known corporate brand are also hard to imitate.

h. Unique configurations of stakeholder relationships can also be very difficult, if not impossible, to
imitate.

B. Resources are highly interconnected.

1. For instance, a firm with strong financial resources can hire better human resources, develop better
physical resources, put more money into knowledge and learning resources, and invest more in
relationships with stakeholders—a part of the category of general organizational resources.

2. In addition, excellent knowledge and learning resources can result in technology development to
improve physical resources, management of financial resources, the skill levels of human resources,
and the strength of a firm’s reputation.

III. Human Resources

A. The internal stakeholders of an organization include the managers, employees, owners and, if the
company is public, a board of directors.

B. Employees and the way they are recruited and managed can be an important source of competitive
advantage.
1. Organizations that treat their employees well are more likely to see high levels of productivity and
higher employee retention.

2. Effective training programs can lead to competitive advantage by building superior skills and
capabilities within the workforce.

C. Management can also be a source of competitive advantage in the relationships they build with key
stakeholders and their strategic leadership abilities.

D. In publicly owned companies, the interests of shareholders are protected by a board of directors
that is elected by the voting shareholders.

1. In addition to their governance role, board members can also play other important strategic roles,
such as providing advice to managers with regard to strategies and strategic direction.

2. If a board of directors is composed of highly successful executives from a range of different

3. Also, directors can provide social network ties, which act as linkages to external stakeholders. Social
network ties can help organizations create strategic alliances. Two studies, in fact, discovered higher
performance in companies with boards that participated more actively in organizational decisions
compared to the companies with “caretaker” boards

IV. Physical Resources

A. Physical resources are tangible such as machinery, plants, buildings, and products. They can be a
source of advantage when there is something about the physical resource that is proprietary or scare,
such as a premier location for a hotel or a unique equipment design, the details of which are kept
secret.

B. Locations can also be a source of competitive advantage. Organizations tend to cluster by industry
so that they can take maximum advantage of the resources available in those areas.

1. Competitive clusters exist in computer technology (Silicon Valley), high-tech automobiles (southern
Germany), and entertainment (Hollywood). Clusters are also prevalent throughout the world in service
industries such as lodging, restaurants, and retail establishments

2. Clustering may lead to higher performance because of improved production that comes from the
availability of specialized raw materials or human resources in an area. For example, Japanese auto
parts suppliers tend to locate near firms that assemble the automobiles and also tend to prefer areas
with high concentrations of manufacturing.

3. Clustering may also lead to demand advantages because consumers are drawn to areas with a
larger variety from which to choose. Hotels, for instance, tend to cluster in particular areas because
they realize that travelers prefer a choice of accommodations in an area.

V. Financial Resources
A. Financial resources can be a source of advantage, although they rarely qualify as “unique” or
“difficult to imitate.”

1. Strong cash flow, low levels of debt, a strong credit rating, access to low interest capital, and a
reputation for creditworthiness are powerful strengths that can serve as a source of strategic flexibility.

2. Firms often attempt to compare their expenses, investments, sources of income, and resulting
profitability to competitors as a way of assessing the success of their strategies.

3. The findings from a competitor comparison must always be weighed against the goals of the firm.

4. Firms also track their own expenses and sources of income over time as a way of identifying trends.
Poor financial trends are sometimes symptoms of greater problems.

VI. Knowledge and Learning Resources

A. More than 50% of the gross domestic product in many developed economies is based on
intangible skills and intellectual assets.

B. Codified knowledge can be communicated precisely through written means. Tacit knowledge is
difficult to describe. It includes creative processes and in-depth expertise, both of which are difficult to
imitate.

C. Organizational learning involves knowledge creation, knowledge retention, knowledge sharing, and
knowledge utilization. Once knowledge is created and stored, it has to be shared.

D. Knowledge sharing is more difficult across international borders and requires consideration of local
cultures and contexts.

V. General Organizational Resources

A. Organizational reputation and a well-known corporate brand are hard to imitate.

B. Other potential sources of competitive advantage include unique configurations of stakeholder

VIII. Resource Analysis and the Development of Strategy

A. In evaluating the resources and capabilities of the organization, it is important to consider all of the
various activities of the business and understand the role they play in building advantage and
implementing strategies.

1. Strategy should be based on what the organization does well relative to competitors or on the
capabilities or resources the firm wants to develop that will create a competitive advantage in the
future.

2. The value chain framework allows systematic study of the various value-adding activities of a
business.
3. Value chain analysis may be used to identify key resources and processes that represent strengths,
areas that need improvement, and opportunities to develop a competitive advantage.

a. The value chain divides organizational processes into distinct activities that create value for the
customer.

b. The primary activities include inbound logistics, operations, outbound logistics, marketing and
sales, and service.

c. Organizations also engage in activities that support these primary functions, including procurement,
technology development, human resource management, and administration.

4. An organization can develop a competitive advantage:

a. In any of the primary or support activities or

b. In the way they are combined or

c. In the way internal activities are linked to the external environment. The cumulative effect of value
chain activities and the way they are linked inside the firm and with the external environment determine
organizational strengths, weaknesses, and performance relative to competitors.

The figure contains a model of what might be called a value chain. The value chain divides a firm’s
organizational processes into distinct activities that create value for the customer. By examining a
firm’s value chain, managers can identify key resources and processes that represent strengths,
areas that need improvement, and opportunities to develop a competitive advantage.

Value Chain Analysis evaluates which value each particular activity adds to the organization's
products or services. This idea was built upon the insight that an organization is more than a random
compilation of machinery, equipment, people, and money. Only if these things are arranged into
systems and systematic activates it will become possible to produce something for which customers
are willing to pay a price.

Porter argues that the ability to perform particular activities and to manage the linkages between
these activities is a source of competitive advantage. Primary activities are directly concerned with
the creation or delivery of a product or service.

Each of these primary activities is linked to support activities that help to improve their effectiveness
or efficiency.

(A) Primary Activities

Inbound Logistics

Here goods are received from a company's suppliers. They are stored until they are needed on the
production/assembly line. Goods are moved around the organization.

Operations

This is where goods are manufactured or assembled. Individual operations could include room
service in an hotel, packing of books/videos/games by an online retailer, or the final tune for a new
car's engine.

Outbound Logistics

The goods are now finished, and they need to be sent along the supply chain to wholesalers,
retailers or the final consumer.

Marketing and Sales

In true customer orientated fashion, at this stage the organization prepares the offering to meet the
needs of targeted customers. This area focuses strongly upon marketing communications and the
promotions mix.

Service

This includes all areas of service such as installation, after-sales service, complaints handling,
training and so on.

(B) Secondary Activities

There are four main areas of support activities: procurement, technology development (including
R&D), human resource management, and infrastructure (systems for planning, finance, quality,
information management etc.).
Procurement

This function is responsible for all purchasing of goods, services and materials. The aim is to secure
the lowest possible price for purchases of the highest possible quality.

Technology Development

Technology is an important source of competitive advantage. Companies need to innovate to

Human Resource Management (HRM)

Employees are an expensive and vital resource. An organization would manage recruitment and
selection, training and development, and rewards and remuneration.

Firm Infrastructure

This activity includes and is driven by corporate or strategic planning. It includes the Management
Information System (MIS), and other mechanisms for planning and control such as the accounting
department.

Margin

Margin’ implies that organizations realize a profit margin that depends on their ability to manage the
linkages between all activities in the value chain. An organization is able to deliver a product/service
for which the customer is willing to pay more than the sum of the costs of all activities in the value
chain.