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Strategic Management - I

Shubhabrata Basu

PGP I Session 10

Why Dynamic Capabilities


Limitations of Previous Frameworks
PEST & SWOT
Only Operations & Marketing Issues No Financial (hence Investment) issues
800 600 400 200 0

Porters Children 5F, GCS, PS

Competitors can copy Margins DO GET HIT (Indian Telecom Sector, Wal-Mart to Sams Club, Tanishq originaI)

Again Porter Babas Value Chain


Too narrowly defined - your VC only is INADEQUATE Its NOT dynamic enough GSRTC Case

Core Competence Practice & Perfect


Who Practices Human Resources Good People ALWAYS FLY ATTRITION (GMTCIs aspiration & attrition problems) What to Do then?

In comes David Teece


Teece and others proposed that
If Market Decides Everything Competence is Human Centric (prone to Leakages) Then the Firm (therefore the Manager and aspiring MBA) is without Worth, Incidental and Accidental

This in NOT-ON Therefore Redefine the Unique Firm, its Sustainable Competitive Advantage and its Processes.
So What they DID?

Teece, Pisano & Sheun Proposed


Firm is a Living Dynamic System Input consists of
Past Experience embedded in processes

Process consists of
Components - Asset like (T,C,F,R,S,I,M,O) Technological, Complementary, Financial, Reputations, Structural, Institutional, Market-Structure and Organizational Boundary Configuration Organizational (Ability to Reconfigure & Transform) & Managerial (Ability to Coordinate & Integrate (Mix and Match the above assets) reduce transaction & production cost)

Preferred Output Revenues (Profits) from Newer Innovative Products Schumpeterian Rent Therefore keeps itself Market Relevant e.g. Samsung Case

Dynamic Capabilities @ Samsung


Input
Past Experience (4 Decades) in Component Manufacturing for Japanese & American Consumer Electronic Giants
Learning Curve Reconciled Dichotomy
Scale Economies (Bargaining Cost US Model) Lean Manufacturing (Japanese Model) Organic Growth Segmental saturation (back fill method) Internationalization
Focus Less on Operational Effectiveness More on Managerial Competences Perfected Revenue Model Perfected Inventory Management

Path Dependence on Following Growth Model

Dynamic Capabilities @ Samsung


Process Assets
Technological SAIT (Research Engine) - Super AMOLED Technology, Eco-Friendly Designs, Superior Visual Quality, Touch & 3D
Complementary B2B - Device Solutions (Semiconductors Chips, LCDs, other components) to B2C - Digital Media & Communication Business (phones, computers), Strategic Alliance Partners like IBM (Printers), Googles Android Platform. Financial - Gross Profit Margin (increasing from 28% to 36.9%) Reputational technologically good products (Galaxy S/Note/ Nexus), Manage Competitor-Collaborator Relationship (although under strain on IP violation from Apple), Brand Value, Focus on Sustainability Issues

Dynamic Capabilities @ Samsung


Process Assets
Structural 2 Person Management Team, 3 Core Business Divisions (each complementing the other), Conciliators to resolve intradivisional business disputes, Cell Based Manufacturing System, nonunionized workforce with ESOPs, People - technical experts/market focus Institutional A Korean Chaebol implicitly backed by the South Korean Government, Plays by the rule of the Industry (often a second mover but moves very fast), Sustainability Focus
Market Structure currently controls 30% of the smart phone market, caused the exit of Nokia Firm Boundary Forwardly and backwardly integrated, Core products in 9 plants located in home country

Dynamic Capabilities @ Samsung


Process Managerial Configuration (Coordinate & Integrate)
Centralized Management Each Division own management structure, staff & performance based financial autonomy Inter-divisional cooperation allowed based on business interest Conciliation Mechanism created to resolve inter-divisional dispute

Process Organizational Config. (Reconfigure & Transform)


3 Core Divisions Independently prioritize on the ordering of assets Ability to Mix and Match Resources/Assets create new products

Output Launch New Products FASTER than Competitors

Distinctiveness of Dynamic Capabilities


Input Intangible (Past Experience) difficult to imitate

Process Components Assets not as inputs but as GIVEN and PRESENT within the firm (no significant transaction cost)
Process Configuration Managers can Coordinate with required assets, Prioritize the required assets and Integrate on a Large Scale

Coordinate Prioritize Integrate provides superior response time higher capacity and better ability to Changing Environment
Consequently New Innovative Products (Schumpeterian Rents) come FIRMS with DYNAMIC CAPABILITIES are likely to be the Movers & Shakers

Dynamic Capabilities - Demystified


INPUT COMPONENTS PROCESS OUTPUT CONFIGURATION

Past Experience Assets Technological Complementary Financial Reputational

PROCESS

Schumpeterian Rent ()

Managerial & Organizational Configuration Structural Institutional Organizational Reconfigure Transform Managerial Coordinate Integrate

Market Structure Firm Boundary

Tour de Course
Core Concepts in SM Course Focus Strategy Formulation Decisions Strategic Decision Elaborated Frameworks

Core Concepts in SM
Strategic Management (SM) caters to the questions
Why & How some firms outperform others How they sustain such performance

SM looks into Sustainable Competitive Advantages or Superior RoI (SNR) w.r.t.


Own Past Performance Nearest Competitors Benchmark Index
Perspective is that of a POTENTIAL INVESTORS Opportunity Cost

Source of SCA
Environmental Opportunities (Outside In Model) Firms own Idiosyncratic Resources (RBV Inside Out Model)

Course Focus
Competitive Strategy One Firm One Business One (Type) of Product The Concepts Firm and Environment CR SCA SNR

SCA = () = (SPf - SPc) (CPf - CPc) or Margin


differential = Revenue Differential Cost Differential

Strategy Formulation Decision is fraught with (a) Planning Triggers, (b) Trade Offs, (c) Activities, (d) Employee Aspirations and (e) Problems Adopted Systems Approach Input Process Output Feedback

Planning Triggers Focus in terms of Resource Allocation or Market Position Trade Offs

Economies of Scale Economies of Scope

Core Concepts

TC(n) = FC/(n) + VC(n) - optimal throughput n Cost(A)(1+2) < Cost(B)(1) + Cost(C)(2) Make or Buy Decision Lower RELATIVE Cost Price by eliminating non-relevant activities Higher RELATIVE Sale Price by adding Higher Utilitarian Activities Difficulty to switch Partners Synchronous and Compatibility Issues Offer/Demand with future spin off benefits e.g. Eco-Friendly Products Processes and Asset Position providing Competitive Advantages Incumbents fighting back usually with price war or better product Substitutes with greater spin off benefits Titan vs. HMT Watches Activities added to improve margin e.g. WaI-Marts Sustainability efforts Firm influencing its business partners e.g. Coke Pepsi - Bottlers Competition directly/indirectIy affecting industry players. E.g. Cola War Value Chain Activities done directly or with a partner sharing risks/costs Using the aspiration of employees to fufiI the firms objectives e.g GMTCI Expertise in a particular functional role can have pros & cons

Cost Leadership Strategy Differentiation Strategy Switching Cost Relative Strategic Importance (O/D) Relative Competitive Capabilities Competitive Retaliation Relative Superiority of Alternatives

Firm Activities

Movement in the Value Chain Span of Control Competitive Dynamics Mode of Operation

Aspirations Problems

Resource Leveraging Path Dependence

Barriers to Entry/Exit
Stage of Firm

Investment intensive operations deters entry of small players


Function of relevance of the product created/deIivered by the firm

Frameworks
Systems Theory (InputProcessOutputFeedback) Competitive Advantage Transaction Cost Framework PEST & SWOT Porters 5 Forces Outside In Model Generic Competitive Strategies Positioning Strategies Value Chain RBV, VRIO Core Competence Framework Inside Out Model Dynamic Capabilities Framework

All the Very Best AU REVOIR!!!