Module 2 - Background THE EXTERNAL ENVIRONMENT, INTERNAL PROFILE, AND SWOT Part 1: External Environment Analysis SWOT is an acronym for: Strengths, Weaknesses, Opportunities, and Threats. The first two variables (strengths and weaknesses) relate to the internal organization, while the last two variables (opportunities and threats) relate to the organization’s external environment. The purpose of an external analysis is to scan the outside environment for factors that might open up new opportunities for the business—or that may present threats to the survival of the organization. Then company managers and executives can formulate plans to take advantage of the opportunities and respond to external threats. Optimally, the organization wishes to altogether eliminate (and if this is not possible, to ameliorate to the greatest extent possible) those threats that exist in the external environment. There are endless numbers and kinds of external factors that can have an effect on a company’s sustainability. Customers, competitors, and suppliers are all pretty obvious entities that can affect profitability. If we think a little more deeply, however, we can see that current as well as potential customers should be considered in an assessment of opportunities and threats (e.g., in terms of changing consumer tastes and preferences). Any such threats or opportunities will affect strategic choices that will (or that can) be made concerning products and services. What about technology? Advances in technology can affect all three of our "obvious" external concerns (customers, competitors, and suppliers) with changes in product features, how products are made and sold, what services are offered and how they are delivered, supply chains, inventory controls, and so on. The failure to monitor the technological environment can spell obsolescence for a business in no time. Ease of substitution is something we always think of when considering competitors. How easy would it be to switch from flying on one airline to flying on another, for example? But thinking more creatively about substitution, we can see that teleconferencing and video conferencing can eliminate the need for much business travel—thus acting as a substitute to airline tickets. Failure to think broadly enough will cause a planner to completely miss a major threat just over the horizon. For example, consider the immeasurable impact that Internet sites such as eBay and Amazon have had on the sales of "brick-and-mortar" operations. Or consider how online video availability has adversely affected companies that sell or rent DVDs, such as Blockbuster. The sheer number of possible external influences creating opportunities and threats is mind-boggling. This is why most strategic planners use analytic models to structure their thinking and help avoid perceptual biases that might interfere with a clear and objective identification of opportunities and threats. In this course, we will be using two different models that approach the external environment from two different perspectives: 1. Industry environment - Porter's Five Forces Model 2. Macro environment - PEST analysis Industry Environment Porter's Model of Five Forces is one of the most versatile frameworks for analyzing the industry (or operating) external environment. Employed by a variety of academics and business practitioners for more than three decades, the Five Forces Model has proved its usefulness in a variety of arenas. The Porter model helps the user get a handle on the competitive and market characteristics of a specific industry. The factors covered by the Five Forces Model are: 1. 2. 3. 4. 5. Threat of new entrants Bargaining power of suppliers Bargaining power of customers Availability of substitutes Degree of rivalry among competitors Macro Environment While the Porter analysis looks at the conditions in a specific industry, the PEST analysis looks at factors that affect the greater business environment. The sub-environments addressed by this model include: 1. 2. 3. 4. Political (including regulatory) Economic Socio-cultural Technical Required Reading For a general introduction to the Five Forces Model, the following video interview with Michael Porter is helpful for putting the external analysis into perspective: The five competitive forces that shape strategy. (2008). Harvard Business Publishing. Podcast retrieved on August 28, 2014, from http://www.youtube.com/watch?v=mYF2_FBCvXw The following site is an excellent introduction to the industry (operating) and remote (macro) environments. This site is a very good overview of Porter's Five Forces and PEST: http://web.missouri.edu/cookml/AE4972/Industry%20Analysi s.pdf Connelley, D. (2005). Strategy for the External Environment (see Attached). Power Point Presentation. PEST analysis. (2009). Retrieved on August 28, 2014, from http://www.valuebasedmanagement.net/methods_PEST_anal ysis.html Porter's Five Forces: A model for industry analysis. (2007). Retrieved on August 28, 2014, from http://www.quickmba.com/strategy/porter.shtml SWOT analysis: Lesson. (2009). Marketing Teacher. Retrieved from http://www.marketingteacher.com/swotanalysis-marketing-tools-from-marketing-teacher/ Optional Material Carrying out a PEST analysis. (2005). The Free Library. Retrieved on August 28, 2014, from http://www.thefreelibrary.com/Carrying+out+a+PEST+analysis -a0141751272 PEST analysis. (2007). Quick MBA. Retrieved on August 28, 2014, from http://www.quickmba.com/strategy/pest/ Porter’s Five Forces. (2009). Mind Tools. Retrieved on August 28, 2014, from http://www.mindtools.com/pages/article/newTMC_08.htm Porter’s Five Forces (2007). The Manager. Retrieved on August 28, 2014, from http://www.themanager.org/Models/p5f.htm Zahorsky, D. (2009). A business owner's secret weapon: SWOT analysis. Retrieved on August 28, 2014, from http://sbinformation.about.com/cs/bestpractices/a/swot.htm Part 2: Internal Analysis One of the criticisms of Porter's Five Forces Model (and external analyses in general) is that while Five Forces can certainly help in the identification of problems and difficulties that firms are likely to encounter in a given industry, the model does not provide insight into what a particular company can do to manipulate those forces in its favor, thus gaining a competitive advantage. In Part 2 of this module, we will focus on an analysis of the internal environment, or the internal company. At the conclusion of this process, we will have what is sometimes referred to as a "company profile" or an "internal profile." Two useful frameworks that will help us to focus on the essential factors for analysis of the internal environment are Porter's Value Chain and the Resource Based View framework (RBV). After conducting an analysis of an organization’s internal environment, you will be in a position to complete the last two elements of the SWOT analysis: identification of the strengths and weaknesses of a company. Internal Analysis Components Before we introduce the analytical models we will be using in this module, some background information will be helpful. A company has (A) primary activities and (B) support activities. A company’s primary activities are: • • • • Research and Development (R&D) Production (manufacturing) Marketing and Sales Customer Service A company’s support activities include: • • • • Materials Management Human Resources Information Systems Infrastructure A. Primary Activities • Research and Development (R&D) includes development and design of products and production processes. Many manufacturing companies have separate R&D departments. For highly innovative companies (such as 3M), this may be one of the most important departments in the organization. Some service companies may include R&D activities as a part of marketing or customer service functions. For instance, banks introduce new products to attract customers. • • • Production is in charge of creating goods or services. Some companies manufacture products. Banks make loans. Retail companies sell products. These are instances of production. Marketing and Sales plays several roles. It advertises and positions the brand, identifies marketing needs, and sets pricing. Customer Service provides after-sale service. B. Support Activities • • • • Materials Management manages the logistics of moving materials from procurement of inputs to production and then moving outputs through distribution to customers. Inventory management is part of the Materials Management support activity. Human Resources is focused on employing the necessary skills mix to carry out the organization's mission, and to motivate, train, and compensate the workforce. Information Systems refers to computer support in processing functions and supporting company operations, as well as Internet. Infrastructure refers to organizational structure, controls, and culture. The infrastructure must be capable of supporting the primary activities of the organization and must also be compatible with its strategy. Presentation on the Internal Environment Review the following presentation by Dr. Connelley. For Part Two of the narrated slide presentation on strategic situation analysis, click on the title below. This slide presentation focuses on the importance of optimizing the internal functions of an organization to create added value to the firm's products or services: Strategy for the Internal Environment (see Attached) Porter's Value Chain Porter's Value Chain is a widely used framework for organizing and interpreting an internal analysis. It is pictured below and is also discussed in the previous PowerPoint presentation. You can see that the Value Chain considers both primary and support activities, although it may use slightly different labels and definitions. By managing the various components of the value chain, companies can achieve a cost advantage over competitors, or distinguish themselves from competitors by offering a distinctively better product or service. Read more about Value Chain analysis at: The value chain. (2007). Retrieved on August 28, 2014, from http://www.netmba.com/strategy/value-chain/ While the Value Chain can be a valuable tool for breaking down and streamlining costs and creating maximum value, it is a complicated process that typically involves considerable quantitative analysis. The Resource-Based View The Resource-Based View (RBV) arose in direct response to the criticism mentioned previously, that is, the external analysis is much less useful to a company seeking to attain a competitive advantage than are its internal capabilities and resources. Instead of focusing on the accumulation of resources necessary to implement the strategy dictated by conditions and constraints in the external environment (I/O model), the resource-based view suggests that a firm's unique resources and capabilities provide the basis for a strategy. The business strategy chosen should allow the firm to best exploit its core competencies relative to opportunities in the external environment (p. 1380).*** *** Source: Hitt, M., Ireland, R., and Hoskisson, R. (2007). A resource-based view of the firm. In International Encyclopedia of Organization Studies (Clegg, S., & Bailey, J.R., Eds.). Thousand Oaks, CA: Sage Publications. Central to this analytical view is the notion that a firm's core competencies and resources are more critical to the development of a strategy than the external environment. In reality, the truth probably lies somewhere in between, with a balance between external demands and internal capacities leading to the most successful competitive position. This is the essence of a SWOT analysis, and RBV can certainly inform an analysis of strengths and weaknesses. For an excellent review of the basics of the Resource-Based View, read the following chapter: Henry, A. (2007). The internal environment: A resource based view of strategy. In Understanding Strategic Management. Oxford University Press. Retrieved on August 27, 2014, from http://fba.aiub.edu/Files/Uploads/MGT110043.pdf Required Connelley, D. Strategy for the internal environment.(see Attached) PowerPoint presentation. Henry, A. (2007). The internal environment: A resource based view of strategy. In Understanding Strategic Management. Oxford University Press. Retrieved on August 27, 2014, from http://fba.aiub.edu/Files/Uploads/MGT110043.pdf The following presentation is a good overview of internal analysis: Bramha, D. (2011). Internal Analysis in Strategic Management. Retrieved on November 6, 2012, from http://www.slideshare.net/guestd507e7/internal-analysys-ofstrategic-management-presentation Optional Reading The Value Chain. (2007). Retrieved on November 6, 2012, from http://www.netmba.com/strategy/value-chain/ 9780199288304_C05 11/12/07 11:12 AM 5 Page 124 The Internal Environment: A Resource-Based View of Strategy Chapter 1 What is Strategy? Chapter 6 Assessing Organizational Performance Chapter 2 The General Environment Chapter 5 The Internal Environment: A Resource-Based View of Strategy Chapter 3 The Competitive Environment Chapter 4 The Internal Environment: Value Creating Activities Learning Objectives After completing this chapter you should be able to: • Discuss the resource-based view of strategy • Explain the role of resources, competencies and capabilities in helping an organization achieve a sustainable competitive advantage • Explain how the resource-based view can guide strategy • Evaluate the importance of knowledge management within organizations 9780199288304_C05 11/12/07 11:12 AM Page 125 125 5.1 Introduction The previous chapter was devoted to an analysis of the internal environment and how the organization might usefully analyse its value creating activities. In order to help assess the importance of the firm’s internal environment we placed our discussion in the context of the factors which account for an organization’s performance. In Chapter 3 we saw that the answer to the question ‘What drives an organization’s performance?’ was rooted in an understanding of an organization’s markets and industry. This ‘positioning approach’ accepts the importance of an organization’s resources but argues that in formulating strategy an analysis of the competitive environment is a more appropriate starting point. • In Section 5.2 we continue the debate on differential firm performance by introducing the resource-based view of strategic management. We evaluate the role of resources, core competencies, and distinctive capabilities in helping the organization to achieve a competitive advantage. • Section 5.3 considers some of the attributes an organization’s resources must possess in order for them to provide it with a source of a sustainable competitive advantage. We also briefly discuss the make or buy decisions facing organizations. • In Section 5.4 we discuss some of the criticisms of the resource-based view. • The chapter ends in Section 5.5 with a discussion of the importance of knowledge management and how tacit knowledge might provide a competitive edge in the knowledge economy. 5 What determines an organization’s performance will continue to be our backdrop as we evaluate an alternative approach to this question. We have already noted that a criticism made about the positioning approach is that it fails to answer this question adequately. In this chapter we will explore a radically different perspective which suggests that relative firm performance, and therefore profitability, is determined by an organization’s resources and competencies. This has been termed the resourcebased view of the firm. 9780199288304_C05 11/12/07 126 11:12 AM Page 126 part 2 Strategic Analysis 5.2 The Resource-Based View of Strategy The resource-based view of strategy has a long antecedent, with links stretching back to Edith Penrose (1959). However, it is more commonly associated with the work of Prahalad and Hamel (1990), Rumelt (1991), Barney (1991), Grant (1991), and Peteraf (1993). The resource-based view also deals with the competitive environment facing the organization but takes an ‘inside-out’ approach, i.e. its starting point is the organization’s internal environment. As such, it is often seen as an alternative perspective to Porter’s (1980) five forces framework, examined in Chapter 3, which takes the industry structure (outside-in) as its starting point. 5 resource-based view emphasizes the internal capabilities of the organization in formulating strategy to achieve a sustainable competitive advantage in its markets and industries The resource-based view emphasizes the internal capabilities of the organization in formulating strategy to achieve a sustainable competitive advantage in its markets and industries. If we see the organization as made of resources and capabilities which can be configured (and reconfigured) to provide it with competitive advantage, then its perspective does indeed become inside-out. In other words, its internal capabilities determine the strategic choices it makes in competing in its external environment. In some cases an organization’s capabilities may actually allow it to create new markets and add value for the consumer, such as Apple’s i-Pod and Toyota’s hybrid cars. Clearly, where an organization’s capabilities are seen to be paramount in the creation of competitive advantage it will pay attention to the configuration of its value chain activities. This is because it will need to identify the capabilities within its value chain activities which provide it with competitive advantage. For example, Toyota’s much admired manufacturing system manages inbound logistics in the form of excellent material and inventory control systems. This ensures that inventory levels are sufficient to meet customer demand by having parts delivered prior to their assembly. If we look at other primary activities in the value chain, such as operations, we find automated and efficient plants with embedded quality control systems. This is backed by marketing and sales through advertising and dealership networks, and service through the use of guarantees and warranties. Toyota’s value chain activities, its linkages across them, and its linkages with the value chain of its suppliers are configured in such a way that they provide the Japanese competitor with a core competence or distinctive capability. It is this capability which provides it with competitive advantage and which its competitors have found difficult to match. Toyota is also able to appropriate the added value that is derived from these activities. For instance, Toyota makes more profit than the three largest automobile companies in the USA combined. 9780199288304_C05 11/12/07 11:12 AM Page 127 127 the internal environment: a resource-based view of strategy If firms in an industry face similar industry conditions we might expect, other things being equal, these firms to exhibit some degree of similarity with respect to profitability. Yet if we compare the profitability of the UK supermarket retailer Tesco with its archrival Sainsbury’s, we see a great divergence in profitability between firms that compete in the same industry. Porter (1980) argues that it is the industry structure within which organizations compete and how they position themselves against that structure which determines how profitable individual firms will be. In contrast, the resourcebased view of strategy points not to industry structure but to the unique cluster of resources and capabilities that each organization possesses (Collis and Montgomery 1995, Stalk et al. 1992). Therefore, for proponents of the resource-based school, the answer to why firms within the same industry experience different levels of performance is to be found by looking inside the organization. 5 As is so often the case, the differences between competing perspectives can be overdone. For example, Amit and Schoemaker (1993) argue that the resource-based view can be seen as a complement to the positioning school. Hamel and Prahalad (1993) concede that Porter’s approach which embodies the notion of strategic fit, matching an organization’s resources to the needs of the external environment, is not so much wrong but more what they refer to as unbalanced. For many managers the concept of strategy implies pursuing opportunities that fit the company’s resources. Hamel and Prahalad suggest that this approach is not wrong but tends to obscure an approach in which strategic stretch supplements strategic fit. They argue that being strategic means creating a chasm between ambition and resources. In other words, an organization with a relatively small amount of resources but with big ambitions can leverage their resources to achieve a greater output for its smaller inputs. We should keep in mind that both the positioning school (see also Porter 1996) and the resource-based view have its relative merits and its criticisms. 5.2.1 Resources The resource-based view of competition draws upon the resources and capabilities that reside within an organization, or that an organization might want to develop, in order to achieve a sustainable competitive advantage. Resources may be thought of as inputs that enable an organization to carry out its activities. Where organizations in the same industry have similar resources but differing performance we might deduce that they vary in the extent to which they utilize their resources. Resources in and of themselves confer no value to organizations. It is only when they are put to some productive use that value follows. Resources can be categorized as tangible and intangible. resources can be thought of as inputs that enable an organization to carry out its activities. They can be classified as tangible and intangible 9780199288304_C05 11/12/07 11:12 AM 128 Page 128 part 2 Strategic Analysis Tangible Resources tangible resources refer to the physical assets that an organization possesses and include plant and machinery, finance and human capital. 5 knowledge-based economy the tacit knowledge and specialist skills of employees which constitute an intangible resource that is difficult for competitors to imitate Tangible resources refer to the physical assets that an organization possesses and can be categorized as physical resources, financial resources, and human resources. Physical resources include such things as the current state of buildings, machinery, materials, and productive capacity. To add value these physical resources must be capable of responding flexibly to changes in the marketplace. Clearly, organizations with the most up to date technology and processes which possess the knowledge to exploit their potential will be at an advantage. The extent to which an organization can achieve an acceptable return on its capital employed will determine the extent to which it can attract outside capital or financial resources. This will be linked to expectations about its future growth. Its financial resources will include its cash balances, debtors and creditors, and gearing (debt-to-equity ratio). The total workforce employed and their productivity, as measured by criteria such as profit or sales per employee, form a tangible human resource. In the knowledgebased economy the tacit knowledge and specialist skills of many employees form an intangible resource that it is difficult for competitors to imitate. It is interesting to note that it is tacit knowledge that can provide developed nations with a comparative advantage over low-cost manufacturing economies such as China and India. Intangible Resources intangible resources may be embedded in routines and practices that have developed over time within the organization. They include an organization’s reputation, its culture, its knowledge, and its brands Intangible resources comprise intellectual/technological resources and reputation. Technological resources include an organization’s ability to innovate and the speed with which innovation occurs. Intellectual resources include patents and copyrights which themselves may derive from the organization’s technological resources. For example, an intangible resource for the manufacturing company, Dyson, is the creative innovation of its founder, James Dyson, which competitors have been unable to successfully imitate (see Case Study: Knowledge Management on p. 145). Organizations with valuable tacit knowledge built up through their culture, processes, and employees possess an intangible resource which cannot readily be transferred. The reputation or ‘goodwill’ of an organization is increasingly recognized as a valuable intangible asset which can easily be damaged by ill-thought-out strategies and marketing campaigns. Some organizations, such as Benetton, have made a point of courting debate with their controversial advertising campaigns. In their case it seems to draw supporters and detractors in equal measure while generating useful free publicity. Johnson & Johnson’s response to malicious tampering with their Tylenol product (see Chapter 1) ensures that it consistently remains top of organizations ranked according to their reputation.1 9780199288304_C05 11/12/07 11:12 AM Page 129 129 the internal environment: a resource-based view of strategy 5.2.2 Competencies Whilst the existence of resources is important, resources per se do not confer any benefit on an organization. It is the efficient configuration of resources that provides an organization with competencies. A competence is the attributes that firms require in order to be able to compete in the marketplace. In this respect, all firms possess competencies. It is a prerequisite for competing within an industry. However, competencies in and of themselves do not confer any competitive advantage for the organization. It may be useful to think of competencies as deriving from the bundle of resources that a firm possesses. For example, in order to be able to compete in the automobile industry organizations must possess knowledge about design and engine and body manufacture. Without this base knowledge, firms would simply be unable to compete effectively in that industry irrespective of their resources. 5.2.3 Core Competencies Prahalad and Hamel (1990) argue that the critical task of management is to create an organization capable of creating products which customers need but have not yet even imagined. To achieve this management must successfully operate across organizational boundaries rather than focus on discrete individual strategic business units (SBUs). Core competencies derive from the collective learning of individual members within an organization and their ability to work across organizational boundaries. Prahalad and Hamel (1990, p. 82) argue: can be defined as the attributes that firms require in order to be able to compete in the marketplace 5 There is a degree of confusion with the plethora of terms that circulate around the resource-based view of strategy. We will try to use common terms with the proviso that even here these may mean different things to different authors. For example, some advocates of the resource-based view use the term core competencies to refer to activities in which the firm can achieve a sustainable competitive advantage. Others use the term distinctive capabilities to make the same point. competencies distinctive capabilities are important in providing an organization with competitive advantage. They derive from three areas: an organization’s architecture, innovation, and reputation The skills that together constitute core competence must coalesce around individuals whose efforts are not so narrowly focused that they cannot recognize the opportunities for blending their functional expertise with those of others in new and interesting ways. Thus a core competence or strategic capability can be thought of as a cluster of attributes that an organization possesses which in turn allows it to achieve competitive advantage. It may simply be that the organization has configured its collection of resources in such a way that allows it to compete more successfully. Dell and Benetton clothing are classic examples of firms that have achieved core competence in core competence or strategic capability a cluster of attributes that an organization possesses which in turn allows it to achieve competitive advantage 9780199288304_C05 11/12/07 130 11:12 AM Page 130 part 2 Strategic Analysis the way they configure their respective value chains. Many organizations have tried to copy Michael Dell’s example but found his direct-sales model less easy to imitate than might be first thought. (See Case Study: Dell.) first-mover advantages 5 refers to organizations which benefit from the learning and experience they acquire as a result of being first in the marketplace Similarly, the Japanese motor manufacturer Toyota has achieved a core competence in the production of petrol-and-electric hybrid cars (see Strategy Focus: Toyota’s Core Competencies). This in no small measure results from their first-mover advantages. This refers to organizations which benefit from the learning and experience they acquire as a result of being first in the marketplace. Other motor manufacturers are placed in the unenviable position of playing ‘catch-up’. Prahalad and Hamel (1990) point out that many major corporations have had the potential to build up core competencies, but senior management lacked the vision to see the company other than as a portfolio of discrete businesses. This is what Prahalad and Hamel refer to as the tyranny of the SBU. They provide three tests that can be applied to core competencies in an organization. 1. A core competence should provide access to a wide variety of markets. For example, Honda’s capabilities in engine design and production have enabled it to leverage its core competencies to compete in markets such as cars, lawnmowers, and powerboats. 2. A core competence should make a significant contribution to the perceived customer benefits of the end products. For example, BMW has distinctive capabilities in engineering which allow it to produce high-quality cars that sell at a premium. 3. A core competence should be difficult for competitors to imitate. For a core competence to have any lasting value to the organization the competitive advantage that derives from its use must be sustainable. In order for that condition to hold, the core competence must be difficult for competitors to imitate. This is the case in the USA with Southwest Airlines; competitors have found that having similar resources to the airline has not enabled them to deconstruct what makes the airline so successful. In the UK, the competitors of the supermarket retailer Tesco have been unable to replicate its success despite having similar resources. A core competence is enhanced as it is applied and shared across the organization. For Prahalad and Hamel, competencies are the glue that binds businesses together and spur new business development. For example, Toyota’s core competencies derive from its ability to blend core competencies across the whole organization. Nonetheless, competencies still need to be protected if the organization is to appropriate the rewards that deride from their use. 9780199288304_C05 11/12/07 11:12 AM Page 131 the internal environment: a resource-based view of strategy 131 strategy focus It is going awfully fast, and they are not sure where it is leading them, but Toyota’s rivals reckon they have no choice but to give chase. The Japanese carmaker is so pleased with the success of its Prius, an electric-and-petrol hybrid car that has sold well in America, that it is pressing ahead with plans to put hybrid engines in a range of other cars and sport-utility vehicles (SUVs). Competitors, ranging from America’s General Motors to Germany’s BMW and DaimlerChrysler, are scrambling to roll out hybrids of their own. Ford has already announced that it could increase production of hybrid cars tenfold by 2010. Adding a hybrid engine costs thousands of dollars; this puts off many consumers. But Toyota is pressing ahead anyway, confident that, with practice, it can master fuel-saving technologies more quickly than rivals. Since it launched the new Prius in America in 2003, Toyota has sold over 150 000. The Prius is an odd-looking machine. Some buyers who would never go near a Prius may choose an existing SUV or luxury car over a rival model if it comes with a fuel-saving and eco-friendly hybrid option that is partly subsidised by the maker. Toyota began offering hybrid versions of its Highlander and Lexus SUVs earlier this year. Although Americans love their oversized SUVs, they are heavy machines that guzzle petrol. So buying a hybrid version might ease some of the guilt, even if the savings at the pump do not end up offsetting the higher price. Toyota will also put a hybrid engine into one of its Lexus luxury sedans, and Honda will do the same for its Acura. That will give wealthy greens a chance to tout their eco-friendly credentials without sacrificing style. Honda has just launched a new hybrid version of its popular 5 The Prius, an electric-andpetrol hybrid car which represents a core competence for Toyota. © Toyota Motor Europe Toyota’s Core Competencies 9780199288304_C05 132 11/12/07 11:12 AM Page 132 part 2 Strategic Analysis Civic in America, and Toyota will begin selling hybrid versions of its Camry sedan in 2007. Overall, Toyota is racing towards its target of selling 1m hybrid vehicles worldwide by 2010. That is the last thing that its American, European, and Korean rivals want to hear. Many of their executives complain that hybrids are unprofitable and over-hyped. Rivals are upset with Toyota, for setting the agenda so deftly; with themselves, for failing to keep pace; and with consumers, for having the temerity to buy what they do not want to sell. The European carmakers have trumpeted diesel technology as a fuel-efficient and eco-friendly alternative. Toyota also sees merit in diesels—it opened a new diesel-engine plant in Poland last week—but it has no intention of making life easy for its rivals by taking its foot off the hybrid accelerator. So everyone else is now playing catch-up. Toyota may leave them in the dust anyway. While its rivals struggle to integrate hybrid engines into their vehicles, the Japanese giant hopes soon to cut the extra costs of those engines in half. 5 Source: ‘Battery assault’ Economist, 22 September 2005 5.2.4 Distinctive Capabilities Kay (1993) argues it is the distinctive capabilities of an organization’s resources that are important in providing it with competitive advantage. However, an organization’s capabilities are only distinctive when they emanate from a characteristic which other firms do not have. Furthermore, possessing a distinctive characteristic is a necessary but not sufficient criteria for success; it must also be sustainable and appropriable. For a distinctive capability to be sustainable it needs to persist over time. For a distinctive capability to be appropriable it needs to benefit primarily the organization which holds it rather than its employees, its customers, or its competitors. These distinctive capabilities derive from three areas: architecture, reputation, and innovation. These in turn are linked to relationships between an organization and its stakeholders: its employees, customers, shareholders, and suppliers, as well as a group of collaborating firms to which it may network. It is these relationships which allow an organization’s resources to provide it with distinctive capabilities through the conduit of its architecture, reputation, and innovation. An organization’s architecture comprises the system of relational contracts which exist inside and outside the organization. We can differentiate between internal architecture, which refers to an organization’s relationships with its employees, and between employees, and external architecture, which refers to its relationships with its customers and suppliers. In addition, an organization may engage in relationships with other firms working in related activities; this form of architecture is referred to as networks. There is a myth about great leaders of organizations which detracts from the reality of organizational behaviour. Organizations depend far less on individual 9780199288304_C05 11/12/07 11:12 AM Page 133 the internal environment: a resource-based view of strategy 133 leaders and groups than they do on their established structures, dominant styles, and organizational routines—what might be termed their existing ways of working. It is these organizational routines that have developed over time and are continually used in changing competitive conditions that allow the organization to get the best out of their ordinary employees. As Kay (1993, p. 69) states, ‘Architecture does not create extraordinary organizations by collecting extraordinary people. It does so by enabling very ordinary people to perform in extraordinary ways’. Reputation as a source of distinctive capability is particularly important in those markets where consumers can only ascertain the quality of a product from their longterm experience. An example would include the use of a firm of architects. An organization’s reputation is built up through its reliable relationships, which may have taken considerable time to nurture and develop. However, once this element of trust is achieved, it can provide the organization with a distinctive capability. A reputation for providing good-quality products and services endows an organization with competitive advantage which can be used to secure repeat business and charge premium prices. In addition, such a reputation can be leveraged when entering related markets, as witnessed by Sony across the consumer electronics industry. Indeed, reputation can be used to help facilitate a more successful entry into unrelated markets, as seen with Virgin and the Easy group. In independent tests,2 Johnson & Johnson scores higher than any other organization on reputation, which in no small measure results from their insistence that managers conduct themselves responsibly and their credo of putting the customer first. An organization’s ability to innovate successfully is also a source of distinctive capability which is sustainable and appropriable. For example, it may produce innovative products such as Apple with its i-Tunes and i-Pod. In a survey of senior executives around the world to find the 50 most innovative companies (BusinessWeek 2007a), Apple came top for the third year running. Apple’s unrivalled innovation in product design and functionality is proving a hard act for competitors to follow. It remains at the forefront of the digital media with its iPod portable music and video players and 5 However, because a distinctive architecture is based upon the output of all employees rather than a few individuals, it allows the added value created to be more readily appropriated by the organization. In the same way, for a distinctive architecture to be sustainable the relational contracts that an organization enters into must be difficult for its competitors to identify and imitate. The relationships will inevitably be implicit, complex, and subtle, based in and around the organization. This lack of formalization inhibits imitation and ensures that architecture remains a source of competitive advantage. Architecture, then, refers to the ability of the organization to create organizational knowledge which is more than just the sum of individual employees. It includes an organization’s ability to respond effectively to changes taking place in its external environment, as well as its exchange of information both within and outside the company. 9780199288304_C05 11/12/07 134 11:12 AM Page 134 part 2 Strategic Analysis 5 iTunes online stores. Rather than sit back complacently, Apple entered the mobile phone market in 2007 with the introduction of its iPhone. This constant innovation and product development keeps competitors guessing about which products Apple will bring out next and provides a source of sustainable competitive advantage as competitors struggle to imitate their success (see Strategy Focus: Steve Jobs). Apple’s ability to innovate with products such as the i-Pod has provided a route for competitive advantage. © istock.com/Vito Elefante In many respects the competitive advantage that appears to emanate from innovation may be seen to derive from an organization’s architecture. An organization may develop innovative processes which are embedded within the routines of the organization and therefore difficult for competitors to copy. By seeking patents and copyrights, organizations can protect innovative products and ensure that they appropriate the value deriving from their use. The use of patents and copyrights may not suit hypercompetitive markets, as we saw in Chapter 3. In such a marketplace, D’Aveni (1999) argues for continuous new product development which allows you to stay one step ahead of competitors. The deliberate cannibalization of a successful product by its successor ensures that the firm is able to appropriate the rewards from its innovations. The concern for innovation is not limited to organizations. The US Department of Commerce formed an advisory committee in 2007 to look at how best to measure innovation initiatives. It is made up of individuals who include Steve Ballmer of Microsoft, IBM’s Sam Palmisano, an entrepreneur, and members of the academic community including a professor of economics at Harvard. The 15-strong panel is intended to represent the diversity of the US economy. Innovation is defined by the panel as the design, invention, development, and/or implementation of new or altered products, services, processes, systems, organizational structures, or business 9780199288304_C05 11/12/07 11:12 AM Page 135 the internal environment: a resource-based view of strategy 135 models for the purpose of creating new value for customers and financial returns for the firm (BusinessWeek 2007b). The ultimate aim of the advisory is not simply to develop new metrics for innovation but to try to ensure that US businesses remain competitive in a global environment. strategy focus One morning, about a year ago, a doctor told Steve Jobs that a cancerous tumour in his pancreas would kill him within months, and that it was time to start saying his goodbyes. Later that night, an endoscopy revealed that the tumour could be cut out. But for one day Steve Jobs, the boss of Apple Computer, as well as Pixar, the world’s most successful animation studio, stared death in the face. The experience seems to have invigorated him. Last week he announced a new mobile phone from Motorola that has iTunes, Apple’s music software, pre-installed; and the ‘iPod nano’, a new digital music-player that is thinner than a pencil, but still holds 1000 songs. His hold on downloaded and portable music now seems overwhelming. iTunes sells 2m songs a day and has a world market share of 82 per cent—he reckons that it is the world’s second-largest Internet store, behind only Amazon. And the iPod has a market share of 74 per cent, with 22m sold. For a man who helped launch the personal-computer era in 1976 with the Apple I, but then had to watch Microsoft’s Bill Gates walk away with, in effect, the monopoly on PC operating systems (Apple’s market share in computers today is less than 3 per cent), this must be some vindication. The interesting event occurred when he was 30 in 1985 and got fired from his own company, after Apple’s board turned against him. He was ‘devastated’. His career seemed dead. He did something uninterrupted success might have made impossible: he became more creative. In 1986 he started two new companies, NeXT, a computer-maker that was always too far ahead of its time, and Pixar, an animation studio that went on to have a series of box-office hits. A decade later, ironically enough, NeXT was bought by Apple, and Jobs was brought back to run the company he had founded. 5 Steve Jobs launching the iPod nano. © Kim Kulish/Corbis Steve Jobs—Innovation 9780199288304_C05 136 11/12/07 11:12 AM Page 136 part 2 Strategic Analysis New toys on the way His rivals in Silicon Valley, Redmond (Microsoft), Tokyo (Sony), Seoul (Samsung), and other places now simply take it for granted that he has a top-secret conveyor belt that will keep churning out best-selling wonders like the iPod. Hollywood and music studios are also increasingly frightened. The music studios, which barely took him seriously when he launched iTunes in 2001, are pressuring him to change his 99-cents-per-song flat rate for music. For somebody famous in large part for a spectacular defeat—to Bill Gates and Microsoft—all this must feel like a new lease of life, in every respect. 5 Source: ‘The resurrection of Steve Jobs’ Economist, 15 September 2005 In an article entitled ‘Strategy and the delusion of grand design’, Kay (2000) summarizes distinctive capability as the characteristics of a company that either cannot be copied by competitors or can only be copied with great difficulty. As we have seen, these will include such things as patents and copyrights, a strong brand image, patterns of supplier or customer relationships, and skills, knowledge, and routines that are often embedded within the organization and therefore are difficult for a competitor to unravel. It is these distinctive capabilities that are the basis of sustainable competitive advantage. The task then is to identify and match these distinctive capabilities with the needs of the marketplace. Kay points out a contradiction inherent in the question ‘How do organizations create distinctive capabilities?’, since if distinctive capabilities can be replicated they fail to be distinctive capabilities. What is truly irreproducible has three sources: (1) market structure that limits entry; (2) a company’s history which by definition will require time to replicate; (3) tacitness in relationships—the routines and behaviours—which cannot be copied since the participants themselves are unsure how they work. Therefore organizations would do well to identify what distinctive capabilities they already possess rather than what distinctive capabilities they would like to have. We will have more to say on this topic when we examine sustainable competitive advantage below. www.oxfordtextbooks.co.uk/orc/henry For a discussion of Kay’s distinctive capabilities go to the Online Resource Centre and see the Key Work feature. Grant (1991) distinguishes between resources and capabilities. He sees resources as inputs into the production process. These include capital equipment, the skills of 9780199288304_C05 11/12/07 11:12 AM Page 137 137 the internal environment: a resource-based view of strategy individual employees, patents, brands, finance, and so on. On their own these resources are rarely productive. To be productive requires the cooperation and coordination of teams (or bundles) of resources. A capability is the capacity for a team of resources to perform some task or activity. Therefore resources are the source of an organization’s capability. And it is capabilities that are the main source of its competitive advantage. Grant (1991) proposes a framework for strategy formulation comprising five stages. 1. Identify and classify the organization’s resources. Appraise strengths and weaknesses relative to those of your competitors. Identify opportunities for better resource utilization. 2. Identify the organization’s capabilities, i.e. what it can do better than its rivals. Identify the resource input to each capability, and the complexity of inputs. 5 3. Appraise the rent-generating potential of resources and capabilities by (a) their potential for sustainable competitive advantage, and (b) the appropriability of their returns. 4. Select a strategy which best exploits the organization’s resources and capabilities relative to the opportunities that exist in the external environment. 5. Identify whether any resource gaps exist which need to be filled. Invest in improving the organization’s resource base. There are two fundamental reasons for making the resources and capabilities of the firm the foundation for its strategy. First, internal resources and capabilities provide the basic direction for a firm’s strategy and, second, resources and capabilities are the primary source of profit for the firm. 4 Strategy 3 Competitive Advantage figure 5.1 5 2 Capabilities 1 Resources A resource-based view of strategy analysis. Adapted from R.M. Grant (1991) The resource-based theory of competitive advantage: implications for strategy formulation, California Management Review 9780199288304_C05 11/12/07 138 11:12 AM Page 138 part 2 Strategic Analysis 5.3 Identifying Sustainable Competitive Advantage sustained competitive advantage 5 occurs when an organization is implementing a value-creating strategy that is not being implemented by competitors and when these competitors are unable to duplicate the benefits of this strategy valuable and rare resources provide a means of competitive advantage. However, if the organization is to achieve sustainable competitive advantage it is necessary that competing organization cannot copy these resources Barney (1991) argues that all the resources that the firm has access to may not be strategically relevant, since some may actually prevent an organization from conceiving and implementing a valuable strategy. Also, some resources may lead it to implement strategies that reduce its effectiveness and efficiency. A competitive advantage arises when an organization is implementing a value-creating strategy that is not also being implemented by current or potential competitors. A sustained competitive advantage occurs when an organization is implementing a value-creating strategy that is not being implemented by current or potential competitors and when these competitors are unable to duplicate the benefits of this strategy. The use of the term sustainability here does not refer to permanence. Rather, it implies that a competitive advantage will not be competed away because competitors are unable to duplicate it. The competitive advantage may indeed be eroded by structural changes within the industry such that what was once a competitive advantage in one industry setting may not transcend industry changes. It then becomes a weakness or an irrelevance. This has resonance with the concept of creative destruction, highlighted by Joseph Schumpeter, which causes economies to advance through transformational changes. An organization’s resource must have four attributes to provide the potential for a sustainable competitive advantage: (1) it must be valuable, (2) it must be rare, (3) it must be difficult to imitate; (4) there should be no strategic substitute for this resource. We can explore each of these in detail. 1. Valuable resources Organizational resources can only be a source of competitive advantage or sustainable competitive advantage when they are valuable. Resources are valuable when they enable a firm to formulate and implement strategies that improve its efficiency and effectiveness. Environmental models such as Porter’s five forces (discussed in Chapter 3) and SWOT analysis (discussed in Chapter 4) seek to identify the organization’s resources which can exploit opportunities and/or neutralize threats. It is in this sense, of exploiting opportunities and mitigating threats and thereby improving efficiency and effectiveness, that some attributes the organization possesses can be called a resource. The resource-based view goes further in suggesting the additional characteristics these resources must possess if they are to provide sustainable competitive advantage. Clearly, there are links between the work of Porter and the resourcebased view, and differences between the two approaches can be overstated. 2. Rare resources If valuable organizational resources reside within a large number of competitors or potential competitors then they cannot be a source of sustainable competitive advantage. The reason is that each competitor 9780199288304_C05 11/12/07 11:12 AM Page 139 139 the internal environment: a resource-based view of strategy would have the capability to exploit that resource in the same way. The same analysis also applies to bundles of valuable organizational resources since some strategies require a mix of resources to be implemented. A valuable resource for implementing a strategy is undoubtedly leadership, but if this resource is not rare then many organizations will also be able to formulate and implement the same strategies. That a resource is valuable is a necessary but not sufficient condition for sustainable competitive advantage. 5 3. Can the resource be imitated? Valuable and rare resources provide a means of competitive advantage. However, if the organization is to achieve sustainable competitive advantage it is necessary that competing organizations cannot copy these resources. Where resources can easily be imitated, competitors will simply compete away an organization’s ability to generate above-average returns. An example is the dot.com companies of the 1990s, some of whom had innovative ideas and gained a competitive advantage largely by first-mover advantages. Unfortunately, others quickly followed, acquiring the resources to imitate their strategies and eroding any lasting value. An organization’s resources will be difficult to imitate if it embodies a unique location, path dependency, causal ambiguity, and social complexity. Unique location An organization based in a unique location will be able to add value to its products which allows it to generate superior returns. The unique location it possesses is a resource that is difficult to imitate. French wines have long experienced a competitive advantage through the uniqueness of their climate, soil and expertise handed down through generations. French wines are an example of competitive advantage through unique location: their climate, soil, and expertise handed down through generations. © istock.com/Christopher Messer Path dependency Competitors will find it extremely difficult to replicate resources that an organization possesses as result of the path it has followed to arrive at its current position. In effect, path dependency can be seen as the unique experiences an organization has acquired to date as a result of its tenure in business. Competitors simply cannot acquire these resources on the open market and therefore cannot copy the firm’s value-creating strategy. path dependency is a way of describing the unique experiences a firm has acquired to date as a result of its tenure in business 9780199288304_C05 11/12/07 11:12 AM 140 causal ambiguity exists when the link between the resources controlled by an organization and its sustainable competitive advantage is not understood or only partially understood social complexity 5 an organization’s resources may be difficult to imitate because they may be based on complex social interactions. These may exist between managers in the organization, a firm’s culture, and a firm’s reputation with its suppliers and customers substitutability implies that there must be no strategically equivalent valuable resources that are themselves not rare or can be imitated. Two valuable firm resources (or bundles of resources) are strategically equivalent when they can be exploited separately to implement the same strategies Page 140 part 2 Strategic Analysis Causal ambiguity Causal ambiguity exists when the link between the resources controlled by an organization and its sustainable competitive advantage is not understood or is only partially understood. Therefore competitors are unsure as to which resources to acquire and, if required, how to configure them. This issue becomes a sustainable competitive advantage when the organization itself is unsure of the exact source of its competitive advantage. The strategies of Dell and Southwest Airlines are cases in point; competitors simply cannot imitate their success because they are unable to replicate their resource combinations or their unique history. Social complexity A final reason why an organization’s resources may be difficult to imitate is because they may be based on complex social interactions. These may exist between managers in an organization, in an organization’s culture, and in its reputation with its suppliers and customers. When it is known how these socially complex resources add value to the firm, there is no causal ambiguity between the resources and competitive advantage of the organization. However, the fact that competitors may know, for example, that the culture within an organization improves efficiency does not mean that they can readily imitate that culture. 4. Substitutability Substitutability implies that there must be no strategically equivalent valuable resources that are themselves not rare or that can be imitated. Two valuable firm resources (or bundles of resources) are strategically equivalent when they can be exploited separately to implement the same strategies. Substitutability can take at least two routes. First, although it may not be possible for a firm to imitate another firm’s resources exactly, it may be able to substitute a similar resource that allows it to formulate and implement identical strategies. For example, an organization may seek to copy a competitor’s top management team. Although this will not be done exactly as the teams will be different, they may be seen as strategic equivalents and therefore as substitutes. Second, very different firm resources can be strategic substitutes. In one organization an inspirational leader may have a clear vision of future consumer trends. In a competing organization a similar vision about the future may require focus groups, and teams of managers thinking, sharing, and debating what the future might hold. The two firm resources may be strategically equivalent, and thus substitutes for one another. The Case Study on Dell illustrates the difficulty that competitors face in trying to imitate Michael Dell’s direct-sales business model. Although the model appears transparent, in reality there exists substantial causal ambiguity and social complexity that makes it very difficult to imitate. 9780199288304_C05 11/12/07 11:12 AM Page 141 the internal environment: a resource-based view of strategy 141 case study 5.1 Dell Michael Dell’s Money-making Machine has Further Scope for Growth 5 AS TECHNOLOGY executives go, Michael Dell is not, you might say, as colourful as some of his peers. Larry Ellison of Oracle has his huge new yacht and his fighter jet; Jeff Bezos of Amazon is funding a space-rocket start-up; Bill Gates of Microsoft has his enormous, high-tech house and a penchant for Leonardo manuscripts; Steve Jobs of Apple somehow combines counter-cultural cool with business smarts and a second job as a movie mogul. What about Mr Dell? He has four kids, a wife and three dogs, he shrugs. And no, he does not invest in rockets. His company, the world’s largest maker of personal computers, is fashioned in Mr Dell’s own forthright, no-nonsense image. It does not make sexy products—but, thanks to its straightforward direct-sales model, its brutally efficient lean-manufacturing approach and its unrivalled expertise in logistics and supply-chain management, it does make an enormous amount of money. The way Dell makes and sells PCs is, in fact, the antithesis of the way Apple makes and sells its iPod music-players, which are arguably the sexiest technological devices around at the moment. Dell’s PCs are based on industry-standard technologies. They are sold direct, through Dell’s website. And the company’s efficiency allows it to offer low prices, squeezing out less competitive rivals while still making a profit. The iPod, by contrast, is based on proprietary standards, is sold through Apple’s glitzy chain of retail stores, and is priced at a premium to rival players. This week Dell launched a new music-player, the DJ Ditty, as a challenge to Apple. As you would expect, it is cheap, powerful, but not terribly exciting. ‘Tape-backup drives are a far bigger business for us, or LCD projectors’, says Mr Dell. Such products, along with storage-area networks, servers, and other bits of corporate-computing gear—only 15 per cent of Dell’s sales are to consumers—may not be as glamorous, but are far more lucrative. Dell’s ability to churn out profits in a predictable and reliable manner has made it a favourite among investors. Look at the last 10 years of sales data in the firm’s 15 biggest markets—a total of 150 data points—and you will find that it increased its market share in 144 cases, says Mr Dell. That is strong evidence, he says, that his firm’s business model ‘works everywhere, in a multitude of market conditions’. But might the Dell machine be in danger of running out of steam? Last month, Dell announced that, despite record earnings, its second-quarter sales had grown by a mere 14.7 per cent, rather than the 16–18 per cent it had forecast, and that sales in the current quarter would also be slightly lower than expected. Its share price immediately fell by nearly 10 per cent, and has since declined further. 9780199288304_C05 142 11/12/07 11:12 AM Page 142 part 2 Strategic Analysis The case against Dell was made most strongly by Laura Conigliaro, an analyst at Goldman Sachs, who downgraded Dell from ‘outperform’ to ‘neutral’. Dell is unlikely to return to reliable double-digit revenue growth in future, she argues. It faces increasing competition from Asian vendors such as Acer and Lenovo, and a widening gap between unit growth and revenue growth. And it is a far less nimble company than it used to be. ‘The company has now come up short of revenue expectations four quarters in a row, with each quarter’s miss caused by a different combination of market conditions and execution miscues’, she wrote. In short, Dell is a victim of its own success: its scale means it is running out of room for growth, cannot respond quickly to changing market conditions, and no longer deserves to be valued at a premium to its rivals. Really? 5 Room for Growth, Outside America Mr Dell says he has heard all this before, ‘maybe ten thousand or twenty thousand times’. Back in the 1990s, he recalls, critics claimed there were limits to the firm’s direct-sales model, and suggested that Dell would never be able to make laptops or servers. ‘People say the sky has fallen, that it’s the beginning of the end’, he says. ‘I don’t agree. There are lots of markets with room to grow’. This week Kevin Rollins, who took over from Mr Dell as chief executive officer in 2004, said the company hopes to double or even triple its market share in Europe, which is around 13 per cent, compared with 32 per cent in America. Sales in The Netherlands, for example, are growing by 40 per cent a year. Dell’s worldwide market share of around 19 per cent means there is also room for growth in other regions, notably Asia. But won’t low-cost Asian vendors be difficult for Dell to elbow aside? No, says Mr Dell. The firm is, in effect, an Asian vendor itself, with factories in China and Malaysia. Dell is more efficient than Lenovo, he says, and more profitable, thanks to its direct-sales model. Other growth areas are printers, storage systems, and services. In printing, profit margins are unusually high, notes Mr Dell. ‘We’ll fix that’, he says, just as the company did when it undercut the high-margin incumbents in the server business. Dell’s services arm, meanwhile, which installs and manages computers for large companies, now represents 10 per cent of its business, and is growing twice as fast as its PC division. What of the charge that Dell’s size means it is less responsive to shifts in demand? Mr Dell makes a point of making regular visits to the company’s call-centres—and even takes a few calls himself—to make sure that he still understands consumer demand. On one of these visits, the deluge of calls received convinced him that the company had gone too far in slashing the prices of its consumer PCs—a move that had compensated for slowing demand from the American government, but hurt the firm’s margins. Mr Dell enjoys his spells in the call-centre—they are, he says with relish, ‘lots of fun’. 9780199288304_C05 11/12/07 11:12 AM Page 143 the internal environment: a resource-based view of strategy 143 Evidently Mr Dell’s idea of fun is different from that of his peers, with their yachts, planes, and spaceships. Like his firm, he is predictable rather than glamorous. But that is the way investors like it, and he intends to keep things that way. Source: ‘Technology’s Mr Predictable’ Economist, 22 September 2005 Questions 1. Identify the resources and core competencies of Dell? 2. Why do competitors find it so difficult to imitate Dell’s direct-sales model given that its products are based on standard industry technology? 5 5.3.1 Make or Buy Decision The recognition of an organization’s core competence or activities that it performs exceptionally well can be the basis for its decision to provide a product or service itself, or to outsource it. If the organization is to focus on its core competencies as the basis of its sustainable competitive advantage, then the corollary of this is that activities which do not constitute a core competence for the firm can be given to outside firms who can provide these at a lower cost. This decision is intrinsically linked with an understanding of the activities contained within the firm’s value chain. For example, British Airways recognize that the provision of in-flight meals and services add little value to their overall activities and that they have no core competencies in these functions. As a result they realize that this function can be best attended to by outside catering organizations. The make or buy decision, or what is more appropriately termed transaction costs, will be discussed in greater detail in Chapter 8. 9780199288304_C05 11/12/07 144 11:12 AM Page 144 part 2 Strategic Analysis 5.4 Criticisms of the Resource-Based View 5 Most would agree that the resource-based view of the firm represents a leap forward in strategic management. There are clear links and complementarity with the work of Michael Porter and the positioning school, and equally sharp departures. Whether one would go so far as classifying the resource-based view as a new paradigm within strategic management is a matter of debate. Furthermore, although there are benefits to the resource-based view of strategy, it is not without criticisms. A common criticism made of the resource-based view is that it says very little on the important issues of how resources can develop and change over time. Similarly, the dynamic role played by individuals within organizations is often assumed to be self-evident and therefore seldom addressed. Others have argued that the resource-based view of strategy lacks detail and is therefore difficult for organizations to implement (Priem and Butler 2001). A more detailed road map is required if it is to prove useful to organizations. Lastly, we are back in the realm of deliberate strategies (see Chapter 1) with no formal recognition of emergent strategies and the role that these might play. 5.5 Knowledge Management The Internet has given rise to talk of a new economy which plays by different rules to the old economy. Whereas in the old economy an organization’s capital assets are crucially important, in the new economy intellectual assets predominate. The real question regarding the Internet is: does it represent a new paradigm or new way of doing business? Porter (2001) disagrees with those who argue that the Internet represents a new way of doing business. He points out that it is the established organizations that are benefiting from their use of the Internet to improve their product offerings and strategy. Whilst the Internet may simply be conducive to aiding existing business practices it has undoubtedly helped with the wide dissemination of knowledge. knowledge management refers to processes and practices through which organizations generate value from knowledge Grant (2005) argues that much current thinking about resources and capabilities has been shaped by an interest in knowledge management. (See Case Study: Knowledge Management at Dyson which illustrates how the knowledge capability that resides within the Dyson organization is being used to re-enter the washing machine market.) Much of the literature has been dominated by organizational learning. It has exhorted firms to become learning organizations and offered remedies for teaching smart people how to learn. We will say more on these issues in Chapters 10 and 11. Grant 9780199288304_C05 11/12/07 11:12 AM Page 145 the internal environment: a resource-based view of strategy 145 suggests that the single most important contribution of knowledge management is the recognition that different types of knowledge have different characteristics. We might also add that, unlike other resources, knowledge tends not to be depleted with use. Furthermore, the leveraging of knowledge across organizational boundaries is an active pursuit of most corporations in their search for sustainable competitive advantage. This search can also be achieved by the organization entering into strategic alliances (see Chapter 9). case study 5.2 Knowledge Management at Dyson 5 James Dyson has been doing a lot of pondering recently about the differences between washing machines and vacuum cleaners. For a decade, he has nurtured an ambition to become as big a force in appliances to clean people’s clothes as those to clear the debris from their carpets. While his foray in floor cleaners has turned out to be a big success, Mr Dyson has so far struggled to make a mark when it comes to machines for washing. Aged 59, Mr Dyson is one of Britain’s best-known entrepreneurs. He has an army of fans, some of whom are competitors. Hans Straberg, chief executive of Electrolux, the Swedish company that is the world’s second biggest maker of domestic appliances, says Mr Dyson ‘has done a great job’, while Sir Anthony Bamford, chairman and owner of the JCB excavator company, says ‘James has been a fabulous success. Britain needs more people like him’. But among the problems Mr Dyson faces trying to make headway in washing machines—an industry with global annual sales of some £15bn and with big competitors including Whirlpool of the US and Japan’s Matsushita—are the fundamental differences between these and vacuum cleaners. Mr Dyson gained success in vacuum cleaners through high price and stylish machines that featured a new way of sucking up dirt without a bag, which appealed to consumers’ desire to try something new. Washing machines, however, are considered by many to be extremely dull. Whether they will pay significantly extra for a new design—even if its performance is better—is open to question. ‘I think James will have to do something very unusual if he is to replace the success he has had with vacuum cleaners in washing machines’, says Graham White, head of the UK operations of Candy, the Italian white goods producer whose UK brands include Hoover. Others say that the complexity of manufacturing washing machines—which feature a host of sophisticated mechanisms including pumps and motors that have to work reliably—is a lot higher than for the relatively simple design of a vacuum cleaner. Six years ago Dyson unveiled a novel type of washing machine—called the ‘Contrarotator’ because it featured two drums spinning in 9780199288304_C05 5 146 11/12/07 11:12 AM Page 146 part 2 Strategic Analysis opposite directions. The machine was very expensive, retailing at more than £500, or twice the price of a standard washing machine sold in the UK. However, even in the product’s best year for sales in 2002, according to market research data, the Contrarotator accounted for sales of only 18 000 units in the UK, out of total washing machine sales of some 2.2m a year. In 2005, the number of Contrarotators sold slumped to 2500. Counting only those sales of ‘up-market’ washing machines retailing at above £500, the Dyson product chalked up a creditable 21 per cent share of the market in 2002. But by 2005—when the machine was quietly withdrawn—this figure had fallen to 2 per cent. Mr Dyson insists instead that a new type of washing machine—now being worked on by a research and development team at Dyson’s headquarters in Malmesbury, Wiltshire—will be better than the first one. Mr Dyson says: ‘We will develop a new machine and then see how many people want to buy it. I am sure it can be a success’. Mr Dyson had to show a lot of perseverance in vacuum cleaners. In the early 1990s he faced huge scepticism that he would make headway in this field. But in the past year the company’s sales reached £470m, roughly two-thirds of which came from outside the UK, while pre-tax profit for the year was £103m, up 32 per cent on 2004. Almost all the sales come from vacuum cleaners—a product in which Dyson has built large sales in the US and Japan. The recent picture has been less good in the UK, where total sales of vacuum cleaners have fallen in the past 2 years due to fierce price competition and a squeeze on household spending. Dyson’s market share by value in the UK vacuum cleaner business—where it is still the market leader—has fallen from about 44 per cent in 2002 to about 37 per cent last year, according to industry data. Four years ago the company controversially closed its UK factory, axing 620 jobs, opting to make its products in Malaysia where manufacturing costs are lower. Even so, staff numbers in the UK (including 420 R&D people) now total 1400, not far short of the 1800 the company employed in the UK in 2002. Mr Dyson describes himself not as an entrepreneur but rather as someone pursuing a ‘gentlemanly hobby’. He adds: ‘I am basically interested in building new machines for myself. I am not really interested in business for its own sake’. But Mr Dyson knows that if he is [to] replicate his floor-care achievements in the different field of washing machines, he still has a lot to prove. Source: ‘A 10-year struggle to clean up in appliance market—James Dyson hopes to repeat his vacuum cleaner success with washing machines’ Financial Times, 27 June 2006 9780199288304_C05 11/12/07 11:12 AM Page 147 the internal environment: a resource-based view of strategy 147 Questions 1. How difficult is it for a competitor to imitate the resources and capabilities that reside inside the Dyson organization? 2. Identify what, if any, are the distinctive capabilities that exist within Dyson? 3. To what extent are intangible resources sufficient for an organization to achieve competitive advantage? For the organization, managing knowledge will require an understanding of its characteristics. If organizations are to learn and grow they need to be able to share tacit knowledge effectively. However, managing this tacit knowledge throughout all areas of the organization is a daunting task. If an organization is to learn in ways that benefit its performance, individuals and groups within the organization must be willing to modify their behaviour accordingly. What is apparent is that the knowledge-based economy is here to stay. Therefore the question for organizations is not Should we? but How do we? Summary The resource-based view has shaken up strategic management by questioning industry selection and positioning which results in organizations pursuing similar strategies. Instead, this approach emphasizes the organization’s own set of resources and capabilities as a determinant of competitive advantage. 5 Nonaka and Takeuchi (1995) differentiate between knowledge that can be seen as tacit and knowledge that can be seen as explicit. Explicit knowledge or ‘knowing about’ is revealed through communication and can be readily transferred. Examples might include company accounts, or how to put up a tent. It is precisely because explicit knowledge is so readily transferred that it requires some form of protection, such as copyright, if it is to remain within the organization. Tacit knowledge or ‘knowhow,’ in contrast, cannot be codified. It is highly personal, and difficult to formalize and disseminate to others. It is revealed through its application and acquired through practice. It consists of mental models, beliefs, and perspectives. No matter how many times one explains how to ride a bicycle to a four-year-old he will only acquire the knowledge through practice. Transfer of tacit knowledge can be slow, costly, and uncertain. Tacit knowledge will require individuals to coalesce around the provider of that knowledge if it is to be eventually acquired. 9780199288304_C05 148 11/12/07 11:12 AM Page 148 part 2 Strategic Analysis 5 In this chapter we have explored and delineated resources, core competencies, and distinctive capabilities in order to identify how competitive advantage might be achieved. We also looked at the issue of sustainable competitive advantage. There is slight confusion among the terms used by different adherents to the resource-based view but, as we have seen, this is readily overcome. Where Prahalad and Hamel discuss core competence, Kay uses the term distinctive capabilities; both are a means of achieving sustainable competitive advantage. Grant distinguishes between resources and capabilities and proposes a five-stage framework for strategy formulation. We examined four attributes an organization’s resources must possess in order to provide it with the potential for sustainable competitive advantage. We also addressed some of the criticisms of the resource-based view which relate to difficulties that organizations may experience in trying to implement this approach. We concluded the chapter with a discussion of knowledge management and the challenges facing organizations as they try to manage tacit knowledge. We end by arguing that Porter’s industry analysis remains important and the choice should not be seen as one of either/or but rather one of complementarity. Organizations cannot neglect the industries within which they operate, but neither can they afford to focus slavishly upon it at the expense of their internal resources and miss opportunities to establish sustainable competitive advantage. Review Questions 1. Evaluate the key differences between Porter’s five forces framework and the resource-based view of competition. 2. What do you believe is the contribution of the resource-based view to strategic management? Discussion Questions 1. To what extent does the resource-based view represent a new paradigm within strategic management? 2. What is the role of knowledge within modern corporations and how can it be managed effectively? Research Topic Identify the internal resources and capabilities that reside within British Airways. Evaluate whether these provide the airline with a sustainable competitive advantage? 9780199288304_C05 11/12/07 11:12 AM Page 149 the internal environment: a resource-based view of strategy 149 Recommended Reading A good introduction to the resource-based view is provided by: • Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. An article that is widely credited with popularizing the views of the resource-based approach is: • Prahalad, C.K. and Hamel, G. (1990). The core competence of the organization. Harvard Business Review, 68(3), 79–91. For an explanation of how organizations with fewer resources but bigger aspirations than their competitors can compete successfully, see: For a detailed discussion of distinctive capabilities, see: • Kay, J. (1993). Foundations of Corporate Success, Oxford University Press. www.oxfordtextbooks.co.uk/orc/henry Test your understanding of this chapter with online questions and answers, explore the subject further through web exercises, and use the weblinks and journal abstracts to provide a quick resource for further research. Notes 1 See www.harrisinteractive.com for a list of companies and their reputation quotient (the Reputation Index). 2 See www.harrisinteractive.com. References Amit, R. and Schoemaker, P.J.H. (1993). Strategic assets and organizational rents. Strategic Management Journal, 14(1), 33–46. Barney, J. (1991). Firm resources and sustained competitive advantage, Journal of Management, 17(1), 99–120. 5 • Hamel, G. and Prahalad, C.K. (1993). Strategy as stretch and leverage. Harvard Business Review, 71(2), 75–84. 9780199288304_C05 5 150 11/12/07 11:12 AM Page 150 part 2 Strategic Analysis BusinessWeek (2007a). The 50 most innovative companies. BusinessWeek Online, 3 May 2007 (available online at: www.businessweek.com). BusinessWeek (2007b). An official measure of innovation. BusinessWeek Online, 20 April 2007 (available online at: www.businessweek.com). Collis, D.J. and Montgomery, C.A. (1995). Competing on resources: strategy in the 1990s, Harvard Business Review, 73(4), 118–28. D’Aveni, R.A. (1999). Strategic supremacy through disruption and dominance. Sloan Management Review, 40(3), 117–35. Grant, R.M. (1991). The resource-based theory of competitive advantage: implications for strategy formulation. California Management Review, 33(Spring), 114–35. Grant, R.M. (2005). Contemporary Strategy Analysis, 5th edn. Boston, MA, Blackwell. Hamel, G. and Prahalad, C.K. (1993). Strategy as stretch and leverage. Harvard Business Review, 71(2), 75–84. Kay, J. (1993). Foundations of Corporate Success. Oxford University Press. Kay, J. (2000). Strategy and the delusion of grand design. In Mastering Strategy, pp. 5–10, Pearson Education, Harlow. Nonaka, I. (1991). The knowledge creating company. Harvard Business Review, 69(6), 96–104. Nonaka, I. and Takeuchi, H. (1995). The Knowledge Creating Company. Oxford University Press. Penrose, E.T. (1959). The Theory of the Growth of the Firm. Wiley, New York. Peteraf, M. (1993). The cornerstones of competitive advantage: a resource-based view. Strategic Management Journal, 14, 179–91. Porter, M. (1980). Competitive Strategy: Techniques for Analysing Industries and Competitors. Free Press, New York. Porter, M. (1996). What is strategy? Harvard Business Review, 74(6), 61–78. Porter, M.E. (2001). Strategy and the Internet. Harvard Business Review, 79(3), 62–78. Prahalad, C.K. and Hamel, G. (1990). The core competence of the organization. Harvard Business Review, 68(3), 79–91. Priem, R.L. and Butler, J.E. (2001). Is the resource-based ‘view’ a useful perspective for strategic management research? Academy of Management Review, 26(1), 22–40. Rumelt, R.P. (1991). How much does industry matter? Strategic Management Journal, 12(3), 167–85. Stalk, G., Evans, P., and Schulman, L.E. (1992). Competing on capabilities: the new rules of corporate strategy. Harvard Business Review, 70(2), 57–69. 9780199288304_C05 11/12/07 11:12 AM Page 151 Strategy for the Internal Environment Presentation prepared by Dr. Debra Louis Connelley Touro University International Click on the speaker icon for sound. Looking Ahead Competitive advantage: Value creation, low cost, & differentiation The building blocks of competitive advantage Business functions, the value chain and value creation Distinctive competencies, resources, and capabilities The durability of competitive advantage Why do companies fail? Avoiding failure and sustaining competitive advantage Competitive Advantage: Value Creation, Low Cost & Differentiation Value: Value to the customer – cost A firm can increase value by lowering costs or increasing the value to the customer (design, quality, etc.) – Low cost (Compaq) – Differentiation (Nordstrom’s) The concept of value creation lies at the core of competitive advantage. A company has high profits when it creates more value for its customers. The Building Blocks of Competitive Advantage Superior quality Superior efficiency Competitive Advantage: •Low cost •Differentiation Superior innovation Superior customer responsiveness Business Functions, the Value Chain, and Value Creation Company infrastructure Support Activities Human resources Materials management Inputs Research & Production development Marketing and sales Primary Activities Service Outputs Distinctive Competencies, Resources, & Capabilities Resources Differentiation Superior Distinctive Competencies Capabilities •Efficiency •Quality •Innovation •Customer responsiveness Value Creation Low Cost Higher Profits The Durability of Competitive Advantage Barriers to Imitation – Imitating resources – Imitating capabilities Capacity of Competitors Industry Dynamism Why do Companies Fail? Inertia Prior Strategic Commitments The Icarus Paradox Avoiding Failure and Sustaining Competitive Advantage Focus on the building blocks of competitive advantage Institute continuous improvement and learning Track best industrial practice and use benchmarking Overcome inertia Strategy for the external environment Powerpoint Presentation Prepared by Dr. Debra Louis Connelley Touro University International Click on the speaker icon for sound. Looking Ahead Situation analysis in strategic planning Methods of industry and competitive anlysis – Economic analysis – Competitive forces – Industry change Conducting an industry and competitive analysis Situation Analysis Purpose: To identify environmental factors that affect – Strategic opportunities – Options for action Two components – External – Internal Economic Analysis Market size and growth rate Number & characteristics of competition Entry & exit barriers Technological change Products & customers Scale economies & learning curve Capital needs & capacity Industry profitability Porter’s Five Forces Model of Competition Risk of Entry Of Potential Competitors Bargaining Power of Suppliers Rivalry Among Established Firms Threat of Substitute Products Bargaining Power of Buyers Rivalry Most Powerful of the five forces Tactics of competitive rivalry – Price – Quality – Features – Service – Advertising – Dealers – Innovation Intensifying Rivalry Loss of competive firms Slow demand growth Pressure to boost volume Low customer switching cost Predatory moves by competitors Large payoff potential High exit costs Diversity Risk of Potential Entry Incumbent firms Barriers to entry – Economies of scale – Absolute cost advantages – Brand loyalty – High switching costs – Government regulation Pharmaceuticals, household detergents, commercial jet aircraft Substitute Products Can place ceilings on prices/profits Customers compare quality, performance & price Lower switching costs = easy substitution Strength indicators for substitute products – – – – Growth rate Market inroads Capacity expansion Increasing profitability Bargaining Power of Suppliers Determinants of strength – Large portion of product cost – Crucial to production or quality – High switching costs – Reputation & demand – Lower costs – Few or no substitiutes – Buyers are not important customers Bargaining Power of Customers Determinants of Strength – Purchase a large percentage of product – Buy in volume – Low switching costs – Availability of substitute sellers – Standardized product – Ability to integrate backward – Product has low value to buyer Summary of Five Forces The competitive environment is unattractive when: 1. 2. 3. 4. Rivalry is strong Entry barriers are low Competition from substitutes is high Suppliers and customers have strong bargaining power A company whose strategy provides a good defense against the five forces can earn above average profits. Industry Change External/driving forces are a major cause of industry change Driving Forces Analysis (1-3 years) Types of driving forces – – – – – – – Change in long-term growth rate Change in purchasing & usage patterns Product, technical, or process innovation Entry/exit of major firms Diffusion of technical knowledge Globalization Regulation, social concerns, attitudes Environmental Scanning Strategic Analysis: Key Success Factors (KSF’s) Specific skills/talents, competitive capability (ability to satisfy customer) Assessing Competitive Positions – Strategic group map – Competitor analysis Current strategy Likely future strategies Assessing Overall Industry Attractiveness Market size & growth potential Favorable/unfavorable driving forces Potential for exit/entry of major firms Stability of demand Strengthening/weakening competitive forces Risk/uncertainty of industry future Rising/falling of industry profitability Remember: Firms that are uniquely situated in an unattractive industry can still earn unusually high profits! Rubric Assessment Rubric Name: MBA/MSHRM/MSL Discussion Grading Rubric - Timeliness v1 Criteria Level 4 - Excellent Level 3 - Proficient Level 2 - Developing Level 1 - Emerging 4 points Quality of Initial Posting (first discussion only) Initial posting reveals a clear understanding of all aspects of the threaded discussion question; uses factual and relevant information; and demonstrates full development of concepts. 6 points Responded to the required number of Quality of Responses students and to the to Classmates professor, if appropriate, for every discussion. Demonstrated analysis of others’ 3 points 2 points 1 point Initial posting demonstrates legitimate reflection and answers most aspects of the threaded discussion question; full development of concepts is not evidenced. Initial posting demonstrates some reflection and answers some aspects of the threaded discussion question; Limited development of concepts is evident. 5 points 4 points Responded to almost all of the required students and to the professor, if appropriate, for every discussion. Provided comments and new 3 points Responded to some students and to the professor, if Did not respond to appropriate, for every any student or the discussion. Little professor. depth in response; agreed or acknowledged one 1 Initial posting was not on topic; the response was unrelated to threaded discussion question; and post demonstrated only superficial thought and poor preparation. posts; extends meaningful discussions by building on previous peer posts and offering alternative perspectives. 3 points Reference to Refers to and Supporting properly cites either Readings/Information course and/or outside Literacy readings in both initial posting and responses to peers. 4 points Critical Thinking Demonstrates mastery conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are logically presented information to other other classmate’s posts; not all initial posting. responses promote further discussion of the topic. 2 points 1 point 0 points Refers to and properly cites course and/or outside reading in initial posting only. Makes some reference to assigned readings with some citations or cites questionable sources. Makes no reference to assigned readings without citations or cites questionable sources. 3 points Demonstrates considerable proficiency conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are 2 points Demonstrates partial proficiency conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are somewhat consistent 2 1 point Demonstrates limited or poor proficiency conceptualizing the problem; viewpoints and assumptions of experts are analyzed, synthesized, and evaluated; and conclusions are with appropriate rationale. 3 points Timeliness Overall Score presented with with the analysis and either absent or necessary rationale. findings. poorly conceived and supported. 1 point 2 points 0 points Initial post occurs Initial post occurs in Initial post occurs substantially late (6-7 a timely manner (1 – later (4 – 5 days into days into module) Initial post occurs 3 days into module) module) allowing allowing minimal to after the first week allowing ample time limited time for no time for of the module. for classmates to classmates to classmates to respond respond and engage. respond and engage. and engage. Level 4 18 or more Level 3 16 or more Level 2 14 or more 3 Level 1 0 or more Student Guide to Writing a High-Quality Academic Paper Follow these guidelines when writing academic papers, including your Case and SLP assignments.  An effective academic writing style is an essential part of a university education.  Poorly written papers detract from your ability to effectively share your knowledge and ideas with others, including your professors.  This guide will help you prepare high-quality papers that are: ▪ Logically argued ▪ Clearly structured and formatted ▪ Written in a professional, academic style The basic structure of an academic paper includes: 2 1. Cover page 2. Introduction 3. Body of the paper (which may have subsections) 4. Conclusion 5. Reference page The cover page of an academic paper should include the: ▪ University name ▪ Student’s name ▪ Assignment title ▪ Course number and name ▪ Professor’s name ▪ Date Note: Some professors recommend adding the assignment instructions (tasks and/or questions) to the bottom of the cover page to help students make sure they have addressed each part of the assignment. 3 University Name Student’s Name Module 1 Case Assignment Course Number: Course Name Professor’s Name Date In the introduction, provide a brief, clear overview of: 1. Each problem or issue that you will discuss 2. The solution to the problem(s) or your response to the issue(s) 4 3. How you will prove or demonstrate that your solution or response is correct Tip: Try writing the body of your paper first. Then come back and write the introduction once you know what your paper is about. 5  The body of the paper is where you discuss the solution to the problem(s) or your response to the issue(s) raised in the assignment.  After you have read the materials related to the assignment, begin by creating a quick outline: ▪ What are the main points of your argument? Jot them down. ▪ Depending on the length of the paper, 3–6 main points should be plenty. ▪ If a point is complex, it may have 2 or 3 sub-points. Jot those down as well. ▪ Now arrange those points in a logical sequence. ▪ Which point needs to be made first because it provides a basis for the points that follow? 6 ▪ For example, “Point A leads to point B, which leads to point C, and when A, B, and C are considered together they mean that the solution is point D.” Example of the structure of a Case Assignment that requires 4 pages of text (not including the cover page, and not including a reference page for assignments that require one): Main Sections Points Sub-points Page # # of Paragraphs 1 1 Point A 1 1 Point B 2 1 Cover Page Introduction Body of Paper " " Sub-point 1 2 1 " Sub-point 2 3 1 7 " Point C 3 1 " Point D 4 2 4 1 Conclusion Reference Page In the body of your paper:  Use headings and subheadings to help your reader follow the points and subpoints in your discussion and to better organize sections and subsections.  Give each point and sub-point a short name that tells your reader what that section is about. Use those names for your headings.  Here is a quick “how-to” guide to headings with links to examples and instructions: http://blog.apastyle.org/apastyle/2011/04/how-to-use-fivelevels-of-heading-in-anapa-style-paper.html  Now you are ready to begin writing the body of your paper. 8 ▪ Discuss one point at a time and explain each point clearly. ▪ Discuss one point or sub-point in each paragraph. ▪ As you advance to writing more complex papers (e.g., upper-division undergraduate or master’s-level assignments), it may take 2 or 3 paragraphs to fully develop and support a point. 9 In the body of your paper:  Each paragraph should be made up of approximately 3–5 sentences. (Note: A single sentence is not a paragraph. Break long sentences into 2 or 3 shorter ones.) Each paragraph should include: ▪ The point or focus of that paragraph in the first sentence ▪ Additional sentences in which you explain, elaborate, and support your point (see section on Supporting Your Points that begins on the next slide) ▪ A conclusion/transition to the next point and paragraph  Each point should be supported by citing and referencing the sources that provide the foundation for your solutions and/or responses. How to do this will be discussed on the next slide. Supporting Your Points  What makes an academic paper “academic”? How does an academic 10 paper differ from other types of writing—for example, a short story, a blog, a newspaper article, a business letter, or an e-mail message?  In an academic paper: ▪ You must provide support for each idea, statement, or point that you make that is based on someone else’s ideas. ▪ Support is provided through citations and references. (References are discussed beginning on Slide 17.) Citations appear within the paper itself wherever you draw upon another person’s ideas or another source of information. References are listed on a separate page at the end of your paper. ▪ Each citation refers to a specific reference so that your reader can look up the sources of your support and read them for himself or herself. ▪ Citations are short and usually only include the author’s last name and the date of publication of the author’s work, for example, “In a study of K–12 education, Jones (2013) found that…” 11 Citation Examples   You can cite at the beginning or ending of a sentence: ▪ According to Jones (2007), a reason for poor student performance is large classroom size. ▪ Student performance decreases as classroom size increases (Jones, 2007). When multiple sources support your point, cite them together in alphabetical order at the end of the sentence: ▪ Educators agree that large classroom size decreases student performance (Adams, 2005; Jones, 2007; Smith, 2008).  When a source is written by more than one person, give their last names in the citation at the end of the sentence, like this: (Smith, Adams, & ...
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