Darko Petričević - Welcome_ EDAMBA - European Doctoral by qingyunliuliu

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									                       The Relevance of Resource Theory
                             in Strategic Positioning
                        of the Metal Processing Industry
                                    in Croatia




Darko Petričević
Faculty of Economics and Business
University of Zagreb
Kennedy Square 6, Zagreb
Croatia



Telephone:   +385 98 232369
Fax:         +385 1 2316747
Email:       darko@petrakom.hr ; dpetricevic@ventilator.hr




Supervisor:        Prof. Lovorka Galetić, Ph. D. Econ.
Supervisor, Email: lgaletic@efzg.hr




                          16th EDAMBA Summer Academy
                                  Soreze, France
                                    July 2007
Abstract:

         The analysis of an industry and the strategic implications that are linked with the
concept of the five competitive forces M. Porter represents a more broadened and
encompassed model than what is offered by the resource approach to a company. The
resource approach definition explicitly suggests that resources and vital competencies as inner
capabilities determine the dominant strategy of companies. Then again, these examples leave
a limited amount of options for strategic actions in the case that the company does not possess
these types of competencies, for example; if the company is in an inferior position within,
conditionally said, mature industries, if there is not a close market or industry for transferring
the effects of the up to present technological innovations, and on the whole, if there is hardly a
technological development for the progress of the industry or the industry simply takes over
complete technological solutions, that is, the product of innovations from the environment,
and does not create it itself.
         The limitation of the structural approach strategy is also that it can be applied only for
the analysis of business strategy. In other words, it does not include the analysis of synergy
effects and dependencies within major diversified corporations. The model of “Parenting
Advantage” is developed as an addition to the five competitive forces model and explains in
detail; the competitive values of a company created by portfolio management, the function of
decentralization of a company, and synergy effects within the corporation itself.
         Furthermore, the business environment that quickly and drastically changes the
demands mainly because of new technological achievements is a more flexible approach
towards forming strategies than is described in the five competitive forces model. According
to the Disruptive Innovation Theory, established by Clayton Christensen, the new
technological innovations are not considered a threat to the existing industry, but an
opportunity for the product that was accessible to a certain segment of the market is offered to
the “average” buyer and in this manner the market is expanded and profits are increased.
Which approach is the best, complete, dominating, and precise is difficult to evaluate for in
literature and in practice numerous examples are supported by both schools. It is for certain
that these approaches as complementary offer a holistic picture of the company’s competitive
environment and the basic determinants of its strength through the specific resources it
possesses.


Keywords:      structural approach strategy, competitive advantage, resource approach
               strategy, distinctive competency, vital competency, distinctive competency,
               asymmetrical approach, blue ocean strategy, disruptive innovation theory.




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1. Introduction

         Regardless of the heterogeneity of the objectives that a company wishes to
accomplish, two fundamental goals are for certain, viability, and profitability. In achieving
these aims the company encounters upon countless opportunities and obstacles whose source
is internal or external. The company’s goals can be actualized only with the aid of an
adequate analytical frame that shall enable the insight of the major determinants of these two
areas.
         The study of academic experts and of consultant-houses reveals numerous modalities
of strategic analysis and company evaluations.       Since the beginning of the last century
researchers have aimed at finding the answer to the question “why some companies
continuously achieve better results than others?” The answer was sought for in the first
researcher’s efforts in distinctive competencies – a characteristic in a company that enables
effective and efficient enforcement of the strategy. In the eighties this was a dominant
economic perspective. Starting from 1979, M. Porter poses the framework for strategic
analysis of companies which contrary to previous approaches is more oriented towards the
external - towards the analysis of the industrial structure. As a criticism towards the external
orientation of the strategic and structural approach during the late eighties and nineties, and
through the engagements of numerous researchers, once again the Resource-based theory is
an affirmed strategy of companies. Theoreticians of the resource approach suggest that the
competitive positioning in existing industries is a secondary strategic issue in circumstances
of great variability and uncertainty of the environment.          The category of competitive
advantage is eluded from the industrial analysis and remains the crucial issue in the long-term
existence of the company, independent of the industry’s future.


2. The structural approach strategy


         The basic proposition of the structural approach strategy is the search for a position
within the industry (the existing, as well as, those we compete with, and also those within the
potential) that would enable us to be positioned better in relation to competitive forces, and to
achieve an above average profit.
         The structural approach strategy was established by Michael E. Porter, by observing
long-term profitability as the basic characteristic of company competitiveness. Not only as a




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result of the development of strategic activities but also as the position of the company in the
competitive environment in which the company exists.
       According to Porter’s theory the competitive advantage of a company consists of (1)
the appeal of the activity in which the company competes and (2) the relative position of the
company in the industry. The basic determinants in the structural approach strategy of a
company is defined according to (1) three basic competitive strategies for developing
Competitive advantages, (2) Value Chain Framework – a model that enables the management
of a company an analysis of specific activities within the company through which the
company attains added value and competitive advantages and (3) a model of five competitive
forces that are tended to determine the relative position of the company in relation to its’
industry.


3. The resource approach strategy of companies


       The resource approach strategy takes as a starting point the fact that, in the
circumstances of high variability and uncertainty of the environment to achieve competitive
advantages strategic positioning is not sufficient in existing industries. As complete industries
may fall under, competitive battles shift towards new activities that may in the long run insure
above average profits, the so-called future markets, the force for creating and conquering new
markets are discovered in the capabilities of the company that are bound to resources that the
company possesses.
       The competitive advantage is linked to the resource traits that the company possesses,
its’ heterogeneity and immobility, as well as, its’ asymmetrical distribution in various
industries.
       Ordinarily three types of resources are under consideration:
                 Tangible assets, located in the balance sheet of companies and simple to
                  identify, but it represents all the physical and financial assets that a company
                  makes use of so as to ensure value to its customers.
                 Intangible assets, which are considered to be rendered from human and
                  informational resources, and their knowledge and experience, the trade mark
                  and the reputation of the company.
                 The organizational capabilities that constitute the skills in combining assets,
                  people, and processes the company utilizes in accomplishing its purpose.



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    The analysis of resources results in the estimation of the capabilities of the company to
withstand to external threats. The analysis often proves that the company has a range of
capabilities, but only a few are vital for the company’s long-term success, and because of this
the company differentiates from the competition (Distinctive capabilities).
    Even though the origin of the resource approach strategy can be found as far back as
1959 when E. Penrose claimed that “a company is more than an organizational unit, it is also
a collection of productive resources whose availability is towards the clients and during time
an organization decision”, J. Barney is considered to be the originator of resource approach
strategy and the VRIN approach strategy from 1991 is explained in detail hereafter.


3. 1. The company’s resource approach


       The theory based upon resources emphasizes that there must be a difference in the
usage of resources among companies, also that the strategic task of the management is to
identify, develop, and use these vital resources so as to achieve above average profits.
       In the abbreviation VRIN are given the key guidelines that constitute valuable
resources, i.e. valuable asset, capability, and competence – VRIN is an abbreviation of the
English term for attributes that resources should be, so as to achieve competitive advantage
(VRIN stands for Valuable-Rare-Imperfectly Imitable-Non-Substitutable):
              Competitively superior (valuable) means that the company with its resources
               can fulfill the needs of the customer better than its competitors, that is, a better
               (efficient and effective) use of the resources than its competitors.
              Rare signifies the resources the company possesses, whereas the competition
               does not or it is difficult to come to.
              Imperfectly imitable - since the impossibility of imitation isn’t everlasting,
               certain isolation mechanisms are developed that determine the resources that
               are difficult to imitate such as:
                           o Physical unique resources, for instance, one of its kind whether
                               being the location or the patent that is impossible to imitate.
                           o Hindered accessibility is applied to those resources that are
                               created during time or are rather expensive.
                           o Causal obscurity - an organizational capability to combine
                               resources, where the competition cannot clarify the combination
                               of resources that contribute to the success.


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                            o Economic intimidation that is usually conducted in massive
                                 investments of capital on the market that is sensitive to volume.
               Non-substitutable – it is interesting that irreplaceability as a competitive
                advantage is emphasized in resource approach strategy, and in competitive
                forces in industrial structural analysis.
        Resources with VRIN characteristics are difficult to create. The techniques of
establishing effective activities in the company as re-designing, downsizing, and so forth are
available and recognizable to the competition on the market in a fairly transparent manner,
and can hardly be used as a source of long-term advantage.


3. 2. Concept of vital competency


        The concept of vital competency is a model in which the strategy of the company is
based upon its vital organizational strength, and therefore is also known as “inside-out
business strategy.”
        While the “outside-in” approach strategy (as in the case of Porter’s analysis of five
competitive forces) places the market, competition, and buyers as the starting point in forming
strategies, the concept of vital competency approaches strategy from the reverse and bases the
competitiveness of companies upon its capability to recognize and build vital competencies
with lower costs and much quicker than the competition. With developing vital competencies
we can come to unexpected products. The actual origin of advantages is in the capability of
the management to consolidate developed technologies and experience in production so that
the production in the company can be adapted quicker to the changing market circumstances.
Vital competencies can be any kind of combination of specific, inseparable, incorporated,
applicable knowledge, expertise, and opinions.
        The main characteristics of vital competencies are:
                       To enable a potential approach to different markets.
                       To significantly contribute to the product, according to the views of the
                        buyer.
                       Difficulty for the competition to copy and imitate.
        The development of vital competencies is possible only through the process of
continuous improvement and extensions. Special attention should be made so that vital
competencies don’t turn out to be vital limitations, extremely difficult to change in the manner
that, situations continue to be solved under inertia as they were in the past.


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       The main propositions to the theory of vital competencies were given by G. Hamel,
C.K. Prahalad in their publication, “Competing for the Future."
       One of the basic categories of success in a company, according to these authors is, a
company besides following its position in the existing market, has to be focused on creating
the future of the industry and creating its position in this future situation, whereby, the
transformation of the industry is the primary goal of the company, in which follows the re-
organization of the company itself. To create a foundation for creating profits is the basic aim
of a company’s long-term activity, while leading in expenses in the sense that by reducing
investments or the number of employees’ results only in short-term successes.
       Furthermore, the competition in the future refers to maximize the approach towards
opportunities that can be offered to companies in the future, and pertaining to a wide area. In
accordance to this thesis, the basic issue is how to recognize and strengthen that knowledge
and capability that shall ensure confrontations against future opportunities.
       The company has to objectively analyze its position on the market so as to be sure that
it shall continue to realize above-average profits, while at the same time be capable to put
behind the manner in which past successes were achieved should these have no future in the
forthcoming markets. The process of objectively reviewing past successes often commences
when employees are encountered with falsely believing that their past capabilities of ensuring
income, shall also be ensured in the future, and thus concentrate on past successes instead of
preparing themselves with future challenges. The danger exists when the majority of the
competitors in the industry are basically of similar opinion and performance, so that the
company itself can hardly turn to new ideas and attempt to alter the industry borders.
       The capability of foreseeing the future enables the companies to consider means in
which to satisfy future, unarticulated needs of the present buyer, as well as, the new potential
customer, in fact, to extend the horizon of possible earnings. A better preparation for future
challenges are, clearly, achieved by a transparent widening of future strategies within the
company itself, hence, by strengthening the internal human resources.
       A successful strategy results in an altered perception of the product as from the user,
as well as, from the motivation of the employees. The successful combination of the existing
resources and their guidance towards achieving the goals are the pre-conditions for the further
development of the company.
       The actual problems which the managers are faced with most frequently are not the
deficiency of resources, but the non-defining of priorities and insufficient investment of
ingenuity as to accomplish greater priority goals with the given quantity of resources.


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Managers need to be capable to direct the attention of the complete organization to vital
challenges that ensure future business activities. The arrangement of resources towards vital
challenges are accomplished in the manner that, the resources are engaged in vital strategic
tasks, so as to elevate the efficiency of performing existing tasks without unnecessary
scattering of resources, so as to make the resources complemented and interchangeable.
Emphasized is the importance of being the first in recognizing the opportunities that the future
offers, but aspired should be the utilization of these opportunities with minimized expenses.
        In the conquest of future markets we differentiate three phases: development and the
shifting of the borders of existing companies or the creation of new markets, migration of
present markets towards new possibilities, and only the dwelling on of new leading positions
in the market. While administering all of the three phases it is clear that it is necessary to
minimize the time spent and be the first, as well as, the expenditure of investments, so as to
establish the rules of the new or extended industry in which competitors can hardly follow.
        To achieve above average profits in future markets, the company has to aim in
building advantages that offer added value to the buyers on the global markets as well as the
advantages of new distributional channels towards the buyers.
        The existence of vital advantages isn’t obligatory, often it is not possible, to assign to
certain parts of the company, for in this manner often lost is the focus of the potential vital
advantage that is placed in “limbo” of the existing areas of the company.
        In the conditions when several companies attempt to reach the same markets of the
future, it is difficult to evaluate which company “is making the right moves.” The probable
estimation of success is possible only after the product has been offered to the market.
        After all, it is not sufficient to perform quickly and correctly, as well as achieving
efficiency and effectiveness through restructuring and various re-engineering, but it is
obligatory to be different. Concerning market competition companies should have a different
opinion that can lead to the expansion or discovery of new markets. With establishing correct
strategies all employees are to be included that are oriented towards the future goals and
accept the necessary organizational changes that lead to the achievement of these goals.


3. 3. The concept of distinctive competency


        The theory was established by John Kay from London Business School in 1993, even
though Selznik in 1957 recognized the differing competence.




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       In his publication, “Foundations of Corporate Success,” Kay argues how the most
successful companies drain their energy from various structural relations that are established
among their employees, buyers, and suppliers by comparison with the competition. He also
claims that the continuity and stability of these relations are the basis for quicker and
coordinated responses to the changes of the environment.
       Kay distinguishes three distinctive competencies that lead a company to creating
added value to the products and competitive advantages:
              Architecture - by architecture it implies the structure of mutual relations within
               an organization, among the employees and outside of the organization with
               buyers and suppliers.
              Reputation which is established upon:
                   o The basis of personal experience of the buyers.
                   o Quality features.
                   o Existence of demonstration of the product and free time of usage.
                   o Guarantees.
                   o Through oral tradition.
                   o The merger with other brands.
                   o Further cultivation once the reputation is established
              Innovation – always successfully converts to a comparative advantage.


3.4. An Asymmetrical approach to resource strategy


     The “classical” resource approach strategy emphasizes that, constant above average
income can be achieved in the case that a company has superior, rare, irreplaceable resources,
and capabilities that are extremely difficult to copy. The definition itself instructs us that
these types of resources are difficult to create. A different approach to resource strategy does
not put emphasis on the unique resources, but on asymmetry or variety that is defined as a
combination of skills, processes, and “assets” that a company possesses, and in which the
competitors do not find justifiable reasons to copy.
     The advantages that emerge from asymmetry cannot be transcribed to any other concrete
activity in the chain of creation of values. The company, when it becomes aware of its
diversities in combining resources and continues to develop them, has a great opportunity to
make the most of the market circumstances.




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3. 5. “Blue Ocean” Strategy


       The Blue Ocean Strategy is based upon the view that the only way to beat the
competition and take a leading position on the market is to cease to battle with the
competition on the existing market and to revert to new, free markets. In that sense Red
Ocean represents a familiar, present market where the rules of trading are set and where the
majority of the companies attempt to attain a greater portion of the already defined industry.
The relentless competition of Blue Ocean free market is transformed into bloody red.
       Blue Ocean represents a still unexploited market where the competition is irrelevant,
since the basic rules of the market are still not set. Based upon the study of 150 strategic
shifts that occurred in the last hundred years and observing thirty industries, Blue Ocean
Strategy enables a practical and systematical approach of strategic shifts towards new
markets.
       According to the authors’ theory, competition in industries with too many competitors
does not lead to above average profits, and as a strategic guidance, suggest research and
discovery of new markets that have not yet been conquered by the competition. Naturally
“The Blue Ocean Strategy” regards the competition as all other strategic theories do;
however, they criticize structural approach because being oriented towards the competition
and the competitive advantages in the present markets the management often drifts away from
strategically investigating for new markets. After the discovery and development of new
markets, the strategy should be directed towards its usage, as well as, its’ protection from
other possible competitors, since new markets ensure quicker and above average proceeds.
       There are two ways in which to create Blue Ocean, which is to set a foundation for the
“Blue Ocean” strategy and establish valuable innovations:
               Set up a completely new industry.
               Within the existing market create a new market in the way to adjust and extend
                the borders of the industries, for example, applying experience instead of new
                technologies. The authors stress the Della example who put out the order for
                computers according to the users specifications without the alterations of the
                technological production.
       We examine “Blue Ocean” as a segment of the market where the activities of the
company, in a reasonable and not too difficult method, affect the structure of expenses and the
value that is being offered to the buyers. Lower costs are achieved by eliminating and
reducing factors in which the industry is competing. The new value for the buyers is created


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by offering elements that have never been offered. During time, expenses are additionally
reduced when a new value is recognized on the market and when we proceed towards
economic greatness.




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