MGT325: Management of Technology

Assignment 2

Deadline: 03/04/2021 @ 23:59

For Instructor’s Use only

Instructions – PLEASE READ THEM CAREFULLY

• The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
• Assignments submitted through email will not be accepted.
• Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page.
• Students must mention question number clearly in their answer.
• Late submission will NOT be accepted.
• Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
• All answered must be typed using Times New Roman (size 12, double-spaced) No pictures containing text will be accepted and will be considered plagiarism).
• Submissions without this cover page will NOT be accepted.

Course Learning Outcomes-Covered 

• Demonstrate a solid understanding of the concepts and models for making strategies to face challenges and improve the performance of technology based enterprises. (Lo 1.2)

Assignment 2                                                                                  Marks: 5    

‘Tesla and its flamboyant, and sometimes erratic, innovator Elon Musk have turned the more than a century old industry upside down in a mere 16 years. Traditional automakers are ill prepared to compete in today’s software-centered world. Unlike nimble Tesla, they are big, bureaucratic, slow to respond to customers, dependent on providing customer financing for unit sales growth, and culturally different from a software company. Tesla’s speed in innovation in the market for high-end vehicles is more like a Google or an Amazon than an automaker. And its soaring market valuation is a clear sign to all automakers that they’ll need to develop more innovative, Tesla-like business models in order to survive.’

 Harvard Business Review. February 28, 2020 

As per your Textbook –  

‘Tesla’s cars had rapidly attracted a large and loyal fan base, and sales were growing at an impressive rate. However, designing and launching multiple major car platforms while building a large-scale battery company, a network of charging stations, and operating Solar City was a lot for a company to take on in its first fifteen years. This left some analysts scratching their heads. Was Tesla trying to do too much too quickly?’   

Students are requested to read Chapter 6 Defining the Organization’s Strategic Direction of their textbooks. With the conceptual knowledge from Chapter 6 and your own research, answer the following questions.

Q1- How would you characterize competition in the Auto Industry?           (1Mark) (200 -300 words)

Q2- What do you think are Tesla’s core competencies? Does it have any sources of sustainable competitive advantage?                                                                              (2Marks) (300 -500 words)

Q3- What do you think Tesla’s (or Elon Musk’s) strategic intent is?             (2Mark) (300 -500 words)

Support your answer with valid points from the Textbook and other references.

NOTE: It is mandatory for the students to mention their references, sources and support each answer with at least 2 peer reviewed journal.

115
Chapter Six
Defining the
Organization’s
Strategic Direction
Tesla, Inc. in 2018
In 2018, Tesla was one of the most talked about companies in the world. What
started as an unlikely and risky venture to produce an all-electric luxury sports
car had grown into a company with almost $12 billion in annual revenues that
produced multiple car models, owned Solar City (a solar panel leasing company),
and produced energy storage systems (e.g., Powerwall) and solar roofs (see
Figure
1 below). Though it was not yet posting profits, it had a market capitalization
of more than $47 billion.
In 2017, Tesla delivered 103,020 cars (see Figure 2 below), a 35 percent rise
over its 2016 figures. In the first quarter of 2018, Tesla delivered 29,980 cars, of
which almost one-third were its newest model, the Model 3. The company also had
a growing waiting list for all three cars, highlighting both a strength and a weakness
of the company: people were enthusiastic about the cars and demand was
high, but Tesla was having trouble ramping up production to meet that demand.
Some of the production capacity for Model S and Model X had been reallocated
to production of the new Model 3 and getting the new model’s production
up and running had been rougher than expected. The company’s CEO, Elon
Musk, had forecasted producing 5000 Model 3 cars a week by the end of the
first quarter of 2018, but instead production was closer to 1000 cars a week by
the end of the first quarter, triggering an onslaught of criticism by analysts.
To make matters worse, the company’s rapid expansion of production capacity
meant that it would likely require additional capital within the year, causing stockholders
to worry about dilution of their shares. Tesla had made bold moves and
impressive progress, but there were lingering concerns over its viability. Would
it be able to turn a sustainable profit on its auto-making operations? In the niche
market of luxury automobiles for the “eco-wealthy,” it had a privileged position
with customers that were relatively price-insensitive and were seeking a stylish,
high performance car that made an environmental statement. To compete for the
116 Part Two Formulating Technological Innovation Strategy
mass market, the car would have to compete on value and efficiency with larger,
more established rivals.
History of Tesla
In the year 2003, an engineer named Martin Eberhard was looking for his next big
project. A tall, slim man with a mop of gray hair, Eberhard was a serial entrepreneur
who had launched a number of start-ups, including a company called NuvoMedia,
which he sold to Gemstar in a $187 million deal. Eberhard was also looking for a
sports car that would be environmentally friendly—he had concerns about global
warming and U.S. dependence on the Middle East for oil. When he didn’t find the
car of his dreams on the market he began contemplating building one himself,
FIGURE 1
Source: Tesla 2018 10K.
2017 Select Items from Income Statement
(figures in $US thousands)
Automotive Sales 8,534,752
Automotive Leasing 1,106,548
Total Automotive Revenues 9,641,300
Energy Generation and Storage 1,001,185
Services and Other 1,116,266
Total Revenues 11,758,751
Cost of Revenue 9,536,264
Gross Profit 2,222,487
R&D Expense 1,278,073
Sales, General and Admin. 2,476,500
Operating Income (1,632,086)
FIGURE 2
Tesla Deliveries in 2017 and 2018
Model S Model X Model 3 Total
2017
Q1 13,450 11,550 25,000
Q2 12,000 10,000 22,000
Q3 14,065 11,865 220 26,150
Q4 15,200 13,120 1550 29,870
Total 54,715 46,535 1770 103,020
2018
Q1 11,730 10,070 8180 29,980
Chapter 6 Defining the Organization’s Strategic Direction 117
even though he had zero experience in the auto industry. Eberhard noticed that
many of the driveways that had a Toyota Prius hybrid electric vehicle (or “dork
mobile” as he called it) also had expensive sports cars in them—making Eberhard
speculate that there could be a market for a high performance environmentally
friendly car. As explained by Eberhard, “It was clear that people weren’t buying a
Prius to save money on gas—gas was selling close to inflation–adjusted all-time
lows. They were buying them to make a statement about the environment.”a
Eberhard began to consider a range of alternative fuel options for his car:
hydrogen fuel cells, natural gas, diesel. However, he soon concluded the highest
efficiency and performance would come from a pure electric vehicle. Luckily for
Eberhard, Al Cocconi (founder of AC Propulsion and one of the original engineers
for GM’s ill-fated EV-1) had concluded the same thing and had produced a car
called the tzero. The tzero could go from 0 to 60 miles per hour in 4.1 seconds,
but it was powered with extremely heavy lead-acid batteries, limiting its range to
about 60 miles between charges. Eberhard approached Cocconi with the idea
of using the lighter lithium-ion batteries, which offered six times more energy
per pound. Cocconi was eager to try out the idea (he had, in fact, been experimenting
with lithium-ion batteries himself), and the resulting lithium-ion based
tzero accelerated to 60 miles per hour in 3.6 seconds, and could travel more
than 300 miles. Eberhard licensed the electric-drive-train technology from AC
Propulsion, and founded his company, Tesla Motors (named after Nikola Tesla, a
late 19th century and early 20th century inventor who developed, among other
things, the AC electrical systems used in the United States today).b
Meanwhile, there was another entrepreneur—one with much deeper pockets—
also interested in developing electric vehicles based on the tzero: Elon Musk. In
2002, Elon Musk was a 31-year-old South African living in California, who had
founded a company that ultimately became PayPal. After selling PayPal to eBay
in 2002 for $1.5 billion, he started a company called SpaceX with the ambitious
goal of developing cheap, consumer space travel. (SpaceX’s Dragon spacecraft
ultimately
made history in May of 2012 by becoming the first commercial
vehicle
to launch and dock at the International Space Station.c) Musk’s
assertive style, and his astonishing record of high-tech entrepreneurship,
made him one of the inspirations
for the portrayal of Tony Stark character in
Jon Favreau’s Iron Man movies.
Like Eberhard, Musk thought electric cars were the key to the United States
achieving energy independence, and he approached Cocconi about buying the
tzero. Tom Gage, who was then AC Propulsion’s CEO, suggested that Musk collaborated
with Eberhard. After a two-hour meeting in February of 2004, Musk
agreed to fund Eberhard’s plan with $6.3 million. He would be the company’s
chairman and Eberhard would serve as CEO.
The Roadster
The first Tesla prototype, named the Roadster, was based on the $45,000 Lotus
Elise, a fast and light sports car that seemed perfect for the creation of Eberhard
and Musk’s grand idea (see Figure 3A). The car would have 400 volts of electric
potential, liquid-cooled lithium-ion batteries, and a series of silicon transistors
118 Part Two Formulating Technological Innovation Strategy
that would give the car acceleration so powerful the driver would be pressed
back against their seat.d It would be about as fast as a Porsche 911 Turbo, would
not create a single emission, and would get about 220 miles on a single charge
from the kind of outlet you would use to power a washing machine.e
After a series of clashes between Musk and Eberhard that led to delays in
launching the Roadster, Eberhard was pushed out of the company. The Roadster
missed its deadline for beginning production at the Lotus facility, triggering
a penalty built into the manufacturing contract Eberhard had signed with Lotus:
a $4 million fee. However, when the car finally launched in 2008, the enthusiastic
response it received was astonishing—it boasted an all-star list of celebrities with
reservations to buy, and everywhere the Roadster drove, people stopped to stare.f
The Model S
Musk’s ambitions did not stop at a niche high-end car. He wanted to build a major
U.S. auto company—a feat that had not been successfully accomplished since the
1920s. To do so, he knew he needed to introduce a less expensive car that could
attract a higher volume of sales, if not quite the mass market. In June of 2008,
Tesla announced the Model S, a high performance all-electric sedan that would
sell for a price ranging from $57,400 to $77,400, and compete against cars like
the BMW 5 Series (see Figure 3B). The car would have an all-aluminium body
and a range of up to 300 miles per charge.g Estimates suggested that the Model
S cost $500 million to develop, however offsetting that cost was a $465 million
loan Tesla received from the U.S. government to build the car, as part of the U.S.
government’s initiative to promote the development of technologies that would
help the United States to achieve energy independence.h
By May of 2012, Tesla reported that it already had 10,000 reservations for customers
hoping to buy the Model S, and Musk confidently claimed the company
would soon be producing, and selling, 20,000 Model S cars a year. Musk also noted
that after ramping up production, he expected to see “at least 10,000 units a year
from demand in Europe and at least 5000 in Asia.”i The production of the Model S
went more smoothly than that of the Roadster, and by June of 2012 the first Model S
cars were rolling off the factory floor. The very first went to Jeff Skoll, eBay’s first president,
and a major investor in Tesla. On the day of the launch, Skoll talked with Musk
about whether it was harder to build a rocket or a car (referring to Musk’s SpaceX
company): “We decided it was a car. There isn’t a lot of competition in space.”j
To build the car, Tesla bought a recently closed automobile factory in Fremont
California that had been used for the New United Motor Manufacturing Inc.
(NUMMI) venture between Toyota and General Motors. The factory, which was
capable of producing 1000 cars a week, was far bigger than Tesla’s immediate
needs and would give the company room to grow. Furthermore, though the plant
and the land it was on had been appraised at around $1 billion before NUMMI
was shut down, Tesla was able to snap up the idled factory for $42 million.k Tesla
also used the factory to produce battery packs for Toyota’s RAV4, and a charger
for a subcompact Daimler AG electric vehicle. These projects supplemented
Tesla’s income while also helping it to build scale and learning-curve efficiencies
in its technologies.
Chapter 6 Defining the Organization’s Strategic Direction 119
In the first quarter of 2013, Tesla announced its first quarterly profit. The company
had taken in $562 million in revenues, and reported an $11.2 million profit.
Then more good news came: the Model S had earned Consumer Reports’ highest
rating, and had outsold similarly priced BMW and Mercedes models in the first
quarter.l In May of 2013, the company raised $1 billion by issuing new shares, and
then surprised investors by announcing that it had paid back its government loan.
After repaying the loan, Tesla had about $679 million in cash. Musk had announced
confidently that he felt it was his obligation to pay back taxpayer money as soon
as possible, and that the company had sufficient funds now to develop its next
generation of automobiles without the loan, and without issuing further shares.m
FIGURE 3B
Tesla Model S
©Melissa Schilling
FIGURE 3A
Tesla Roadster
©Ian Giblin
FIGURE 3C
Tesla Model X
©Melissa Schilling
FIGURE 3D
Tesla Model 3
©Melissa Schilling
120 Part Two Formulating Technological Innovation Strategy
Model X
The Model X, unveiled in 2015, was designed as a high-end sport utility vehicle
(SUV) that seats seven. It had several distinctive features that set it apart from
the crowded luxury SUV market (Figure 3C). In addition to being all-electric and
able to go from 0 to 60 miles per hour in just 3.2 seconds, it featured a panoramic
windshield and distinctive gull wing doors (that open upward rather than
swinging out) that open automatically in response to the driver’s approach. “It will
triangulate my position,” Musk said, “It will open the front door without touching.
When you sit down, it will close the door.”n The Model X had a range of about
250 miles (like the Model S) but could tow 5000 pounds. Its selling price would
start at $70,000 but could exceed $100,000 depending on the options selected.
In the United States, the mid-size luxury SUV market was about five times the
size of the high-end luxury sedan market, and the Model X rapidly attracted a long
waiting list of people who placed deposits for the car. Musk projected a fast production
ramp up, with goals of producing 85,000 to 90,000 Model X and S vehicles in
2017. Analysts at the time doubted that production could be ramped up so quickly,
but despite several supplier parts shortages, Tesla’s estimates ended up being very
close to the mark: The company produced a total of 83,922 cars in 2017.o
Reviews of the car were mixed. Consumer Reports found the car disappointing,
citing rear doors that were prone to pausing, the car’s limited cargo capacity,
and a ride that was “too firm and choppy for a $110,000 car.”p Car and Driver’s
review also expressed some doubts about the wing doors, but gave the car
overall a rating of five out of five stars, stating, “There are no other electric SUVs
at the moment. And even against fossil-fuel-fed SUVs, the Tesla’s effortless performance
and efficiency can’t be matched.”q
By the end of 2016, the Model X had accumulated total sales of 25,524, ranking
it seventh among the best-selling plug-in cars in the world (notably, cumulative
sales of Tesla Model S reached 158,159 by the end of 2016, making it
the second best-selling plug-in car in the world, behind only the Nissan Leaf).r
By the end of 2017, cumulative sales of the Model X reached approximately
72,059 units.s
Model 3
To achieve Musk’s goal of making a real dent in fossil fuel use, Tesla needed a
truly mass-market car. Thus, in the fall of 2016, he announced the Model 3, a
mid-size all-electric four-door sedan with a range of 220 to 310 miles (depending
on the battery option), and a base price of $35,000 (see Figure 3D). Within
a week, Tesla had received 325,000 reservations for the car, ranking it among
the most sought-after cars in the world. A review in Road and Track said that
the “Model 3 proves that Tesla is thinking far beyond the edges of the Model S
and X. Stepping out of the 3, you realize that, as far as the S and X pushed the
envelope, they were always meant as intermediaries, stepping stones designed
to draw people away from comfortable convention and into the future of the
automobile.”t Popular Mechanics gave the car its 2018 Car of the Year award,
and Automobile Magazine gave it the 2018 Design of the Year Award.
Chapter 6 Defining the Organization’s Strategic Direction 121
The company announced an extremely ambitious production ramp up plan,
with a goal of being able to produce 500,000 total units (across all three models)
by the end of 2018. This would require a massive expansion in production
capacity that many experts viewed as unattainable in such a short time frame.
The Model 3 would also incorporate new hardware and software to enable automated
driving that created significant new design and production challenges. By
early 2018, it was clear that Model 3 production was well behind Musk’s initial
ambitious projections, and criticism from analysts and the press were coming at a
furious pace. As one analyst at Cowen and Co noted, “Tesla needs to slow down
and more narrowly focus its vision and come up for a breath of fresh air. . . . Elon
Musk needs to stop over promising and under delivering.”u
Other Projects
In 2016, Tesla opened Gigafactory 1—a giant lithium-ion battery factory built
near Reno, Nevada with its partner Panasonic. Musk justified the vertical integration
move by arguing that the Gigafactory 1 would ultimately drive battery
production costs down by as much as 30 percent. In addition to producing batteries
for Tesla automobiles, the factory would build Powerwall and Powerpack
energy storage devices. The Powerwall was a device for consumers to store
solar energy at home. The Powerpack enabled industrial users to manage variable
energy needs and provided a source for backup power.
In August of 2016, Tesla also finalized a plan to acquire SolarCity, a company
that leases and installs solar panels, for $2.6 billion. Solar City was founded in
2006 by Peter and Lyndon Rive, Elon Musk’s cousins. Musk had sketched out
the concept for the company around the time of Tesla’s founding and had helped
his cousins start the company. He also served as its Chairman of the Board. The
company had an innovative business model that enabled consumers to have
solar panels installed on their roofs with no upfront costs, and to pay instead for
the power generated by the panels at a price that was comparable to or less
than the price they would normally pay for electricity.
In the same month that the Solar City acquisition plan was finalized, Elon Musk
announced that the company would begin producing house roofs made entirely
from solar panels. “I think this is a really fundamental part of achieving differentiated
product strategy, where you have a beautiful roof,” Musk said. “It’s not a
thing on the roof. It is the roof.”v By early 2018, Tesla had also built a new Gigafactory
2 in Buffalo, New York and reported that manufacture of solar roofs was
already underway.
Tesla’s Future
Tesla’s cars had rapidly attracted a large and loyal fan base, and sales were
growing at an impressive rate. However, designing and launching multiple major
car platforms while building a large-scale battery company, a network of charging
stations, and operating Solar City was a lot for a company to take on in its first
fifteen years. This left some analysts scratching their heads. Was Tesla trying to
do too much too quickly?
122 Part Two Formulating Technological Innovation Strategy
Discussion Questions
1. What were Musk’s and Eberhard’s goals in founding Tesla?
2. How would you characterize competition in the auto industry?
3. What do you think are Tesla’s core competencies? Does it have any
sources of sustainable competitive advantage?
4. What is your assessment of Tesla’s moves into (a) mass-market cars, (b)
batteries (car batteries and Powerwall), (c) solar panels? Please consider
both the motivation for the moves, and the opportunities and challenges for
Tesla to compete in these businesses.
5. Do you think Tesla will be profitable in all of these businesses? Why or why
not?
6. What do you think Tesla’s (or Elon Musk’s) strategic intent is?
a Copeland, M. V., Tesla’s Wild Ride. Fortune, 158, no. 2 (2008):82–94.
b Ibid.
c Boudreau, J. In a Silicon Valley Milestone, Tesla Motors Begins Delivering Model S Electric Cars. Oakland
Tribune (June 24, 2012), Breaking News Section.
d Copeland, M. V., Tesla’s Wild Ride. Fortune, 158, no. 2 (2008):82–94.
e Williams, A. Taking a Tesla for a Status Check in New York. New York Times (July 19, 2009):ST.7.
f Ibid.
g Ramsey, M., Tesla Sets 300-Mile Range for Second Electric Car. Wall Street Journal (Online) (March 7,
2011).
h Overly, S. This Government Loan Program Helped Tesla at a Critical Time. Trump Wants to Cut It. Washington
Post, March 16, 2017.
i Sweet, C., Tesla Posts Its First Quarterly Profit. Wall Street Journal (Online) (May 9, 2013).
j Boudreau, J. In a Silicon Valley Milestone, Tesla Motors Begins Delivering Model S Electric Cars. Oakland
Tribune (June 24, 2012), Breaking News Section.
k Anonymous. Idle Fremont Plant Gears Up for Tesla. Wall Street Journal (Online) (October 20, 2010).
l Levi, M. How Tesla Pulled Ahead of the Electric-Car Pack. Wall Street Journal (June 21, 2013):A.11.
m White, J. B., Corporate News: Electric Car Startup Tesla Repays U.S. Loan. Wall Street Journal (May 23,
2013):B.3.
n Hirsch, J., and R. Mitchell, Model X: Under the Hood of Tesla’s SUV Strategy. Los Angeles Times
September
29th, 2015.
o Tesla Q4 Production and Delivery Report (January 3, 2016).
p Tesla Model X Review: Fast and Flawed. Consumer Reports (2016).
q Tesla Model S. Car and Driver (May, 2016).
r Cobb, J., Tesla Model S Is world’s Best-Selling Plug-in Car for Second Year in a Row. HybridCars
(January 26, 2017).
s Estimate based on Tesla quarterly production and delivery reports for quarter 1-4 in 2017. In some years
Tesla only provides rounded numbers for breakdown between Model X and Model S, thus only an
approximate number can be given here.
t Sorokanich, B., Tesla Model 3: The Road & Track Review. Road and Track (January 12, 2018).
u Panchadar, A., Tesla Must Stop Overpromising, Could Need More Finance: Analysts. Reuters Business
News (November 2, 2017).
v Milman, O., Elon Musk Leads Tesla Effort to Build House Roofs Entirely Out of Solar Panels. The Guardian
(August 19, 2016).
Chapter 6 Defining the Organization’s Strategic Direction 123
OVERVIEW
The first step in formulating a company’s technological innovation strategy is to assess
its current position and define its strategic direction for the future. This chapter reviews
some of the basic tools used in strategic analysis to assess the firm’s current position
and help chart its direction for the future. These tools help the manager answer such
questions as:
∙ What threats and opportunities are most pressing in the firm’s environment?
∙ What are the firm’s key strengths and weaknesses?
∙ Does the firm have any sources of sustainable competitive advantage?
∙ What are the firm’s core competencies, and what kind of value propositions do
those core competencies offer to customers? How do managers want those value
propositions to evolve?
∙ What key resources and capabilities does the firm need to develop or acquire to
meet its long-term objectives?
The outputs of the analytical tools in this chapter are crucial inputs for the tools used in
Chapter Seven, Choosing Innovation Projects. A coherent technological innovation strategy
both leverages and enhances the firm’s existing competitive position, and it provides
direction for the future development of the firm. Formulating a technological innovation
strategy first requires an accurate appraisal of where the firm currently is. It then requires
articulating an ambitious strategic intent—one that creates a gap between a company’s
existing resources and capabilities and those required to achieve its intent.1 The ability of
the firm to cohesively leverage all its resources around a unified vision can enable it to
create a competitive advantage that is very difficult for competitors to imitate.2
ASSESSING THE FIRM’S CURRENT POSITION
To assess the firm’s current position in the marketplace, it is useful to begin with some
standard tools of strategic analysis for analyzing the external and internal environment
of the firm.
External Analysis
The two most commonly used tools for analyzing the external environment of the firm
include Porter’s five-force model and stakeholder analysis.
Porter’s Five-Force Model
In this model, the attractiveness of an industry and a firm’s opportunities and threats
are identified by analyzing five forces (see Figure 6.1).3
While the five-force model was originally developed to assess industry attractiveness
(i.e., “Is this a desirable industry in which to compete?”), in practice the model is
often used to assess a specific firm’s external environment (i.e., “What factors in the
firm’s external environment create threats and opportunities for the firm?”). The difference
between these two approaches is subtle but important. In the former approach,
124 Part Two Formulating Technological Innovation Strategy
the analysis focuses on the industry level, treating all competitors as roughly the same,
and its objective is to ascertain whether the industry as a whole will tend to be profitable.
In the latter approach, the analysis may take the perspective of a particular
firm, often identifying ways in which the external forces differentially affect the firm
vis-à-vis its competitors, and its objective is to identify threats and opportunities for
the firm.4 For example, an external analysis of the discount retailing industry that is
focused only on industry attractiveness might conclude that the industry is relatively
unattractive given high price competition and limited opportunities to differentiate. An
external analysis of the discount retailing industry focused on Walmart, on the other
hand, might conclude that while the industry is a difficult one in which to be profitable,
Walmart is likely to be more profitable than its competitors because its scale,
its use of advanced technology for inbound and outbound logistics, and its location
strategies give it considerable bargaining power over both suppliers and buyers. The
latter approach will be emphasized here because it better suits our purpose of helping
a particular firm to chart its strategic direction.
The five forces are:
1. The degree of existing rivalry. An industry’s degree of rivalry is influenced by
a number of factors. First, the number and relative size of competitors will shape
the nature of rivalry. In general, the more firms competing that are of comparable
size, the more competitive the industry will be. There are, however, exceptions to
this generality. For example, oligopolistic industries (those that have a few large
competitors) can be fiercely competitive if firms choose to engage in price wars
(as happened in the personal digital assistant industry). On the other hand, oligopolistic
industries can have a low degree of rivalry if the competitors choose to
avoid competing head-to-head in the same market segments, or if they engage in
oligopolistic
industries
Highly consolidated
industries
with a few large
competitors.
FIGURE 6.1
Porter’s Five-
Force Model
Source: Michael
Porter,
Competitive
Strategy: Techniques
for Analyzing Industries
and Competitors.
Threat of
Substitutes
Threat of
Potential
Entrants
Bargaining
Power
of Suppliers
Bargaining
Power of
Buyers
Degree of
Existing
Rivalry
Chapter 6 Defining the Organization’s Strategic Direction 125
tacit price collusion. Rivalry is also influenced by the degree to which competitors
are differentiated from each other. For example, if competitors are highly differentiated,
they will experience less direct rivalry because their products are likely to
appeal to different market segments. For example, even though Genzyme operated
in the extremely competitive biotech industry, its unique focus on orphan drugs
meant that it typically was not competing head-on with other rivals for its customers.
This enabled it to charge much higher margins on its products. Demand
conditions also influence degree of rivalry. When demand is increasing, there are
more revenues to go around and firms will experience less competitive pressure.
On the other hand, when demand is declining, firms have to compete for a shrinking
pool of revenues, and competition can become very aggressive. In declining
industries, high exit barriers (fixed capital investments, emotional attachment to
the industry, etc.) can also intensify rivalry by making firms reluctant to abandon
the industry.
2. Threat of potential entrants. The threat of potential entrants is influenced by
both the degree to which the industry is likely to attract new entrants (e.g., is
it profitable, growing, or otherwise alluring?) and the height of entry barriers.
Entry barriers can include such factors as large start-up costs, brand loyalty, difficulty
in gaining access to suppliers or distributors, government regulation, threat
of retaliation by existing competitors, and many others. While profitability and
growth may attract new entrants, entry barriers will deter them. For example,
while high projected growth in the smart phone market attracts potential entrants
to this market, the challenge of competing against large, well-established, and efficient
competitors such as Nokia and Ericsson deters many entrants. To effectively
compete against these companies requires that an entrant be able to manufacture,
advertise, and distribute on a large scale, suggesting significant start-up costs for
an entrant to achieve a competitive position. However, some of these capabilities
could be obtained through partnerships with other firms, such as having contract
manufacturers handle production and having mobile phone service providers handle
distribution, thereby lowering start-up costs.
3. Bargaining power of suppliers. The degree to which the firm relies on one or
a few suppliers will influence its ability to negotiate good terms. If there are few
suppliers or suppliers are highly differentiated, the firm may have little choice in
its buying decision, and thus have little leverage over the supplier to negotiate
prices, delivery schedules, or other terms. On the other hand, if suppliers are very
abundant and/or are not highly differentiated, the firm may be able to force the
suppliers to bid against one another for the sale. The amount the firm purchases
from the supplier is also relevant. If the firm’s purchases constitute the bulk of a
supplier’s sales, the supplier will be heavily reliant upon the firm and the supplier
will have little bargaining power. Likewise, if the supplier’s sales constitute a large
portion of the firm’s purchases, the firm will be heavily reliant upon the supplier
and the supplier will have more bargaining power. For example, manufacturers
that sell to Walmart often have little bargaining power because Walmart’s enormous
volume often makes its purchases a significant portion of a manufacturer’s
yearly sales. Walmart’s suppliers typically have little bargaining power. When Intel
sells to personal computer manufacturers, on the other hand, it typically wields
exit barriers
Costs or other
commitments
that make it difficult
for firms
to abandon an
industry (large
fixed-asset
investments,
emotional commitment
to the
industry, etc.).
entry barriers
Conditions that
make it difficult
or expensive for
new firms to
enter an industry
(government
regulation, large
start-up costs,
etc.).
126 Part Two Formulating Technological Innovation Strategy
considerable supplier bargaining power. When computer manufacturers consider
potential suppliers for microprocessors, they often have little choice but to go with
Intel—many consumers demand that their systems include Intel microprocessors,
and the majority of personal computer hardware and software has been optimized
for the Intel architecture. If the firm faces switching costs that make it difficult
or expensive to change suppliers, this will also increase the supplier’s bargaining
power. Finally, if the firm can backward vertically integrate (i.e., produce its
own supplies), this will lessen supplier bargaining power, and if the supplier can
threaten to forward vertically integrate into the firm’s business, this will increase
the supplier’s bargaining power.
4. Bargaining power of buyers. Many of the same factors that influence the bargaining
power of suppliers have an analogous role with the bargaining power of
buyers. The degree to which the firm is reliant on a few customers will increase
the customer’s bargaining power, and vice versa. If the firm’s product is highly
differentiated, buyers will typically experience less bargaining power, and if the
firm’s product is undifferentiated, buyers will typically experience greater bargaining
power. If buyers face switching costs, this is likely to lower their bargaining
power, and if the firm faces switching costs to work with other buyers,
this will increase the buyer’s bargaining power. Finally, if the buyers can threaten
to backward vertically integrate, this will increase their bargaining power, and
if the firm can threaten to forward vertically integrate, it will lower customer
bargaining power.
5. Threat of substitutes. Substitutes are products or services that are not considered
competitors, but fulfill a strategically equivalent role for the customer. For example,
Starbucks may consider other coffeehouses as competitors, but other social
destinations (such as bars or restaurants) or beverages (such as soft drinks or beer)
as substitutes. The more potential substitutes there are, and the closer they are in
function to the firm’s product or service, the greater the threat of substitution.
Furthermore, the threat of substitutes will also be shaped by the relative price.
For example, while traveling by bus versus air is not particularly comparable in
terms of speed, traveling by bus is often considerably less expensive; thus, it poses
a threat of substitution, particularly for shorter distances to be traveled. Note that
distinguishing between a competitor and a substitute depends on how the industry
is defined. For example, if one considers the airline industry as the unit of analysis,
then bus service is a substitute for airlines. However, if one were considering
the transportation industry as the unit of analysis, then bus services would be
competitors of airlines.
Recently, Porter has acknowledged the role of complements.5 As has been discussed
in several of the earlier chapters, complements are products that enhance the
usefulness or desirability of a good. For example, software is an important complement
for computers, and gasoline is an important complement for automobiles. The availability,
quality, and price of complements will influence the threats and opportunities
posed by the industry. It is important to consider (1) how important complements are
in the industry, (2) whether complements are differentially available for the products
of various rivals (impacting the attractiveness of their goods), and (3) who captures the
value offered by the complements. For example, desktop printer manufacturers such as
vertical
integration
Getting into
the business of
one’s suppliers
(backward vertical
integration)
or one’s buyers
(forward vertical
integration).
For example, a
firm that begins
producing its
own supplies
has practiced
backward vertical
integration,
and a firm that
buys its distributor
has practiced
forward vertical
integration.
switching
costs
Factors that
make it difficult
or expensive to
change suppliers
or buyers, such
as investments in
specialized assets
to work with a
particular supplier
or buyer.
complements
Products or
services that
enhance the
usefulness or
desirability of
another product.
Chapter 6 Defining the Organization’s Strategic Direction 127
Hewlett Packard and Lexmark make a considerable portion of their desktop printing
profits from the ink cartridges that consumers have to replace when empty. The printer
manufacturers thus design the printer cartridges to be specific to each printer model,
avoiding standardized designs that would facilitate consumers purchasing printer cartridges
from other vendors for their Hewlett Packard and Lexmark printers. The market
for ink cartridges is so lucrative, however, that a number of third-party vendors
have emerged that either clone Hewlett Packard and Lexmark cartridges or offer to
refill the consumer’s empty cartridges with ink.
Stakeholder Analysis
Stakeholder models are often used for both strategic and normative purposes. A
strategic stakeholder analysis emphasizes the stakeholder management issues that
are likely to impact the firm’s financial performance, while a normative stakeholder
analysis emphasizes the stakeholder management issues the firm ought to attend to
due to their ethical or moral implications.6 Typically, the first step of a stakeholder
analysis is to identify all the parties that will be affected by the behavior of the firm
(and thus have a “stake” in the firm). For each party, the firm identifies what that
stakeholder’s interests are, what resources they contribute to the organization, what
claims they are likely to make on the organization, and which will be most important
from the firm’s perspective. Stakeholders include (but are not limited to) stockholders,
employees, customers, suppliers, lenders, the local community, government, and rivals
(see Figure 6.2).
Internal Analysis
The analysis of the internal environment of the firm most often begins with identifying
the firm’s strengths and weaknesses. Sometimes this task is organized by examining
each of the activities of the value chain (see Figure 6.3).7 In Michael Porter’s model
of a value chain, activities are divided into primary activities and support activities.
stakeholder
Any entity that
has an interest
(“stake”) in the
organization.
FIGURE 6.2
Stakeholder
Analysis Customers Employees
Stockholders
Lenders
Local
Community
Government
Suppliers Rivals
Firm
128 Part Two Formulating Technological Innovation Strategy
Primary activities include inbound logistics (all activities required to receive, store,
and disseminate inputs), operations (activities involved in the transformation of inputs
into outputs), outbound logistics (activities required to collect, store, and distribute
outputs), marketing and sales (activities to inform buyers about products and services
and to induce their purchase), and service (after-sales activities required to keep
the product or service working effectively). Support activities include procurement
(the acquisition of inputs, but not their physical transfer, as that would be covered in
inbound logistics), human resource management (activities such as recruiting, hiring,
training, and compensating personnel), technology development (activities involved
in developing and managing equipment, hardware, software, procedures, and knowledge
necessary to transform inputs into outputs), and infrastructure (functions such
as accounting, legal counsel, finance, planning, public affairs, government relations,
quality assurance, and general management necessary to ensure smooth functioning of
the firm). This generic model can be adapted to better fit a particular firm’s needs. For
example, for a biotechnology firm or software developer, research and development is
likely to be a primary activity and inbound logistics may be insignificant.
Each activity can then be considered from the point of view of how it contributes to
the overall value produced by the firm, and what the firm’s strengths and weaknesses
are in that activity. For example, Figure 6.4 illustrates what a value-chain analysis
might look like for Take-Two Interactive Software, which produces the Grand Theft
Auto video game. In the figure, research and development is considered a primary
activity, but the support activity of the technology development is not considered.
Because all the game manufacturing is performed by the console producers rather than
by Take-Two its primary technology activities center on design of the games, which is
covered in the research and development section.
FIGURE 6.3
Porter’s Value Chain
Source: Michael Porter, Competitive Advantage: Creating and Sustaining Superior Performance.
Support Activities
Primary Activities
Service
Marketing
Outbound
Logistics
Operations
Inbound
Logistics
Firm
Infrastructure
Human
Resource
Management
Technology
Development
Procurement
Chapter 6 Defining the Organization’s Strategic Direction 129
Value-Chain Activity Strengths Weaknesses
Inbound Logistics
Insignificant; few inputs necessary.
Research & Development
Ability to incorporate state-of-the-art
graphics capabilities, sound, and innovative
themes significantly differentiates
the product in the eyes of the consumer.
Take-Two game maximized the
polygon processing potential of
the video game console, making
play more lifelike.
Parallel development processes
kept the development cycles
short.
Lack of experience in developing
online games could become
major liability if the market for
playing games over the Internet
takes off.
Operations
Company focuses on producing a few
very high-quality games, introducing a
new version every year. Once designed,
games are manufactured by the video
game console producers (e.g., Sony).
Concentrating on a few games
enables firm to focus significant
resources on ensuring that the
game is a hit.
Concentrating on a few games
could be risky—if a game fails, the
company may have no revenues
to support operations.
Take-Two is completely reliant
on console manufacturers for
the right to develop compatible
games and for manufacture of
games.
Outbound Logistics
Products are sold through game retailers
(e.g., Gamestop), general merchandisers
(e.g., Best Buy), and occasionally
through bundling arrangements with
video console producers, avoiding
expense of maintaining the company’s
own retail stores. On initial launch,
Take-Two had signed an exclusive deal
with Sony to offer Grand Theft Auto
exclusively for PlayStation 2.
Existing retailers already have
excellent market penetration,
providing rapid and wide
deployment of the games.
Since Sony PlayStation 2 was
the No. 1 video game console,
signing an exclusive with Sony
enabled Take-Two to tap a large
market.
Using retailers gives company
little discretion over store placement,
promotion, and pricing.
Marketing
Helps build customer awareness of
products, builds brand image, accelerates
sales. Uses Web sites, advertisements
in gaming magazines, billboards.
Grand Theft Auto is targeted toward the
adult market.
GTA had successfully established
an image as being leading
edge, and was the No. 1
game in 2002. In 2008, Grand
Theft Auto: San Andreas made
the “Top 20 console games of
all times” list by selling 12 million
copies.
Some consumers, retailers, and
regulatory agencies criticized
Grand Theft Auto’s violence and
sexual images, potentially tarnishing
the company’s image.
Service
Phone line for technical support helps
customers resolve problems in using the
product.
Take-Two has had relatively few
returns or warranty problems.
FIGURE 6.4
Example of Value-Chain Analysis for Take-Two Interactive Software
continued
130 Part Two Formulating Technological Innovation Strategy
Once the key strengths and weaknesses are identified, the firm can assess which
strengths have the potential to be a source of sustainable competitive advantage. This
helps the firm gain valuable perspective on which of its activities and resources should
be further leveraged in its articulation of its strategic intent for the future.
To be a potential source of sustainable competitive advantage, resources must
be rare, valuable, durable, and inimitable.8 Resources that are rare and valuable
may yield a competitive advantage, but that advantage will not be sustainable if the
firm is incapable of keeping the resources, or if other firms are capable of imitating
them. For example, a positive brand image can be a rare and valuable resource, but
it requires ongoing investment to sustain. If a firm lacks the capital to reinvest in its
brand image, it will erode. Furthermore, many valuable resources are quickly imitated
by other firms. Technological advances are reverse-engineered, skillful marketing
campaigns are copied, innovative human resource practices are adopted by
imitators, and so on. Some resources, however, are not readily imitable. For example,
if valuable resources are tacit (i.e., they cannot be readily codified in written
form), path dependent (i.e., they are dependent on a particular historical sequence of
events), socially complex (i.e., they arise through the complex interaction of multiple
people), or causally ambiguous (i.e., it is unclear how the resource gives rise
to value), they will be extremely difficult to imitate.9 For example, talent is typically
considered to be a tacit and causally ambiguous resource. It is thought to be an inherent
trait that cannot be trained, and the mechanisms by which individuals acquire it
or tap it are poorly understood. A first-mover advantage is a path-dependent
advantage
that cannot be copied—once a firm has become the first mover in a category,
other firms no longer have the opportunity to be first. Once the firm has established
a baseline internal analysis, it can move on to identifying its core competencies and
formulate its strategic intent.
tacit resources
Resources of
an intangible
nature (such as
knowledge) that
cannot be readily
codified.
socially complex
resources
Resources or
activities that
emerge through
the interaction
of multiple
individuals.
causal
ambiguity
The relationship
between
a resource and
the outcome
it produces is
poorly understood
(the causal
mechanism is
ambiguous).
Value-Chain Activity Strengths Weaknesses
Firm Infrastructure
Legal department negotiates license
rights for games.
Copyright infringement suits by
other game producers are becoming
more frequent.
Human Resource Management
Hiring and retaining skilled and creative
developers is crucial for the production
of high-quality games. Company had
2002 full-time employees in 2007.
Employees are not unionized.
Employee stock option plan
improves loyalty and morale.
Procurement
Necessary to acquire rights to use
copyright-
protected characters and
music.
Thus far, Take-Two has been
very successful in obtaining
rights to use copyrighted
materials.
Sources: S. Balasubramanian, A. Kim, L. Lei, and S. Singh, “Beyond the Mayhem: Take-Two Interactive Software,” New York University teaching case,
2003; www.Take2games.com.
concluded
Chapter 6 Defining the Organization’s Strategic Direction 131
IDENTIFYING CORE COMPETENCIES AND DYNAMIC CAPABILITIES
Core Competencies
A company’s core competencies are typically considered to be those that differentiate
it strategically. A core competency is more than just a core technology. A core competency
arises from a firm’s ability to combine and harmonize multiple primary abilities
in which the firm excels into a few key building blocks of specialized expertise. Competencies
often combine different kinds of abilities, such as abilities in managing the
market interface (e.g., advertising, distribution), building and managing an effective
infrastructure (e.g., information systems, logistics management), and technological
abilities (e.g., applied science, process design).10 This combination and harmonization
of multiple abilities make core competencies difficult to imitate. Consider, for example,
Sony’s core competency in miniaturization.11 This competency arises from the
harmonization of multiple technologies (liquid crystal displays, semiconductors, etc.)
and is leveraged into multiple markets (televisions, radios, personal digital assistants,
etc.). A firm’s core competencies also depend on building high-quality relationships
across different functions and business units.
Prahalad and Hamel compare core competencies to roots, from which grow core
products such as major components or subassemblies. Core products, in turn, give
rise to business units, whose fruits are the various end products of the company (see
Figure 6.5).
Several core competencies may underlie an individual business unit, and several
business units may draw upon the same core competency. This indicates the organization’s
structure and incentives must encourage cooperation and exchange of resources
across strategic business unit boundaries. If managers or resources are wed too closely
to their business units, there will be underinvestment in the development and leverage
of core competencies.12 Prahalad and Hamel go so far as to argue that strategic business
units should be expected to bid for people in the firm who have particular skills to
contribute to a project. Instead of viewing individuals as being employed by a particular
strategic business unit, individuals should be considered corporate assets that can
be redeployed across the organization.
Prahalad and Hamel offer the following tests to identify the firm’s core competencies:
1. Is it a significant source of competitive differentiation? Does it provide a unique signature
to the organization? Does it make a significant contribution to the value a
customer perceives in the end product? For example, Sony’s skills in miniaturization
have an immediate impact on the utility customers reap from its portable products.
2. Does it transcend a single business? Does it cover a range of businesses, both
current and new? For example, Honda’s core competence in engines enables the
company to be successful in businesses as diverse as automobiles, motorcycles,
lawn mowers, and generators.
3. Is it hard for competitors to imitate? In general, competencies that arise from
the complex harmonization of multiple technologies will be difficult to imitate.
The competence may have taken years (or decades) to build. This combination
of resources and embedded skills will be difficult for other firms to acquire or
duplicate.
132 Part Two Formulating Technological Innovation Strategy
According to Prahalad and Hamel, few firms are likely to be leaders in more than
five or six core competencies. If a company has compiled a list of 20 to 30 capabilities,
it probably has not yet identified its true core competencies. By viewing the business
as a portfolio of core competencies, managers are better able to focus on value creation
and meaningful new business development, rather than cost cutting or opportunistic
expansion.13
The Risk of Core Rigidities
Sometimes the very things that a firm excels at can enslave it, making the firm rigid
and overly committed to inappropriate skills and resources.14 Incentive systems may
FIGURE 6.5
Visualizing the Firm’s Core Competencies, Core Products, Business Units, and End Products
Source: C. K. Prahalad and G. Hamel, “The Core Competence of the Corporation,” Harvard Business Review, May–June 1990.
Core Product 1
Core Product 2
Business 2 Business 3 Business 4
2 3 4 5 6 7 8 9 10 11 12
End Products
Business 1
Competence 1 Competence 2 Competence 3 Competence 4
1
Chapter 6 Defining the Organization’s Strategic Direction 133
evolve that favor activities that reinforce the firm’s core competencies. The organizational
culture may reward employees who are most closely connected to core competencies
with higher status and better access to other organizational resources. While
these systems and norms can prove beneficial in reinforcing and leveraging the firm’s
existing core competencies, they can also inhibit the development of new core competencies.
For example, a firm’s emphasis on a scientific discipline that is central to
its core competency can make the firm less attractive to individuals from other disciplines.
Rewards for engaging in core competency activities can discourage employees
from pursuing more exploratory activities. Finally, as noted in Chapter Four, knowledge
accumulation tends to be very path dependent. Firms that have well-developed
knowledge sets along a particular trajectory may find it very hard to assimilate or utilize
knowledge that appears unrelated to that trajectory, potentially limiting the firm’s
flexibility.15
Dynamic Capabilities
In fast-changing markets, it can be extremely useful for a firm to develop a core
competency in responding to change. Whereas in Prahalad and Hamel’s model,
core competencies relate to sets of specific core products, it is also possible for a
firm to develop core competencies that are not specific to any set of technologies
or products, but rather to a set of abilities that enable it to quickly reconfigure its
organizational structure and routines in response to new opportunities.16 Such competencies
are termed dynamic capabilities. Dynamic capabilities enable firms
to quickly adapt to emerging markets or major technological discontinuities. For
example, Corning has made its own evolvability one of its most important core
competencies. It invests heavily in research in areas likely to provide scientific
breakthroughs (such as opal glasses and their solvents). It develops pilot plants
to experiment with new products and production processes.17 It even manages its
relationships with alliance partners not as individual relationships focused on particular
projects, but rather as an integrative and flexible system of capabilities that
extend the firm’s boundaries.18
STRATEGIC INTENT
A firm’s purpose is to create value. This entails more than just improving operations
or cutting costs; it means leveraging corporate resources to create more performance
for customers, more well-being for employees, and more returns for shareholders. This
is accomplished through developing new businesses and markets, and leveraging corporate
resources, all guided by the firm’s strategic intent.19
A company’s strategic intent is a long-term goal that is ambitious, builds upon
and stretches the firm’s existing core competencies, and draws from all levels of
the organization. Hamel and Prahalad’s examples include Canon’s obsession with
overtaking Xerox in copiers, Apple’s mission of ensuring that every individual has a
personal computer, and Yahoo’s goal of becoming the world’s largest Internet shopping
mall. Typically, a strategic intent looks 10 to 20 years ahead and establishes
clear milestones for employees to target.20 This forward-looking orientation is crucial;
without it companies can easily become focused on markets they have served in
dynamic
capabilities
A set of abilities
that make a firm
more agile and
responsive to
change.
134 Part Two Formulating Technological Innovation Strategy
Research Brief Blue Ocean Strategy
In a series of articles and a booka, Renée Mauborgne
and W. Chan Kim describe firms who crafted what they
call “blue ocean” strategies by innovating in a way that
allowed them to enter untapped market space. In most
industries, the rules of the game are well-understood
and accepted, and firms compete by trying to outdo
each other on the accepted dimensions of competition.
Each firm hopes to capture a greater share of existing
demand, and as the industry becomes crowded, the
likelihood of firm profits or growth diminishes. Cutthroat
competition turns the ocean bloody (also known
as “red ocean”). Blue oceans refer to untapped market
space that firms create by redefining the dimensions of
competition. They are uncharted, and there are no (or
few) competitors. Blue ocean strategies are thus fundamentally
about differentiation through innovation.
Mauborgne and Chan suggest that firms can identify
“blue ocean” strategies by first using a visualization
tool, the “strategy canvas,” to help them understand
how different players are competing in an industry,
and how they might choose to compete differently.
The horizontal axis lists the factors that the industry
competes on/invests in, and the vertical axis indicates
“high” or “low.” Managers can then plot “value curves”
for different product offerings. For example, you might
draw a graph as indicated in the figure below.
Eating facilities
Architectural aesthetics
Lounges
Room size
Reception
Amenities
Bed quality
Hygiene
Silence
Price
Dimensions of Competition
Relative Level of Oering
1 Star
2 Star
Red Ocean Strategy Blue Ocean Strategy
Compete in existing market space
Beat the competition
Exploit existing demand
Make the value-cost trade-off
Align the whole system of a firm’s
activities with its strategic choice of
differentiation or low cost.
Create uncontested market space
Make the competition irrelevant
Create and capture new demand
Break the value-cost trade-off
Align the whole system of a firm’s
activities in pursuit of differentiation
and low cost.
continued
Chapter 6 Defining the Organization’s Strategic Direction 135
the past. Focusing on the firm’s existing markets results in the development of products
and services that meet current market requirements, rather than future market
requirements. Successful and innovative firms question existing price–performance
assumptions. They lead customers by developing and introducing products that
extend well beyond current market requirements and help mold the market’s expectations
for the future.21
Once the strategic intent has been articulated, the company should be able to identify
the resources and capabilities required to close the gap between the strategic intent
Managers can then challenge the industry’s strategic
logic by asking the following four questions:
1. Which of the factors that the industry takes for
granted should be eliminated?
2. Which factors should be reduced well below the
industry’s standard?
3. Which factors should be raised well above the
industry’s standard?
4. Which factors should be created that the industry
has never offered?
For example, returning to the hotel example
Formule 1 found a successful market space by
rejecting the idea that all hotel customers need
eating facilities, lounges, and large rooms. Instead,
some customers would prefer a hotel that skimped
on these things and instead provided very quiet
and clean rooms with high-quality beds at a moderate
price:
Mauborgne and Chan argue that the NIntendo Wii,
Cirque du Soleil, and Southwest Airlines’ business
model are all examples of successful “blue ocean”
strategies.
a Adapted from Kim, W. C. and R. Mauborgne, Blue Ocean
Strategy (Boston: Harvard Business School Press, 2005).
concluded
Eating facilities
Architectural aesthetics
Lounges
Room size
Reception
Amenities
Bed quality
Hygiene
Silence
Price
Dimensions of Competition
Relative Level of Oering
Formule 1
2 Star
1 Star
136
Theory in Action The Balanced Scorecard
Robert Kaplan and David Norton point out that a firm’s
methods of measuring performance will strongly influence
whether and how the firm pursues its strategic
objectives. They argue that effective performance measurement
must be more than simple reliance on financial
indicators; it must be a coherent and integral part
of the management process. They proposed a method,
the “balanced scorecard,” that they argue can motivate
breakthrough improvements in product, process, customer,
and market development.a The balanced scorecard
(see Figure 6.6) emphasizes four perspectives the
firm should take in formulating goals that target critical
success factors and in defining measures:
1. Financial perspective. Goals might include such
things as “meet shareholder’s expectations” or
“double our corporate value in seven years.” Measures
might include return on capital, net cash flow,
and earnings growth.
2. Customer perspective. Goals might be to “improve
customer loyalty,” “offer best-in-class customer service,”
or “increase customer satisfaction.” Measures
might include market share, percentage of repeat
purchases, customer satisfaction surveys, and so on.
3. Internal perspective. Goals might include such
things as “reduce internal safety incidents,”
“build best-in-class franchise teams,” or “improve
FIGURE 6.6
The Balanced Scorecard
Source: R. Kaplan and D. Norto, “Putting the Balanced Scorecard to Work,” Harvard Business Review, September–October 1993.
If my vision succeeds, how will I dier?
What are the critical success factors?
What are the critical measurements?
The Balanced Scorecard
Statement of Vision
. Definition of SBU
. Mission Statement
. Vision Statement
To my
shareholders
Financial
Perspective
To my
customers
Customer
Perspective
With my internal
management
processes
Internal
Perspective
With my ability
to innovate and
grow
Innovation and
Learning
continued
137
inventory management.” Measures might include
the number of safety incidents per month, franchise
quality ratings, stockout rates, and inventory
costs.
4. Innovation and learning perspective. Goals might
include such things as “accelerate and improve
new product development” or “improve employee
skills.” Measures might include the percentage of
sales from products developed within the past five
years, average length of the new product development
cycle, or employee training targets.
Kaplan and Norton acknowledge that the balanced
scorecard model often has to be adapted to fit different
markets and businesses, but many firms (including
IBM, Philips Electronics, Apple, and Advanced Micro
Electronics) in many different industries (including electronics,
petrochemicals, and health care) are finding the
balanced scorecard useful.b In fact, a 2002 survey by
Bain & Company found that approximately 50 percent
of Fortune 1000 companies in the United States and
40 percent in Europe use some version of the balanced
scorecard.c
a R. Kaplan and D. Norton, “Putting the Balanced Scorecard to
Work,” Harvard Business Review, September–October 1993,
pp. 134–47; and R. Kaplan and D. Norton, “The Balanced
Scorecard—Measures That Drive Performance,” Harvard Business
Review, January–February 1992, pp. 71–80.
b Kaplan and Norton, “Putting the Balanced Scorecard to
Work.”
c A. Gumbus and B. Lyons, “The Balanced Scorecard at Philips
Electronics,” Strategic Finance 84, no. 5 (2002), pp. 45–49.
concluded
FIGURE 6.7
Identifying the
Resource and
Capability Gap
Firm’s Current
Position
Firm’s Desired
Future Position
Resource and
Capability Gap
Resources and capabilities
underlying current position
Resources and capabilities
necessary for future position
and the current position (see Figure 6.7). This includes identifying any technological
gap. Articulating the company’s strategic intent enables the company to focus its
development efforts and choose the investments necessary to develop strategic technologies
and incorporate them into the company’s new products.22 Many companies
are now pairing the articulation of their strategic intent with a multidimensional performance
measurement system, such as the balanced scorecard, as discussed in the
Theory in Action section.
1. The first step in establishing a coherent strategy for the firm is assessing the external
environment. Two commonly used models of external analysis are Porter’s
five-force model and stakeholder analysis.
2. Porter’s five-force model entails assessing the degree of existing rivalry, threat of
potential entrants, bargaining power of suppliers, bargaining power of customers,
Summary
of
Chapter
138 Part Two Formulating Technological Innovation Strategy
and threat posed by substitutes. Recently Porter added a sixth force, the role of
complements.
3. Stakeholder analysis involves identifying any entity with an interest in the firm,
what it wants from the company, and what claims it can make on the company.
4. To analyze the internal environment, firms often begin by identifying strengths
and weaknesses in each activity of the value chain. The firm can then identify
which strengths have the potential to be a source of sustainable competitive
advantage.
5. Next the firm identifies its core competencies. Core competencies are integrated
combinations of abilities that distinguish the firm in the marketplace. Several core
competencies may underlie each business unit, and several business units may
draw upon the same core competency.
6. Sometimes core competencies can become core rigidities that limit the firm’s
ability to respond to a changing environment.
7. Dynamic capabilities are competencies that enable a firm to quickly reconfigure
the firm’s organizational structure or routines in response to change in the firm’s
environment or opportunities.
8. A firm’s strategic intent is the articulation of an ambitious long-term (10 to
20 years out) goal or set of goals. The firm’s strategic intent should build upon and
stretch its existing core competencies.
9. Once the firm articulates its strategic intent, managers should identify the
resources and capabilities that the firm must develop or acquire to achieve its strategic
intent.
10. The balanced scorecard is a measurement system that encourages the firm to consider
its goals from multiple perspectives (financial, customer, business process,
and innovation and learning) and establish measures that correspond to each of
those perspectives.
1. What is the difference between a strength, a competitive advantage, and a sustainable
competitive advantage?
2. What makes an ability (or set of abilities) a core competency?
3. Why is it necessary to perform an external and internal analysis before the firm
can identify its true core competencies?
4. Pick a company you are familiar with. Can you identify some of its core
competencies?
5. How is the idea of strategic intent different from models of strategy that emphasize
achieving a fit between the firm’s strategies and its current strengths, weaknesses,
opportunities, and threats (SWOT)?
6. Can a strategic intent be too ambitious?
Discussion
Questions
Chapter 6 Defining the Organization’s Strategic Direction 139
Classics
Barney, J., “Firm Resources and Sustained Competitive Advantage,” Journal of Management
17 (1994), pp. 99–120.
Kim, W. C., and R. Mauborgne, Blue Ocean Strategy: How to Create Uncontested
Market Space and Make Competition Irrelevant (Boston: Harvard Business School
Press, 2005).
Penrose, E. T., The Theory of the Growth of the Firm (New York: Wiley, 1959).
Porter, M. E., Competitive Advantage (New York: Free Press, 1985).
Brandenburger, A. M., and B. J. Nalebuff, Co-opetition (New York: Doubleday, 1996).
Recent Work
Leatherbee, M., and R. Katila, “Stay the Course or Pivot? Antecedents of Cognitive
Refinements of Business Models in Young Firms,” (2018) Stanford Working Paper.
Schilke, O., “On the Contingent Value of Dynamic Capabilities for Competitive
Advantage: The Nonlinear Moderating Effect of Environmental Dynamism,” Strategic
Management Journal, 35 (2014):179–203.
Tushman, M. L., W. K. Smith, and A. Binns, “The Ambidextrous CEO,” Harvard
Business Review (2011), pp. 74–80.
Suggested
Further
Reading
1. G. Hamel and C. K. Prahalad, “Strategic Intent,” Harvard Business Review, May–June 1991,
pp. 63–76.
2. C. K. Prahalad, “The Role of Core Competencies in the Corporation,” Research Technology
Management, November–December 1993, pp. 40–47.
3. M. A. Porter, Competitive Strategy. (New York: Free Press, 1980).
4. Michael Porter is fully supportive of both ways of applying the five-force model. Personal communication
with Michael Porter, March 25, 2006.
5. M. A. Porter, “Strategy and the Internet,” Harvard Business Review 79, no. 3 (2001), pp. 62–78;
and personal communication, March 13, 2006.
6. S. L. Berman, A. Wicks, S. Kotha, and T. M. Jones, “Does Stakeholder Orientation Matter?
The Relationship between Stakeholder Management Models and Firm Financial Performance,”
Academy of Management Journal 42 (1999), pp. 488–507; T. Donaldson, and L. Preston, “The
Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications,” Academy of
Management Review 20 (1995), pp. 65–91; and W. Evan and R. E. Freeman, “A Stakeholder
Theory of the Modern Corporation: Kantian Capitalism,” in Ethical Theory in Business, eds.
T. Beauchamp and N. Bowie (Englewood Cliffs, NJ: Prentice Hall, 1983), pp. 75–93.
7. M. A. Porter, Competitive Advantage (New York: Free Press, 1985).
8. J. Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17
(1991), pp. 99–120.
9. R. Reed and R. J. DeFillippi, “Causal Ambiguity, Barriers to Imitation, and Sustainable Competitive
Advantage,” Academy of Management Review 15, no. 1 (1990), pp. 88–102.
Endnotes
140 Part Two Formulating Technological Innovation Strategy
10. M. Gallon, H. Stillman, and D. Coates, “Putting Core Competency Thinking into Practice,”
Research Technology Management, May–June 1995, pp. 20–28.
11. Prahalad, “The Role of Core Competencies in the Corporation.”
12. Prahalad and Hamel, “The Core Competence of the Corporation.”
13. Prahalad, “The Role of Core Competencies in the Corporation.”
14. Leonard-Barton, “Core Capabilities and Core Rigidities.”
15. G. Dosi, “Sources, Procedures, and Microeconomic Effects of Innovation,” Journal of
Economic
Literature, September 26, 1988, p. 1130; and M. Tripsas and G. Gavetti, “Capabilities,
Cognition,
and Inertia: Evidence from Digital Imaging,” Strategic Management Journal 21
(2000), p. 1147.
16. A. King and C. Tucci, “Incumbent Entry into New Market Niches: The Role of Experience and
Managerial Choice in the Creation of Dynamic Capabilities,” Management Science 48 (2002),
pp. 171–86; and K. M. Eisenhardt and J. A. Martin, “Dynamic Capabilities: What Are They?”
Strategic Management Journal 21 (2000), pp. 1105–21.
17. M. B. Graham and A. T. Shuldiner, Corning and the Craft of Innovation (New York: Oxford
University Press, 2001); and C. L. Tucci, “Corning and the Craft of Innovation,” Business
History
Review 75 (2001), pp. 862–65.
18. C. A. Bartlett and A. Nanda, “Corning, Inc.: A Network of Alliances,” Harvard Business School
case no. 9-391-102, 1990.
19. Prahalad, “The Role of Core Competencies in the Corporation.”
20. Hamel and Prahalad, “Strategic Intent.”
21. Prahalad, “The Role of Core Competencies in the Corporation.”
22. K. Marino, “Developing Consensus on Firm Competencies and Capabilities,” Academy of Management
Executive 10, no. 3 (1996), pp. 40–51.

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