SME STATEGIC ANALYSIS
A case study into a kitchen retailer
by
SJ van Rijs
University of Groningen Faculty of Economics and Business Msc Small Business and Entrepreneurship
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Acknowledgements
I would first like to thank my supervisor dr. C.H.M. Lutz for his time, guidance and knowledge which allowed me to make a better thesis. I would also like to thank Mr. Verbeek of Feenstra Keuken en Bad for the given opportunity to do research into his firm and freeing up the time needed for the interviews. My gratitude extends to Drs. Ir. van der Velde who provided me with vital industry knowledge. And last, but not least, I have deep gratitude for my family, friends and fellow students who supported me throughout my university career. My accomplishments could not have been possible without them.
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Executive summary
The goal of this research is establishing if it is possible for the firm Feenstra Keuken en Bad to create a sustainable competitive advantage on the basis of the current strategic positioning. The research is performed from the perspective of the resource based view. This theory states that a firm can possibly create a competitive advantage through their resource base. The resource base is formed by the capabilities and resources of a firm. Capabilities are the representation of the strategy of the firm and are the performances that a firm wants to deliver to the market. They are made up out of resources. The resources are the possessions of the firm that enable the execution of the capabilities. The industry factors that are a determinant for the profitability of the firm, the strategic industry factors, are also taken into account. The key performances need to have an overlap with the strategic industry factors in order for a firm to have success with the performances. A key performance becomes a key capability when an overlap is determined. It became apparent that the firm has seven key capabilities; „fast and effective complaint solving‟, „orientation and design‟, „effective marketing, „cooperation with the building contractors‟, „excellent service‟, „offering high quality products‟ and „a constant internal reflection‟. All seven capabilities have an overlap with an industry factor making it possible for the firm to earn money with them. Above average incomes however are only possible when a resource or capability has strategic value and is therefore able to generate a sustainable competitive advantage. There are four capabilities and three resources in the firm that can be considered strategic. The capabilities; „constant internal reflection‟, „fast and effective complaint solving‟, „orientation and design‟ and „cooperation with the building contractors‟, and the resources; reputation of the firm, the brand awareness and the knowledge and experience of Mr. Verbeek.
5 Index
1 Introduction ... 6
2 Theoretical framework ... 7
2.1 Strategic management and competitive advantage ... 7
2.2 Resources ... 14
2.3 Capabilities ... 16
2.4 The requirements for resources and capabilities to create rents ... 17
2.5 Key success factors and the fit with the firm ... 19
2.6 Strategic options ... 23
2.7 Operating without a competitive advantage ... 24
3 Conceptual model ... 27
3.1 Research steps ... 28
3.2 Methodology ... 32
4 Analysis; key capabilities ... 34
4.1 The firm... 34
4.2 Internal analysis ... 36
4.3 External analysis ... 39
4.4 The key capabilities ... 42
5 Analysis; possibilities for a competitive advantage ... 46
5.1 Resources influencing the key capabilities ... 47
5.2 Strategic value ... 54
6 Conclusion ... 73
6.1 Strategic options ... 73
6.2 The model ... 80
Bibliography ... 83
Appendix I: Interview I – De onderneming ... 86
Appendix II: Interview II - Key Performances. ... 92
Appendix III: Interview III - Strategic Industry Factors, ... 102
6 1 Introduction
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- To which level has Feenstra Keuken en Bad the possibility to create a sustainable competitive advantage, and can the current strategic direction of the firm be improved?
It is important to provide a model of strategy analysis that has its grounds in the most significant views and arguments of strategic theory. In order to ensure this a literature review is needed to identify the important arguments and to combine them in a model;
1. What is the current academic debate on strategic analysis and the application of this concept?
2. Which model for strategy analysis of Feenstra Keuken en Bad can be subtracted from this debate?
The next step is to use the model. The model will be executed under the guidance of the following step;
3. What are the results from the model for Feenstra Keuken en Bad?
The results of the model provide a strategic analysis for Feenstra Keuken en Bad. The results from this question can be used to answer the following sub-questions;
4. What strategic options does Feenstra Keuken en Bad have?
The strategic options give the firm a guideline about how to cope with the results of the research.
2 Theoretical framework
2.1 Strategic management and competitive advantage
The goal of this research is to apply a model for a firm level strategic analysis. Exploring the concept of strategy is thus the logical starting point for the theoretical background. Strategic management is concerned with relating the firm to its environment in order to successfully meet long term objectives (de Wit & Meyer, 2004). The most important aspect of the concept is strategy. It is therefore important to establish what strategy exactly is. This chapter provides an answer to the first sub-question.
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Strategy is fundamental to organizational success (Besanko, 2007). It can be defined as the determination of the basic long term goals and objectives of an enterprise, the adoption of courses of action and the allocation of resources necessary to carry out these goals (Chandler, 1962). Acting without strategy means that managers have no prescription for doing business, no road map to competitive advantage and no game plan for pleasing customers or achieving high performance (Thompson Jr. & Strickland III, 2003). Strategic success depends on the alignment between the internal possibilities of a firm and the external environment (Valentin, 2001; Houben, Lenie, & Vanhoof, 1999; Porter, 2008; de Wit & Meyer, 2004). For determining the best strategic options it is important that a strategic analysis incorporates the goals and direction of a firm or „the type of organization it strives to become‟, a determination of the possibilities of a firm and an analysis of the requirements from the external environment (Thompson Jr. & Strickland III, 2003). Strategy is thus purpose driven, and the purpose acts as an input into the three dimensions of strategy; process, content and context (de Wit & Meyer, 2004).
The three dimensions of strategy
As mentioned before the three dimensions of strategy are strategy process, strategy content and strategy context. The three are not different parts of strategy but are distinguishable components of the same concept. They also interact; the way in which the strategy process is organized influences the resulting content of strategy and vice versa (Ketchen, Thomas, & McDaniel, 1996). The general definitions of the dimensions are (de Wit & Meyer, 2004);
- Strategy process; The manner in which strategies come about. It is concerned with „the how’, „who’ and „when’ of strategy, or; how strategy is made and controlled, by whom and when the necessary actions take place.
- Strategy content; The product of a strategy process. It is concerned with „the what’ of strategy; what is, and should be, the strategy of the firm and each of its constituent units.
- Strategy context; The set of circumstances under which both the strategy process and the strategy content are determined. It is concerned with the where of the strategy; where are the strategy process and content embedded.
One of the goals of this thesis is to establish which strategic options for Feenstra Keuken en Bad can be derived from its strategic positioning. A strong relationship hereby exists with the strategic content of strategy (although there is some overlap with the other dimensions) because the strategic options are essentially „the what’ of strategy, the reason why this dimension is studied more in depth.
Strategy content
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The functional level refers to strategic issues related to the various functional activities of a firm (e.g. marketing or finance.). The strategy at the business level is the comprehensive strategy for a business or product. This level is often the highest level for firms that target one group of customers with a narrow line of products. The last strategy aggregation level is the corporate level, which aligns the various business level strategies (de Wit & Meyer, 2004). Feenstra Keuken en Bad focuses on one group of customers with a narrow line of products, namely the selling of kitchens and bathrooms with corresponding products. The focus of this research therefore lies on the business level strategy.
Business level strategy (de Wit & Meyer, 2004)
Part of the difficulty of strategic management is the competitive nature of the environment. Organizations need to have a competitive advantage over rival organizations in order to be successful according to de Wit and Meyer. Preferably this advantage needs to be sustainable over a prolonged period of time. How this advantage is supposed to be achieved is subject of an ongoing discussion by practitioners as well as academics.
The nature of a competitive advantage depends on the business system of an organization. The business system exists to relate the organization with the environment, and consists of the configuration of the inputs, activities (throughput) and output. Success depends on the value proposition of the organization which has to be more attractive to consumers than the proposition of rivals. An important role in this case is the role of the resource base. The resource base of an organization are its specific assets, tangible and intangible, like know-how, patents and residents, and can form the base for the value proposition (de Wit & Meyer, 2004).
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lot of time and energy to change a resource base. It means that firms need to be flexible and presumes that resources are mobile between firms (de Wit & Meyer, 2004).
There are two reasons that this mobility is unlikely. First; the characteristics of some of the resources, principally the intangible ones, make that they are very difficult to transfer between firms (Dalkir, 2005). And secondly; the high costs involved make that a lot of firms are not in the position of changing their resource base (de Wit & Meyer, 2004). This is especially true for SME‟s because of their lack of financial capabilities (Stone & Brush, 1996). After the resource base is set attention must be given to the market opportunities which fit the resource base according to the inside-out view. This is an essential step, as only a strong market position will result in a competitive advantage. The market position should act as leverage to the resource base. Figure 1 (de Wit & Meyer, 2004) illustrates the two views;
Figure 1; two perspectives on shaping the business system
11 Competitive advantage and rents
As said before, the success of a firm is dependent on its competitive advantage. This competitive advantage is exactly what it says; an advantage over the competition. When this is viewed from a business economical perspective a competitive advantage relates to the financial performance of a firm; a firm earns more than competitors. There are basically two ways to achieve a better financial performance. Either a firm‟s price-quality relation is better (product differentiation) through which a firm sells more and therefore earns more than competition, or a firm has a cost advantage through which its margins are bigger than those of the competition (Teece, Pisano, & Shuen, 1997; Peteraf, 1993). The former is called monopoly or Schumpeterian rents and the latter Ricardian rents (Peteraf, 1993; Mahoney & Pandian, 1992). Rents are essentially above average rates of return (Mahoney & Pandian, 1992). The resource based view (from now on the RBV) is based on the inside out view and presumes that these differences in costs or products arise from within the firm (Barney, 1991). A firm hereby chooses its strategy to generate rents based upon their resource base (Mahoney & Pandian, 1992).
The literature depicts that there are two ways in which the resource base of a firm can result in the achievement of rent. First the sources for Schumpetarian and monopoly rents can be found in the control or ownership of a resource base in a given firm (Teece, Pisano, & Shuen, 1997; Peteraf, 1993; Makadok, 2001; Amit & Schoemaker, 1993; Barney, 1991). The other source is the leveraging of the resource base to use it more effective and efficient. Teece (1997) and Makadok (2001) talk about the employment of resources next to the selection of it, and Wernerfelt (1984) and Mahoney (1992) even say that a firm does not achieve rents because of its control over resources, but through the use of its resources. This can be accomplished by, for example, the synergy effects of a resource combination. This second source is represented by the capabilities of a firm (Teece, Pisano, & Shuen, 1997; Makadok, 2001; Amit & Schoemaker, 1993).
The framework of Rangone (1999) in relation to rents
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The widespread believe exists that the resources (resource base) and capabilities have to settle to a number of requirements (explained further in the next chapter). These requirements ensure that the resources and capabilities can create long term rents and have a fit with the success factors of the environment (Amit & Schoemaker, 1993). The resources that meet these requirements are called strategic or critical resources (Amit & Schoemaker, 1993; Barney, 1991; Makadok, 2001; Rangone, 1999). Makadok (2001), Amit and Schoemaker (1993) and others believe that both resources and capabilities should be assessed on the fact if they are strategic or not. Rangone however only tests the resources of a firm on their ability to create long term rents. Not testing the capabilities of the firm can be considered a flaw in the Rangone model because of their importance in the rent creation process of a firm.
Teece, Pisano and Shuen say that resources are a firm‟s organizational processes and asset positions, but add the path of the firm. The organizational processes and asset positions are incorporated in the definitions of Rangone (he calls it resources); the path of the firm however is not. The path is called the dynamic capability and is the ability of a firm to integrate, build and reconfigure the competences (resources) of a firm to address to rapidly changing environments (Teece, Pisano, & Shuen, 1997). Non-transferability stems from the fact that capabilities must be built and can‟t be bought (Makadok, 2001; Teece, Pisano, & Shuen, 1997). There are differences between the authors. Teece focusses more on the rapidly changing environments that characterize some industries today and argues that a firm needs to be able to constantly adjust its resource base to these changing conditions in order to stay competitive (Teece, Pisano, & Shuen, 1997). Makadok argues that a competitive advantage of a firm does not only stem from selecting the separate resources of a firm, but also from the ability of the firm to combine the available resources into a resource base and leverage the resource base towards maximum effectiveness. Both mechanisms are used to create a competitive resource base, but capabilites can especially be an important source of competitive advantage because they cannot be bought and are extremely firm specific, unlike most resources. (Makadok, 2001). So Teece and Makadok seems argue the same approach to resource management but Teece places it in a dynamic context and Makadok presumes a more stable context.
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behaviour if the effects of the current economic crisis is taking out of account (Centrale Branchevereniging Wonen, 2008). Taking it all into account leads to the conclusion that the kitchen and bathroom branche seems to be a relative stable market, reason enough to keep the dynamic concept of Teece out of the research.
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can be the explanation for the fact that in reality firms seem able to differentiate themselves and obtain a competitive advantage in an industry without a resource that is strategic on its own. If this reasoning is taken further the conclusion can be drawn that leaving out the capability concept weakens the effectiveness of the model. Most resources that are put through the strategic value tests of Rangone to assess their potential for long term competitive advantage will fail due to their imitability and substitutability. So based on the argument of Amit and Schoemaker, Makadok and Mahoney & Pandian the model should be adjusted so that besides the individual resources also the capabilities, a group of resources, are tested.
2.2 Resources
The success of this research partly depends on an accurate establishment of the resources that influence the capabilities of a firm, it is therefore important to determine what resources precisely are. Dollinger devotes a chapter in his book entrepreneurship to the concept of resources and gives a nice explanation of resource classifications (Dollinger, 1999). He argues that resources can be divided into six homogeneous classifications. The six classifications are illustrated by P.R.O.F.I.T. which comprises the physical, reputational, organizational, financial, intellectual/ human and technological resources of a firm. They are broadly drawn so that they apply to most firms, but all firms do not necessarily incorporate every classification. Each classification includes the assets, skills, organizational processes, firm attributes, information and knowledge of a firm being either tangible or intangible (Dollinger, 1999). Barney also delivers three categories of classification, being; physical capital resources, human capital resources and organizational capital resources (Barney, 1991), and Wernerfelt (1984) mentions a classification regarding the (in)tangibility of resources. There are two conclusions that can be drawn from Dollinger, Barney, Wernerfelt and Rangone. First the actual definition of resources is the skills, assets, competences, processes, attributes, information and knowledge that a firm has. The resources can subsequently be divided into different classifications. This brings us to the second conclusion; there are different ways of classifying resources. They can be divided into homogeneous classes or into the classification of being either tangible or intangible for example (Rangone, 1999).
Resource classification
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very broad classification that offers no guidline because it does not relate to the underlying resources. The homogenous classes classification on the other hand ís capable of doing this. It says something about the workings of the underlying resources and offers therefore a guideline for determining resources in an organization. Organizational resources for example include the structure, routines and systems of a firm and refers to the reporting, planning, information gathering and decisionmaking systems (Dollinger, 1999). This information says more and is more usable for this research than the fact that a resource is visible or touchable. The use of homogenous classes as a classification method does however has its drawbacks. Homogeneous classes are detail specific resulting in the fact that resources that do not influence one of the classes are not considered in an investigation. So it is vital that a researcher selects a set of classes that fits the aim of the research and the nature of the organization, otherwise possible strategic resources of great influence can be left out in the research. Because of the above reasons of comparison and guidelines I agree with Rangone that classifying the resources in homogeneous classes is the best approach for a strategic analysis.
Rangone classifies resources as being the financial resources, physical assets, human resources, organizational resources (including networks), skills, know-how, competencies, brands and reputations of a firm. He based the classification of the resources on the definitions of Barney (1991) and they are comparable to the profit classification of Dollinger (1999) (see also table 2). For the implementation of the model it is important to understand what the homogeneous classes of Barney exactly are and what they mean. Therefore an explanation of the resource definitions is given below;
- Financial resources; They represent the money assets of a firm and are generally the firm‟s borrowing capacity, the ability to raise new equity and the amount of cash generated by internal operations (Dollinger, 1999).
- Physical assets; Physical assets are the tangible properties of the firm. They include the firm‟s plant and equipment, location and the amenities available at the location (Dollinger, 1999) - Human resources; Include the knowledge, training and experience of the employees of the
firm (Dollinger, 1999).
- Organizational resources (including networks); Organizational resources include the firm‟s structure, routines and systems. They relate to the firm‟s reporting systems. Its information gathering systems and decision making systems (Dollinger, 1999).
- Skills and Competencies; Refers to something that a business is able to do like efficient manufacturing and marketing (Hall, 1992; Rangone, 1999).
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- Brands and reputations; Brands are a name, phrase, symbol, or some combination of these elements that identifies a firms' output and differentiates it from its competitors (Lovelock & Wirtz, 2007). Reputations are the opinion that people in general have about a firm and his output, or how much respect or admiration a firm and his output receives, based on past behavior or character (Cambridge University Press, 2009).
The determined resources from a strategy analysis must fit into these classes in order to be relevant and thus investigated. Resources are one of the most important inputs to the Rangone model and determine its success. Any faults in the resource definitions therefore greatly undermines the effectiveness and reliability of the model. The P.R.O.F.I.T. classification and the classification of Barney, which are relatively the same, take care of this problem however and offers enough width to use in this research because they apply to most firms (Dollinger, 1999). Therefore these classifications can be used in the model.
2.3 Capabilities
Capabilities are also an important aspect of the research. It is thus important, just as with the resources, to establish what they are exactly and how they should be established. Rangone (1999) uses them to identify the resources in a firm. These capabilities are; the production capability, market management capability and the innovation capability. The three are primarily core process focused because they basically entail the capabilities of a firm to develop, produce and deliver products or services. This focus on the core processes of a firm is also brought forward by Amit and Schoemaker who mentions that an analysis should focus on the resources and capabilities that create the final product (Amit & Schoemaker, 1993). The reason why capabilities are used to identify resources becomes clearer when capabilities are better explained and when also the exact difference between capabilities and resources are made clear. This distinction is well put by Amit and Schoemaker and comprises the following;
- Resources are essentially the tradable knowhow (patents etc), assets, human capital etc of a firm used to convert inputs into final products or services.
- Capabilities are the firm‟s ability to deploy these resources, usually in combination and by using the firm‟s organization processes. These are tangible and intangible processes that are firm specific and are developed over time through complex interactions among the firm‟s resources. Capabilities are often developed in functional areas, like marketing, or by combining resources at a firm level. This results in the fact that capabilities of a firm may be excellent service or flexible manufacturing (Amit & Schoemaker, 1993).
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It was established previously that Rangone incorporates the capability argument by identifying the basic capabilities of a firm. Based on emperical research Rangone argues that there are three possible capabilites in a firm. An individual firm can focus on one or more capabilities. The description of the capabilites are:
- The innovation capability: A firm‟s ability to develop new products and processes, and achieve superior technological and/or management performance (e.g., development cost, time-to-market, etc.),
- The production capability: The ability to produce and deliver products to customers, while ensuring competitive priorities, such as quality, flexibility, lead time, cost, dependability, etc., - The market management capability: A firm‟s ability to market and sell its products effectively
and efficiently.
Each basic capability is formed by the relevant key performances. The key performances can be seen as capabilites that are based on the strategy of the firm and the key success factors of the industry (Rangone, 1999). These capabilities are thus comparable to the definitions of Makadok and Amit & Schoemaker. Especially because Rangone also argues that the capabilities result from the deployment and combination of resources. There is however a major difference between the authors. Both Makadok and Amit & Schoemaker think that resources ánd capabilities need to be strategic in order to create rents, but for some reason Rangone decided to only test the resources of a firm on their ability to create rents and not the capabilities. These requirements will be further explored in the next chapter.
2.4 The requirements for resources and capabilities to create rents
18 Strategic value
The strategic value of a resource relates to its ability to create and sustain a long term competitive advantage. This in turn depends on the results of the five tests which asses (Rangone, 1999);
1. Competitive superiority; evaluates if and to what extend resources differentiate the firm from its competitors.
2. Imitability; analyses actual and potential competitors difficulty in imitating the resource. 3. Duration; which measures if the resource benefits will also be generated in the long term. 4. Appropriability; verifies if the firm owning the resource is able the exploit the generated
advantages in the market.
5. Substitutionalibility; assesses how difficult it is for competitors to replace the resource with an alternative the gives the same advantages.
The entrepreneur assesses the strategic value of each resource with such evaluations qualitatively. The five tests are again based on a comprehensive literature review performed by Rangone and incorporate the views of most of the prominent resource based view authors (see also table 1). Only Amit and Schoemaker developed another test which measures the overlap between the resources and capabilities with the external success factors (treated more thoroughly in section 2.5). So the grounds on which the five tests are based are solid. It is however unclear exactly how the tests are supposed to be performed. Rangone does not specify when a resource passes the test. He mentions that the strategic value of a resource needs to be medium to high what constitutes as a score between 5.1 and 10 on a ten point scale (Rangone, 1999). There is no mention however of the grounds on which a resource gets a particular score. Other literature also gives no clarity, partly because they are theoretically aimed instead of practically. I will go deeper into the subject in the research steps section.
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Author Requirements for competitive advantage
Wernerfelt (1984)
Existence of both an entry barrier in at least one entry barrier and resource positioning barriers
Barney (1991) Resources have to be valuable, rare among current and potential competitors, imperfectly imitable and valuable substitutes do not exist. These indicators determine the heterogeneity and immobility of resources and thus usefulness to create competitive advantage.
Rangone (1999) These resources have to be durable, difficult to imitate and difficult to substitute.
Mahoney & Pandian (1992)
A firm achieves rents not because they have better resources, but because they make better use of their existent resources. This can result in contestable and idiosyncratic synergy.
Teece, Pisano & Shuen (1997)
Capabilities must be honed to a user‟s need, unique and difficult to replicate.
Prahalad & Hamel (1992)
Core competencies should provide access to a wide array of markets, should make a significant contribution to the perceived customer benefits of the product, and should be difficult to imitate.
Peteraf (1993) Resources have to be heterogenic, there most ex-post and ex-ante limits to competition and have to be imperfectly mobile.
Connor (1991) The resources have to produce value in excess of their hire price, and incorporate characteristics that render these inputs costly for rivals to copy.
Makadok Capabilities need to be hard to transfer between firms.
Amit & Schoemaker (1993)
Also depends on the overlap of the resources with the key performances of the industry.
Table 1; Requirements for resources to be strategic
Strategic consistency
The strategic consistency test is developed by Rangone and is not explicitly mentioned by the other authors. The test entails assessing the ability of resources to contribute to the achievement of the firm‟s strategic intent, or the alignment of the resources with the firm‟s strategic objectives (Rangone, 1999). There are two reasons that this test is not included in the model of this thesis. First the lack of support by other theorists raises some questions about the relevance of the concept, and second it measures the alignment of the resources with the strategy of the firm. The starting point of the whole analysis is the strategy however; the capabilities and subsequently the resources are deducted from it. The strategic alignment of these resources and capabilities is thereby guaranteed which makes the test unnecessary.
2.5 Key success factors and the fit with the firm
20 Key success factors
Leidecker & Bruno performed an investigation into the origins and usage of what they call critical success factors, which are comparable to the key success factors of Rangone (1999). They define critical success factors (CSF‟s) as those characteristics, conditions, or variables that when properly sustained, maintained, or managed can have a significant impact on the success of a firm competing in a particular industry. A CSF can be a characteristic such as price but it can also be a condition such as capital structure or advantageous customer mix, or an industry structural characteristic such as vertical integration (Leidecker & Bruno, 1984). Amit and Shoemaker (1993) provide evidence from empirical research that a fit between a firm‟s strengths and the industries key success factors determine the success of a firm, further supporting the notion that the fit is important. They call key success factors strategic industry factors (SIF‟s) and consider them to be a determinant of profitability in an industry with the following general characteristics (Amit & Schoemaker, 1993);
- Stock type Resources and Capabilities that ex-post are shown to be key determinants of firm profitability in an industry;
- Determined at the market level through complex interactions among industry rivals, new entrants, customers, regulators, innovators, suppliers, and other stakeholders;
- Strategic in that they are subject to market failures and may be the basis for competition among rivals;
- The bundle of SIF changes over time and is not known ex-ante;
- Their development takes time, skill, and capital; they may be specialized to particular uses; - Investments in them are largely irreversible (i.e., entail sunk costs);
- Their values deteriorate or appreciate, over time, at varying rates of change;
- Their pace of accumulation may be affected by a range of managerial actions (policy levers) and by the magnitude of other Resources and Capabilities that are controlled by industry rivals. One cannot easily speed up their development (e.g., doubling the investment will not usually halve the time);
- Their value to any particular firm may depend on its control of other factors; the complementarily property. For instance, the value of a firm's product design capability may depend upon the effectiveness of its distribution network;
- Not all aspects of their development and interactions will be known or controllable.
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particular firm does also depend on firm specific characteristics, especially on their resource and capability base. The base and the SIF should be complementary to each other, in other words have a fit, in order to exploit the SIF‟s the best (Amit & Schoemaker, 1993).
Because SIF‟s are better described in comparison to the key success factors of Rangone the definition that is used in this thesis will be that of the SIF‟s. Amit and Schoemaker provide clear guidelines for determining and evaluating SIF‟s (or key success factors) because they deliver a good description of SIF‟s and also analyze their workings, upsides and downsides. Rangone doesn‟t mention any of this.
Identifying Strategic Industry Factors
There are three levels of analysis on which the concept can be applied. The first is a firm level on which an internal focus is used to identify the success factors of the firm. The second level is the industry level, used to identify certain aspects in the structure of the industry that significantly impacts a firm‟s performance in that industry. Thirdly there is the level of analysis that focuses beyond the boundaries of an industry in order to define the factors that an industry needs in order to survive (Leidecker & Bruno, 1984). Because one of the aims of this paper is to compare the success factors of the industry with the internal capabilities of the firm an industry level analysis is appropriate. Leidecker & Bruno also offer different identification techniques in order to determine the SIF‟s including their advantages and disadvantages. They argue that there are two techniques for an industry level analysis, one is analyzing the structure of the industry by the Porter five forces analysis and the second is industry or business experts. The expert way is a good way of establishing the important SIF‟s fast and effectively. This is also agreed upon by Armstrong and Shimizu (2007) who feel that the industry expert is an important source of information. The expert way is important because this can uncover factors that are missed by the more objective, formal and analytical approaches (Leidecker & Bruno, 1984). The more objective data is gathered from an already performed marketing survey instead of using the five forces analysis. This survey gives more information that the five forces analysis because the research was performed more thoroughly. Grant (2005) also mentions aspects that are important when attempting to find the SIF‟s. He mentions an industries analysis, just like Leidecker & Bruno, but also mentions the definition of the needs of the customer. These customer benefits will also be established with the help of the marketing survey. The expert technique is straight forward and will be done by interviewing experts of the industry.
Analyzing the fit between the firm and the strategic industries factors
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of the „fit‟. The other input is the industries strategic factors based on the analysis above. It is important to establish the best way to evaluate the fit for a firm.
- Amit and Schoemaker
Amit and Schoemaker (1993) provide a straight forward way. They basically say that the resources and capabilities of a firm should be compared to the determined SIF‟s. An overlap, or fit, between the two means a source of rent. The method is also relatively easy because they are similar in their nature; the SIF‟s are also illustrated by resources and capabilities. A firm should try to adjust their resource base in such a way that the most comprehensive overlap exists with the SIF‟s according to them. If there is an overlap a possibility to create profits exist because the SIF‟s are the key determinants of the profitability of a firm in the market. A firm needs to have strategic capabilities and resources however in order to create above average rates. These are for Amit and Schoemaker those resources and capabilities that are scarce, durable, not easily traded and difficult to imitate, and they use the same tests for them as Rangone (1999) does.
- Rangone
Rangone (1999) uses a different method. Instead of separately determining the SIF‟s and the resources and capabilities of a firm he makes the establishment of the resources and capabilities dependent on the SIF‟s. Rangone argues that the strategic intent of a firm should first be established. This implies, according to him, two related levels of choices; deciding on which of the three basic capabilities a firm relies, and defining the key performances to achieve. Although Rangone does not explicitly mention it the key performances can be seen as the groups of capabilities of a firm that together form a basic capability. If a key performance is delivering high quality for example, delivering high quality is a capability of the firm. The key performances are based on a combination of the industries key success factors and the core customer benefits that the firm wants to provide. The next step is to determine which resources influence the key performances. An assessment is subsequently made to see if the influencing resources have strategic value.
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capabilities of a firm Rangone presumes per definition that the there is a fit between the capabilities key performances of the firm and the SIF‟s, but this fit obviously does not have to be the case for every firm. And if it is the case for every firm in an industry the SIF‟s are no longer SIF‟s (Amit & Schoemaker, 1993; Prahalad & Hamel, 1990). I do agree with Rangone however regarding his argument to only investigate the resources that affect the capabilities. Because these resources are the only relevant resources, they execute the strategy of a firm. My doubts lie with the establishment of the capabilities. This should be done on the basis of the strategy only, not the strategy in combination with the SIF‟s. The resources and capabilities should be tested on their overlap with the SIF‟s and a connection should not be assumed. The overlap test is important because it seems that the overlap is an indicator of the success of a firm. Testing for overlap should be done before the strategic value tests. The resources and capabilities without any overlap are irrelevant, and there is thus no reason to check them on their ability for sustaining a competitive advantage and supporting the strategy of the firm. It is also possible to just test the capabilities for the overlap because of the fact that the capabilities are formed through the resources. The resources are thus automatically tested when the capabilities are tested.
2.6 Strategic options
Several strategic options can be derived from the tests and frameworks of the articles of Rangone and Amit & Schoemaker. Amit & Schoemaker argue that the overlap between the capabilities of a firm with the SIF‟s is a determination of the success of the firm in the industry (Amit & Schoemaker, 1993). Capabilities that do not fit the SIF‟s are thus less relevant and cannot lead to the earning of rents. The firm should evaluate in this case which benefits the capabilities deliver in order to pursue them. The capabilities with an overlap can lead to profits. Strategic value is however needed for the creation of rents.
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2.7 Operating without a competitive advantage
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Author Goal article Source of heterogeneity Critical resources Link to competitive advantage Requirements for competitive advantage Important issues Wernerfelt (1984)
Development of economic tools for analyzing a firm‟s resource position and look at strategic options.
Resources Tangible and intangible assets semi-permanently tied to an firm, seen as a strength or weakness of a given firm
Relates to a first mover advantage. First holders of a particular (combination) resource(s) result in an advantage and potential high returns.
Existence of both an entry barrier in at least one entry barrier and resource positioning barriers
Barney (1991) Examines the link between a firm‟s resources and sustained competitive advantage
Resources Firm resources include all capabilities, organizational processes, firm attributes, information, knowledge etc. that are controlled by and enable them to implement strategies that improve its efficiency and effectiveness.
When a resource of a combination of resources lead to a value creating strategy that is not simultaneously
implemented by competitors; and when these competitors are unable to duplicate the benefits of the strategy
Resources have to be; valuable, rare among current and potential competitors, imperfectly imitable and valuable substitutes do not exist. These indicators determine the heterogeneity and immobility of resources and thus usefulness to create competitive advantage.
Further expansion of the value chain model of Porter
Rangone (1999) Present a resource based view of an SME‟s sustainable competitive advantage, and propose an approach to a strategy analysis based on this view.
Resources The financial resources, physical assets, human resources, organizational resources (including networks), skills, know-how, competencies, brands and reputations of a firm.
The long term competitiveness of a firm depends on its endowment of resources that differentiate it from its competitors.
These resources have to be durable, difficult to imitate and difficult to substitute.
Mahoney & Pandian (1992)
Development of the thesis that the RB approach presents an opportunity for dialogue and debate between scholars from different research perspectives
Resources Resources are classified under a few headings divided as far useful for the problem at hand. Examples of headings are; land and equipment, labor (incl. capabilities and knowledge) and capital (tangible and intangible)
Firms select a strategy to generate above average rates of return (i.e. rents) based upon their resource capabilities. These capabilities (for example know-how or managerial ability) can result in a competitive advantage
Firms achieve rents not because they have better resources, but because they make better use of their existent resources. This can result in contestable and idiosyncratic synergy.
RBV is complementary to industrial organization analysis.
Teece, Pisano & Shuen (1997)
Developing the dynamic capabilities approach, in order to analyze the sources of wealth creation and capture by firms.
Dynamic capabilities Dynamic capabilities are the firm‟s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments. They can be determined through the processes, positions and paths of a given firm. The
Resource control can lead to economic rents. But because the external environment is prawn to change a dynamic handling of the resources is needed which is illustrated through the dynamic capabilities of a firm.
Capabilities must be honed to a user‟s need, unique and difficult to replicate.
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processes and paths are comparable to resources. Prahalad &
Hamel (1992)
Competences Corporate technologies and productions skills.
The sources of advantage lie in the ability of the firm to consolidate corporate technologies and productions skills into competencies that empower the firm to adapt to quickly changing environments
Core competencies should provide access to a wide array of markets, should make a significant contribution to the perceived customer benefits of the product, and should be difficult to imitate. Peteraf (1993) Develop a general model of
resources and firm performance which a once integrates the various strands of research and provides a common ground from which further work can proceed.
Resources and capabilities Not defined Firms with superior resources have lower average costs (Ricardian rents) and can have monopoly rents from a deliberate restriction of output.
Resources have to be heterogenic, there most ex-post and ex-ante limits to competition and have to be imperfectly mobile.
Connor (1991) Assessing the distinctiveness of strategy‟s resource-based theory, as compared to major streams of antecedent theory related to Industrial Organization economics.
Resources Resources are the inputs used to produce the product or service of a firm. These inputs are a bundle of unique resources and relationships per firm.
The resource based leads to a competitive advantage in two possible ways; 1. The firm‟s product is distinctive in the eyes of buyers. 2. A firm selling an identical product has a low cost position. The competitive advantage results mainly from the connectedness between the firm‟s resources and resource conversion activities.
The resources have to produce value in excess of their hire price, and incorporate characteristics that render these inputs costly for rivals to copy.
Makadok (2001) Investigating the interaction between the two rent creating activities of deploying and selecting resources.
Resources and capabilities Capabilities of selecting and deploying resources effectively. The two are complementary in some circumstances, substitutes in others.
Rents or the heterogeneity in performance is due to the ownership and/ or application of resources.
Capabilities need to be hard to transfer between firms.
Amit & Schoemaker (1993)
Examination of the conditions that contribute the realization of sustainable economic rents.
Capabilities and resources Resources are the stocks of available factors that are owned or controlled by the firm. Capabilities are the firm‟s capacity to deploy resources.
Rents follow when there is an overlap between the firm‟s resources and the industries key success factors.
Resources have to be difficult to buy, sell, imitate or substitute, and also have an overlap with de industries key success factors.
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3 Conceptual model
The following conceptual model is developed on the grounds of the theoretical background and the goal of the research. It represents a model of strategic analysis for SME‟s and is an answer to the second sub-question. The model will be applied in following chapters. The steps of the model are explained below.
Figure 2; conceptual model
Internal analysis; - Firm strategy
- Core customer benefits
Basic capabilities Key performances Resources influencing key capabilities Overlap test Strategic resources External analysis; - Industry analysis - Expert technique
Strategic value tests Strategic Industry Factors
Strategic options
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3.1 Research steps
The steps that are used to research the firm follow the conceptual model. The model of Rangone (1999) is used as a basis and guidance and is adjusted to its critiques and limitations. The adjustments are made on the grounds of the argumentation in the theoretical background and by it the model represents a way to make a strategic analysis on Feenstra Keuken en Bad. The key performances are the expression of the strategy and goals of the firm and are therefore the first step of the model.
Internal analysis to establish the key performances and basic capabilities
This is the first step in the model of Rangone (1999) and implies two strictly related levels of choices. One of the choices is defining the basic capabilities on which the firm relies. There are three basic capabilities on which the firm can rely and each consist (of a number) of key performances. These basic capabilities are;
- The innovation capability: a firm‟s ability to develop new products and processes, and achieve superior technological and/or management performance (e.g., development cost, time-to-market, etc.),
- The production capability: the ability to produce and deliver products to customers, while ensuring competitive priorities such as quality, flexibility, lead time, cost, dependability, etc., - The market management capability: a firm‟s ability to market and sell its products effectively
and efficiently (Rangone, 1999).
29 External analysis to establish the strategic industry factors
The external analysis is performed to identify the SIF‟s. These factors are later in the model compared to the key performances of the firm in order to see if there is an overlap between the two. The literature research showed that asking an expert is a good way of establishing the SIF‟s. Besides asking the expert on his opinion, an important part of this step will entail the establishment of the needs of the consumers in the industry and an analysis of the industry itself. This will be derived from an independent marketing survey and the industry expert.
The overlap test
The capabilities need to have an overlap with the SIF‟s in order to be a basis for a competitive advantage and subsequently to create rents. The capabilities are represented by the already established key performances. Rangone only looks at the impact of the resources on the SIF‟s and not if there is an overlap between the two, but it is exactly this overlap that is important and is an indicator of the success of the firm (Amit & Schoemaker, 1993). Thus an extra step is included in the model of Rangone that assesses this fit. The capabilities that were identified in the external analysis (the SIF‟s) are compared to the key performances on which Feenstra Keuken and Bad focuses. Only the performances (and the resources that influence them) that have a fit are tested for their strategic value and consistency because they are the only relevant performances. The key performances that have an overlap will become key capabilities. Key capabilities are able to create profits for the firm, only not above average profits without strategic value.
Identifying the resources that influence the key capabilities
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relevant resources. The resources that do not fall into one of the classes do not have the empirical basis to be seen as a resource and are less relevant for this research.
Assessing the strategic value of the resources and key capabilities
Only strategic resources and capabilities can possibly be a source of rent. The strategic element relates to the fact that only strategic factors are capable of generating and sustaining a long term competitive advantage. To become strategic they have to comply with a number of requirements, which will be tested in this step. The second deviation from the model of Rangone is also made in this step. Rangone only tests the resources in his model while other authors underline the significance of the capabilities for firms and argue that these should also be tested on their strategic value. This is why the key capabilities will also be tested. First the strategic value of each of the established resources will be assessed by using five tests from the article of Rangone (1999). The resources are tested first because they (partially) determine the strategic value of the key capabilities. The five tests are;
1. Competitive superiority test, which evaluates if and to what extent the resource contributes to differentiating the firm from its competitors.
2. Imitability test, which analyses actual and potential competitors‟ difficulty in imitating the resource, due, for example, to its physical uniqueness, path dependency, causal ambiguity or economic deterrence.
3. Duration test, which measures if the resource‟s benefits will also be generated in the long term.
4. Appropriability test, which verifies if the firm owning the resource is able to exploit the advantages generated in the market.
5. Substitutability test, which assesses how difficult it is for competitors to replace the resource with an alternative that gives the same advantages.
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critical because they have enough strategic value. Critical resources are the only resources that can lead to a sustainable competitive advantage. There are thus three possible qualifications (low, medium or high) for each resource and individual test. The question is when a resource passes one of the five tests. Rangone combines the scores on the five tests into one average score that assesses the strategic value of the specific resource. So a resource with a low score on the imitability test but a high score on the other four tests will have enough strategic value to become critical. This is not correct in my opinion. The resource in the example cannot lead to a sustainable competitive advantage because the competition will immediately imitate it for the reason that it is differentiating, durable, appropriate and hard to substitute. And because of this imitation the competitive advantage will be lost. The same reasoning can be applied to other situations. If a resource scores high on everything but the appropriability test for example, the firm in question will have a defendable and durable resource but no way of gaining its benefits. The lowest score on one of the five tests therefore determines the strategic value of a resource in my opinion. So instead of using an average scoring method, a „weakest link‟ scoring method will be used in the research.
After the resources are individually assessed on their strategic value it is now important to assess the key capabilities. This can be done because of the fact that each key capability is made up out of one or more resources. Thus the individual results for the resource(s) can be combined to assess the strategic value of the key capabilities. This way a firm can still have a sustainable competitive advantage through its key capabilities even though some of the individual resources are not strategic. The combining will be performed by averaging the scores for each of the five tests of the resources that together form the key capability. A key capability is thus also strategic if for example only four of the five resources in that capability are critical resources. Even if the fifth resource fails the imitability test, the capability will still have enough value because the competition cannot imitate the whole capability due to the other four resources. This is not the whole picture though. This way of assessing passes over the synergy effect regarding capabilities. This synergy effect relates to the conviction of some theorists that a capability is more than the sum of its parts (being resources). The key capabilities should therefore also be tested in their entirety. This is done by testing them by the same five tests as with the resources and also with a „weakest link‟ scoring method. Assessing the capabilities in two manners has the advantage that the given value to a capability has more power if the results of the two manners are similar. A medium or high constitutes a critical key capability.
Generating strategic options
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- Resources and capabilities with high strategic value should be exploited as before and nurtured to avoid any loss of value. These resources and capabilities are capable of generating and sustaining a competitive advantage.
- Resources and capabilities with low strategic value should be developed through specific investments, in order to increase their value. These resources and capabilities are for now unable to generate and sustain a competitive advantage.
- The relevance of the resources and capabilities should be assessed if development is not possible. Some are still important though, despite their lack of strategic value. The resources and capabilities with a low strategic value should not be abandoned just like that. They can still deliver value for the firm because the key capabilities still have an overlap with the strategic industry factors. They are just not capable of delivering above average rates of return. Recommendations to execute these options will also be provided in the strategic options section.
3.2 Methodology
Type of study and data collection
The subject of investigation for this thesis is Feenstra Keuken en Bad. This firm will be investigated by the means of a case study. A case study is appropriate because only one firm is researched. The model that is used for the study is based on an extensive literature review of the most important authors in the strategic theory area especially regarding the research based view. A number of measures were used to assure that the most relevant articles were used. Only articles from sound academic journals are used and all articles are based on a solid empirical study. Moreover the articles were chosen on their number of references in other articles and their mention in handbooks and textbooks. The data for testing the firm comes from a number of sources. The way of data collection is stated for each step of the model because it differs among steps. A lot of the data stems from interviews. The interviews were performed using open questions instead of closed questions. Open questions are not leading and show the extent of the knowledge of the interviewee because they have to come up with their own answer. The questions also create the ability to go deeper into a certain topic and therefore the possibility to gain more data.
Internal analysis data collection
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questionnaires because the former offers the possibility of adjusting the interview on the spot. The reason for only interviewing the president of the firm is that he has the ultimate vote in deciding the strategic direction of the firm and is thereby the right person to ask about the strategy (see also the introductory interview). The data from the interviews for this step can be found in appendixes I and II.
External analysis data collection
The expert that will be consulted is an expert from the consumers' co-operative society. This organization is operating in several European countries and the expert is the managing director of it. Asking the expert entails harvesting qualitative data and will therefore be done by the means of interviews. The reasons for this are the same as with the internal analysis. The core customer benefits are determined through an already performed marketing survey. This survey was performed scientifically by an independent marketing research firm. They executed a survey among 911 kitchen buyers. The data from the interview with the industry expert can be found in appendix III. The data from the marketing research is available with the author.
Data collection for the overlap test
The step will be performed on the basis of the previous collected data and conclusions that were derived from that data. The data can be found in appendixes I, II and III.
Data collection for the identification of the resources
The source for this data has to be as close to the activities as possible. This means that it can be collected through observation or asking people who are directly involved. Observation is the most effective technique in this case but has to be done by the researcher and because I do not have any relevant experience in the business or industry I may be unqualified to observe. Furthermore the time limits of the research do not give me space to perform observations. Again interviewing seems to be the right approach. Feenstra Keuken en Bad operates with three showrooms managed directly by the president of the firm, so he is the person with the broadest knowledge of the firm. This is furthermore supported by the flat structure of the firm. Directly operating under him are the sales teams and he spends a few days a week in each showroom. The interview has the same characteristics as the interviews of previous steps. The resulting data can be found in appendix IV.
Data collection for assessing the strategic value
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4 Analysis; key capabilities
The goal of this chapter is to see if Feenstra Keuken en Bad has key capabilities. It is investigated if there is an overlap between the key performances of the firm with the strategic industry factors. A key performance becomes a key capability when there is an overlap. The firm has the possibility to create profits on the basis of this overlap because the strategic industry factors are a determinant of the profitability of the firm in this market. The firm will first be introduced briefly; afterwards the key performances of the firm and the strategic industry factors are determined and compared.
4.1 The firm
Mission, vision and goals
The mission for the firm is to create a stable organization that is aligned with the market in order to provide a total package of kitchens and bathrooms for those buyers who are interested in high quality products in combination with excellent service, and to do this in collaboration with professional building contractors. This mission is viewed as the guideline for all activities of the firm. It is executed under the vision that the firm must be able to take away any concerns of the customer. The firm has, because of its history, a close bond with the building contractors in their region. This is seen as a benefit because the building contractors are a major buyer of kitchens for new houses and also refer their customers to Feenstra Keuken en Bad. The short term goals are to establish a stable organization because of the recent transfer of ownership and the fact that the firm is on its own feet for the first time, but also to look how to better reach and persuade potential customers. All these goals and the mission and vision are written down and actively lived up to.
Products, services and activities
The core business of the firm is the selling of new kitchens, bathrooms and tiles. The major turnover lies with the kitchens, but the bathroom sales are growing and tiles are a stable factor throughout the year. Tiles are therefore important despite the fact their turnover is lower than that of the kitchens and bathrooms. The firm also offers the service of removing old kitchens and installing the new kitchens.
Competition and the market
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2003). The market can be classified as stable. The effects of the current economic crisis are felt but not extremely. The competition seems to be slowly growing because more and more firms are aiming to provide more benefit to the customer in the kitchen and bathroom industry and are therefore creeping to the higher segment. But this is a slow process. Fifty percent of all kitchen sales are coming from the specialized kitchen and bathroom suppliers like Feenstra Keuken en Bad. The firm is furthermore structurally looking at trends in the market, their own strengths and weaknesses and the actions of the competition. This ensures that they are aligned with the market, which is part of their mission. The firm is operating from the northern part of the Netherlands.
Organization and employees
The firm has a workforce of ten employees and can be defined as a SME according to the definition of the European Union (Bridge, O'Neill, & Cromie, 2003). The firm, its subsidiaries and employees are organized in the following way;
Figure 3; Organization of the firm
Mr. Verbeek feels that it is important for employees to take initiative. He therefore gives them room to seek and exploit opportunities, providing that they do this within the established boundaries, the mission and the vision.
President; Dhr. A. Verbeek Dhr. A. Verbeek + stockholder Showroommanager + employees Showroommanager + employees Showroommanager + employees Showroom Hoogeveen BELTA beheer
BELTA beheer (Feenstra en Bakker Keuken en Bad)
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The sections 4.2 through 5.2 represent the results of the conceptual model for the firm and answer sub question 3.
4.2 Internal analysis
This section is about determining the key performances of Feenstra Keuken en Bad. The step entails two related sets of choices, namely the determination of the basic capabilities on which the firm relies and the already mentioned key performances. The two relate because the basic capabilities are in essence the classes in which the key performances fit. The key performances will be established first and they will subsequently be classed into a basic capability. The italic parts in the text are quotes of Mr. Verbeek, president of the firm.
Key performances
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brought forward by building contractors because they advice their customers where to buy their kitchen or bathroom. The contractors also buy kitchens for their own projects. “Our customers are the consumers and the professional user (building contractors)” and; “Good cooperation with the building contractors is absolutely a target for us, the building contractors get provision if we sell a kitchen to one of their customers. We approach them once a month to let them know that we are still here.” A good relationship with the building contractors improves the probability that Feenstra Keuken en Bad are mentioned by the builders and can therefore be considered as a key performance according to Mr. Verbeek. The last key performance that became apparent from the mission and that was acknowledged by Mr. Verbeek is creating a stable organization through financial health. This is considered an important performance by the firm because they are trying to build an organization that is profitable in the long term; “A stable organization always relates to liquidity. We always try to invest, but by only investing the money we earn we avoid taking enormous risks. This way we can be as stable as we are now in five and even ten years.”
The next step was to take a closer look at the activities of the firm in order to see if it was possible to extract more key performances by using another perspective. The activities are based on the steps that are performed when a kitchen is sold. These steps were agreed upon by Mr. Verbeek. The following steps were used;
1. Reaching potential customers, 2. Customers select a product, 3. Customers buy a product,
4. Delivery/ installment of the product, 5. After sales.
