Pixar Value Chain Case Study Please see all attachments and do according to the word document. The standard planning question, “What business are we in?” h

Pixar Value Chain Case Study Please see all attachments and do according to the word document. The standard planning question, “What business are we in?” has become obsolete.
The more cogent question is this: “What capabilities do we need to develop
and nurture to take advantage of changing conditions?”
Using Core Capabilities to
Create Competitive Advantage
CARL LONG
he traditional approach to strategic
planning has taken some hard hits of late.
Many companies are dismantling their large,
formal planning departments, and Henry
Mintzberg devotes five of the six chapters of
T
his new book. The Rise and Fall of Strategic
Planning, to the weaknesses inherent in how
companies have managed strategy and how
academics have written about it. In a Harvard
Business Review article with the more optimistic title of “The Fall and Rise of Strategic
Planning,” Mintzberg summarizes these
weaknesses, pointing out that strategic
planning often spoils strategic thinking by
“causing managers to confuse real vision w^ith
the manipulation of numbers.” He concludes
that successful strategies tend to be visions,
not plans.
Mintzberg’s insight highlights an emerging paradox: Even as many companies
abandon the elaborate planning procedures
they used in the 1970s and 1980s, they show
increasing interest in strategic visioning as a
means of creating meaning and direction, and
in strategic thinking as a means of creating
value for customers. To appreciate the discrepancies, consider that, while Mintzberg
was carefully documenting the fall of strategic planning, Gary Hamel and C.K. Prahalad
MARY VICKERS-KOCH
were writing a book that reframes “what it
means to be strategic—and successful.”
What is happening to our understanding
and use of strategy? What is driving these
paradoxical movements?
Examining how businesses traditionally
developed their strategies, and comparing it
with the way some innovative firms have
begun to plan, reminds us of the change in
many companies’ approach to quality. Quality
was traditionally associated with inspectors
assuring quality after the fact—after parts
were made—rather than getting everyone
down the line involved in building in quality
in the first place, as eventually happened
through the total quality management movement.
We believe a similar trend is emerging in
the field of strategy. Traditionally, many companies regarded strategy development as an
exercise in which specialists “programmed”
the right products and services into existing
markets. But as global competition grows
more complex and volatile, and as information
technology revolutionizes organizational
structure and decision making, we are seeing
responsive, flexible, and innovative organizational designs displace hierarchical, command-and-control structures. This is putting
Carl Long is a managing partner of Long &
Vickers Inc. He has consulted with executives in a wide range of organizations on
strategy development, leadership, service
quaiity, and team deveiopment issues. He
wrote the chapter on “Establishing New Directions with Senior Executives” for Ttie
Practice of Management Development. He
has published in Managerial Planning. Organizational Dynamics. The Journal for Quality
and Participation, and other journals and
magazines. He is currently doing research
on how successful executives establish and
execute their leadership agendas.
He has an MPA degree in Organization
Theory and Behavior from New York University and has taught at the New School for Social Research in New York. He is a Certified
Management Consuitant (CMC) in the institute of Management Consultants. He is also
a member of the Association for Quality and
Participation, the international Registry of
Organization Development Consultants, and
the American Academy of Political Science.
strategy as a planning-by-the-numbers process
on the same road to obsolescence as the notion
that we can create quaiity by setting tolerance
standards and manning inspection stations.
More and more companies are beginning
to view strategy as a process involving a broad
spectrum of management to identify and develop the core capabilities the company can use
to create unique levels of value for selected
customers and other stakeholder groups.
The basic concept of core capabilities has
existed for some time, and writers like Gary
Hamel and C.K. Prahalad have given a great
deal of attention to the concept. But the application of core capabilities as a key component
of strategy is relatively new, and there is still
much to learn about the application process.
In this article, we examine the origins of
the concept of core capabilities, how it remained dormant for a number of years, and
why it has reemerged as a powerful strategic
concept. Most importantly, we examine how
it can be applied as a valuable strategic thinking tool.
We do not intend to present an exhaustive
review of the strategy literature. At least two
excellent books have already done so. The first
of these. Strategy Formulation: Analytical Con-
cepts, by Charles Hofer and Dan Schendel,
appeared in 1978 when strategy was at the
height of its popularity in the business world.
The second, by Henry Mintzberg (cited earlier), appeared in 1994, when the traditional
views of strategy were being reconsidered.
Mintzberg’s work views historical developments from that perspective.
Indeed, looking back at the development
of strategy can help us place the concept of
core capabilities or competencies in context.
PRODUCT AND MARKET FOCUS
IN EARLY STRATEGY WRITINGS
We often think of the word strategy, from the
Greek word strategia, meaning “generalship,”
as a long-standing part of our management
vocabulary. But the word did not appear in
the English-speaking world until the beginning of the 19th century. It was first used to
refer to the science and art of employing political, economic, military, and other forces to
support the policies of a nation or group of
nations. It eventually came to be most strongly
associated with the deployment of military
forces in support of an overall goal.
The word doesn’t surface in management
literature until the 1950s. As with so many other management ideas, Peter Drucker appears
to be one of the first to talk about strategy in a
business context. However, he spoke about it
in 1954 only in terms of answering the questions: “What is our business? And what
should it be?” He had little else to say about it.
The term distittctiiye competence was first
used by Philip Selznick in 1957 to refer to what
a firm does especially well in relation to its
competitors. The Encyclopedia of Management,
published in 1963 and edited by Carl Heyel,
has no entries labeled strategy or strategic, although it does have an entry for long-range
planning.
In 1962, Alfred Chandler was one of the
first to offer an explicit definition of strategy:
“the determination of the basic long-term
goals and objectives of an enterprise, and the
adophon of courses of action and the allocation of resources necessary for carrying out
these goals.” But the first writers to focus on
the concept of strategy in terms of its development and implementation were Kenneth
Andrews and Igor Ansoff, who independently
introduced such concepts in 1965.
In that same year, Ansoff first used the
term capabilities to describe a company’s ability to deal with different combinations of
competitive environments and levels of “entrepreneurial turbulence.” He spoke of the different managerial capabilities needed to deal
with stable, reactive, or anticipatory environments, and of functional capabilities—the
firm’s skill level in functions such as R&D,
purchasing, and marketing. But he did not
describe capabilities as components of strategy. In fact, he saw strategy development and
capability development as separate, competing demands for limited resources. When a
company needed both a strategy change and
a capability transformation, he recommended
a fairly elaborate priority-setting exercise to
Mary Vickers-Koch is a managing partner
of Long & Vickers Inc. Her consulting work
on the design and facilitation of strategic
planning processes with boards of directors
and executive management in many different
companies has led her to the conclusion that
leadership is the most critical organizational
dimension for leveraging the value of strategies. To increase that leverage, she has designed a leadership development program
based on a process for examining personal
and organizational vision, current reality, and
core capabilities.
She has published in The Journal for
Quality and Participation and is the co-author
of “Managing Processes for Results: Avoiding False Dichotomies” and “The Role of Vision in TQM and the Leadership Paradox.”
She is a graduate of the University of South
Carolina and holds an MBA from the Babcock School, Wake Forest University. She is
a Certified Management Consultant (CMC)
in the Institute of Management Consultants
and a member of the Association for Quality
and Participation, and Women Executives.
choose between them. However, he left no
doubt which should come first in a pinch,
saying, “In such cases, strategy transformation must be given first priority.”
Within the strategy arena, he gave more
attention and emphasis to external appraisals
and action plans centered on products and
markets. Indeed, Ansoff said, “The end product of strategic decisions is deceptively simple;
a combination of products and markets is selected for the firm.”
It was not until 1978 that writers and
managers began to consider competence and
capability as integral components of strategy.
Although Hofer and Schendel use the terms
only as alternate ways of referring to resource
deployments, they clearly saw the components as specific means of creating competitive advantage:
We have included resource deployments (distinctive competences) as a
strategy component, however, because
it is clear that no actions or goal
achievements can take place unless
some basic skills are created and resources obtained and deployed in
ways that cannot be duplicated easily
by others. Second, resource deployments and competitive advantages are
not only very fundamental aspects of
strategy, but they also may be more important than scope in determining success. This claim is contrary to much of
the current literature in the policy field,
most of which assumes that scope is the
predominate and, in some instances,
the only component of strategy.
Most other writers saw the creation of
competitive advantage and shareholder value
only in relation to the selection of products
and markets. These writers tended to think of
a company as owning a portfolio of individual businesses, each with its own set of products, services, and markets. It became general
practice to break companies into discrete
components called strategic business units
(SBUs). Some SBUs grew and needed lots of
resources; others leveled off but generated
lots of cash; some were on their way out.
10
Strategic planners following this practice
went on to develop formulas for identifying
each unit’s contribution to the company’s
overall stock price. This approach—called
“value-based planning”—led to an intense
concentration on moving portfolio components around to affect the stock price. Not
coincidentally, the symbol often chosen to
represent the conventional view of strategy
was a chess board, with products as the pieces
and markets as the squares.
THE CONSEQUENCES OF STRATEGY
AS PORTFOLIO PLANNING
As a legal entity, the corporation was created
to have a separate existence from the individuals who run it. Theoretically, a corporate
form of organization could exist in perpetuity,
unfettered by the biological limitations of
human life spans. Yet a study reported by
Richard Hodgetts, Fred Luthans, and Sang
Lee in the Winter 1994 issue of Organizational
Dynamics ranked the 100 largest U.S. industrial firms as of 1980 and followed them for 12
years, until 1992. Only about half (56 percent)
of the firms were still in the top 100 at the end
of the study, and only 18 percent had managed to improve their ranking. In other
words, 82 percent of the companies either
declined in performance or disappeared from
the list over that period.
The study suggests that even some of the
biggest and best companies have had serious
problems maintaining a competitive advantage over time. What has been the role of
strategy in this ongoing struggle?
Strategy, when viewed as portfolio planning, often puts management into the role of
bankers or traders, expected to buy and sell or
manipulate financial resource allocations between SBUs to inflate stock prices, all in the
name of increasing shareholder value. This
type of strategic planning focuses extreme
attention on what companies do for one constituency (shareholders) and very little directly on how, or if, they are creating value for
customers, employees, and other stakeholder
groups. Robert Reich, now Secretary of Labor,
once called this focus on short-term profits for
selected investors through legal and financial
maneuvering “paper entrepreneurialism.”
Another executive said, “Paying attentior
only to share price is like trying to play tennis
by keeping your eye on the Scoreboard rather
than on the ball.”
The preoccupation with stock price as the
definition of value and the SBU as the unit of
competition has several unfortunate results. It
tends to pit one SBU against another in competition for the firm’s resources and blocks
the sharing of core capabilities across units
within the firm. It also defines value from the
shareholder’s point of view, rather than from
the customer’s. It places more emphasis on
financial resource allocation and balancing
the portfolio than on growing the company as
a whole and achieving synergy by sharing
core capabilities across the company. The focus is on increasing productivity by reducing
the denominator of the “production v investment = productivity” equation, rather than
by increasing the numerator.
The consequences of this one-track focus
are clearly shown in a series of studies John
Kotter and James Heskett conducted and
wrote about a few years ago in Corporate Culture and Performance. From the more than 200
companies in their studies, they compared
twelve firms that had what they called “performance-enhancing cultures” to twenty
firms without such cultures. The differences
were striking. Over the eleven-year period
covered by the study (1977-1988), the firms
with performance-enhancing cultures increased their revenues four times as much as
the other firms and increased their stock price
by twelve times as much. They raised their
net income 700 percent, compared with an
average of one percent for the other firms.
These are astonishing differences. In trying to understand what distinguished the
high-performing firms from the others, the
authors pinpointed several interdependent
characteristics that interacted with great synergy. The high-performers had cultures that
were:
1. “Strong,” with shared values and prac-
tices that promoted and supported those core
competencies (skills, knowledge, attitudes,
and know-how) that were most important to
their efforts to serve the firm’s stakeholders;
2. “Strategically appropriate,” with strategies that matched the business context of the
firm (core capabilities effectively linked to
strategic targets); and
3. “Adaptive,” with strong leadership focused on serving the needs of aU key stakeholder groups and on developing processes
that delivered the attributes they most valued.
CAPABILITIES REDISCOVERED
The approach to strategy taken by the highperforming firms in the Kotter and Heskett
study places core capabilities at the center of
the company’s strategic resources. These
firms focus on their distinctive, hard-to-imitate core capabilities, rather than on portfolios of products and markets, and their
strategic vision determines the scope of the
strategy.
Capability-based organizations take the
traditional strategic task of finding the best fit
between a firm’s resources and existing
business conditions and markets to a new
level. They define their resources in terms of
the capabilities they have developed for
adding value for their customers and other
stakeholders.
These companies don’t just ask, “What
businesses are we in?” and “What businesses
should we be in, given the competitive landscape and forecasts for future changes?” Instead, they pay more attention to the question, “What capabilities do we need to develop
and nurture to take full advantage of those
changes?” They are rediscovering the importance of organizational competencies or capabilities as strategic resources—an insight
that was largely ignored for a number of
years, as companies searched for quicker,
more direct means of affecting share price.
When the focus is exclusively on shareholders, it reinforces the vertical orientation of
the orgaruzation and strengthens the tendency to create funcfional silos. However, focus11
ing on customers as the arbiters of value shifts
attention to the processes that run horizontally through organizations to meet the needs
and expectations of customers. This emphasis
on cross-functional (and cross-SBU) process
improvement causes companies to think differently about how they add value. It broadens their perspectives on who their stakeholders are and causes them to ask, “What
special skills, knowledge, abilities, and
processes do we use to meet the needs of our
stakeholders and to create whatever competitive advantage we now enjoy? And how can
we use these capabilities as a foundation for
building future competitive advantage?”
The very leadership agenda of many
companies has been affected. Instead of being
based on the “paper entrepreneurialism”
Robert Reich spoke about, more and more
companies are basing their leadership agenda
on:
• Vision
• Opportunity identification
• Capability assessment
In these companies, the vision represents
a set of targeting parameters that defines major stakeholder groups and how the company
can best add value for them. Dynamic rather
than static, the vision is based on an ongoing
effort to identify emerging opportunities in
the external environment and assess the
firm’s core capabilities and how these can be
applied to create value.
KEY TERMS IN CAPABILITY-BASED
STRATEGIC THINKING
As the thinking about strategy developed,
planners began to use the terms core competence and core capability more or less interchangeably. However, George Stalk, Philip
Evans, and Lawrence Shulman, writing in the
March-April 1992 issue of Harvard Business
Review, took a different position:
Competencies and capabilities represent two different but complementary
dimensions of an emerging paradigm
12
for corporate strategy. Both concepts
emphasize “behavioral” aspects of
strategy in contrast to the traditional
structural model. But whereas core
competence emphasizes technological
and producfion expertise at specific
points along the value chain, capabilities are more broadly based, encompassing the entire value chain.
We have illustrated our own distinctions
in Exhibit 1: competencies relate to the skills,
knowledge, and technological know-how
that give a special advantage at specific points
of the value chain, which in combination with
the strategic processes that link the chain together, form core capabilities.
We find it useful to disHnguish between
competencies and processes in a firm’s capabilities because each requires differert kinds
of decisions and actions. The decisions and
actions required to improve a firm’s competence usually revolve around the people and
technology needed to improve skills and
abilities—those necessary to add value to
products and services. A different set of decisions and actions are required to improve or
redesign the processes used to deliver those
products and services in ways that customers
and other stakeholders most value. Yet only
when these two aspects are successfully
brought together can the firm display the fiill
measure of its capabilities.
For exa…
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