"This presentation provides an introduction into Competence-based Strategic Management. Competence-based Strategic Management is a relatively new way of thinking about how organizations gain high performance for a significant period of time. Established as a theory in the early 1990’s, competence-based strategic management theory explains how organizations can develop competitive advantage in a systematic and structural way. In other words, a competent organization has the ability [being capable of] to structurally and systematically coordinate and commit resources for respectively the realization of the organizations goals and objectives and the creation and distribution of customer value, in order to develop competitive advantage. For developing an integrated system of resources, management needs extraordinary analytic and appraisal skills. Furthermore, the idea behind competence-based strategic management is that the difference of the mix available resources between organizations, the speed with which resources are exploited and are develop, plus the costs which are involved, is determinative for the realisation of the organizations competitive advantage. Resources are all elements, tangible or intangible, which an organization can use for the arrangement of products and bring services on the market. The resources an organization can use may be either organization-specific of organization-addressable. An organization from a competence-based perspective is seen as an open social system. Open social system = dynamic and complex collection of elements, interacting as a structured functional entity that continuously interacts with its environment. Five challenges play a central role in the application of competence-based strategic management in order to realize continuous value creation and distribution [strategic logic]: - Recognize market opportunities - Define product offers that create value for customers with targeted preferences - Attract, retain and improve the best available resources for creating and realizing product offers - Manage uncertainties in creating and realizing product offers - Distribute value created to providers of required resources When managing these challenges management can choose two approaches: statically and dynamically. The focus of the static approach to competence-based management is at entirely exploiting existing resources to develop competitive advantage in the short term. In this case strategy means a maximum exploitation of the current organizational competences of the organization. Answering the three central questions from the static interpretation the central issue is to maintain the existing resources of the organization in order to develop competitive advantage. The primary aim of the dynamic approach of the competence-based management is realising competitive advantage by constantly improving the existing resources and obtaining new resources. In this case strategy means a fit between exploiting the available resources and obtaining and developing [modify] new resources. At answering the three central questions from the dynamic interpretation the central issue is not only to maintain the existing resources of the organization but also the replacement or modification of these resources, in order to develop competitive advantage."

1. Arjan Vernhout Competence-based strategic management A competent organization has the ability to structurally and systematically coordinate and commit resources for creating and distributing value to customers and stakeholders

2. Topics ▪ Strategic management ▪ Strategic logic ▪ Systems thinking ▪ Hierarchy of assets ▪ Manager as a puzzler ▪ Organization as an open social system ▪ Competence modes ▪ Competence leveraging vs. developing ▪ Strategic working with competences

3. Strategic management Art & science of structurally and systematically discovering strategic options and formulating, implementing and evaluating cross-functional decisions… ▪ specifying the role and objectives ▪ developing policies and plans ▪ allocating resources to implement policies and plans… For creating and distributing value to customers and stakeholders STRATEGIC ANALYSIS STRATEGIC CHOICE STRATEGIC IMPLEMENTATION

5. Strategic logic From: R. Sanchez, A. Heene [2004], The new strategic management: organization, competition and competence Recognize market opportunities Strategic logic for continuous value creation and distribution Attract, retain and improve the best available resources for creating and realizing product offers Define product offers that create value for customers with targeted preferences Distribute value created to providers of required resources Manage uncertainties in creating and realizing product offers 5 2 3 4 1

6. Strategic logic - Starbucks Coffee Around 25 new stores a week with the goal to open 25.000 stores worldwide in the next 10 years Starbucks Hear Music™ Coffeehouses and Media Bars and opened a special Starbucks Entertainment area at iTunes. Also customers can wirelessly browse, search for, preview, buy and download music from the iTunes Wi-Fi Music Store in several Starbucks stores Starbucks is Fair Trade Certified™, Starbucks initiated C.A.F.E. [Coffee and Farmer Equity] Practices, Black Apron Exclusives™ 1. 2. 3.

7. Strategic logic - Starbucks Coffee Starbucks management is constantly improving training resources, not only at the product knowledge level, but also in areas that help store partners take ownership in the business….. employee turnover rate, according to some reports, is 120% less than the industry level Starbucks paid on average, $2.64 per kg for high-quality coffee beans. This was 74% higher than the commodity market’s price during the year. Other examples are: partnerships with firms like Johnson Development Corporation, acquired businesses like Ethos Water and started the Starbucks Foundation 4. 5.

8. Systems thinking #1 An organization from a competence-based perspective is seen as an open social system Open social system = dynamic and complex collection of elements, interacting as a structured functional entity that continuously interacts with its environment ▪ energy, material and information flow between the different elements that compose the system ▪ feedback is used to regulate the dynamic behavior of the system: feedback is a process whereby some proportion of the output signal of a system is passed [fed back] to the input

9. Systems thinking #2 Environment Organization Assets Process Products/Services Customers Resources Stakeholders Competitors

10. Hierarchy of assets #1 Core competences Competences Capabilities Skills Assets Resources

11. Hierarchy of assets #2 Assets ▪ brands ▪ corporate image ▪ corporate identity ▪ relationship with suppliers ▪ customer satisfaction ▪ patents, copyright, company secrets ▪ R&D facilities ▪ qualifications of employees ▪ knowlegde and expertise ▪ adaptability ▪ loyalty ▪ availability ▪ pe rformance ▪ receivables from clients ▪ cash and cash equivalents ▪ liabilities ▪ equity ▪ c haracteristics production facilities ▪ location ▪ production flexibility ▪ capacity surpluses ▪ property and equipment Reputation Technological Human Financial Physical Intangible assets Tangible assets

12. Hierarchy of assets #3 Skills are special forms of capability, usually embedded in individuals or teams, that are “useful in specialized situations or related to the use of a specialized asset” Capabilities are repeatable patterns of action in the use of assets to create, produce and/or offer products to a market. Capabilities arise from the coordinated activities of groups of people who pool their individual skills in using assets to generate organizational action

13. Hierarchy of assets #4 Competence is the ability [ being capable of] to apply assets in a coordinated way [interaction and integration of capabilities] in order to reach a certain aim. If this coordinated interaction and integration of capabilities leads to reach a certain aim [e.g. introduce new products successfully] then these capabilities lead to a competence Furthermore a competence is related to processes and interaction between the assets in an organization and lies generally embedded in certain organizational units, such as sales, marketing, logistics or production

14. Hierarchy of assets #5 Core competences is defined as an unique combination of knowledge, capabilities, structures, technologies and processes in an organization, which makes it possible to provide products or services which absolutely no other organization can produce in the same way, at the same moment and at the same speed Core competences and competences add the most value to the realization of the organization goals and objectives From: Sanchez, R. [2002], Understanding competence-based management Identifying and managing five modes of competence, Journal of Business Research, Volume 57, pp. 518- 532

15. Manager as a puzzler “ He who wants to understand how the organization achieves competitive advantage, must search for the system resources” For developing an integrated system of resources, management needs extraordinary analytic and appraisal skills A certain model for the puzzle of an organization system of resources that can be imitated does not exist If managers want to develop an integrated system of resources, the pieces of the puzzle eventually have to fit

16. Organization as open social system From: Sanchez, R. [2004], Understanding competence-based management Identifying and managing five modes of competence, Journal of Business Research, Volume 57, pp. 518- 532 Mode 1 Mode 2 Mode 3 Mode 4 Mode 5 Strategic logic Management processes Intangible assets Tangible assets Operations Product offers Product markets Firm-adressable resources Borders of the data data data data & Competitors decisions policies & procedures budgets revenue organization

17. Competence mode #1 Cognitive flexibility to imagine alternative strategic logics: Depends on managers ability to perceive market needs and identify specific market preferences the organization might serve, to determine the characteristics of products and services that can satisfy those needs and preferences, to design supply chains and select appropriate distribution channels for realizing new products, and ultimately to define product offers that will be perceived by markets as having attractive net delivered customer value 1.

18. Competence mode #2 Cognitive flexibility to imagine alternative management processes: Depends on managers ability to identify the kinds of resources [assets, skills and capabilities] required to carry out a given strategic logic, to create effective organization designs [allocations of tasks, decision making and information flows] for the processes that will use the required resources and to define appropriate controls and incentives for monitoring and motivating the value-creating processes envisioned by a given strategic logic 2.

19. Competence mode #3 Coordination flexibility to identify, configure and deploy resources: Depends on the ability of a firm’s managers - in this case, usually the midlevel managers of larger firms, but also top managers of smaller firms - to acquire or access, configure and deploy chains of resources for leveraging product offers capable of creating value in the markets targeted by the firm. These resources may include both firm-specific resources that are acquired and become internalized by a firm and firm-addressable resources that the firm can access but that remain external to the firm 3.

20. Competence mode #4 Resource flexibility to be used in alternative operations: Depends on the managers ability of the resources in an organization’s resource chains to be used in alternative ways. In essence, within the resource chains available to an organization, the intrinsic resource flexibility of the resources composing those chains will constrain the different ways in which the organization’s available resource chains can be used 4.

21. Competence mode #5 Operating flexibility in applying skills and capabilities to available resources: The operating flexibility depends fundamentally on the skills and capabilities an organization can apply at the working level in using its available resources. This mode is therefore expressed by the operating flexibilities that result from the collective capabilities of a firm’s human resources - in this case, primarily its front-line managers and employees - to sustain efficient use of available resources when facing a range of variations in inputs, in required outputs and in the environmental conditions affecting the operations of the firm 5.

22. Competence leveraging vs. building From: R. Sanchez, A. Heene [2004], The new strategic management: organization, competition and competence Competence developing Creation of new strategic options Competence leveraging Realization of strategic options Internal cashflow

23. Strategic working with competences From: Vernhout, A. [2004], Strategisch werken met competenties: theorie en praktijk van het competentiedenken Define the role of the organization within the social-economic environment Phase 1 Phase 2 Phase 3 Phase 4 Phase 5 Phase 6 Phase 7 Determine the goals and objectives of the organization Determine the need for competences of the organization Inventory the present competences of the organization Analyse the ‘fit’ between the present and needed competences Competence-based training and development Determine to what extent the goals and objectives are realised Determine effective work behaviour based on the formulated objectives Performance appraisal and competence-based rewarding Phase 8

24. Management….. Management exists for the sake of the institution’s results and performance. It has to start with the intended results and has to organize the resources of the institution to attain these results ~ Peter F. Drucker

25. Further reading R. Sanchez, A. Heene [2004], The new strategic management: organization, competition and competence A. Heene, S. Vermeylen [1999], De stille kracht van de onderneming: competentiedenken in strategisch management A. Vernhout [2004], Strategisch werken met competenties: theorie en praktijk van het competentiedenken www.competentiedenken.nl/downloads