Based on the work we've done in weeks one to four, where we've looked at the steps needed to

understand your strategy context, and that includes exploring customer, industry, and macro
environmental analysis, you should be able to identify a number of strategic options for your
organization. 

However, there's an elephant in the room, which we're yet to address. Can your organization capture
the identified opportunities? In other words, does your organization have the necessary skills
and capabilities to actually capture the value by creating a strong value proposition for customers? 

The reality is, not every organization can do everything well. 

To answer these questions, you need to analyze your organization. 

As we've seen, an external analysis is very useful. It enables you to understand what customers
value, as well as, how competition, industry conditions, and relevant macro environmental factors
give insights into the opportunities and threats in your markets. 

We also talked about suitable generic strategies that your organization could implement, position
itself, and to create value for customers. In doing that, you've identified a set of opportunities in the
market. This, we can define it in this way, we have the opportunity to create value proposition A
for market segment C.

So how do you know which to pursue? 

For each option, you need to identify the key capabilities that the option will require, and assess
whether the organization currently has these. If not, whether they can be developed at a reasonable
cost. 

You need to find out whether the opportunities that have been identified through extra analysis can
realistically be met by your organization, given your organization's key strength and capabilities. 

What we're doing is looking at whether your organization's internal environment matches the

external environment. 

The external environment determines 

 what your organization might do, 
 which is a function of the opportunities, and
 your organization's external environment. 

The internal environment determines 

 what your organization can do, 
 which is a function of your organization's resources, capabilities, and key capabilities. 

It's important to note here that any organization which operates in an attractive industry, does not
automatically enjoy above average returns. Over time, competitors may use their own unique
resources, capabilities, and key capabilities to duplicate your firm's ability to create value for
customers. 

So let's get started.

As we learned in a previous video, when you formulate strategies, you always need to consider

whether an identified opportunity or strategic option fits with the organization. Or in other words, is
your organization capable of seizing the identified opportunity to create value? 
For example, imagine you've been a low-cost producer of sporting apparel and you've identified an
opportunity in a highly differentiated niche segment. At that point, you need to ask yourself the
question. Is it really a good idea to pursue the strategy? 

In this video, we're going to look at the idea of fit and it's importance for strategic success. 

Overall, organizations need to achieve two types of fit, external fit and internal fit. 

Internal fit focuses on how organizational systems are connected and are useful to each other and
to internal clients. We'll discuss internal fit in great detail in the know your organization course, so for
now, let's focus on external fit. 

External fit represents the degree to which an organization is matching its resources and key
capabilities with the opportunities in the external environment. 

External fit relates to activities, capabilities and strategies that the organization develops to respond
to the external environment. That is, to customers, competitors and other external factors. 

Achieving a match between the external environment and the organization is facilitated through your

competitive strategy and therefore vital that the company has the actual key capabilities to execute
and support the strategy. 

Key capabilities will enable you to generate a unique value proposition. 

These capabilities will provide your organization with a competitively unique way to seize a market
opportunity, and position your organization favorably in the market. 

For example, Apple has developed key design and marketing capabilities to offer a higher quality
and functional products to well-off market segments, combined with a unique brand
identity. Customers are willing to pay a price premium for these based on the high benefits they see
in Apple's products. 

So for each option, you need to identify the key capabilities that the option will require and
assess whether your organization currently has this, and if not, whether they can be developed at a
reasonable cost. 

The difficult part for this task is for you to understand which activities are crucial to seize an
opportunity and to capture value from the market. 

Earlier in the course, we talked about

 how you need to decide on your organization's positioning and responding to a strategic
option or opportunity. 
 How can you set up your organization to realize a differentiator or cost leadership strategy by
aligning your value chain accordingly. 

Now is a good time to revisit Porter's generic competitive strategies. If you remember, this describe
the basic types of competitive strategy that hold across many kinds of business situations. 
So what key capabilities should your organization focused on when choosing a particular strategy? 

First, let's look at differentiation strategy. When realizing a differentiation strategy, you need to

understand the integrated set of actions that your organization needs to take to produce goods or
services at an acceptable cost which customers perceive as being different in ways that are
important to them. 
The focus is on non-standardized products, which means you need to make 
your value offering stand out. There are multiple ways of setting your organization up to become a
differentiator. 

We could use the example of a professional services firm that wants to be differentiated by being the
best quality provider of strategy advice. In that case, you may want to focus on your human
resources management to recruit the best talent and to train them appropriately to ensure a high
quality position. 

Many professional services firms also invest in so-called outplacement programs that
setup employees who are about to leave the organization for success in the next job. 

Why would they do that? There's a high chance that former employees will come back as a client
with a new firm. A manufacturing firm that wants to be positioned as providing high-quality products
with low failure rates will need to focus on setting up the best procurement and operations possible
to source the best input factors and to transform these into the best products. 

Brands also often play a critical role in differentiating your offering from the competition, paving the
way for you to charge a higher margin. 

Just think about the many luxury clothing brands in the market. What if you want to set the
organization up to be a successful cost leader? There are multiple aspects and a value chain that
can be adjusted to optimize a cost leadership strategy. 

For example, selecting the cheapest input factors when procuring them may be very important for a
manufacturing organization. Also, investments may be required to set up highly productive
operations including factories. 

In terms of technology development, much of your investment in innovation should be

directed towards process innovation to optimize operations. 

So an important aspect of being competitive is achieving strategic fit. 

That is, your organization needs to match its key capabilities with the identified strategic options. 
In order to develop an understanding of what opportunities are suitable for your organization, 
you need to understand the key strength of your organization. 

You may benefit from conducting a resource and capabilities analysis. 

To do so, you need to
 identify all resources and capabilities within your organization, and
 conduct a VRIO analysis to identify 

which resources and capabilities should form the basis of your competitive strategy, and with that,
form your organization's key capabilities. 

We will discuss that analysis in the next video.

So by now, you've learned about the importance of fit. 

I've also touched on the idea that your capabilities need to match the opportunity. Otherwise, the
organization may not be able to realize a given value proposition and strategy. And ultimately, sees
an identified opportunity. 
Given the capabilities is usually take a long time to develop, you should also consider using them
as the basis of your strategy instead of just basing your strategy on your external analysis which
has been the focus of the past four weeks.

In other words, given that the organization has particular strength, 

 are there other opportunities you should follow instead? 
 Are there any key skills your organization has that makes it stand out from
your competition? 

Let's break this down using an example. 

How can you have four Honda products in your garage to be clear? 
You cannot have the same product category more than one. 
You know the answer? There it is. 

Honda sells very different products from cars to lawnmowers to jet skis and scooters, but what do
they all have in common?Correct, engines. So Honda's key capability is the design and manufacture
of quality engines. They leverage this capability across various product categories.

Companies, such as Disney and Virgin leverage their brand across various products and markets as
well. 

So in order to understand whether you should capture an identified opportunity or whether you
should develop your strategy from the inside out, that is base your competitive strategy not on
identified gaps in the market. But rather, build on key strength your organization has. 

I recommend a resources and capabilities analysis.

To do that, we'll use a logic of the resource-based view. 
A major theory in management research made popular by the likes of Jay Barney and Birger
Wernerfelt. The resource-based view, RBV for short follows the logic that your organization's key
capabilities should form the cornerstone of your organization's strategy. Rather than you following
every market trend and trying to adjust your resource and capability portfolio which may make
your strategies rather tactical given the rate of change organizations have to face, you should base
your competitive strategies on your key capabilities.

The RBV structures the internal components of the organization into resources, capabilities and
key capabilities.The guiding question of this analysis is what makes my organization unique? 

In step one of this analysis, collect all the information that you've gathered through your
external analysis which should include the five forces and your PESTEL analysis. 

In step two, you'll structure your organization around resources and 

capabilities.Resources we present inputs into your organization's operations. They typically do not
yield a competitive advantage or create value that results in above average returns on their own. 

For example, a brand is no use, unless you use it. Important resources may be human resources,
brands, factories and financial resources.

Capabilities are activities through which your organization adds unique value to its offerings over an
extended period of time. Capabilities are often developed in specific functional areas, such as
distribution, human resource management, marketing, general management, manufacturing and
research and development. 
Step three, identify which of your organization's capabilities have the potential to form the
foundation of your competitor's strategy as they will enable you to generate a unique value
proposition. These capabilities are also called key capabilities. 

There are four specific criteria that you can use to determine which capabilities are key capabilities.
 Is this organization capability valuable?
 Does this capability add value by enabling your organisation to exploit opportunities or
defend against threats?
 Is this capability rare? 
 That is do competitors have access to the same capability? 

Rare capabilities are those possessed uniquely by one organization or small number of
organizations. 

For example, a company may have patented a product. They may have supremely talented people
or a powerful brand. Verity could, however, be temporary. 

For example, patents expire. Key individuals can leave the organization or brands can be devalued
by adverse publicity. 

 Can competitors imitate buy or substitute the respective capability at a reasonable price? 
 Could a competitor directly duplicate the capability or use a different capability to provide a
compatible offering in effect substituting your capability?
 Is this capability organizationally exploitable? 

That is the resources and capabilities themselves do not create any advantage for your organization
if they're not organize to capture the value from them. 

For that reason, it's important to find out whether your organization can arrange itself in a way to be
able to fully capture the potential of resources and capabilities that are valuable, rare and costly to
imitate.

Some notable examples of this include Amazon. 

They're exceptionally good at pricing the products using data that shows when various groups of
customers make various purchase decisions, which lets them extract the highest value from
customers. Meaning, they end up charging the most appropriate price.

Singapore Airlines is known for their high quality service both in the air and on the ground.

Nike is known to most of us as a leading sport apparel company, but you may be surprised to learn
that Nike doesn't focus on manufacturing. Their manufacturing is outsourced to other organizations
for cost reasons. The in-house value generating activities include design, development, marketing
and selling of athletic footwear, apparel and equipment. Therefore, Nike largely focuses on what
they're good at marketing and sales. They create value to customers by offering well-
designed innovative sporting equipment with a strong brand image attached to it. 
Nike follows a textbook differentiation strategy.

To sum up, identifying key capabilities of your organization is important when developing

comparative strategies. Conducting a capability analysis of your organization can be helpful in two
ways. 

First, to understand whether you have the key capabilities needed to seize an opportunity which
presents its self as a result of the analysis of the external strategy context.
Or second, a capability analysis can also help to create your own strategic option. That is by
creating a deep understanding of your organization. Its strength and weaknesses, and its key
capabilities. 

You may be able to navigate the external environment and identify opportunities in the market, which
you can best serve with your existing capabilities. 

By now you should have identified two to three opportunities in the market that are promising based
on your understanding of both the external and internal contexts of your organization. 
These will have resulted from either your extra analysis or by looking at how you can best use your
key capabilities to create a market opportunity. 

But how do you prioritize these options? Which strategy should you choose? 
It's a difficult task for you as a strategist to select the most appropriate strategy, especially if several
strategic opportunities and possible strategies have been identified. I suggest that you use the so-
called SAF framework and apply it to each strategic option. SAF stands for suitability,
acceptability, and feasibility, as per the modal device by Johnson, Scholes, and Whittington. They
suggest that a promising strategy must meet these three criteria before it can be successful. 

Referring back to past videos, the analysis you've conducted thus far will help you test your strategic
options against these criteria, as you can see in this figure. 

Let's flesh out these three criteria starting with suitability. 

 Ask yourself, is this strategic options suitable and compatible with the current and expected
external environment? 
 Does this strategic option fit with important issues in the external environments? 

So this answers the questions around external fit. 

The tools learned in week 2 and 3 of this course will come in handy here, including Porter's Five
Forces and PESTLE. Each strategic option, will have specific advantages and disadvantages. 
The important task here is to assess their importance and base your decision making on this
segment. 

Feasibility looks at whether your organization has the resources and capabilities to pursue a

particular strategic option. Feasibility analysis will largely draw on your resources and capability
analysis as discussed in the previous video. 

Questions you might need to ask yourself here are, 

 do you have enough financial, organizational, and technical resources, and capabilities
available to implement a strategy? 
 In essence, is it possible for your organization to implement a specific option? 

Finally, acceptability. 
Here you need to look at two aspects; 
 the financial aspect, and
 the stakeholder aspect. 

Financially, you need to ask yourself, what are expected outcomes in terms of, for example,
payback period or shareholder value? This involves making an objective assessment around
expected revenues, risks, investments required immediately, and investments required over the
long-term. Financial measures such as net present value, internal rate of return, and shareholder
value analysis, may be appropriate indices to calculate necess. 
In terms of stakeholders, look at the strategic options and how your stakeholders will react to each
option. 

As discussed earlier in this course, your organization deals with many stakeholders. 

Important ones being your own employees, your shareholders, your customers, and supply chain
partners. These are some of the stakeholders you deal with directly. There are also stakeholders
you don't deal with directly, for example, the wider public. 

You may also ask, is the option socially legally, and ecologically viable? 
This part of the analysis may be rather qualitative. But it's nevertheless very important to try to
predict stakeholders' responses to your possible strategic moves. 

Once you've assessed each dimension of the SAF framework, identify which criteria are crucial
to your organization, you need to assess each strategic option individually using the criteria. 

The strategic option that fits each of the suitability, acceptability, and feasibility criteria best, is
ultimately the best option for your organization. 

In summary, the outcome of this process may look something like this. 

In the left-hand column, you write down the three criteria; suitability, acceptability, and feasibility. 

In the top row, you list the various options; option one, option two, and so on. 

You can then fill the cells with both qualitative information and with numbers. 

For example, use a scale from one to 10, with 10 indicating that the respective option performs
highest on this specific dimension. This will give you a ranking of the various options based on the
SAF criteria which will ultimately help your decision process. So this evaluation step is the
culmination of all the valuable analysis that you have done and the strategic options that you have
generated. 

The next step would now be the strategy implementation, which is discussed in the Know your
organization calls in great detail.