Analysing Resources and Capabilities

730N1 Strategic ManagementLecture 4

Learning outcomes

Identify what comprises strategic capabilities in terms of organisational resources and competences and how these relate to the strategies of organisations.

Analyse how strategic capabilities might provide sustainable competitive advantage on the basis of their value, rarity, inimitability and non-substitutability (VRIN).

Diagnose strategic capability by means of value chain analysis, activity mapping and SWOT analysis.

Consider how managers can develop strategic capabilities for their organisations.

Overview of lecture

Reminder of basic framework The Resource-based View (RBV) Resources and capabilities/competences

Key success factors Resources Capabilities and core competences Competitive advantage and VRIN Redundant and dynamic capabilities Functional and Value Chain analyses

Approaches to capability development

THE FIRM

Goals and Values

Resources andCapabilities

Structures and Systems

THE INDUSTRYENVIRONMENT

•Competitors•Customers•Suppliers

STRATEGYSTRATEGY

The Firm-Strategy

Interface

TheEnvironment-Strategy

Interface

The basic framework – strategy as a linkbetween the firm and its environment

The basic framework – strategy as a linkbetween the firm and its environment

Shifting the focus …

Strategy is concerned with matching a firm’s resources and capabilities to the opportunities that arise in the external environment

So far we have emphasised the role of the external environment but the focus is now shifting to the interface between firm strategy and the internal environment – and more particularly its resources and capabilities

Resource-based strategy

The resource-based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities, and that this should be the principle basis for firm strategy

The question “What is our business?” has traditionally been answered in terms of the market, but …

When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market focus

Resources and capabilities are considered to be the primary sources of profitability, and the principle basis for firm strategy

Rationale (argument) for the RBV approach to Strategy

Mobilising invisible assets

“Analysts have tended to define assets too narrowly, identifying only those that can be measured, such as plant and equipment.

Yet the intangible assets, such as a particular technology, accumulated consumer information, brand name, reputation, and corporate culture, are invaluable to the firm’s competitive power.

In fact, these invisible assets are often the only real source of competitive edge that can be sustained over time” (Hiroyukiami Itami).

Honda Motor Company

Honda is the world’s biggest producer of motorcycles, and a leading producer of cars, but has never defined itself in those terms

Its strategy is focused upon its expertise in the development and production of a wide range of engines

1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000

HondaTechnicalResearchInstitutefounded

1st motorcycle:98cc, 2-cycle

Dream D

4 cycle engine

405ccmotorcycle

Power products:ground tillers, marineengines, generators,pumps, chainsaws

snow blowers

First product: Model A

clip-on enginefor bicycles

The 50ccSupercub

N360 minicar

1000ccGoldwing

touringmotor cycle

Acura Cardivision

Competes inIsle of Man TT

motorcycleraces

4-cylinder750cc

motorcycle

Portablegenerator

Enters Formula 1Gran Prix racing

HondaCivic Enters Indy

car racing

1st gasoline-poweredcar to meet US Low

Emission Vehicle Standard

Civic GS(natural

gaspowered)

Civic Hybrid(dual gasoline/

electric)

Home co-generation

system

Honda FCXfuel cell

car

The evolution of Honda Motor Company

Canon Inc.

Started with cameras, then moved on to fax machines, calculators, copying machines, printers, semiconductors, and so on.

The common thread is that most of these products have involved the application of precision mechanics, microelectronics, and fine optics

Precision Mechanics

Fine Optics

Micro-Electronics

35mm SLR cameraCompact fashion cameraEOS autofocus camera

Digital cameraVideo still camera

Plain-paper copierColor copier

Color laser copier Laser copierBasic fax

Laser faxMask aligners

Excimer laser alignersStepper aligners

Inkjet printerLaser printer

Color video printerCalculator

Notebook computer

Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities

3M Corporation

3M’s product list now comprises over 30,000 items but they claim that it all rests upon a foundation of core technical know-how relating to adhesives, thin-film coatings, and materials sciences

All underpinned by an outstanding ability to develop and launch new products

Carborundummining

Carborundummining

SandpaperSandpaper

Scotch tapeScotch tape

Road signs& markings

Road signs& markings

Post-it notesPost-it notes

Audio tapeAudio tape

Surgical tapes& dressings

Surgical tapes& dressings

VideotapeVideotape

Acetate film

Acetate film

Floppy disks & data storage

products

Floppy disks & data storage

products

PharmaceuticalsPharmaceuticals

Housewares/kit-chen products

Housewares/kit-chen products

AbrasivesAbrasives AdhesivesAdhesivesNew-product

development &introduction

New-productdevelopment &introduction

Thin-film technologies

Thin-film technologies

PRODUCTSPRODUCTS

CAPABILITIES

CAPABILITIES

Materials sciencesMaterials sciences

Health sciencesHealth sciences

MicroreplicationMicroreplication

Flexiblecircuitry

Flexiblecircuitry

3M: Evolution of Capabilities and Products3M: Evolution of Capabilities and Products

Resources and capabilities as sources of profit

We have seen before that there are two sources of superior profitability Industry attractiveness Competitive advantage

Establishing competitive advantage (through the development and deployment of resources and capabilities) is the more important

The RBV holds that each firm possesses a unique collection of resources and capabilities, and that the key to profitability is doing things differently, using a strategy that exploits the firm’s unique qualities

Consequently we need to acquire a thorough understanding of the R&C of a firm

What are Resources and Capabilities (aka Competences)

Resources are the assets that organisations have, or can call upon from partners or suppliers, that is: ‘what we have’ .

Capabilities or competences are the ways those assets are used or deployed effectively, that is: ‘what we do well’.

Key Success Factors

Key success factors (the things that all firms in the industry need to do to be successful) provide a starting point for the search by asking the question …

What are the resources and capabilities needed to deliver the KSFs?

For example, budget airlines require low operating costs, for which they need a standardised fleet of fuel-efficient aircraft, a motivated and non-unionised workforce, and a culture of frugality

STRATEGY INDUSTRY KEYSUCCESS FACTORS

COMPETITIVEADVANTAGE

ORGANIZATIONALCAPABILITIES

RESOURCESTANGIBLE INTANGIBLE HUMAN

•Financial•Physical

•Technology•Reputation•Culture

•Skills/know-how•Capacity for communication & collaboration•Motivation

The Links between Resources, Capabilities and Competitive Advantage

The Links between Resources, Capabilities and Competitive Advantage

Identifying Resources

We need a framework for identifying and classifying different resources and capabilities

Three main types of resources Tangible Intangible Human resources

Appraising a firm’s resources Appraising a firm’s resources

RESOURCES CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratioInternal funds generation Credit rating

Tangible Net cash flow

Resources

Physical Plant and equipment: Market value of size, location, technology fixed assets.flexibility. Scale of plantsLand and buildings. Alternative uses forRaw materials. fixed assets

Technology Patents, copyrights, know how No. of patents ownedR&D facilities. Royalty income

Intangible Technical and scientific R&D expenditureResources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equityreputation (with suppliers, customers, Customer retentiongovernment) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.

Tangible resources

How can the firm economise on their use?

Can existing assets be used more profitably? Walt Disney consolidated their admin

function into fewer buildings and released their movie library on videocassettes and then DVDs

Intangible resources

Brand names Technical know-how Intellectual property Exploited by spreading the profit

potential across a range of products (e.g. Nike brand extended across a range of sports wear and sports equipment)

Organisational capabilities

An organisational capability is “a firm’s capacity to deploy resources for a desired end result” (Helfat and Lieberman, 2002)

The terms capability and competence are used interchangeably

We are primarily interested in capabilities that can provide the basis of competitive advantage

These are distinctive or “core” competencies

Activity 1

Turn to your neighbour Identify and classify the resources

and capabilities of a local book shop that is struggling to compete against on-line providers and is searching for a new strategic direction

Resources and capabilities (cont’d)Core competences

Core competences are the linked set of skills, activities and resources that, together: deliver customer value differentiate a business from its competitors potentially, can be extended and developed as

markets change or new opportunities arise.

G. Hamel and C.K. Prahalad, ‘The core competence of the corporation’, Harvard Business Review, vol. 68, no. 3 (1990),pp. 79–91.

Strategic capabilities andcompetitive advantage (VRIN)

The four key criteria by which capabilities can be assessed in terms of providing a basis for achieving sustainable competitive advantage are:

valuerarity inimitability and non-substitutability

Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17 (1991), no. 1, pp. 99–120.

VRIN

VRIN (1)

V – Value of strategic capabilitiesStrategic capabilities are of value when they:

take advantage of opportunities and neutralise threats provide value to customers provide potential competitive advantage at a cost that allows an organisation to realise acceptable levels of return

VRIN (2)

R – Rarity Rare capabilities are those possessed

uniquely by one organisation or by a few others only (e.g. a company may have patented products, have supremely talented people, or a powerful brand.)

Rarity could be temporary.(e.g. patents expire, key individuals can leave, or brands can be de-valued by adverse publicity.)

VRIN (3)

I – InimitabilityInimitable capabilities are those that competitors find difficult to imitate or obtain.

Competitive advantage can be built on unique resources (a key individual or IT system) but

these may not be sustainable (key people leave or others acquire the same systems).

Sustainable advantage is more often found in competences (the way resources are managed,

developed and deployed) and the way competences are linked together and integrated.

VRIN (4)

N - Non-substitutabilityCompetitive advantage may not be sustainable if there is a threat of substitution. Product or service substitution from a different

industry/market. For example, postal services partly substituted by e-mail.

Competence substitution. For example, a skill substituted by expert systems or IT solutions

Redundant capabilities

Capabilities, however effective in the past, can become less relevant as industries evolve and change.

Such ‘capabilities’ can become ‘rigidities’ that inhibit change and become a weakness.

Dynamic capabilities

Dynamic capability is the ability of an organisation to renew and recreate its strategic capabilities to meet the needs of changing environments.

BREAK !!!

Classifying capabilities

Two common approaches to identifying, classifying and disaggregating a firm’s activities: Functional analysis (identifying

capabilities within each of the firm’s functional areas)

Value chain analysis (providing a detailed identification of the firm’s activities and the capabilities that correspond to them)

Identifying Organizational Capabilities:A Functional Classification

Identifying Organizational Capabilities:A Functional Classification

FUNCTION CAPABILITY EXEMPLARSCorporate Financial management ExxonMobil, GEManagement Strategic control IBM, Samsung

Coordinating business units BP, P&GManaging acquisitions Citigroup, Cisco

MIS Speed and responsiveness through Wal-Mart, Dell rapid information transfer Capital One

R&D Research capability Merck, IBMDevelopment of innovative new products Apple, 3M

Manufacturing Efficient volume manufacturing Briggs & StrattonContinuous Improvement Nucor, Harley-DFlexibility Zara, Four Seasons

Design Design Capability Apple, Nokia

Marketing Brand Management P&G, LVMH

Quality reputation Johnson & JohnsonResponsiveness to market trends MTV, L’Oreal

Sales, Distribution Sales Responsiveness PepsiCo, Pfizer& Service Efficiency and speed of distribution LL Bean, Dell

Customer Service Singapore AirlinesCaterpillar

The value chain

The value chain describes the categories of activities within an organisation which, together, create a product or service.

The value chain invites the strategist to think of an organisation in terms of sets of activities – sources of competitive advantage can be analysed in any or all of these activities.

Porter’s Generic Value Chain

Figure 3.4 The value chain within an organisationSource: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performanceby Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved

Uses of the value chain

A generic description of activities understanding the discrete activities and how they both contribute to consumer benefit and how they add to cost.

Identifying activities where the organisation has particular strengths or weaknesses

Analysing the competitive position of the organisation using the VRIN criteria – thus identifying sources of sustainable advantage.

Looking for ways to enhance value or decrease cost in value activities (e.g. outsourcing)

The value network

The value network comprises the set of inter-organisational links and relationships that are necessary to create a product or service.

Competitive advantage can be derived from linkages within the value network.

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

FINANCIAL MANAGEMENT & CONTROL

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY ACTIVITIES

SUPPORTACTIVITIES

Key Success Factors•How do customers choose?•What do we need to survive competition?

What resources & capabilitiesdo we need to deliver theseKSFs?

Starting from the insideStarting from the inside Starting from the outsideStarting from the outside

Two approaches to identifying anorganization’s resources and capabilities

Two approaches to identifying anorganization’s resources and capabilities

 Strategic

ImportanceVW’s

Relative Strength

C1. Product development

9 4

C2. Purchasing 7 5

C3. Engineering 7 9

C4. Manufacturing 8 7

C5. Financial management

6 3

C6. R&D 6 4

C7. Marketing & sales

9 4

C8. Government relations

4 8

  Strategic Importance

VW’s Relative Strength

R1. Finance 6 4

R2. Technology 7 5

R3. Plant and equipment 8 8

R4. Location 7 4

R5. Distribution 8 5

RESOURCES CAPABILITIES

Assessing a Companies Resources and Capabilities: The Case of VW

Assessing a Companies Resources and Capabilities: The Case of VW

Rel

ativ

e S

tren

gth

Strategic Importance

Superfluous Strengths Key Strengths

Zone of Irrelevance Key Weaknesses

1

1

5 10

5

10

R1

R2

R3

R4

R5

C1

C2

C3

C4

C5C6 C7

C8

Appraising VW’s Resources and Capabilities Appraising VW’s Resources and Capabilities

(Hypothetical only)

Approaches to Capability DevelopmentApproaches to Capability Development

1) Acquire and develop the underlying resources. Especially human resources --Externally (hiring) --Internally through developing individual skills

2) Acquire/access capabilities externally through acquisition oralliance

3) Greenfield development of capabilities in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)

4) Build team-based capabilities through training and team development (i.e. develop organizational routines)

5) Align structure & systems with required capabilities

6) Change management to transform values and behaviors (GE, BP)

7) Product sequencing (Intel , Sony, Hyundai)

8) Knowledge Management (systematic approaches to acquiring, storing, replicating, and accessing knowledge)

1) Acquire and develop the underlying resources. Especially human resources --Externally (hiring) --Internally through developing individual skills

2) Acquire/access capabilities externally through acquisition oralliance

3) Greenfield development of capabilities in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)

4) Build team-based capabilities through training and team development (i.e. develop organizational routines)

5) Align structure & systems with required capabilities

6) Change management to transform values and behaviors (GE, BP)

7) Product sequencing (Intel , Sony, Hyundai)

8) Knowledge Management (systematic approaches to acquiring, storing, replicating, and accessing knowledge)

Developing strategic capabilities (1)

Internal capability development: Leveraging capabilities – identifying capabilities

in one part of the organisation and transferring them to other parts (sharing best practice).

Stretching capabilities - building new products or services out of existing capabilities.

Developing strategic capabilities (2)

External capability development – adding capabilities through mergers, acquisitions or alliances.

Ceasing activities – non-core activities can be stopped, outsourced or reduced in cost.

Monitor outputs and benefits – to understand sources of consumer benefit and enhance anything that contributes to this.

Managing the capabilities of people – training, development and organisation learning.

4. Develop strategy implications: (a) In relation to strengths--How can these be exploited more effectively and fully? (b) In relation to weaknesses --Identify opportunities to outsourcing activities that can be better performed by other organizations. --How can weaknesses be corrected through acquiring and developing resources and capabilities?

3. Appraise the firm’s resources and capabilities in terms of:

(a) strategic importance(b) relative strength

2. Explore the linkages between resources and capabilities

1. Identify the firm’s resources and capabilities

STRATEGY

CAPABILITIES

RESOURCES

POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE

Summary: A Framework for Analyzing Resources and CapabilitiesSummary: A Framework for Analyzing Resources and Capabilities

SWOT analysis

SWOT summarises the strengths, weaknesses, opportunities and threats likely to impact on strategy development.

INTERNAL STRENGTHS WEAKNESSES

EXTERNAL OPPORTUNITIES

THREATS

Uses of SWOT analysis

Scoring (e.g. + 5 to - 5) can be used to assess the inter-relationship between environmental impacts and the strengths and weaknesses.

SWOT can be used to examine strengths, weaknesses, opportunities and threats in relation to competitors.

SWOT can be used to generate strategic options– using a TOWS matrix.

Dangers in a SWOT analysis

Long lists with no attempt at prioritisation. Over generalisation – sweeping

statements often based on biased and unsupported opinions.

SWOT is used as a substitute for analysis – it should result from detailed analysis

SWOT is not used to guide strategy – it is seen as an end in itself.

Summary (1)

Strategic capabilities comprise both resources and competences.

The concept of dynamic capabilities highlights that strategic capabilities need to change as the market and environmental context of an organisation changes.

Sustainability of competitive advantage is likely to depend on an organisation’s capabilities being of at least threshold value in a market but also being valuable, relatively rare, inimitable and non-substitutable.

Summary (2)

Ways of diagnosing organisational capabilities include: Analysing an organisation’s value chain and value network as a basis for understanding how value to a customer is created and can be developed. Activity mapping as a means of identifying more detailed activities which underpin strategic capabilities. SWOT analysis as a way of drawing together an understanding of strengths, weaknesses, opportunities and threats an organisation faces.