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Analysing Resources and

Capabilities
730N1 Strategic Management
Lecture 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 nonsubstitutability (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
The basic
basic framework
framework strategy
strategy as
as aa link
link
between
between the
the firm
firm and
and its
its environment
environment

THE FIRM

THE
INDUSTRY
ENVIRONMENT

Goals and
Values
Resources and
Capabilities
Structures and
Systems

STRATEGY
STRATEGY

The
Firm-Strategy
Interface

Competitors
Customers
Suppliers

The
Environment-Strategy
Interface

Shifting the focus

Strategy is concerned with matching a


firms 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

Rationale (argument) for the RBV approach to


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

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 firms 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 worlds 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

The evolution of Honda Motor Company


Honda
Technical
Research
Institute
founded

Competes in
Isle of Man TT
motorcycle
races

1 motorcycle:
98cc, 2-cycle
Dream D
st

1946 1950
4 cycle
engine

First product:
Model A
clip-on engine
for bicycles

1955

4-cylinder
750cc
motorcycle

1st gasoline-powered
car to meet US Low
Emission Vehicle Standard

Portable
generator

Power products:
ground tillers, marine
engines, generators,
pumps, chainsaws
snow blowers

405cc
motor
cycle

1960

The 50cc
Supercub

1965

1970

1975

N360 mini
car

Enters Formula 1
Gran Prix racing

Honda
Civic

1980

Civic Hybrid
(dual gasoline/
electric)
Civic GS
(natural
gas
powered)

1985

1990

1995

Acura Car
division
1000cc
Goldwing
touring
motor cycle

2000

Home cogeneration
system

Enters Indy
car racing
Honda FCX
fuel cell
car

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

Canon:
Canon: Products
Products and
and Core
Core Technical
Technical Capabilities
Capabilities
Precision
Mechanics

Fine
Optics

35mm SLR camera


Plain-paper copier
Compact fashion camera
Color copier
EOS autofocus camera
Color laser copier
Digital camera
Basic fax Laser copier
Video still camera
Laser fax
Mask aligners
Inkjet printer
Excimer laser aligners
Laser printer
Color video printer
Stepper aligners
Calculator
Notebook computer

MicroElectronics

3M Corporation

3Ms 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

3M:
3M: Evolution
Evolution of
of Capabilities
Capabilities and
and Products
Products
Road signs Videotape
Sandpaper
Sandpaper Road signs Videotape
Carborundum
&&markings
Carborundum
markings
Floppy
Floppydisks
disks&&
mining
mining
Scotch
data storage
Scotchtape
tape
Audio
Audiotape
tape data storage
products
products
Acetate
Acetate
Post-it
Post-itnotes
notes
film
Housewares/kitfilm
Housewares/kitPRODUCTS
PRODUCTS
chen
Surgical
chenproducts
products
Surgicaltapes
tapes
&&dressings
dressings
Pharmaceuticals
Pharmaceuticals
Materials
Materialssciences
sciences Flexible
Flexible
Health
Healthsciences
sciences circuitry
circuitry
Microreplication
Microreplication

CAPABILITIES
CAPABILITIES
Abrasives
Abrasives

Adhesives
Adhesives

Thin-film
Thin-film
technologies
technologies

New-product
New-product
development
development&&
introduction
introduction

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 firms 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

The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities
and
and Competitive
Competitive Advantage
Advantage
COMPETITIVE
ADVANTAGE

INDUSTRY KEY
SUCCESS FACTORS

STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES

TANGIBLE
Financial
Physical

INTANGIBLE
Technology
Reputation
Culture

HUMAN
Skills/know-how
Capacity

for
communication
& collaboration
Motivation

Identifying Resources

We need a framework for identifying


and classifying different resources
and capabilities
Three main types of resources
Tangible
Intangible
Human

resources

Appraising
Appraising aafirms
firmsresources
resources
RESOURCES

CHARACTERISTICS

INDICATORS

Financial

Borrowing capacity
Internal funds generation

Debt/ Equity ratio


Credit rating
Net cash flow

Physical

Plant and equipment:


size, location, technology
flexibility.
Land and buildings.
Raw materials.

Market value of
fixed assets.
Scale of plants
Alternative uses for
fixed assets

Technology

Patents, copyrights, know how


R&D facilities.
Technical and scientific
employees

No. of patents owned


Royalty income
R&D expenditure
R&D staff

Reputation

Brands. Customer loyalty. Company


reputation (with suppliers, customers,
government)
Training, experience, adaptability,
commitment and loyalty of employees

Brand equity
Customer retention
Supplier loyalty
Employee qualifications,
pay rates, turnover.

Tangible
Resources

Intangible
Resources

Human
Resources

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 firms


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 (contd)


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. 7991.

Strategic capabilities and


competitive advantage (VRIN)
The four key criteria by which capabilities
can be assessed in terms of providing a
basis for achieving sustainable
competitive advantage
are:
value
rarity
VRIN
inimitability and
non-substitutability
Jay Barney: Firm resources and sustained competitive advantage,
Journal of Management, vol. 17 (1991), no. 1, pp. 99120.

VRIN (1)
V Value of strategic capabilities
Strategic 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 Inimitability
Inimitable 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-substitutability
Competitive 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 firms activities:
Functional

analysis (identifying
capabilities within each of the firms
functional areas)
Value chain analysis (providing a detailed
identification of the firms activities and
the capabilities that correspond to them)

Identifying
Identifying Organizational
Organizational Capabilities:
Capabilities:
AAFunctional
FunctionalClassification
Classification
FUNCTION
Corporate
Management

CAPABILITY
Financial management
Strategic control
Coordinating business units
Managing acquisitions

EXEMPLARS
ExxonMobil, GE
IBM, Samsung
BP, P&G
Citigroup, Cisco

MIS

Speed and responsiveness through


rapid information transfer

Wal-Mart, Dell
Capital One

R&D

Research capability
Development of innovative new products

Merck, IBM
Apple, 3M

Manufacturing

Efficient volume manufacturing


Continuous Improvement
Flexibility

Briggs & Stratton


Nucor, Harley-D
Zara, Four Seasons

Design

Design Capability

Apple, Nokia

Marketing

Brand Management
Quality reputation
Responsiveness to market trends

P&G, LVMH
Johnson & Johnson
MTV, LOreal

Sales, Distribution
& Service

Sales Responsiveness
Efficiency and speed of distribution
Customer Service

PepsiCo, Pfizer
LL Bean, Dell
Singapore Airlines
Caterpillar

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.

Porters Generic Value Chain

Figure 3.4

The value chain within an organisation

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance
by 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.

Two
Two approaches
approaches to
to identifying
identifying an
an
organizations
organizations resources
resources and
and capabilities
capabilities
Starting
Startingfrom
from the
the inside
inside

Starting
Startingfrom
fromthe
the outside
outside
Key Success Factors
How

do customers choose?
What do we need to survive
competition?

What resources & capabilities


do we need to deliver these
KSFs?

Assessing
AssessingaaCompanies
CompaniesResources
Resources
and
and Capabilities:
Capabilities: The
TheCase
Caseof
of VW
VW
RESOURCES

Strategic
Importance

VWs
Relative
Strength

R1. Finance

R2. Technology

R3. Plant and equipment

R4. Location
R5. Distribution

7
8

Strategic
Importance

VWs
Relative
Strength

C1. Product
development

C2. Purchasing

C3. Engineering

C4. Manufacturing

C5. Financial
management

C6. R&D

C7. Marketing &


sales

C8. Government
relations

CAPABILITIES

4
5

Appraising
AppraisingVWs
VWsResources
Resourcesand
andCapabilities
Capabilities
(Hypothetical only)

10

Key Strengths

Superfluous Strengths

Relative Strength

C3
R3

C8

C4
C2
R2

5
R1

R5

R4

C6

C1
C7

C5

Zone of Irrelevance

1
1

Key Weaknesses
5

Strategic Importance

10

Approaches
Approachesto
toCapability
CapabilityDevelopment
Development
1)
1) Acquire
Acquireand
anddevelop
developthe
theunderlying
underlyingresources.
resources.Especially
Especially
human
humanresources
resources
--Externally
--Externally(hiring)
(hiring)
--Internally
--Internallythrough
throughdeveloping
developingindividual
individualskills
skills

2)
2) Acquire/access
Acquire/accesscapabilities
capabilitiesexternally
externallythrough
throughacquisition
acquisitionor
or
alliance
alliance
3)
3) Greenfield
Greenfielddevelopment
developmentof
ofcapabilities
capabilitiesin
inseparate
separate
organizational
organizationalunit
unit(IBM
(IBM&&the
thePC,
PC,Xerox
Xerox&&PARC,
PARC,GM
GM&&Saturn)
Saturn)
4)
4) Build
Buildteam-based
team-basedcapabilities
capabilitiesthrough
throughtraining
trainingand
andteam
team
development
development(i.e.
(i.e.develop
developorganizational
organizationalroutines)
routines)
5)
5)
6)
6)

Align
Alignstructure
structure&&systems
systemswith
withrequired
requiredcapabilities
capabilities
Change
Changemanagement
managementto
totransform
transformvalues
valuesand
andbehaviors
behaviors(GE,
(GE,

7)
7)
8)
8)

Product
Productsequencing
sequencing(Intel
(Intel, ,Sony,
Sony,Hyundai)
Hyundai)
Knowledge
KnowledgeManagement
Management(systematic
(systematicapproaches
approachesto
toacquiring,
acquiring,

BP)
BP)

storing,
storing,replicating,
replicating,and
andaccessing
accessingknowledge)
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.

Summary:
Summary:AAFramework
Frameworkfor
forAnalyzing
AnalyzingResources
Resourcesand
andCapabilities
Capabilities
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 firms resources and
capabilities in terms of:
(a) strategic importance
(b) relative strength
2. Explore the linkages between resources
and capabilities

1. Identify the firms resources and


capabilities

STRATEGY

POTENTIAL FOR
SUSTAINABLE
COMPETITIVE
ADVANTAGE

CAPABILITIES

RESOURCES

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 organisations 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 organisations 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.