Analyzing Resources

& Capabilities

OUTLINE

The role of resources and capabilities in strategy

formulation.
The resources of the firm
Organizational capabilities
Appraising the profit potential of resources and
capabilities
Putting resource and capability analysis to
worka practical guide
Creating new capabilities.
 Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment

THE FIRM THE

Goals and INDUSTRY
Values ENVIRONMENT
Resources and
Capabilities STRATEGY Competitors
STRATEGY
Structure and Customers
Systems Suppliers

The The
Firm-Strategy Environment-Strategy
Interface Interface
 Rationale for the Resource-based
Approach to Strategy

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 the primary

sources of profitability
 The Evolution of Honda Motor Company
Honda
Technical 4-cylinder 1st gasoline-powered
Competes in Civic Hybrid
Research 750cc car to meet US Low
Isle of Man TT (dual gasoline/
Institute motorcycle Emission Vehicle Standard
motorcycle electric)
founded
races
Portable Power products: Civic GS
generator ground tillers, marine (natural
1stmotorcycle:
engines, generators, gas
98cc, 2-cycle
405cc pumps, chainsaws
Dream D powered)
motor snowblowers
cycle

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

N360 mini Acura Car

4 cycle division Home co-
car generation
engine The 50cc
1000cc
Supercub system
Honda Goldwing
Civic touring
motor cycle Enters Indy
Enters Formula 1 car racing
First product: Gran Prix racing
Model A Honda FCX
clip-on engine fuel cell
for bicycles car
Canon: Products and Core Technical Capabilities

Precision Fine
Mechanics 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
Stepper aligners Color video printer
Calculator
Notebook computer

Micro-
Electronics
Links between Products & Capabilities:
Capability-Based Strategy at 3M

Sandpaper Road signs Videotape

Carborundum & markings Floppy disks &
mining Scotchtape Audio tape data storage
products
Acetate
Post-it notes
film Housewares/kit-
PRODUCTS
Surgical tapes chen products
& dressings
Pharmaceuticals
Materials sciences
Flexible
Health sciences circuitry
CAPABILITIES Microreplication
New-product
Abrasives Adhesives Thin-film development &
technologies introduction
Evolution of Capabilities and Products: 3M

Sandpaper Road signs Videotape

Carborundum & markings Floppy disks &
mining Scotchtape Audio tape data storage
products
Acetate
Post-it notes
film Housewares/kit-
PRODUCTS
Surgical tapes chen products
& dressings
Pharmaceuticals
Materials sciences
Flexible
Health sciences circuitry
CAPABILITIES Microreplication
New-product
Abrasives Adhesives Thin-film development &
technologies introduction
 Eastman Kodaks Dilemma

Resources & Capabilities Businesses

Chemical Imaging Film
1980s Organic Chemistry Cameras
Polymer technology Fine Chemicals
Optomechtronics
Pharmaceuticals
Thin-film coatings
Brands Diagnostics
Global Distribution

1990s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital Digital Imaging

imaging capability Products (e.g. Photo CD
System; Advantix
cameras & film
The Links between Resources, Capabilities
and Competitive Advantage

INDUSTRY KEY
COMPETITIVE SUCCESS FACTORS
STRATEGY
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE INTANGIBLE HUMAN

Financial Skills/know-how
Technology Capacity for
Physical Reputation communication
Culture & collaboration
Motivation
 Appraising Resources
RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternative uses for
Raw materials. fixed assets

Technology Patents, copyrights, know how No. of patents owned

R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure
Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity

reputation (with suppliers, customers, Customer retention
government) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.
 Firms with the Highest Ratios of Market Value to Book Value
(December 2005)

Company Valuation Country Company Valuation Country

ratio ratio

Yahoo! Japan 72.0 Japan Coca-Cola 7.8 US

Colgate-Palmolive 20.8 US Diageo 7.4 UK

Glaxo Smith Kline 13.4 UK 3M 7.3 US

Anheuser-Busch 12.6 US Nokia 6.7 Finland

eBay 11.2 US Sanofi-Aventis 6.3 France

SAP 10.8 Germany AstraZeneca 5.9 UK

Yahoo! 10.7 US Johnson & Johnson 5.7 US

Dell Computer 10.0 US Boeing 5.7 US

Sumitomo Mitsui Financial 8.8 Japan Eli Lily 5.6 US

Procter & Gamble 8.4 US Cisco Systems 5.5 US

Qualcomm 8.3 US Roche Holding 5.5 Switz.

Schlumberger 8.2 US LOreal 5.3 France

Unilever 8.1 Neth/UK Altria 5.2 US

PepsiCo 8.0 US Novartis 5.1 Switz.

 The Worlds Most Valuable Brands, 2006

Rank Company Brand Rank Company Brand

value value
($bn.) ($bn.)

1 Coca-Cola 67.5 11 Mercedes Benz 20.0

2 Microsoft 59.9 12 Citi 20.0
3 IBM 53.4 13 Hewlett-Packard 18.9
4 GE 47.0 14 American Express 18.6
5 Intel 35.6 15 Gillette 17.5
6 Nokia 26.5 16 BMW 17.1
7 Disney 26.4 17 Cisco 16.6
8 McDonalds 26.0 18 Louis Vuitton 16.1
9 Toyota 24.8 19 Honda 15.8
10 Marlboro 21.2 20 Samsung 15.0

Source: Interbrand
 Identifying Organizational Capabilities:
A Functional Classification
FUNCTION CAPABILITY EXEMPLARS
Corporate Financial management ExxonMobil, GE
Management Strategic control IBM, Samsung
Coordinating business units BP, P&G
Managing acquisitions Citigroup, Cisco
MIS Speed and responsiveness through Wal-Mart, Dell
rapid information transfer Capital One
R&D Research capability Merck, IBM
Development of innovative new products Apple, 3M
Manufacturing Efficient volume manufacturing Briggs & Stratton
Continuous Improvement Nucor, Harley-D
Flexibility Zara, Four Seasons
Design Design Capability Apple, Nokia
Marketing Brand Management P&G, LVMH
Quality reputation Johnson & Johnson
Responsiveness to market trends MTV, LOreal
Sales, Distribution Sales Responsiveness PepsiCo, Pfizer
& Service Efficiency and speed of distribution LL Bean, Dell
Customer Service Singapore Airlines
Caterpillar
 The Value Chain:
The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

 The Porter Value Chain

FIRM INFRASTRUCTURE
SUPPORT
HUMAN RESOURCE MANAGEMENT ACTIVITIES
TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY
ACTIVITIES
 The Architecture of Organizational Capability

ORGANIZATIONAL
CAPABILITY

SKILLS &
KNOWLEDGE Organization Management
Structure Systems
VALUES
TECHNICAL & NORMS RESOURCES
MANAGERIAL
SYSTEMS Human skills & know-how
SYSTEMS Technology
Culture (values, norms)

Dorothy Leonard Core Capabilities

A modified view
& Core Rigidities
 A Hierarchy of Capabilities:
A Telecom Manufacturer

CROSS FUNCTIONAL New product Customer Quality

CAPABILITIES development support management
capability capability capability

BROAD FUNCTIONAL operations R & D and MIS Marketing Human

capability design capability and sales resource mgt.
CAPABILITIES capability capability capability

Manufacturing Materials Process Product Test

ACTIVITY RELATED capability management engineering engineering engineering
CAPABILITIES capability capability capability capability
(Operations related
only)
SPECIALIZED Printed Telset System
circuit-board assembly assembly
CAPABILITIES assembly
(Manufacturing related
only)
Automated Manual Surface Wave
SINGLE-TASK through-hole insertion of mounting of soldering
component components components
CAPABILITIES (Only insertion
those related to PCB
assembly)

INDIVIDUALS SPECIALIZED KNOWLEDGE

 The Rent-Earning Potential
of Resources and Capabilities

THE EXTENT OF THE Scarcity

COMPETITIVE ADVANTAGE
ESTABLISHED Relevance

Durability
THE PROFIT
EARNING POTENTIAL SUSTAINABILITY OF THE Transferability
OF A RESOURCE OR COMPETITIVE
CAPABILITY ADVANTAGE Replicability

Property rights

Relative
APPROPRIABILITY bargaining power

Embeddedness
 Two approaches to identifying an
organizations resources and capabilities

Starting from the inside Starting from the outside

Key Success Factors

How do customers choose?
FIRM INFRASTRUCTURE
What do we need to survive
SUPPORT
HUMAN RESOURCE MANAGEMENT ACTIVITIES competition?
TECHNOLOGY DEVELOPMENT
FINANCIAL MANAGEMENT & CONTROL

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE What resources & capabilities

LOGISTICS LOGISTICS & SALES
do we need to deliver these
KSFs?
PRIMARY
ACTIVITIES
 Assessing a Companies Resources
and Capabilities: The Case of VW
Importance VWs VWs
RESOURCES CAPABILITIES Importance Relative
Relative
Strength Strength

C1. Product
R1. Finance 6 4 9 4
development

R2. Technology 7 5 C2. Purchasing 7 5

R3. Plant and equipment 8 8 C3. Engineering 7 9

C4. Manufacturing 8 7
R4. Location 7 4
C5. Financial
6 3
management
R5. Distribution 8 5
C6. R&D 6 4

C7. Marketing &

9 4
sales

C8. Government
4 8
relations
 Appraising VWs Resources and Capabilities

(Hypothetical only)

10 Key Strengths
Superfluous Strengths
C3
R3
Relative Strength

C8
C4

C2
R2 R5
5
R1 R4 C1
C6 C7
C5

Zone of Irrelevance Key Weaknesses

1
1 5 10
Strategic Importance
 Appraising the Capabilities of a
Business School (illustrative only)
C1 Alumni relations
C2 Student
Superior Superfluous Key strengths placement
strengths 6 C3 Teaching
C4.Administration
C5 Course devlpmnt
9
Relative Strength

C6 Student
3 recruitment
C7 Research
C8 Corporate
Parity 5 relations
Inconsequential 2 C9 Marketing
weaknesses 8 C10 IT
4 C11 PR
12 C12 HRM
1
11
7 Key weaknesses
Deficient 10

Not Critically
important important
Importance
 Amocos Appraisal of Organizational Capabilities
(illustrative only)

1. Effective deal
making
Superfluous Key strengths 2. Rapid new product
Superior
strengths 6 development
3. Relentless cost
9 forms
4. Product quality
4 5. JV management
6. Superior EH&S
management
5 7. Managing culturally
Parity
Inconsequential 2 diverse workforce
weaknesses 11 8. Fast decision
3
making
9. Customer
1 segmentation
10 10.Capture synergies
1 8 across divisions
Deficient 7 Key weaknesses 11. Effective
Not Needed Needed procurement
important to play to win
Importance
 Distinctive Capabilities as a
Consequence of Childhood Experiences

Company Capability Past History

Exxon Financial Exxons predecessor, Standard Oil (NJ)
management was the holding co. for Rockefellers
Standard Oil Trust

RD/ Coordinating Shell a j-v formed from Shell T&T founded to

Shell decentralized sell Russian oil in China, and Royal Dutch
global empire founded to exploit Indonesian reserves

BP Elephant Discovered huge Persian reserves, went on to

hunting find Forties Field and Prudhoe Bay

ENI Deal making in The Enrico Mattei legacy; the challenge of

politicized managing government relations in post-war
environments Italy

Mobil Lubricants Vacuum Oil Co. founded in 1866 to supply

patented petroleum lubricants 2
 Approaches 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 or
alliance
3) Greenfield development of capabilties 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)
 Product Sequencing to Build
Hydrodynamics
Capabilities: Hyundai Thermodynamics
Auto Fuel engineering
styling Emission control
Capabilities
&design FWD Lubrication
Casting & engineering Kinetics& vibration
forging CAD/CAM Ceramics
Chassis Assembly Electronic control
design control systems
Assembly
Tooling systems Large-scale
Production
Body Advanced design integration
engineering
production component Global logistics
Local
Export handling Lifecycle
marketing
mktg. engineering

SKD CKD Alpha Accent

Pony Excel
Ford Cortina engine Avante
Products Sonanta
1968 1970 1974 1985 1994-95
 What Determines Organizational
Capability in Football?

Matt Busby Manchester U. 1945-70

Alf Ramsey Ipswich 1955-64
Bill Shankley Liverpool 1959-74
Who are the Jock Stein Glasgow Celtic 1965-78
outstandingly Brian Clough Derby/Notts F. 1972-84
successful team Bob Paisley Liverpool 1974-83
managers Alex Ferguson Aberdeen 1980-86
(coaches) in Manchester U. 1986-
British football?
Arsene Wenger Monaco 1985-95
Arsenal 1996-
Jose Mourinho Porto 2000-04
Chelsea 2004-
 Building Team Capabilities in Soccer:
Alex Ferguson at Manchester United
Scouting staff doubled find the best.
Find/develop young players Building youth team1992 youth team
included Ryan Giggs, David Beckham, Paul
Scholes, Nicky Butt, Gary Neville

State-of-the-art training complex

Training Rigorous training schedule (+war on booze)

Training for team skills

Developing coordination Building team spiritteam functions with
single spirit & constant flow of mutual
support; Talent without unity of purpose
is hopeless

Build a core of group internally

Structuring the team Supplement with key purchases
Blending personalities as well as skills
Player rotation for experimentation &
flexible coordination

Building the wider teamcoaches,

Cross-functional integration scouts, physiotherapists,
psychologists, even cleaners
 Summary: A Framework for Analyzing Resources and 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 STRATEGY
activities that can be better
performed by other organizations.
--How can weaknesses be corrected
through acquiring and developing
resources and capabilities? POTENTIAL FOR
SUSTAINABLE
COMPETITIVE
3. Appraise the firms resources and
ADVANTAGE
capabilities in terms of:
(a) strategic importance
(b) relative strength

2. Explore the linkages between resources CAPABILITIES

and capabilities

1. Identify the firms resources and RESOURCES

capabilities
 Knowledge Management and the
Knowledge-based View of the Firm
OUTLINE

1) Why the surge of interest in knowledge management (KM)?

--kn. as the key resource of the firm
--giving us a better understanding of management
2) What is KM?
3) What progress have we made, what are the key gaps, which
areas are likely to add most value?
4) Developing strategy: Exploiting strengths, protecting and
eliminating weaknesses
5) Building the capability base: Can it be done? How?
6) What can be learn from Knowledge Management?
7) Implications for organizational structure.
 Knowledge Processes within the Organization

Knowledge Research
Creation
Knowledge
Training
Generation Recruitment
(Exploration) Knowledge Intellectual property
Acquisition licensing
Benchmarking

Knowledge New product

development
Integration Operations
Knowledge Strategic planning
Sharing Communities of practice

Knowledge Best practices transfer

Knowledge Replication On-the-job training
Application Knowledge
(Exploitation) Databases
Storage & Standard operating practices
Organization
Knowledge Intellectual capital accounting
Measurement Competency modeling

Knowledge Project reviews

Identification Competency modeling
 Nonakas Knowledge Conversion Matrix

Tacit TO Explicit
Knowledge Knowledge

SOCIALIZATION EXTERNALIZATION
Sharing of tacit The articulation and
Tacit knowledge among systematization of tacit
Knowledge individuals and from the into explicit knowledge.
organization to the Use of metaphor to
individual communicate tacit
concepts
FROM
COMBINATION
INTERNALIZATION A key role of information
Instructions and principles systems is to combine
Explicit are converted into intuition
Knowledge different units of
and routines information and other
forms of explicit
knowledge
 What is Knowledge Management?
Intellectual
On-the- Courses & Seminars Capital
Data job Accounting
mining Training Benchmarkin
g Intellectual
Property
IT New Product Protection
Development Customer &
Communications Best
Market Analysis Practice
Strategic Alliances Scenario Transfer
Lesson Analysis T Q M
ERP s Research
CRM
learned
Definition:
The systematic leveraging of information and expertise
to improve organizational innovation, responsiveness,
productivity and competency. (Lotus division of IBM)
 Types & Levels of Knowledge
(and Knowledge Conversion)

Levels of knowledge

Individual Organization

Databases
Information Systems & procedures
Explicit Facts Intellectual property
Scientific kn.
Types
of
Knowledge

Tacit
Skills Organizational
Know-how routines
 Replication through Knowledge Systematization

Levels of knowledge

Individual Organization

Databases
Information Systems & procedures
Explicit Facts Intellectual property
Scientific kn. INDUSTRIAL
Types ENTERPRISES

of
Knowledge CRAFT
ENTERPRISES

Tacit
EXAMPLES Skills Organizational
Ford capabilities
McDonalds
Starbucks
Accenture
 Knowledge Transfer Mechanisms
D
I
S M Rules, procedures & directives
a
S
n Manuals &
E y Shared
Modular integration reports
M data
I Communities bases
N Communities -of-interest
A -of-practice E-mail
T Group
Internal -ware
I
consultants Training
O
N seminars
Video
& Data
conferencing
courses exchange
B Meetings
R Personnel
E F transfer Informal
On-the job Fax
A e training
visits
D w Telephone
T
H Low (know-how & High (explicit
contextual kn..) ABILITY TO CODIFY kn.. & information
 Designing a Knowledge Management System

What kn. processes which are critical to creating value

& competitive advantage?
--Dow: creating and exploiting patents
--McKinsey & Co.: sharing kn. & retaining experienced consultants
--Accenture: systematization.)

What are the characteristics of the relevant kn.?

What mechanisms are needed for the generation and

application of the relevant kn.?

What organizational conditions need to be in place in order

for knowledge management mechanisms to work?
---Organizational structures
---Incentives to contributors and users
---Behavioral norms and values