Analyzing Resources and Capabilities

The Role of Resources and Capabilities in Strategy Formulation Strategy is concerned with matching a firms resources and capabilities to the opportunities that arise in the external environment. With this chapter, our emphasis shifts to the interface between strategy and the internal environment of the firm, and more specifically, to the resources and capabilities of the firm Figure: Analyzing resources and capabilities/

Basing Strategy on Resources and Capabilities During the 1990s,ideas concerning the role of a firms resources and capabilities as the principal basis for its strategy and primary source of its profitability coalesced into what has become known as the Resource-based viewof the firm: The firm is essentially a pool of resources and capabilities, and that these resources and capabilities are the primary determinants of its strategy

Resources and Capabilities as Sources of Profit Superior profitability might derive from two sources: 1.Location within an attractive industry 2.Achieving a competitive advantage over rivals Establishing competitive advantage through the development and deployment of resources and capabilities, rather than seeking shelter from the storm of competition, has become the primary goal for strategy

Resource-based approach to strategy The basic requirement of a resource- based approach: the firm seeks a thorough and profound understanding of its resources and capabilities which provides a basis for: Selecting a strategy that exploit a firms key strengths Developing a firms resources and capabilities

The Resources of the Firm It is important to distinguish between the resources and capabilities of the firm. The basic units of analysis are the individual resources of the firm:capital equipment, human resources, intellectual capital, and so on. But, in most instances, these resources do not create value for the firm on their own

The Resources of the Firm In order for the firm to establish competitive advantage, resources must work together in order to create organizational capability

Tangible Resources Tangible resources are the easiest to identify and evaluate: financial resources and physical assets are identified and valued in the firms financial statements.

Tangible Resources To identify how we can create value from tangible resources, we must address two key questions: 1. What opportunities exist for economizing on the use of finance, inventories, and fixed assets? 2.What are the possibilities for employing existing assets more profitably?

Intangible resources For most companies, intangible resources contribute much more than do tangible resources to total asset value. Among the most important intangible resources are brand names. Brand names and other trademarks are a form of reputational assets: their value is in the confidence they instill in customers /Table: The Words Most valuable Brands,2000/

Intangible resources Brand value is reflected in the price premium the customers are willing to pay for the branded product over that for an unbranded or unknown brand Brand value can be estimated by taking the price premium attributable to a brand, multiplying it by the brands annual sales volume.

Intangible Resources Reputation may be attached to a company as well as to its brands Company reputation is a valuable resource, not just in relation to customers, but also in relation to employees, supplies/including financial institutions/, and governments.

Intangible Resources Like reputation, technology is an intangible asset whose value is not evident from most companies balance sheets Intellectual property - patents, copyrights, and trade secrets- comprise technological and artistic resources where ownership is defined in law.

Human Resources Human resources are the productive services that human beings offer to the firm in terms of their skills, knowledge, motivations and decision-making abilities. Human resources do not appear on corporate balance sheets for the simple reason that people cannot be owned: companies contract with their employees to purchase their time and expertise.

Resources The ability of employees to harmonize their efforts and integrate their separate skills depends not only on their interpersonal skills but also the organizational context. This organizational context as it affects internal collaboration is determined by a key intangible resource : the culture of the organization / organizations values, traditions, and social norms/

Resources The organizational culture is identified as a firm resource that is potentially very valuable and great strategic importance

Organizational Capabilities Resources are not very productive on their own. A brain surgeon is close to useless without a radiologist, anesthetist, nurses, surgical instruments,imaging equipments and host of other resources. We use the term organizational capabilities to refer to a firms capacity for undertaking a particular productive activity.

Classifying Capabilities: Functions and Value Chain Activities To identify a firms capabilities two approaches are commonly used : 1. A functional analysis identifies organizational capabilities in relation to each of the principal functional areas of the firm.

Classifying Capabilities: Functions and Value Chain Activities 2. A value chain analysis separate the activities of the firm into a sequential chain / from research and product development through to marketing and customer after-sales services/ Porters value chain distinguishes between primary activities and support activities

Architecture of Capability How is Wal-Mart able to combine relentless cost focus and high levels of flexibility and adaptability? Why has Exxon-Mobil been so much better at financial management than the Royal Dutch/Shell group? We can hypothesize about the answers to these questions, but the fact remains: We dont really know how organizational capabilities are created, how they are performed, and why some companies perform a capability to a much higher standard than another

Capability as Routine Routines form the basis of most organizational capabilities. At the manufacturing level, a series of routines govern the passage of raw materials and components through the production process to the factory gate. Sales, ordering, distribution, and customer service activities are similarly organized through a number of standardized, complementary routines

The Hierarchy of Capabilities The broad functions or value chain segments can be disaggregated into more specialist capabilities where more general, broadly defined capabilities are formed the integration of more specialized capabilities: A hospitals capability in treating heart disease depends on its integration of capabilities pertaining to a patients diagnosis, cardiovascular surgery, pre-and post-operative care, as well as capabilities relating to various administrative and support functions.

Leveraging Resources into Capabilities The linkage between resources and capabilities is complex. Why has Sony, with a much smaller research budget than Philips, produced so many more successful innovation? Outstanding capabilities are not always the result of superior resources!

Leveraging Resources into Capabilities A firms resource base has only an indirect link with the capabilities that that firm can generate The key is the firms ability to leverage its resources

Resources can be leveraged in the following ways: Concentrating resources through the processes of converging resources on a few clearly defined and consistent goals; focusing the efforts of each group, department, and business unit on individual priorities in a sequential fashion; and targeting those activities that have the biggest impact on customers perceived value

Resources can be leveraged in the following ways: Accumulating resources through mining experience in order to achieve faster learning, and borrowing from other firms- accessing their resources and capabilities through alliances, and the like. Complementing resources involves increasing their effectiveness through linking them with complementary resources and capabilities

Resources can be leveraged in the following ways: Conserving resources involves utilizing resources and capabilities to fullest by recycling them through different products, markets, and product generations Recovering resources by increasing the speed with which investments in resources generate cash returns to he firm

Appraising the Profit-earning Potential of Resources and Capabilities The profits that a firm obtains from its resources and capabilities depend on three factors: Their abilities to establish a competitive advantage To sustain that competitive advantage To appropriate the returns to that competitive advantage

Establishing Competitive Advantage For resource or capability to establish a competitive advantage, two conditions must be present: 1.A resource or capability must be scarce. If it is widely available within the industry, then it may be essential in order to play, but not a sufficient basis for winning.

Establishing Competitive Advantage 2. The resource or capability must be relevant. British coal mines produced some wonderful brass bands. Unfortunately, these bands did little to assist the miners in meeting competition from cheap South African and American coal and North Sea gas. R&C are valuable only if they can be linked to one or more of the key success factors

Sustaining Competitive Advantage The profits earned from R&C depend not just on their ability to establish competitive advantage, but also on how long that advantage can be sustained. This depends on whether R&C are durable and whether rivals can imitate the competitive advantage they offer. R&C are imitable if the are transferable or replicable.

Durability Some resources are more durable than others and, hence, are a more secure basis for competitive advantage.The increasing pace of technological change is shortening the useful life span of most resources; both capital equipment and technological resources such as patents. Reputation, on the other hand, can show remarkable resilience to passage of time. Brands such as Hoover vacuum cleaners, Singer sewing machines, and Coca-Cola have been market leaders for periods of a century or more

Transferability If rivals can acquire the resources required to imitate the strategy of a successful company, that companys competitive advantage will be short lived. The ability to buy a resource or capability depends on its transferability-to extent to which it is mobile between companies.

Sources of immobility 1.Geographical immobility of natural recourses, large items of capital equipment, and some types of employees. 2. Imperfect information concerning the quality and productivity of resources creates considerable risks for firms seeking to acquire those resources.

Sources of immobility 3. Complementarity between resources such that the detachment of a resource from its home team causes it to lose productivity and value.Thus, if brand reputation is associated with the company that created it, a change in ownership of the brand erodes its value

Replicability In financial services most innovations can be easily imitated by competitors- unlike mechanical or chemical innovations Less easily replicable are capabilities based on complex organizational routines. Federal Expresss national,next-day delivery service and Nucors system for steel manufacturing that combines efficiency with flexibility are complex capabilities based on unique corporate cultures

Appropriating the Returns to Competitive Advantage Who gains the returns generated by a resource or capability? We should expect that such returns accrue to the owner of that resource or capability. However, ownership is not always clear-cut. The boundary between the human capital owned by the employee and the know-how and trade secrets of the company is particularly difficult to define

Appropriating the Returns to Competitive Advantage When General Motors cost-cutting genius Jose Ignacio and his colleagues left Opel for Volkswagen in 1993, to what extent were they transferring their individual knowledge and expertise, and to what extent were they stealing GMs trade secrets?

Appropriating the Returns to Competitive Advantage The less clearly defined are property rights in resources and capabilities, the greater the importance of relative bargaining power in determining the division of returns between the firm and its individual members. The more deeply embedded individual skills and knowledge are within organizational routines, and the more they depend on corporate systems and reputation, the weaker the employee is relative to the firm.

Appropriating the Returns to Competitive Advantage If the individual employees contribution to productivity is clearly identifiable, if the employee is mobile, and if the employees skills offer similar productivity to other firms, the employee is in a strong position to appropriate a substantial proportion of his contribution to the firms value added.

Putting Resource and Capability Analysis to Work: A practical Guide Step 1 Identify the Key resources and capabilities. What factors determine why some firms in an industry are more successful than others and on what resources and capabilities are these success factors based? Step 2 Appraising resources and capabilities. Which resources and capabilities are most important in conferring sustainable competitive advantage? Where our strengths and weaknesses as compared with competitors?

A Practical Guide What we must bear in mind: our ultimate objective is not to attract customers, but to make superior profit through establishing a sustainable competitive advantage

A Practical Guide Step 3 Developing Strategy implications: Exploiting Key Strengths Managing Key Weaknesses

Summary A systematic appraisal of a companys resources and capabilities provides the basis for reconsidering strategy How can the firm deploy its strengths to maximum advantage? How can it minimize its vulnerability to its weaknesses? How can it develop and extend its capabilities to meet the challenges of the future?

Summary Despite the progress that has been made in the last ten years in our understanding of resources and capabilities, there is much that remains unresolved. We know little about the microstructures of organizational capabilities and how they are established and developed.