To accompany contemprory strategy analysis concepts techiniques application chapter05slides

Analyzing
Analyzing Resources
Resources &
&
Capabilities
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
• Creating new capabilities.


Shifting
Shifting the
the Focus
Focus of
of Strategy
StrategyAnalysis:
Analysis:
From
From the
the External
External to
to the
the Internal
Internal Environment
Environment

THE FIRM

THE
INDUSTRY
ENVIRONMENT

Goals and
Values
Resources and
Capabilities
Structure and
Systems

STRATEGY
STRATEGY

The
Firm-Strategy
Interface

•Competitors
•Customers
•Suppliers

The
Environment-Strategy
Interface

Rationale
Rationale for
for the
the Resource-based
Resource-based
Approach
Approach to
to Strategy
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
The Evolution
Evolution of
of Honda
Honda Motor
Motor Company
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
snowblowers

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:
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


Links between Products & Capabilities:
Capability-Based Strategy at 3M
Road signs Videotape
Sandpaper
Sandpaper Road signs Videotape
Carborundum
&&markings
Carborundum
markings
Floppy
Floppydisks
disks&&
mining
mining
Scotchtape
data storage
Scotchtape

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


Evolution
Evolution of
of Capabilities
Capabilities and

and Products:
Products: 3M
3M
Road signs Videotape
Sandpaper
Sandpaper Road signs Videotape
Carborundum
&&markings
Carborundum
markings
Floppy
Floppydisks
disks&&
mining
mining
Scotchtape
data storage
Scotchtape
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


Eastman Kodak’s Dilemma

Resources & Capabilities
1980’s

Chemical Imaging

Businesses
Film

•Organic Chemistry
•Polymer technology

Cameras
Fine Chemicals

•Optomechtronics
•Thin-film coatings

Pharmaceuticals

Brands

Diagnostics

Global Distribution
1990’s

DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics
Need to build digital
imaging capability

Digital Imaging
Products (e.g. Photo CD
System; Advantix
cameras & film


The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities
and
and Competitive

CompetitiveAdvantage
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

Appraising
Appraising Resources
Resources
RESOURCE

CHARACTERISTICS

INDICATORS

Financial
Borrowing capacity Debt/ Equity ratio
Internal funds generation Credit rating
Tangible Net cash flow
Resources
Physical
Plant and equipment:
size, location, technology fixed assets.
flexibility.
Scale of plants
Land and buildings.
Alternative uses for
Raw materials. fixed assets

Market value of

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
Firmswith
withthe
theHighest
HighestRatios
Ratiosof
ofMarket
MarketValue
Valueto
toBook
BookValue
Value
Accenture
27.6

Consulting
Gillette
17.9
Personal care
Anheuser Busch
16.8
Brewing
Gap
17.0
Retailing
Kellogg 16.0
Food
Dell Computer
15.9
Computers
Oracle
12.2
Software
GlaxoSmithKline
11.0
Drugs
Hennes & Mauritz
10.5
Retailing
SAP
10.1
Software
SCM
10.0
Computers

Pfizer
9.9
Drugs
Unilever
9.6
Consumer goods
Coca-cola 9.3
Soft drinks
Sysco
9.1
Food services
Forest Labs
8.5
Drugs
EBay
8.2
E-business
Pepsico
8.0
Soft drinks
Medtronic 7.9
Medical equipment
3M 7.8 Diversified
Procter & Gamble
7.8
Consumer goods
France Telecom
7.6
Telecom
Smith & Nephew

6.7
Drugs
Johnson & Johnson 6.7
Drugs

Source: Business
Week, July 2003


The
The World’s
World’s Most
Most Valuable
Valuable Brands,
Brands, 2003
2003
Rank Company
value
($bn.)

Brand
value
($bn.)

1
2
3
4
5
6

7
8
9
10

70.45
65.17
13
14
15
29.44
28.03

Coca-Cola
Microsoft
IBM 51.76
GE 42.34
Intel 31.11
Nokia
Disney
McDonald’s
Marlboro
Mercedes

Rank

Company

11 Toyota
20.78

12 Hewlett-Packard
Citibank 18.57
Ford
17.07
American Express 16.29
16 Gillette
17 Cisco
15.57
24.69
18 Honda
22.18
19 BMW
21.31
20 Sony

Brand

19.86

15.98
15.63
15.11
13.15
Source: Interbrand


Identifying
Identifying Organizational
Organizational Capabilities:
Capabilities:

A
AFunctional
Functional Classification
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
Sony, 3M

Manufacturing

Efficient volume manufacturing
Continuous Improvement
Flexibility

Briggs & Stratton
Nucor, Harley-D
Zara, Southwest Air

Design

Design Capability

Apple, Nokia

Marketing

Brand Management
Quality reputation
Responsiveness to market trends

P&G, LVMH, PepsiCo
Johnson & Johnson

MTV, L’Oreal

Sales, Distribution
& Service

Sales Responsiveness
Efficiency and speed of distribution
Customer Service

PepsiCo, Pfizer
Amazon, Dell
Singapore Airlines
Caterpillar


The
The Value
Value Chain:
Chain:
The
The McKinsey
McKinsey Business
Business System
System

TECHNOLOGY

PRODUCT DESIGN

MANUFACTURING

MARKETING

DISTRIBUTION

SERVICE


The
The Porter
Porter Value
Value Chain
Chain
FIRM INFRASTRUCTURE

SUPPORT
ACTIVITIES

HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND
LOGISTICS

OPERATIONS OUTBOUND
LOGISTICS

MARKETING

SERVICE

& SALES
PRIMARY
ACTIVITIES


Superior
SuperiorResources
Resourcesdo
do not
notnecessarily
necessarily mean
mean
Superior
SuperiorCapabilities:
Capabilities: Transfer
Transfer Fees
Feesand
and Team
Team
Performance
Performance in
inEuropean
European Soccer
Soccer
WINNING
TEAMS 19982003
Valencia (Sp)
Real Madrid

(Sp)
Deportivo La
Coruna (Sp)
Juventus (It)
AC Milan (It)

EXPENDITURES ON KEY PLAYERS, 1998-2003

Pablo Aimar ($20.4m), Ruben Baraja ($12m)

1.
2.
Zinedine Zidane ($68m), Luis Figo ($55m), Ronaldo ($43m),
3.
Nicolas Anelka ($36m), David Beckham ($26m),
4.
Sergio Gonzales ($16m), Alberto Luque ($15m)
5.
6.
Gianluigi Buffon ($49m), Pavel Nedved ($38m), Lilian Thuram7.
8.
($33m), David Trezeguet ($21m), Marco de Viao ($10m)
9.
Rui Costa ($42m), Alessandro Nesta ($30m), Andriy
Shevchenko ($24m), Andrea Pirlo ($16m), Kaka ($9m)

Parma (It)

Hidetoshi Nakata ($30m), Sdrian Mutu ($9m)

Manchester
United (Eng)

Rio Ferdinand ($45m), Juan Veron ($42m), Ruud van
Nistelrooy ($30m), Cristiano Ronaldo ($18m), Fabien Bartez
($12m), Diego Forlan ($10m), Kleberson ($9m), Mikael
Silvestre
($6m) ($20m), Thierry Henry ($16m), Dennis
Sylvain Wiltord

Arsenal (Eng)
Liverpool
(Eng)

HIGHEST EXPENDITURES
ON NEW PLAYERS (Top 3
in Spain, Italy & England)

Bergkamp ($12m), Nwankwo Kanu ($7m), Gilberto Silva
($7m), Patrick Vieira ($6m)
Emile Heskey ($16m), El Hadji Diouf ($15m), Dietmar Hamann
($12m), Chris Kerkland ($8m), Harry Kewell ($8m), Salif Diao
($8m)

Barcelona
Chelsea
Lazio
Manchester United
Inter Milan
Juventus

AC Milan
Arsenal
Real Betis

Note: Spain, Italy &
England only).


The
The Architecture
Architecture of
of Organizational
Organizational
Capability
Capability
ORGANIZATIONAL
CAPABILITY

SKILLS &
Organization
Management
KNOWLEDGE
Structure
Systems
VALUES
TECHNICAL& NORMS
RESOURCES
MANAGERIAL
•Human skills & know-how
SYSTEMS

SYSTEMS
•Technology

Dorothy Leonard “Core Capabilities
& Core Rigidities”

•Culture (values, norms)

A modified
view


A
AHierarchy
Hierarchy of
of Capabilities:
Capabilities:
A
ATelecom
Telecom Manufacturer
Manufacturer
CROSS FUNCTIONAL
CAPABILITIES

N e w p ro d u c t
d e v e lo p m e n t
c a p a b ility

C u s to m e r
s u p p o rt

c a p a b ility

BROAD FUNCTIONAL
CAPABILITIES

o p e r a tio n s
c a p a b ility

R & D and
d e s ig n
c a p a b ility

M IS
c a p a b ility

M a r k e t in g
a n d s a le s
c a p a b ility

H um an
r e s o u r c e m g t.
c a p a b ility

M a n u f a c tu r in g
c a p a b ility

M a t e r i a ls
m anagem ent
c a p a b ility

P ro c e s s
e n g in e e r in g
c a p a b ility

P ro d u c t
e n g in e e r in g
c a p a b ility

Test
e n g in e e r in g
c a p a b ility

P r in t e d
c ir c u it - b o a rd
a s s e m b ly

T e ls e t
a s s e m b ly

S y s te m
a s s e m b ly

A u to m a te d
t h r o u g h - h o le
com ponent
in s e r t io n

M anual
in s e r tio n o f
c o m p o n e n ts

ACTIVITY RELATED
CAPABILITIES
(Operations related
only)
SPECIALIZED
CAPABILITIES
(Manufacturing related
only)
SINGLE-TASK
CAPABILITIES (Only
those related to PCB
assembly)

Q u a lity
m anagem ent
c a p a b ility

S u rfa c e
m o u n t in g o f
c o m p o n e n ts

W a ve
s o ld e r in g

INDIVIDUALS’ SPECIALIZED KNOWLEDGE


The
The Rent-Earning

Rent-Earning Potential
Potential
of
of Resources
Resources and
and Capabilities
Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED

THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY

Scarcity
Relevance
Durability

SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE

Transferability
Replicability
Property rights

APPROPRIABILITY

Relative
bargaining power
Embeddedness


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

Importance

VW’s
Relative
Strength

C1. Product
development

9

4

5

C2. Purchasing

7

5

8

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

Importance

VW’s
Relative
Strength

R1. Finance

6

4

R2. Technology

7

R3. Plant and equipment

8

R4. Location
R5. Distribution

7
8

 CAPABILITIES

4
5


Appraising
Appraising VW’s
VW’sResources
Resourcesand
and Capabilities
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


Appraising
Appraising the
the Capabilities
Capabilities of
of aa
Business
Business School
School (illustrative only)
Superfluous
Superfluous
strengths
strengths

Relative Strength

Superior

Key
Keystrengths
strengths

6

9
3
5

Parity

2

Inconsequential
Inconsequential
weaknesses
weaknesses

8

4

12
11

Deficient

10

7

Not
important

1
Key
Keyweaknesses
weaknesses
Critically
important

Importance

C1 Alumni relations
C2 Student
placement
C3 Teaching
C4.Administration
C5 Course devlpmnt
C6 Student
recruitment
C7 Research
C8 Corporate
relations
C9 Marketing
C10 IT
C11 PR
C12 HRM

Amoco’s Appraisal of Organizational Capabilities
(illustrative only)

Superfluous
Superfluous
strengths
strengths

Superior

Key
Keystrengths
strengths

6

Relative Strength

9
4
5

Parity

2

Inconsequential
Inconsequential
weaknesses

weaknesses

11

3
1

10

Deficient
Not
important

7

1

Needed
to play

Importance
Importance

8
Key
Keyweaknesses
weaknesses

Needed
to win

1. Effective deal
making
2. Rapid new product
development
3. Relentless cost
forms
4. Product quality
5. JV management
6. Superior EH&S
management
7. Managing culturally
diverse workforce
8. Fast decision
making
9. Customer
segmentation
10.Capture synergies
across divisions
11. Effective
procurement


Distinctive
Distinctive Capabilities
Capabilities as
as aa
Consequence
Consequence of
of Childhood

Childhood Experiences
Experiences
Company Capability

Past History

Exxon

Financial
management

Exxon’s predecessor, Standard Oil (NJ)
was the holding co. for Rockefeller’s
Standard Oil Trust

RD/
Shell

Coordinating
decentralized
global empire

Shell a j-v formed from Shell T&T founded to
sell Russian oil in China, and Royal Dutch
founded to exploit Indonesian reserves

BP

“Elephant
hunting”

Discovered huge Persian reserves, went on to
find Forties Field and Prudhoe Bay

ENI

Deal making in
politicized
environments

The Enrico Mattei legacy; the challenge of
managing government relations in post-war
Italy

Mobil

Lubricants

Vacuum Oil Co. founded in 1866 to supply
patented petroleum lubricants

2


Approaches
Approaches to
to Capability
Capability Development
Development
1)

1) Linking
Linkingstrategy
strategyto
to Human
HumanResource
Resource Management
Management
—modeling
—modeling&&developing
developing individual
individualcompetencies
competencies
2)
2) Greenfield
Greenfield development
developmentin
inseparate
separate organizational
organizational
unit
unit(IBM
(IBM&&the
the PC,
PC,Xerox
Xerox&& PARC,
PARC, GM
GM&& Saturn)
Saturn)
3)
3) Change

Changemanagement
managementto
to transform
transformvalues
valuesand
and
behaviors
behaviors(GE,
(GE,BP)
BP)
4)
4) Product
Productsequencing
sequencing(Intel
(Intel,,Sony,
Sony,Hyundai)
Hyundai)
5)
5) Knowledge
Knowledge Management
Management(e.g.
(e.g.lessons
lessonslearned,
learned,
best
bestpractices
practicestransfer,
transfer, etc.)
etc.)