DEVELOPING STRATEGIES FOR COMPETITIVE ADVANTAGE Session 4 Analyzing Resources and Capabilities Session 4 Analyzing Resources and Capabilities 1.

DEVELOPING STRATEGIES FOR COMPETITIVE ADVANTAGE

Session 4Analyzing Resources

and Capabilities

Session 4Analyzing Resources

and Capabilities

1

• 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 work

—a practical guide• Creating new capabilities.

OUTLINE

Analyzing Resources & CapabilitiesAnalyzing Resources & Capabilities

2

THE FIRM

Goals & Values

Resources &Capabilities

Structure & Systems

THE INDUSTRYENVIRONMENT

•Competitors•Customers•Suppliers

STRATEGYSTRATEGY

The Firm-Strategy

Interface

TheEnvironment-Strategy

Interface

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

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

3

• 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

Rationale for the Resource-based Approach to Strategy

Rationale for the Resource-based Approach to Strategy

4

1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006

HondaTechnicalResearchInstitutefounded

1st motorcycle:98cc, 2-cycle

Dream D

4 cycle engine

405ccmotorcycle

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

snowblowers

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

Begins production of diesel engines

The evolution of Honda Motor CompanyThe evolution of Honda Motor Company

Honda wins Indy Championship

5

Precision Mechanics

Fine Optics

Micro-Electronics

35mm SLR cameraCompact fashion cameraEOS autofocus camera

Digital cameraVideo still camera

Video security systemsCamcorders

Plain-paper copierColor copier

Color laser copier Laser copier

Basic faxLaser fax

ScannersMask aligners

Excimer laser alignersStepper aligners

Inkjet printerLaser printer

Color video printerDigital commercial

printer

CalculatorNotebook computer

Binoculars

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

6

Carborundummining

Carborundummining

SandpaperSandpaper

ScotchtapeScotchtape

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

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

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

7

Carborundummining

Carborundummining

SandpaperSandpaper

ScotchtapeScotchtape

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

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

8

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

9

Appraising ResourcesAppraising Resources

RESOURCE CHARACTERISTICS INDICATORS

Tangible Resources

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

Intangible Resources

Technology Patent, 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)

Brand equity

Customer retention

Supplier loyalty

Human Resources Training, experience,adaptability, commitment and loyalty of employees

Employee qualifications,

Pay rates, turnover

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Company Valuation ratio

Country Company Valuation ratio

Country

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 L’Oreal 5.3 France

Unilever 8.1 Neth/UK Altria 5.2 US

PepsiCo 8.0 US Novartis 5.1 Switz.

Firms with the Highest Ratios of Market value to Book Value(December 2006)

Firms with the Highest Ratios of Market value to Book Value(December 2006)

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Source: Interbrand

Rank Brand Brand valuein 2008, $ bill.

Changefrom 2007

Countryof origin

1 Coca-Cola 66.7 -1% USA 2 IBM 59.0 +11% USA 3 Microsoft 59.0 -2% USA 4 GE 53.1 +14% USA 5 Nokia 35.9 +35% Finland 6 Toyota 34.1 +37% Japan 7 Intel 31.3 6% USA 8 McDonald’s 31.0 0% USA 9 Disney 29.3 +11% USA10 Google 25.6 +96% USA11 Mercedes Benz 25.6 +28% Germany12 Hewlett-Packard 23.9 +26% USA 13 BMW 23.3 +36% Germany14 Gillette 22.1 +5% USA15 American Express 21.9 +18% USA16 Louis Vuitton 21.6 +34%. France17 Cisco 21.3 +22% USA18 Marlboro 21.3 0% USA 19 Citi 20.2 +1% USA 20 Honda 19.1 +21% Japan

The World’s Most Valuable Brands, 2008The World’s Most Valuable Brands, 2008

12

Identifying Organizational Capabilities:A Functional Classification

Identifying Organizational Capabilities:A Functional Classification

FUNCTION CAPABILITY EXEMPLARS

CORPORATE FUNCTIONS

Financial control

Management development

Strategic innovation

Multidivisional coordination

Acquisition management

International management

Exxon Mobil, PepsiCo

General Electric, Shell

Google, Haier

Unilever, Shell

Cisco Systems, Luxottica

Shell, Banco Santander

MANAGEMENT INFORMATION

Comprehensive, integrated MIS network linked to managerial decision making

Wal-Mart, Capital One, Dell Computer

R&D Research

Innovative new product development

Fast-cycle new product development

IBM, Merk

3M, Apple

Canon, Inditex (Zara)

OPERATIONS Efficiency in volume manufacturing

Continuous improvements in operations

Flexibility and speed of response

Briggs & Stratton, YKK

Toyota, Harley-Davidson

Four Season Hotels

PRODUCT DESIGN Design capability Nokia, Apple

MARKETING Brand management

Building reputation for quality

Responsiveness to market trends

Procter & Gamble, Altria

Johnson & Johnson

MTV, L’Oreal

SALES AND DISTRIBUTION

Effective sales promotion and execution

Efficiency and speed of order processing

Speed of distribution

Customer service

PepsiCo, Pfizer

L. L. bean, Dell Computer

Amazon.com

Singapore Airlines, Caterpillar 13

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

The Value Chain:The McKinsey Business System

The Value Chain:The McKinsey Business System

14©

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY ACTIVITIES

SUPPORT ACTIVITIES

The Porter Value ChainThe Porter Value Chain

15

CROSS FUNCTIONAL CAPABILITIES

BROAD FUNCTIONAL CAPABILITIES

ACTIVITY RELATED CAPABILITIES (Operations related only)

SPECIALIZED CAPABILITIES (Manufacturing related only)

SINGLE-TASK CAPABILITIES (Only those related to PCB assembly)

INDIVIDUALS’ SPECIALIZED KNOWLEDGE

A Hierarchy of Capabilities:A Telecom Manufacturer

A Hierarchy of Capabilities:A Telecom Manufacturer

New product development capability

Customer Support capability

Quality management capability

Operations Capability

Marketing and sales capability

MIScapability

HR management capability

R&D and design capability

Test engineering capability

Product engineering capability

Process engineering capability

Materials management capability

Manufacturing capability

System assembly

Printed circuit-board assembly

Telset assembly

Surface mounting of components

Wave soldering

Manual insertion of components

Automated through-hole component insertion

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Scarcity

Relevance

Durability

Transferability

Replicability

Property rights

Relative bargaining power

Embeddedness

THE EXTENT OF THE COMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE

APPROPRIABILITY

THE PROFITEARNING POTENTIALOF A RESOURCE OR

CAPABILITY

The Rent-Earning Potentialof resources and Capabilities

The Rent-Earning Potentialof resources and Capabilities

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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

C4C5C6 C7

C8

(Hypothetical only)

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

C9

R6

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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 Capabilities

Summary: a Framework for Analyzing Resources and Capabilities

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