Chapter 3Resources and

CapabilitiesRachel Parrish

Nikki ChaibBanner OwenAlex Gonzalez

In this chapter…• Shifting focus from the external environment to

the internal environment• Concentrating on the resources and capabilities

that firms possess• Building foundations for our analysis of

competitive advantage

Shifting from the external to the internal• Emphasis towards the interface between strategy

and the resources and capabilities of the firm• The trend over time from seeing sources of profit

as lying mainly in the external environment, to seeing sources of profit being located within the firms

Figure 3.3Goals & ValuesResources & CapabilitiesStructure &

Systems

Strategy

CompetitionCustomersSuppliers

The firm-strategy interface

The Environment-Strategy Interface

Two reasons for the shift

• Firms’ industry environments have become more unstable

• It has become increasingly apparent that competitive advantage rather than industry attractiveness is the primary source of superior profitability.

Resource-Based View• Resources and capabilities are the principal basis

for firm strategy and the primary source of profitability.

• Firms typically start strategy formulation with a mission statement

• Firms have answered the questions:o “What is our business?”o “Who are our customers?”o “Which of their needs are we seeing to serve?”

Rationale for Resource-Based ViewIn general, the greater the range of change in a firm’s external environment, the more likely that it is that internal resources & capabilities rather than external market focus will provide a secure foundation for long-term strategy.

Example: Kodak dominated the world market, but trying to keep up with the change to digital imaging has hurt their profits and market leadership.

Resources vs. Capabilities

• Resources are the productive assets owned by the firm

• Capabilities are what the firm can do• Resources must work together to create

organizational capability, and capability is the essence of superior performance

Figure 3.4

Resources

Organizational Capabilities

StrategyIndustry Key

Success Factors

Competitive

Advantage

ResourcesTangible• Financial • Physical

Intangible• Technology• Reputation

• Culture

Human• Skills/know-

how• Capacity for Communicatio

n and Collaboration• Motivation

Tangible Resources• Easiest to identify and evaluate

o Firm’s financial statements

• Once we have information on tangible resources, we explore how we create additional value from them and address two key questions:o What opportunities exist for economizing on their use? o What are the possibilities for employing existing assets more

profitably?

Intangible Resources• More valuable than tangible resources for most

companies• Largely invisible on financial statements

o Brand names, a reputational asset, derives its value from the confidence it instills in customers.

o Intellectual property• Copyright, patent, trademark• Technological and artistic resources where ownership is defined in

law.

Human Resources• Comprised of the expertise and effort offered by

employees. • Also not visible on financial statements, but are

included in a firm’s resources because of their stability.

• Firms evaluate their human resources through competency modelling and organizational culture.

Human Resources• Competency Modelling

o Identifying the set of skills, content knowledge, attitudes, and values associated with superior performers, and assessing each employee against that profile.

o ‘Hire for attitude; train for skills’

• Organizational Cultureo Organization’s values, traditions, and social norms. o Peters and Waterman believed ‘firms with sustained financial

performance typically are characterized by a strong set of core managerial values that define the ways they conduct business’

Organization’s Capabilities

• Resources are not productive on their own. To perform a task, a team of resources must work together.

• Organizational Capability: firm’s capacity to deploy resources for a desired end result

• Primary interest are those capabilities that provide a basis for competitive advantage

Capabilities• Distinctive competence: the things that an

organization particularly well relative to its competitors.

• Hamel and Prahalad:o Core competences: made a disproportionate contribution to ultimate

customer value, or to the efficiency with which that value is delivered; and provide a basis for entering new markets

Prahalad and Hamel• Criticize U.S. companies for emphasizing product

management over competence management.• Sony vs RCA

o RCA failed and ended its venture into home video systemso Sony failed but continued to develop its capabilities in video

technology and produced many successful video products

Classifying Capabilities

• Functional Analysis: identifies organizational capabilities in relation to each of the principal function areas of the firm.o Corporate functions: financial controlo Management Functions: integrated MIS network lined to

management decision makingo Research and Development: innovate new product developmento Operations: Efficiency in volume managemento Products Design: design capabilityo Marketing: brand management and reputationo Sales and Distribution: customer service

Classifying Capabilities

• Value Chain Analysis: Separates the activities of the firm into a sequential chain o Distinguishes between primary and support activitiesThreshold capabilities: capabilities that are common to all to an industry because they comprise the essential set of capabilities that any firm needs to compete and survive in its chosen industry

Capability As Process & Routine

• Organizational Process: the sequence of actions through which a specific task is performed

• In order to be productive, company’s use Routinization.

• It’s an essential step in translating directions and operating practices into capabilitieso Continuous repetition

Video http://youtu.be/umGHmyXJ6qk

Establishing Competitive Advantage

To Establish a Competitive Advantage • For a resource or

capability to establish a competitive advantage two conditions must be present:

1. Scarcity

2. Relevance

The Conditions • Scarcity – if a resource or capability is widely

available within the industry, then it may be essential to compete, but it will not be sufficient basis for competitive advantage.

• Relevance – a resource or capability must be relevant to the key success factors in the market.

Sustaining a competitive advantage • Profits earned depend not just on ability to

establish Competitive Advantage

• But also on how long the advantage can be sustained

Sustaining Competitive Adv. Cont. • Sustaining depends on

durability, and if rivals can transfer, and replicate resources and capabilities.

• Durability – leads to a more secure basis for CA.

• Transferability – must be mobile between companies.

• Replicability – if a firm cannot buy it, it must build it.

Appropriating the returns to Competitive Advantage

• Who gains the returns generated by superior capabilities?o Normally, to the owner of the capability

• But it’s not always that simpleo Capabilities depend heavily on the skills and efforts of employees –

who are not owned by the firm.

Putting Analysis into Practice

• It is a step by step approach to:

o How a company can appraise its resources and capabilities

o Then use the appraisal to guide strategy formulation

Step One • Identify the key resources and capabilities

o Either begin from outside or inside the firmo Hyundai example

• External factors – new product development capability, effective supply chain management, global distribution, brand strength and so on.

• Internal function – is either a functional approach or the value chain approach.

Step Two• Appraising resources and capabilities

o Appraised against two key criteria1. Assessing Importance

o Which resources and capabilities are most important in keeping a competitive advantage

2. Assessing Relative Strengths o Where are the strengths and weaknesses as compared to

competitors

• Bringing together importance and relative strength – highlights key strengths and key weaknesses

Step 3: Developing Strategy implications

• How can we exploit our key strengths?

• How do we upgrade our weaknesses? Reducing vulnerability?

• What are our inconsequential strengths? Can we deploy them better?

Exploiting Key strengths

• We want to deploy our strengths to the greatest effect.

• Ex.- Hyundai’s product development

• Strategies will be different within each company.• Ex.- Toyota’s outstanding manufacturing

capability

• Each company is striving after a distinctly different strategy.

Managing Key Weaknesses

• Converting a weakness to a strength is likely to be a long term process.

• The most successful approach to these weaknesses is to outsource. As seen in the car industry.

• Ford was completely vertically integrated in the 1930’s.

• In 2004 with the opening of their Dearborn truck plant they have outsourced very many key aspects of production.

• Nike itself only handles design, marketing, and overall system integration. But every other aspect even manufacturing is outsourced.

Examples

Superfluous Strengths • Having strengths that are not vital to the

companies main focus. • Recognizing these strengths, and how the

opportunity cost is leading elsewhere.• Thus reinvesting the capital in somewhere that

can improve profit or production. • Ex.- Capcom realizing that developing was their

key strength rather than manufacturing.

Developing resources and capabilities

• As time passes companies must deal with change. • Firms must develop new resources and capabilities.• (Tangible or intangible)

• It has shown throughout sports and in many different industries that it does not necessarily mean being the biggest or most affluent will make you the best.

• Ex.- GM and Honda, Pixar and Aardman Animations over Walt Disney, and soccer teams Arsenal vs. Chelsea.

Organizational capability

• Organizational capability is path dependent.

• Meaning capabilities are developed over time.

• The company’s capabilities today are the result of its history.

The link between resources and capabilities

• Two factors that contribute to efficiency and effectiveness of teams.

• The first being organizational learning.

• The second is culture.

Are organizational capabilities rigid or dynamic?

• The more rigid a firm is the harder to adapt to new circumstances. (referencing culture)

• Flexibility in organizational routines- studies have shown that even the most basic operations have the capacity to adapt.

• Dynamic Capability- refers to the firms ability to adapt and integrate external competences to address the rapidly changing environment.

• This all depends if the change is competence enhancing or destroying.

Acquiring Capabilities• To develop your capabilities as a company you

can add to your repertoire by three means.• Mergers, acquisitions, and alliances.• These are very risky and costly but in the long run

can be very beneficial.

• Relational Capability- comes into play when the firm is need of building upon relationships across its vast network.

Internal Development: focus and sequencing

• Once all resources or capabilities have been attained the hard part is to focus on integration

• It is a very hard task but if performed, you can see systematic progress throughout the firm.

• Focus should be developed in sequences giving pretense to vital objectives and so forth.

• A targeted approach to the use of your resources is needed.

Thank you!

• Questions?