MANAGEMENT POLICY AND STRATEGY
SESSION - IV
Capability Analysis
Prof. Sushil
Department of Management Studies
Indian Institute of Technology, Delhi
INDIA
Email: sushil@dms.iitd.ernet.in
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Ingredients Critical to a Successful
Strategy
Be consistent with
conditions in the
competitive environment
Strategy
must . . .
Place realistic
requirements on the firm’s
resources
Be carefully executed
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What is the Resource-Based View of the
Firm?
Firms differ in fundamental ways because each
firm possesses a unique “bundle” of resources tangible and intangible assets and organizational
capabilities to make use of those assets.
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The Three Basic Resources



Tangible assets
– Easiest to identify and often found on a firm’s balance sheet
– Include physical and financial assets
– Examples: Production facilities, raw materials, financial
resources, real estate, computers
Intangible assets
– Cannot be seen or touched
– Often very critical in creating competitive advantage
– Examples: Brand names, company reputation, company
morale, patents and trademarks, accumulated experience
Organizational capabilities
– Involve skills - ability to combine assets, people, and
processes - used to transform inputs into outputs
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Examples of Different Resources
Tangible Assets
Intangible Assets
• Hampton Inn’s
• Nike’s brand name
reservation system
• Ford Motor’s cash
reserves
• 3M’s patents
• Georgia Pacific’s
land holdings
• Virgin Airlines’ plane
fleet
• Coca-Cola’s Coke
• Dell Computer’s
reputation
• Wendy’s advertising
with Dave Thomas
• Jack Welch as GE’s
leader
• IBM’s management
team
• Wal-Mart’s culture
formula
Organizational
Capabilities
• Dell Computer’s
customer service
• Wal-Mart’s
purchasing and
inbound logistics
• Sony’s productdevelopment
processes
• Coke’s global
distribution
coordination
• 3M’s innovation
process
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What Makes a Resource Valuable?
1. Competitive superiority: Does the resource help
fulfill a customer’s need better than those of firm’s
competitors?
2. Resource scarcity: Is the resource in short supply?
3. Inimitability: Is the resource easily copied or acquired?
4. Appropriability: Who actually gets the profit created by a
resource?
5. Durability: How rapidly will the resource depreciate?
6. Substitutability: Are other alternatives available?
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Wal-Mart’s Resource-Based
Competitive Advantage
Industry ave. cost - Wal-Mart cost
(% of sales)
Resource
Tangible
Store Locations
0.3 store rental space
Intangible
Brand reputation
Employee loyalty
1.2 advertising expense
1.1 payroll expense
0.7 shrinkage expense
Capabilities
Inbound logistics
1.2 distribution expense
Total Advantage: 4.5%*
*Wal-Mart’s cost advantage as a percent of sales. Each percentage
point advantage is worth $500 million in net income to Wal-Mart.
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Characteristics Making Resources Difficult to
Imitate

Physically unique resources
– Resources virtually impossible to imitate
– Examples: One-of-a-kind real estate location, mineral
rights, patents

Path-dependent resources
– Resources that must be created over time in a manner
that is often expensive and difficult to accelerate
– Examples: Dell Computer’s system of direct sales of
customized PCs via the Internet, Coca-Cola’s brand
name, Gerber Baby Food’s reputation for quality
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Characteristics Making Resources Difficult to
Imitate

Causal ambiguity
– Situations where it is difficult for competitors to
understand how a firm has created its advantage
– Example: Southwest Airlines’ approach
• Same plane, routes, gate procedures, number of
attendants
• Culture of fun, family, and frugal yet focused services

Economic deterrence
– Involves large capital investments in capacity to provide
products or services in a given market that are scale
sensitive
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Resource Inimitability
Cannot be
imitated
• Patents
• Unique locations
Difficult to imitate• Unique assets
• Brand loyalty
• Employee satisfaction
• Reputation for
fairness
Can be imitated
• Capacity preemption
• Economies of scale
Easy to imitate
• Cash
• Commodities Prof.Sushil\Canada\Session-IV
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SWOT Analysis
Based on assumption an effective strategy derives from a sound
“fit” between a firm’s internal resources and its external situation
Opportunities
A major favorable situation in
a firm’s environment
Threats
A major unfavorable situation
in a firm’s environment
Strengths
A resource advantage relative
to competitors and the needs
of markets firm serves
Weaknesses
A limitation or deficiency in
one or more resources or
competencies relative to
competitors
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STRATEGIC CAPABILITY ANALYSIS
RESOURCE AUDIT
VALUE CHAIN ANALYSIS
Resource Utilization
Resource Control
DRAWING COMPARISONS
Historical Analysis
Industry Norms
Best Practice
ASSESSING BALANCE
Product Portfolio
Skills/Personality
Flexibility Analysis
IDENTIFICATION OF KEY ISSUES
Strengths and Weaknesses
Core Competencies
UNDERSTANDING
STRATEGIC
CAPABILITY
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What is Value Chain Analysis?



Focuses on how a business creates customer value by
examining contributions of different internal activities to that
value
Divides a business into sets of activities within the
business
– Starts with inputs a firm receives
– Finishes with firm’s products or services and after-sales
service to customers
Allows better identification of a firm’s strengths and
weaknesses since the business is viewed as a process
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The Value Chain
Human resource management
Research, technology, and
development
systems
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Primary Activities
Service
Marketing
and sales
Outbound
logistics
Operations
Procurement
Inbound
Logistics
Suppo
rt
Activit
ies
General administration
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Conducting a Value Chain Analysis
Identify specific activities or business processes,
grouping them into primary and support activities
Allocate costs to each discrete activity
Identify the activities that differentiate the firm
Examine value chain based on firm’s mission, unique
industry characteristics, and firm’s relative position in a
broader value chain system
Compare firm’s status to competitors
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Difference Between Traditional Cost Accounting and
Activity-Based Cost Accounting
Traditional Cost Accounting
Categories in a Purchasing
Department
Wages and salaries
Employee benefits
Supplies
Travel
Depreciation
Other fixed charges
Miscellaneous
operating expenses
Activity-Based
Cost Accounting in Same
Purchasing Department
$350,000
115,000
6,500
2,400
17,000
124,000
25,520
Evaluate suppliers
Process purchase orders
Expedite deliveries
Expedite internal process
Check item quality
Check deliveries against
purchase orders
Resolve problems
Internal administration
$640,150
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$135,750
82,100
23,500
15,840
94,300
48,450
110,000
130,210
$640,150
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Possible Factors for Assessing Sources of
Differentiation in Support Activities of the Value
Chain
General Administration
• Capability to identify new product market opportunities and potential
•
•
•
•
•
environmental threats
Quality of strategic planning system to achieve corporate objectives
Ability to obtain relatively low-cost funds for capital expenditures
Level of information systems support in making strategic and routine
decisions
Timely, accurate management information on external environments
Public image and corporate citizenship
Human Resource Management
• Effectiveness of procedures for recruiting, training, and promoting all
•
•
•
•
•
employees
Appropriateness of reward systems for motivating and challenging
employees
A work environment minimizing absenteeism and keeping turnover low
Relations with trade unions
Active participation by managers and technical personnel in professional
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organizations
Levels of employee motivation and job satisfaction
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Possible Factors for Assessing Sources of
Differentiation in Support Activities of the Value
Chain (continued)
Technology Development
• Success of R&D activities in leading to product and process innovations
• Quality of working relationships between R&D personnel and other
•
•
•
•
departments
Timeliness of technology development activities in meeting critical deadlines
Quality of laboratories and other facilities
Qualification and experience of laboratory technicians and scientists
Ability of work environment to encourage creativity and innovation
Procurement
• Development of alternate sources for inputs to minimize dependence on a
•
•
•
•
single supplier
Procurement of raw materials (1) on a timely basis, (2) at lowest possible
cost, (3) at acceptable levels of quality
Procedures for procurement of plant, machinery, and buildings
Development of criteria for lease-versus-purchase decisions
Good, long-term relationships with reliable suppliers
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Possible Factors for Assessing Sources of
Differentiation in Primary Activities of the Value
Chain (continued)
Inbound Logistics
• Soundness of
material and
inventory control
systems
• Efficiency of raw
material warehousing
activities
Operations
• Productivity of
equipment compared
to key competitors
• Appropriate
automation of
production
processed
• Effectiveness of
production control
systems to improve
quality and improve
costs
• Efficiency of plant
layout and work-flow
design
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Outbound Logistics
• Timeliness and
efficiency of delivery
of finished goods and
services
• Efficiency of finished
goods warehousing
activities
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Possible Factors for Assessing Sources of
Differentiation in Primary Activities of the Value
Chain (concluded)
Marketing and Sales
Service
• Effectiveness of research to
•
•
•
•
•
•
identify customer segments and
needs
Innovation in sales promotion and
advertising
Evaluation of alternate distribution
channels
Motivation and compensation of
sales force
Development of quality image and
favorable reputation
Extent of brand loyalty among
customers
Extent of market dominance within
market segment or overall market
• Means to solicit customer input
for product improvements
• Promptness of attention to
customer complaints
• Appropriateness of warranty and
guarantee policies
• Quality of customer education and
training
• Ability to provide replacement
parts and repair services
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RESOURCE UTILIZATION AND
COMPETITIVE ADVANTAGE
IDENTIFY: VALUE ACTIVITIES
 Assign Costs and Added Value
 Identify Critical Activities
IDENTIFY: COST OR VALUE DRIVERS
 Factors w hich Determine Cost or
Value of Each Activity
IDENTIFY: LINKAGES
 Which Reduce Cost or Add Value
 Which Discourage Imitation
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SOURCES OF COST EFFICIENCY
ECONOMIES OF
SCALE
EXPERIENCE
COST
EFFICIENCY
SUPPLY COST
PRODUCT/
PROCESS DESIGN
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Internal Analysis: Making Meaningful
Comparisons
1. Comparison with past
performance
Perspective
s to use in
evaluating
how a firm
stacks up
based on
its internal
capabilities
2. Stages of industry evolution
3. Benchmarking Comparison with
competitors
4. Comparison with success
factors in the industry
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ASSESSING BALANCE OF
RESOURCES

Portfolio Analysis



SBUs
BCG, GE, Product/Market Evolution
Balance of Skills/Personalities
 Functional Areas
 Team Roles

Flexibility Analysis
 Adaptiveness to Change
 Openness
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ANALYSING EFFECTIVENESS
CLIENT REQUIREMENTS
 Product Attributes
 Service Expectations
 Price Sensitivity
Degree
of Matching
ORGANISATION’ S CAPABILITY
 Product Features
 Service Performance
 Communication w ith Clients
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FINANCIAL ANALYSIS




Share Holders
– Payoffs
Bankers
– Risk Attached to Loans
Suppliers and Employees
– Liquidity of Co.
Managers
– Performance
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FINANCIAL ANALYSIS
Contd……..

Financial Ratios
 Profitability
 Stock-Turnout
 Sales Margin
 Return on Equity
 Debt-Equity Ratio
 Return of Assets
 Net Profit Margin
 Asset Turnover
 Leverage
 Current Ratio
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IDENTIFICATION OF KEY ISSUES


SWOT Analysis
Core Competencies
– Who Owns?
– Professional Employees

How Durable?
– Shorter Life Cycles
– How Transferable?


Raw Materials-High
Brand Name/Reputation – Low
– How Replicable?

Threat of Imitation
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Internal Factor Analysis Summary (IFAS): Maytag as Example
Internal Factors
Weight
Rating
Weighted
Score
Comments
.15
.05
5
4
.75
.20
Quality key to success
Know appliances
.10
.05
.15
4
3
3
.40
.15
.45
Dedicated factories
Good, but deteriorating
Hoover name in cleaners
Weaknesses
 Process-oriented R&D
 Distribution channels
.05
.05
2
2
.10
.10
 Financial position
 Global positioning
.15
.20
2
2
.30
.40
 Manufacturing facilities
Total Scores
.05
1.00
4
.20
3.05
Slow on new products
Superstores replacing small
dealers
High debt load
Hoover weak outside the
United Kingdom and Australia
Investing now
Strengths
 Quality Maytag Culture
 Experienced top
management
 Vertical integration
 Employee relations
 Hoover’s international
orientation
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