Analyzing Resources
& 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
• Putting resource and capability analysis
to work—a practical guide
Some game theory observations
• Is the simulation game turning out to be a prisoner’s dilemma,
battle of the sexes, or game of chicken coordination problem?
• Consider the recent behavior of some builders
– pedal to the metal
Quiet
Defect
Her Way
His Way
Q
1, 1
-2, 2
Her
1, 0
-1, -1
D
2, - 2
-1, -1
His
-1, -1
0, 1
Defect or not
His choice or her choice
Chicken
C
A
Aggressor
0, 0
-2, 2
2, -2
-10, -10
Swerve or not
Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment
THE FIRM
Goals and
Values
Resources and
Capabilities
Structure and
Systems
THE
INDUSTRY
ENVIRONMENT
STRATEGY
STRATEGY
The
Firm-Strategy
Interface
•Competitors
•Customers
•Suppliers
The
Environment-Strategy
Interface
Rationale for the Resource-based
Approach to Strategy
• More variation in profitability within an industry
than between industries (see simulation!)
– Still variations in profit within the same strategic group
who are deploying similar assets, follow similar
strategies and have the same mobility barriers
– If industry or group doesn’t drive profitability then what
does?
– Rumelt’s isolating mechanisms
– Resources and capabilities as the primary sources of
profitability – embedded in products and services
• Also, when the external environment is subject to
rapid change, internal resources and capabilities
may offer a more secure basis for strategy than
market focus.
The Links between Resources, Capabilities
and Competitive Advantage
COMPETITIVE
ADVANTAGE
INDUSTRY KEY
SUCCESS FACTORS
STRATEGY
ORGANIZATIONAL
CAPABILITIES
“PROFITS” Acronym
Physical
Reputational
Organizational
Financial
Informational
Technological
Skills
What you do with resources
RESOURCES
TANGIBLE
INTANGIBLE
•Financial
•Physical
•Technology
•Reputation
•Culture
HUMAN
•Skills/know-how
•Capacity for
communication
& collaboration
•Motivation
The Rent-Earning Potential
of Resources and Capabilities
What is rent?
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED
Scarcity
Relevance
Durability
SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE
Transferability
Replicability
Property rights
APPROPRIABILITY
Other frameworks
VRIO/VRINE (Barney, 1991/2003)
Heterogeneity, ex-ante/ex-post/imperfect mobility/ (Peteraf, 1993)
Relative
bargaining power
Embeddedness
Competitive Advantage
• Scarcity and relevance
– All value (rent) comes from scarcity relative to demand (Lewin and
Phelan)
•
•
•
•
•
Oxygen on moon, World’s oldest janitor
Monopoly rent=artificial scarcity, Ricardian rent=natural scarcity
Differential rent = difference in the quality between resources (talent, fertility)
Marshallian or entrepreneurial rent = temporary scarcity
Quasi-rents relates to generating more rent in one use than another (Jordan
with Bulls), see also X-inefficiency or infra-marginal efficiency
• Asset accumulation (Dierickx & Cool, 1986)
– Not all rare assets are tradeable – must be accumulated (built) over time
• Reputation, brand name, tacit knowledge – stocks and flows
– Samurai swords, English country gardens
• Implication
– Acquire or develop scarce resources to create value
– Recognize that competitors might have superior resources
– Resources can earn more rent in some uses than others
Sustainability of Rents
• Durability – longer lived assets produce more rents (rents
are a flow, value is a stock)
• Ex-post limits to competition (I in VRIO)
– Why doesn’t supply increase?
– Naturally (or artificially) scarce
• (BLM) land, Michael Jordan’s quasi-rents (until cloning)
– Information or time
• Time compression diseconomies or causal ambiguity
– Lack of close substitutes
• Questions:
– Why do business professors earn more than liberal arts professors?
– Why do professors at Harvard earn more than professors at UNLV?
Appropriability
• Who claims the rent stream?
• Importance of property rights
– Contracts, rule of law as engine of economic growth
– Firms/owners as residual claimants
• Strategic Factor Markets (Barney, 1986)
– Superior information or luck (Peteraf ex-ante limits to competition)
– Utah Railroad Game
• Labor and mobility (Peteraf imperfect mobility)
–
–
–
–
Culkin, Home Alone
Bargaining power and value-added again
Resources will flow to maximise quasi-rents
Champion team versus team of champions
• Superior coordination and cooperation (culture) advantages (the O in
Barney’s VRIO)
Appraising Resources
RESOURCE
Tangible
Resources
CHARACTERISTICS
Financial
Borrowing capacity
Internal funds generation
Physical
Plant and equipment:
size, location, technology
flexibility.
Land and buildings.
Raw materials.
Debt/ Equity ratio
Credit rating
Net cash flow
Market value of
fixed assets.
Scale of plants
Alternative uses for
fixed assets
Technology
Patents, 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
Training, experience, adaptability,
commitment and loyalty of employees
Employee qualifications,
pay rates, turnover.
Intangible
Resources
Human
Resources
INDICATORS
Capabilities
• A firm’s capacity to deploy resources for a
desired end result
– Core competences – make a disproportionate
contribution to ultimate customer value
(products)
• Honda engine tech for instance.
• Capabilities as routines
• Hierarchy of capabilities
Identifying Organizational Capabilities:
A Functional 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
Apple, 3M
Manufacturing
Efficient volume manufacturing
Continuous Improvement
Flexibility
Briggs & Stratton
Nucor, Harley-D
Zara, Four Seasons
Design
Design Capability
Apple, Nokia
Marketing
Brand Management
Quality reputation
Responsiveness to market trends
P&G, LVMH
Johnson & Johnson
MTV, L’Oreal
Sales, Distribution
& Service
Sales Responsiveness
Efficiency and speed of distribution
Customer Service
PepsiCo, Pfizer
LL Bean, Dell
Singapore Airlines
Caterpillar
Eastman Kodak’s Dilemma
Resources & Capabilities
1980’s
Chemical Imaging
•Organic Chemistry
•Polymer technology
•Optomechtronics
•Thin-film coatings
Brands
Global Distribution
1990’s
Businesses
Film
Cameras
Fine Chemicals
Pharmaceuticals
Diagnostics
DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics
Need to build digital
imaging capability
Digital Imaging
Products (e.g. Photo CD
System; Advantix
cameras & film
Evolution of Capabilities and Products: 3M
Carborundum
mining
PRODUCTS
Road signs Videotape
& markings
Floppy disks &
Scotchtape
Audio tape data storage
products
Acetate
Post-it notes
film
Housewares/kitchen products
Surgical tapes
& dressings
Pharmaceuticals
Sandpaper
Materials sciences
Flexible
circuitry
Microreplication
Health sciences
CAPABILITIES
Abrasives
Adhesives
Thin-film
technologies
New-product
development &
introduction
The Value Chain:
The McKinsey Business System
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE
The Porter Value Chain
FIRM INFRASTRUCTURE
SUPPORT
ACTIVITIES
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
MARKETING
LOGISTICS
& SALES
SERVICE
PRIMARY
ACTIVITIES
The Architecture of Organizational Capability
ORGANIZATIONAL
CAPABILITY
SKILLS &
Organization
Management
KNOWLEDGE
Structure
Systems
VALUES
TECHNICAL & NORMS
RESOURCES
MANAGERIAL
SYSTEMS
•Human skills & know-how
SYSTEMS
•Technology
•Culture (values, norms)
Dorothy Leonard “Core Capabilities
& Core Rigidities”
A modified view
Two approaches to identifying an
organization’s resources and capabilities
Starting from the inside
FIRM INFRASTRUCTURE
SUPPORT
ACTIVITIES
HUMAN RESOURCE MANAGEMENT
Starting from the outside
Key Success Factors
•How do customers choose?
•What do we need to survive
competition?
TECHNOLOGY DEVELOPMENT
FINANCIAL MANAGEMENT & CONTROL
INBOUND
LOGISTICS
OPERATIONS OUTBOUND
LOGISTICS
MARKETING
What resources & capabilities
do we need to deliver these
KSFs?
SERVICE
& SALES
PRIMARY
ACTIVITIES
Assessing a Companies Resources
and Capabilities: The Case of VW
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
RESOURCES
R4. Location
R5. Distribution
7
8
CAPABILITIES
4
5
Appraising VW’s Resources and 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 the Capabilities of a
Business School (illustrative only)
Superfluous
strengths
Relative Strength
Superior
Key strengths
6
9
3
5
Parity
2
Inconsequential
weaknesses
8
4
12
11
Deficient
10
7
Not
important
1
Key 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
Case
• What is basis of competitive advantage in
soccer?
• What is the relationship between strategy
and financials?
• What resources and capabilities should Man
U develop?