Foundations of Strategy
Chapter 3: Resources and Capabilities
Team 2:
Mike Mullin
Elizabeth Allen
Joshua Zamarron
Michael Johnson
James Stariha
Outline
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Role of resources and capabilities in strategy formulation
Identify the organization's resources
Identify the organization’s capabilities
Appraise resources and capabilities
Put resources and capability analysis to work
Develop resources and capabilities
Approaches to capability development
Hyundai Motor Company
 2009: Hyundai/Kia overtook Ford
 4th Largest car manufacturer by sales
 Doubled Net Profit and Increased sales by 11% from
previous year
 Great example of capability development over a short period
of time.
Acquiring Key Capabilities
 Rapid International Expansion
 Develop Overseas Operations
 Recruiting talented individuals for market research and
customer service
 Production plants in India, USA, Europe, and China
 Customized product offerings to different countries.
 10-year/100,000 mile warranties
Effects?
 Quality Awards
 Ranked above average in the well-recognized, annual quality
study carried by J.D. Power and Associates
Role of resources and capabilities in
strategy formulation
 Shift to relationship b/t strategy and internal environment.
(resources and capabilities of firm)
 Two main reasons for shift:
 Industry environments become more unstable
 Competitive advantage rather than industry attractiveness is the
primary source of superior profitability
Basing Strategy on Resources and
Capabilities
 External Environment may be in a state of flux
 Resources and Capabilities may be much more stable to
define firm’s identity.
 Ex: Honda Motor Company
 Not defined as either Motorcycle or Motor Vehicle Company.
 Expertise in developing/manufacturing engines
Continued…
 “The greater the rate of change in a firm’s external
environment, the more likely it is that internal resources and
capabilities rather than external market focus will provide a
secure foundation for long-term strategy.”
Resources vs. Capabilities
 Resources- are the productive assets owned by the firm
 Capabilities- what the firm can do
 Remember: Individual resources do not confer competitive
advantage alone, they must work together to create
organizations capability.
Tangible Resources
 Financial- cash securities, borrowing capacity
 Physical- plant equipment, land
 Both identified and valued in Financial Statements
 Primary goal is not to value company assets, but to
understand potential for creating competitive advantage
Intangible Resources
 More valuable than tangible resources
 Brand Names
 Technology
 Relationships
 Intellectual Property
 IBM (World’s biggest patent portfolio)
Human Resources
 Expertise and Effort by employees
 Recruiting and Assessing potential employees
 Competency Modeling
 Identify skills, content knowledge, attitudes and values
associated with superior performers within a particular job
category, then assessing each employee against that profile
Identifying the Organization’s
Capabilities
 Organizational Capability – a firm’s capacity to deploy
resources for a desired end result
 To perform a task, a team of resources must work together.
 i.e. a brain surgeon with a radiologist, anesthetist, nurses, etc.
 Distinctive Competence – those things that an organization
does particularly well relative to its competitors
Core Competences
 Make 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.
 Ex) Product management over competence management
(Prahalad and Hamel)
 RCA vs. Sony
Case Insight 3.1 ~ Hyundai Motor
Company
 Resources classified by type
 Tangible Resources
 3 car production bases in Korea, 7 overseas manufacturing plants, & plans
for additional plants in Russia (both established and emerging markets)
 Intangible Resources
 Brand name: now considered one of the top 100 most valuable brands
 Human Resources
 Recruits experienced senior staff, but cuts cost by producing overseas in
less developed areas of its target regions to keep labor costs down
Classifying Capabilities
 Functional Analysis – identifies organizational capabilities in
relation to each of the principal functional areas of the firm
 Value Chain Analysis – separates the activities of the firm into
a sequential chain
Functional Analysis
Functional Analysis Cont.
Case Insight 3.2 ~ Hyundai’s
Capabilities by function
 Corporate Functions
 International Management
 Financial Management
 Management Information
 A threshold capability
 Research & Development
 Product & Process
improvements
• Operations
– Planning & Scheduling
• Product Design
– Global product
development
• Marketing
– Threshold competence
• Sales & Distributions
– Packaging and customer
service
Value Chain Analysis
Case Insight 3.3 ~ Porter’s value chain
& the car industry
Capability as Process & Routine
 Organizational Capability
 Requires efforts of various individuals to be integrated with one another and
with capital equipment, technology and other resources.
 Organizational Process
 Coordinated actions undertaken by teams of people engaged in a series of
productive tasks. The sequence of actions through which a specific task is
performed is an organizational process.
 Routinisation
 An essential step in translating directions and operating practices into
capabilities – only by becoming routine do processes become efficient and
reliable.
 These organizational routines are viewed by evolutionary economists as
fundamental building blocks of what firms are & what they do
Hierarchy of Capabilities
 Capabilities are the outcome of processes and routines
 Likely to be broadly defined, but can be broken down into
more specialized capabilities
 This creates a hierarchy of capabilities where more general,
broadly defined capabilities are formed from the integration
of more specialized capabilities
Appraising Resources and Capabilities
 The profit earning potential of a resource or capability
-
The extent of the competitive
advantage established
Sustainability of the competitive
advantage
Appropriating the returns to
competitive advantage
Profit-Earning Potential
Establishing Competitive Advantage
 Scarcity – Resources and capabilities within a given industry
 Relevance – A resource or capability must be relevant to the
key success factors in the market
Sustaining Competitive Advantage
 Durability – Some resources are more durable than others
and therefore are a more secure basis for competitive
advantage
 Transferability – Acquiring resources and capabilities form
other companies
 Replicability – If a firm cannot buy a resource or capability, it
must build it
Appropriability
 Property Rights – Capabilities are depended heavily on
employees skills and efforts
 Relative Bargaining Power – Division of returns between
firms and individual members
 Embeddedness – How deeply rooted are the employees skills
and knowledge tied to the company
Putting Resource and Capability
analysis to work
 How do we put these analysis into practice in the business
world
 Broken down into 3-step approach
1.
2.
3.
Identify the key resources and capabilities
Appraising resources and capabilities
Developing strategy implications
Step 1: Identify the key resources and
capabilities
 Construct a list of firms resources and capabilities (begin
from inside or outside)
 From an external focus begin with key success factors
 What factors determine why some firms are more successful
than others and on what resources and capabilities are these
success factors based on
Step 1: Hyundai’s example
 Start with key success factors in the world car industry (external)
 Low-cost production, attractively designed new models with latest
technology, and the financial strength to weather the cyclicality and
heavy investment requirements of the industry
 What resources and capabilities does this imply
 Manufacturing capabilities, new product development, effective
supply chain management, global distribution, brand strength, scale
efficient plants with up-to-date capital equipment, a strong balance
sheet and so on…
 To organize and categorize these it is helpful to switch to the
inside of Hyundai using either a functional approach(3.2) or the
value chain approach (3.3)
Step 2: Appraising resources and
capabilities
 Need to be appraised against two key criteria
1.
2.
Their importance, what is most important in conferring
sustainable competitive advantage (Relative Importance)
Where are our strengths and weaknesses as compared to
our competitors (Relative Strength)
Hyundai example
Resources
Importanc Hyundai’s Relative
e
Strength
Comments
Finance
6
6
Net profits are up despite
general downturn in the car
industry; rating about equal
to industry average
Technology
7
4
Not a leader in automotive
technology
Plant and
Equipment
8
9
Invested heavily
Location
4
5
Key low-cost growth markets
but labor is rising
Distribution 8
7
Experimented with new
dealership arrangement, early
stage very successful
Assessing Importance
 Temptation is to concentrate on customer choice criteria
 However, we must remember that our ultimate goal is not to
attract customers, but to make superior profit through
establishing a sustainable competitive advantage
 Need to look beyond customer choice to the underlying
strategic characteristics of resources and capabilities (2
criteria)
 What is needed to just play, vs. needed to win
Step 2: Hyundai example assessing
importance
 Many resources and capabilities are essential to compete in
business, but are not scarce
 TQM and technologically advanced assembly plants have
become widely diffused
 While IT and design capability are outsourced
 Needed to play
 While others like brand strength, global distribution
network, fast-cycle new product development, and global
logistics cannot be easily acquired or internally developed
and are critical to establishing and sustaining advantage
 Needed to win
Assessing Relative Strengths
 Objectively appraising comparative strengths and weaknesses is
difficult
 Frequently fall victim to past glories, hopes for future, and own
wishful thinking
 Business success often sows the seeds of its own destruction (U.S.
steel giants)
 To identify and appraise capabilities must look inside and outside
the company
 Internal: discussion can provide insights and evidence and build
consensus regarding organization resource and capability profile
 Evidence of history can reveal instances where firm performed well
and those where it performed poorly, do any patterns appear?
Assessing Relative Strengths
 Benchmarking: a powerful tool for quantitative assessment of
performance relative to that of competitors (external)
 Process of identifying, understanding and adapting outstanding
practices from organizations anywhere to help improve our
firms performance
 Offers a systematic framework and methodology for
identifying particular functions and processes
Assessing Relative Strengths
 Ultimately, appraising is not about data, its about insight and
understanding
 Every organization has some activity where it excels
 FedEx: Guarantees next-day delivery
 BMW: World class engineering
 McDonalds: supply millions of hamburgers all over the world with
remarkable uniformity
 All these companies are highly successful
 Were able to recognize what they can do well and have based their
strategies on their strengths
 For poor-performing companies the problem is not necessarily the
absence of distinctive capabilities, but the failure to recognize what
they are and to deploy them effectively
Bringing Together Importance and
Relative Strength
 Combining the two criteria- importance and relative
strength- allows us to highlight a firms key strengths and key
weaknesses in a single display
 Dividing this display into four quadrants labeling each section
appropriately
Appraising resources and capabilities
R
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Superfluous Strengths
Key Strengths
Zone of irrelevance
Key weaknesses
5
Strategic Importance
10
Hyundai
Step 3: Developing Strategy
Implications
 Key focus is on the two right hand quadrants
 How do we exploit are key strengths effectively?
 What do we do about our key weaknesses in terms of both
upgrading them and reducing our vulnerability to them?
 what about our “inconsequential” strengths?
 Are they really superfluous, or are there ways in which we can
deploy them to greater effect?
Exploiting Key Strengths
 Key task is to formulate our strategy to ensure that these
resources are deployed to the greatest effect
 Use key strengths and differentiate yourself from
competitors
 To the extent that different companies within an industry
have different capability profiles, this naturally implies
differentiation of strategies within the industry
 Toyotas outstanding manufacturing capabilities vs. VW’s
engineering excellence
Managing Key Weaknesses
 What does a company do about its key weaknesses?
 Converting weaknesses into strengths is ultimate goal, but is
likely a long-term task for most companies
 In short to medium term a company is likely to be stuck with
the same resources and capabilities as before
 Most decisive and often most successful solution to
weaknesses in key functions is to outsource
 Clever strategy formulation however may be able to negate
the impact of a key weakness
 Hyundai case: company decided to offer a 10-year warranty on
its cars to negate the negative perception of quality
What About Superfluous Strengths
 A strength that does not appear to be an important source of
competitive advantage
 Lower the level of investment in these activities and reinvest
them in a key strength
 Possible to develop innovative strategies that turn apparently
superfluous strengths into potential key strengths
 Capcom: started out manufacturing and distributing arcade
game machines, soon realized it was their subsidiary skill in
developing the game rather than the machines that offered the
greatest potential
Developing Resources and Capabilities
 Capabilities are not simply an outcome of resources upon
which they are based.
 The Firms that demonstrate the most outstanding capabilities
are not those with the greatest resource pools.
 Examples: 1) Honda vs. GM
2) Pixar vs. Walt Disney
3) Cisco vs. Alcatel-Lucent
Path Dependency
• Organizational capability is path dependent- A company’s
capabilities today are the result of its history.
 We can trace the origins of a distinctive capability to circumstances
during the founding or early development of the entity.
 Wal-Mart Inc supply chain logistics: Result of the need to create their
own distributino system because of unreliable delivery in Arkansas and
Oklahoma.
Is it possible to develop new
capabilities for future competition?
Answer:Yes
Two factors that contribute to efficiency and effectiveness:
1. Coordination is perfected through repetition
2. An understanding of culture and common values.
Organizational capabilities rigid or
dynamic?
 Core capabilities are rigid, meaning they inhibit firms’ ability to
access and develop new capabilities.
 This is challenged in two directions:
1. Flexibility in organizational routines: even basic
operations display variation and ability to adapt
2. Dynamic capability: “higher level” process
through which firms modify their operating
routines(HOWEVER, these are very uncommon which
further implies rigidities)
Approaches to capability development
 Acquiring capabilities through mergers, acquisitions, and
alliances
Acquiring a company with the already desired capability can
speed up the process of capability development

Major risks involved with these acquisitions:
1. Acquisitions are expensive
2. Acquiring company must find way to
integrate the acquiree’s capabilities with its own.

Our Company: Amgen
 On January 26, 2012 Amgen released a statement about their
most recent a successful acquisition, Micromet, for 1.16
Billion dollars.
 Micromet is a biotechnology company that’s main capability
is oncology development
 This is an example of a merger or acquisition that already
contains a desired capability to speed up the process of
development.
Strategic alliances
 Risks of mergers and acquisitions leads to desire of strategic
alliances: cooperative relationships between firms that involve
the sharing of resources and pursuit of common goals.
 Key issue: Gain access to the capabilities of the partner firm or
acquire capabilities through one partner learning from another
 Strategic alliances managing is itself a critical organizational
capability making them more costly and timely then they appear.
Our Company: Amgen
 Amgen focuses on building strategic alliances, or
“partnerships”, with developers and wholesalers of human
therapeutics by offering their financial backing and
commitment in return for the partner’s resources and aid in
development in their biotechnology goals.
 As stated in their mission statement, proper cooperation with
their partners is one of their highest business priorities.
Approaches to Capability development
 Internal development(focus and sequencing): Capability
development needs to be systematic and a step by step
process of design and implementation through several stages
and in order.

The organization must limit the number and scope of
the capabilities that it is attempting to create at any point of
time
 Focusing on developing and supplying the products that
utilize the desired capabilities is often a useful strategy
Capabilities development in relation to
the Hyundai example
 1967-1997 systematically developed capabilities in a series of
compressed phases
 Recruited designers and engineers with car company
experience to aid in implementation
 Since 2000, has developed quality control, market research,
brand, and international management capabilities in similar
fashion
In conclusion
 Key issue for the internal environment is “what a firm can
do”
 Our interest is the potential for resources and capabilities to
establish sustainable competitive advantage
 The emphasis of our chapter was to identify, assess, and
develop a firm’s existing resources and capabilities as well as
consider how they can be developed for the future
ANY QUESTIONS?