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
• Creating new capabilities.
Rationale for the Resource-based
Approach to Strategy
• 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
The Evolution of Honda Motor Company
50cc 2-cycle engine
Founding of
Honda motor
company
1948 1950
First product:
clip-on engine
for bicycles
405cc
motor
cycle
4 cycle
engines
1955
Related products:
ground tillers, marine
engines, generators,
pumps, chainsaws
1960
The 50cc
super
-cub
1965
1970
N360 mini
car
1975
1980
1000cc
Goldwing
touring
motor cycle
1985
1990
Acura Car
division
1995
Canon: Products and Core Technical Capabilities
Precision
Mechanics
Fine
Optics
35mm SLR camera
Plain-paper copier
Compact fashion camera
Color copier
EOS autofocus camera
Color laser copier
Digital camera
Basic fax Laser copier
Video still camera
Laser fax
Mask aligners
Inkjet printer
Excimer laser aligners
Laser printer
Color video printer
Stepper aligners
Calculator
Notebook computer
MicroElectronics
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 Links between Resources, Capabilities
and Competitive Advantage
COMPETITIVE
ADVANTAGE
INDUSTRY KEY
SUCCESS FACTORS
STRATEGY
ORGANIZATIONAL
CAPABILITIES
RESOURCES
TANGIBLE
INTANGIBLE
•Financial
•Physical
•Technology
•Reputation
•Culture
HUMAN
•Skills/know-how
•Capacity for
communication
& collaboration
•Motivation
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
Alternatives 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. Product
price premium.
Recognition.
Training, experience, adaptability,
commitment and loyability of customers
Employee qualifications,
pay rates, turnover.
Intangible
Resources
Human
Resources
INDICATORS
Firms with the Highest Ratios of Market Value to Book Value
Juniper Networks
Oracle (US)
TIM (Italy)
Broadcom
Nokia (Finland)
Yahoo (US)
Cisco Systems (US)
America Online (US)
US West (US)
Glaxo Wellcome (UK)
Sun Microsystems (US)
Charles Schwab (US)
L.M. Ericsson (Sweden)
Warner Lambert (US)
EMC (US)
Amgen (US)
Dell Computer (US)
Colegate Palmolive (US)
SmithKline Beecham (US)
SAP (Germany)
Pfizer (US)
Eli Lilly (US)
Sprint PCS Group
Softbank (Japan)
58.5
56.2
45.0
42.6
42.0
41.3
31.9
34.0
28.9
25.4
24.4
24.2
24.1
23.0
21.5
21.4
21.0
20.8
20.6
19.4
19.4
18.8
18.3
18.2
Computer software and services
Computer software and services
Telecommunications
Computer software and services
Telecom equipment
Computer software and services
Telecom equipment
Telecommunications
Telecommunications
Drugs
Computers
Financial services
Telecom equipment
Drugs
Electronics
Source: Business
Drugs
Week, July 2000
Computers
Personal care products
Drugs
Computer software and services
Drugs
Drugs
Telecommunications
Computer software and services
The World’s Most Valuable Brands, 2000
Rank Company
1
2
3
4
5
6
7
Coca-Cola
Microsoft
IBM
Intel
Nokia
Genera Electric
Ford
Brand
value
($bn.)
72.5
70.2
53.2
39.0
38.5
38.1
36.4
Rank
8
9
10
11
12
13
14
Company
Brand
value
($bn.)
Disney
McDonald’s
AT&T
Marlboro
Mercedes
Hewlett-Packard
Cisco Systems
33.6
27.9
25.5
22.1
21.1
20.6
20.0
Source: Interbrand
Identifying Organizational Capabilities :
Functional Approach
FUNCTION
Corporate
Management
CAPABILITY
Financial management
Strategic Control
Coordinating decentralized
business units
Managing Acquisitions
EXEMPLARS
Exxon, Coca Cola
General Electric,
Emerson Electric, GE
ABB, Shell
Nationsbank, ConAgra
MIS
Speed and responsiveness through
rapid information transfer
American Airlines
LL Bean
R&D
Research capability
Development of innovative new products
Merck, AT&T
Sony, 3M
Manufacturing
Efficient volume manufacturing
Continuous Improvement
Flexibility
Briggs & Stratton
Nucor, Motorola
Benetton
Design Marketing
Design Capability
Brand Management
Sales & Distribution
Promoting reputation
Responsiveness to market trends
Sales Responsiveness
Efficiency and speed of distribution
Customer Service
Apple, Swatch,
Proctor & Gamble,
PepsiCo
American Express
The Gap
Microsoft, Glaxo
Federal Express
Walt Disney
The Porter Value Chain
FIRM INFRASTRUCTURE
SUPPORT
ACTIVITIES
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
MARKETING
LOGISTICS
& SALES
SERVICE
PRIMARY
ACTIVITIES
A Hierarchy of Capabilities:
A Telecom Manufacturer
New product
development
capability
Customer
support
capability
operations
capability
R & D and
design
capability
MIS
capability
Marketing
and sales
capability
Human
resource mgt.
capability
Manufacturing
capability
Materials
management
capability
Process
engineering
capability
Product
engineering
capability
Test
engineering
capability
SPECIALIZED
CAPABILITIES
(Manufacturing related
only)
Printed
circuit-board
assembly
Telset
assembly
System
assembly
SINGLE-TASK
CAPABILITIES (Only
those related to PCB
assembly)
Automated
through-hole
component
insertion
Manual
insertion of
components
CROSS FUNCTIONAL
CAPABILITIES
BROAD FUNCTIONAL
CAPABILITIES
ACTIVITY RELATED
CAPABILITIES
(Operations related
only)
Quality
management
capability
Surface
mounting of
components
Wave
soldering
INDIVIDUALS’ SPECIALIZED KNOWLEDGE
The Rent-Earning Potential
of Resources and Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
Scarcity
Relevance
Durability
SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE
Mobility
Replicability
Property rights
APPROPRIABILITY
Relative bargaining
power
Embeddedness of
resources
Appraising VW’s Resources and Capabilities
10
Superfluous Strengths
Key Strengths
Relative
5
Strength
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
Amoco’s Appraisal of Organizational Capabilities
(illustrative only)
Superfluous
strengths
Superior
Key weaknesses
6
9
4
Performance
5
Parity
2
Inconsequential
weaknesses
11
3
1
10
Deficient
Not
important
7
1
Needed
to play
Importance
8
Key strengths
Needed
to win
1. Effective deal
making
2. Rapid new product
development
3. Relentless cost
forms
4. Product quality
5. JV management
6. Superior EH&S
management
7. Managing culturally
diverse workforce
8. Fast decision
making
9. Customer
segmentation
10.Capture synergies
across divisions
11. Effective
procurement
Distinctive Capabilities as a
Consequence of Childhood Experiences
Company Capability
Past History
Exxon
Financial
management
Exxon’s predecessor, Standard Oil (NJ)
was the holding co. for Rockefeller’s
Standard Oil Trust
RD/
Shell
Coordinating
decentralized
global empire
Shell a j-v formed from Shell T&T founded to
sell Russian oil in China, and Royal Dutch
founded to exploit Indonesian reserves
BP
“Elephant
hunting”
Discovered huge Persian reserves, went on to
find Forties Field and Prudhoe Bay
ENI
Deal making in
politicized
environments
The Enrico Mattei legacy; the challenge of
managing government relations in post-war
Italy
Mobil
Lubricants
Vacuum Oil Co. founded in 1866 to supply
patented petroleum lubricants
2
Approaches to
Capability Development
1) Linking strategy to Human Resource
Management--developing individual
competencies
2) Greenfield development in separate
organizational unit (IBM & the PC, Xerox &
PARC, GM & Saturn)
3) Product sequencing (Intel , Sony, Hyundai)
4) Change management to transform values
and behaviors (GE, BP)
Product Sequencing to Build
Capabilities: Hyundai
Capabilities
•Assembly
•Production
engineering
•Local
marketing
SKD CKD
Ford Cortina
Products
1968
•Auto
styling
&design
•Casting &
forging
•Chassis
design
•Tooling
•Body
production
•Export
mktg.
Pony
1970
•Hydrodynamics
•Thermodynamics
•Fuel engineering
•Emission control
•FWD
•Lubrication
engineering •Kinetics& vibration
•CAD/CAM
•Ceramics
•Assembly
•Electronic control
control
systems
systems
•Large-scale
•Advanced
design integration
component
•Global logistics
handling
•Lifecycle
engineering
Excel
1974
‘Alpha’
engine
1985
Accent
Avante
Sonanta
1994-95
Summary: A Framework for Analyzing Resources and Capabilities
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
POTENTIAL FOR
SUSTAINABLE
COMPETITIVE
ADVANTAGE
CAPABILITIES
RESOURCES
Knowledge Management and the
Knowledge-based View of the Firm
OUTLINE
1) Why the surge of interest in knowledge management (KM)?
--kn. as the key resource of the firm
--giving us a better understanding of management
2) What is KM?
3) What progress have we made, what are the key gaps, which
areas are likely to add most value?
4) Developing strategy: Exploiting strengths, protecting and
eliminating weaknesses
5) Building the capability base: Can it be done? How?
6) What can be learn from Knowledge Management?
7) Implications for organizational structure.
Knowledge Processes within the Organization
Knowledge
Creation
Knowledge
Generation
(“Exploration”)
• Training
Knowledge
Acquisition
Knowledge
Integration
Knowledge
Sharing
Knowledge
Application
(“Exploitation”)
• Research
Knowledge
Replication
Knowledge
Storage &
Organization
• Recruitment
• Intellectual property
licensing
• Benchmarking
• New product
development
• Operations
• Strategic planning
• Communities of practice
• Best practices transfer
• On-the-job training
• Databases
• Standard operating practices
Knowledge
Measurement
• Intellectual capital accounting
• Competency modeling
Knowledge
Identification
• Project reviews
• Competency modeling
Nonaka’s Knowledge Conversion Matrix
Tacit
Knowledge
Tacit
Knowledge
TO
SOCIALIZATION
Sharing of tacit
knowledge among
individuals and from the
organization to the
individual
Explicit
Knowledge
EXTERNALIZATION
The articulation and
systematization of tacit
into explicit knowledge.
Use of metaphor to
communicate tacit
concepts
FROM
Explicit
Knowledge
INTERNALIZATION
Instructions and principles
are converted into intuition
and routines
COMBINATION
A key role of information
systems is to combine
different units of
information and other
forms of explicit
knowledge
What is Knowledge Management?
IT
On-thejob
Training
Research
Courses & Seminars
Benchmarkin
g
New Product
Development
Communications
Strategic Alliances
Intellectual
Capital
Accounting
Intellectual Property
Protection
Customer &
Market Analysis
Scenario
TQM
Analysis
Best
Practice
Transfer
Definition:
“The systematic leveraging of information and expertise
to improve organizational innovation, responsiveness,
productivity and competency.”
(Lotus division of IBM)
Knowledge Types and
Knowledge Conversion
Levels of knowledge
Individual
Explicit
Types
of
Knowledge
Tacit
Information
Facts
Scientific kn.
Organization
Databases
Systems & procedures
Intellectual property
‘INDUSTRIAL’
ENTERPRISES
CRAFT
ENTERPRISES
Skills
Organizational
capabilities
Knowledge Transfer Mechanisms
D
I
S
S
E
M
I
N
A
T
I
O
N
B
R
E
A
D
T
H
M
a
n
y
Rules, procedures & directives
Modular integration
Manuals &
reports
Communities
Communities -of-interest
-of-practice
F
e
w
E-mail
Group
-ware
Internal
consultants
Personnel
transfer
Shared
data
bases
Training
seminars
Video
&
conferencing
courses
Meetings
On-the job
training
Informal
visits
Data
exchange
Fax
Telephone
Low (know-how &
contextual kn..)
ABILITY TO CODIFY
High (explicit
kn.. & information
Designing a Knowledge Management System
• What kn. processes which are critical to creating value
& competitive advantage?
--Dow: creating and exploiting patents
--McKinsey & Co.: sharing kn. & retaining experienced consultants
--Andersen Consulting: systematization.)
• What are the characteristics of the relevant kn.?
• What mechanisms are needed for the generation and
application of the relevant kn.?
• What organizational conditions need to be in place in order
for knowledge management mechanisms to work?
---Organizational structures
---Incentives to contributors and users
---Behavioral norms and values