Foundations of Strategy
Chapter 3
Resources and Capabilities
BY: SPENCER BROWN, LAURA CARR, IKE
HUESTIS, BRAD KLINGBERG, TREANNE
TURNER
Summary
The Role of Resources and Capabilities in
Strategy Formulation
 Emphasis on correlation between strategy and the
internal environment of a firm
 Relationship between strategy and the resources
and capabilities of a firm
 Two main reasons for this change


Internal resources and capabilities are more secure when
forming a strategy
Competitive advantage has become the source of
profitability
Resource-based view
Competitive Advantage
Strategy
Industry Key Success Factors
Organizational Capabilities
Resources
Tangible
 Financial (cash,
securities,
borrowing
capacity)
 Physical (plant
equipment, land,
mineral reserves)
Intangible
• Technology
(patents,
copyrights,
trade secrets)
• Reputation
(brands,
relationships)
• Culture
Human
• Skills/knowhow
• Capacity for
communication
and
collaboration
• Motivation
Identifying Resources
 Tangible Resources
 Easiest to identify and evaluate
 Financial resources and physical assets are located in a firm’s
financial statements
 How does a firm create additional value?
 Improving efficiency
 Using existing assets more profitably
Identifying Resources
 Intangible Resources
 Brand names and trade marks are a form of reputational asset
 Value lies in the confidence it instills in customers
 Technological and artistic resources
Patents
 Copyrights
 Trade secrets
 Trade marks

Identifying Resources
 Human Resources
 Comprised of the expertise of employees
 Most firms devote considerable time into improving HR
 Competency Modeling


Comparing potential employees to a set of skills they are looking
for
Company Culture

Organization’s values and traditions
Classifying Capabilities
 Organizational Capability
 Using resources to attain desired goals
 Must find a firm’s distinct and core competencies
 What a firm does to make them superior relative to
competitors
 Important success factors a firm competes on
Classifying Capabilities
 Identifying a firm’s capabilities
 Functional Analysis


Identifies capabilities in relation to certain functional areas
Value Chain Analysis

Determine capabilities according to the sequential chain of
activities of the firm
Functional
Functional Area
Capability
Example
Corporate Functions
Financial Control
Exxon Mobil
Management
Information
Comprehensive MIS
network
Wal-Mart
Research and
Development
Innovative Product
Development
Apple
Operations
Efficiency in Volume
Briggs and Stratton
Product Design
Design Capability
Nokia, Apple
Marketing
Brand Management
Proctor and Gamble
Sales and Distribution
Customer Service
Caterpillar
Value Chain
Type of Activity
Generic Value Chain
Label
Examples of
Activities
Primary Activities
Logistics
Purchasing, SCM
Operations
Design, Assembly,
Quality Control
Marketing and Sales
Market Research, Ads,
Promoting, Pricing
Service
Warranties, Parts,
Recycling
Infrastructure
Global Communications,
Risk Management
HR Management
Training, Recruitment
Technology
Development
Technology managed
design and manufacture
Procurement
Database and Inventory
management
Support Activities
Profit-Earning Potential of a Resource/Capability
 The extent of the competitive advantage established
 The sustainability of the competitive advantage
 Appropriability of the returns
Establishing Competitive Advantage
 Scarcity
 Resource/capability must be widely unavailable within the
industry
 Relevance
 Resource/capability must be relevant to the key success factors
in the market
Sustaining Competitive Advantage
 Durability
 Resource/capability must have a useful lifespan
 Transferability
 Resource/capability must be mobile between companies
 Replicability
 Product can not be imitated by competitors
Appropriating the Returns to Competitive
Advantage
 Property rights
 Relative bargaining power
 with determining the division of returns between the firm and
its individual members
 Embeddedness
 Deeply embedded individual skills and knowledge leads to
dependence on corporate systems and reputation
Competitive Advantage: Gucci
 French retailer PPR acquires Gucci Group in 2001.
 Chairman Domenico De Sole and vice chairman Tom Ford
leave Gucci in 2004.
 The duo had masterminded Gucci’s transformation into a
Global style leader, and the combination of talented CEO
and designer proved to be a competitive advantage for the
company.
 As a result, Gucci’s share price fell from $86.10 to around
$75, losing the company an estimated $1.2 billion.
Putting Analysis Into Practice
 Step 1: Identify the key resources and capabilities
 Step 2: Appraising resources and capabilities


which resources are most important in conferring sustainable
competitive advantage?
what are the firms strengths/weaknesses compared to its
competitors?
 Step 3: Developing strategy implications



Exploiting key strengths
Managing key weaknesses
Utilizing inconsequential strengths
Organizational Capabilities
 Develop over long time periods
 Can be traced back to prevailing circumstances during the
founding and early development of a company.
 Embodied within organizational structure
 The more complex the task, the greater the gains from learnby-doing.
 Embedded with organizational culture
 Collaboration without managerial direction depends upon
shared perceptions, common values and behavioral norms.
Approaches to Capability Development
 Acquiring Capabilities
 acquisitions and alliances
 Internal Development
 focus and sequencing
Acquiring Capabilities
 Acquisitions


Can help fast track the
process of capability
development, especially in
technological
environments.
However, major risks
include culture clashes,
expenses, and surpluses.
 Alliances


Quick and low-cost means
of extending capabilities
available to a firm.
However, building trust
and managing alliance
relationships is critically
important.
Internal Development
 Focus
 Must limit the number and scope of the capabilities that it is
attempting to create at any point of time.
 Sequencing
 Develop capabilities incrementally through several stages, and
target no more than a few capabilities in each time period.
Comparison
20 Mile March Elements
 Performance markers
 Self-imposed constraints
 Tailored to the enterprise
 Lies largely within your control
 A proper timeframe
 Designed and self-imposed by the enterprise
 Must be achieved with great consistency
• GREAT BY CHOICE
Why it Wins
 It builds confidence in your ability to perform well in
adverse circumstances
 It reduces the likelihood of catastrophe when you’re
hit by turbulent disruption
 It helps you exert self-control in out-of-control
environments
• GREAT BY CHOICE
Six Paths Framework
 Path 1: Look across alternative industries
 Path 2: Look across strategic groups within industry
 Path 3: Look across the chain of buyers
 Path 4: Look across complementary product and
service offerings
 Path 5: Look across emotional or functional appeal
to buyers
 Path 6: Look across time
• BLUE OCEAN STRATEGY
Classes
Economics
 Competitive advantage
 An advantage that a firm has over its competitors, allowing it to
generate greater sales or margins and/or retain more customers
than its competition.

Example: firm's cost structure, product offerings, distribution
network and customer support.
 Strategy
 An adaption or complex of adaptions that serve an important
function
 Identify means of resources
Human Resource Development
 Human Resources
 Current Trends in HR
 Training
 Leading and Managing Change
 Motivation
 Employee Engagement
Accounting
 Intangible Assets
 Tangible Assets
 Profit Earning Potential
 Strategic Analysis
 Financial Analysis
 Assessing worth of on Asset
Functional Areas
Capability
Exemplars
Corporate functions
Financial control
Exxon Mobil, PepsiCo
Management
development
General Electric, Shell
Strategic innovation
Google, Haier
Multidivisional
coordination
Unilever, Shell
Acquisition management
Cisco, Systems, Luxottica
International
Management
Shell, Banco Santander
Comprehensive,
integrated MIS network
linked to managerial
decision making
Wal-Mart, Capital One,
Dell Computer
Management information
Examples of Hyundai’s Capabilities by function
 Corporate functions
 Management information
 Research and Development
 Operations
 Product Design
 Marketing
Our Company:
Dick’s Sporting
Goods
Resources: Tangible
 Financial
 2012: $5.64 Billion in revenue
 $294.49M Total cash on hand
 Physical
 511 Stores in 44 states
Resources: Intangible
 Relationships with high margin brands, such as Nike
and Under Armour.
 Private brands that create customer loyalty.
 Reputation for customer service.
Resources: Human
 Stores employ experts in their fields
 PGA and LPGA golf pros
 Certified fitness trainers
 Specialty trained footwear sales associates
 Professional fisherman and kayakers
Capabilities
 Specialty shops within stores.
 Dicks combines their tangible resources (massive stores) with
intangible resources (relationships with high margin brands)
to create specialty shops to help promote brands.
 Currently have 45 Under Armour All-American shops and 105
Nike Field House shops
Capabilities - Continued
 Specialty stores also include more specialized
markets
The Lodge
Fitness
Footwear
Appraising Resources
Resource
Importance
Relative Strength
Finance
8
9
Technology
2
3
Location
7
9
Distribution
8
4
Brands
8
10
Appraising Resources
Key Strengths
Superfluous Strengths
12
10
8
6
4
2
Key Weaknesses
Zone of Irrelevance
0
0
2
4
6
8
10
Dealing With Key Weaknesses
 Currently has only three distribution centers, barely
enough to keep up with current stores.
 Plans to build a new 600,000 square foot
distribution center that will allow for about 250
more stores.
Questions?