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
• Creating new capabilities.
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
• 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
Honda
Technical
Research
Institute
founded
Competes in
Isle of Man TT
motorcycle
races
1st
motorcycle:
98cc, 2-cycle
Dream D
1946 1950
4 cycle
engine
1955
1st gasoline-powered
car to meet US Low
Emission Vehicle Standard
4-cylinder
750cc
motorcycle
Portable
generator
Power products:
ground tillers, marine
engines, generators,
pumps, chainsaws
snowblowers
405cc
motor
cycle
1960
The 50cc
Supercub
1965
1970
1975
Enters Formula 1
Gran Prix racing
Civic GS
(natural
gas
powered)
1985
1990
1995
Acura Car
division
N360 mini
car
Honda
Civic
First product:
Model A
clip-on engine
for bicycles
1980
Civic Hybrid
(dual gasoline/
electric)
1000cc
Goldwing
touring
motor cycle
2000
Home cogeneration
system
Enters Indy
car racing
Honda FCX
fuel cell
car
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
Links between Products & Capabilities:
Capability-Based Strategy at 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
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
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
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
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
Firms with the Highest Ratios of Market Value to Book Value
(December 2005)
Company
Valuation Country
ratio
Company
Valuation Country
ratio
Yahoo! Japan
72.0
Japan
Coca-Cola
7.8
US
Colgate-Palmolive
20.8
US
Diageo
7.4
UK
Glaxo Smith Kline
13.4
UK
3M
7.3
US
Anheuser-Busch
12.6
US
Nokia
6.7
Finland
eBay
11.2
US
Sanofi-Aventis
6.3
France
SAP
10.8
Germany
AstraZeneca
5.9
UK
Yahoo!
10.7
US
Johnson & Johnson
5.7
US
Dell Computer
10.0
US
Boeing
5.7
US
Sumitomo Mitsui Financial
8.8
Japan
Eli Lily
5.6
US
Procter & Gamble
8.4
US
Cisco Systems
5.5
US
Qualcomm
8.3
US
Roche Holding
5.5
Switz.
Schlumberger
8.2
US
L’Oreal
5.3
France
Unilever
8.1
Neth/UK
Altria
5.2
US
PepsiCo
8.0
US
Novartis
5.1
Switz.
The World’s Most Valuable Brands, 2006
Rank Company
Brand
value
($bn.)
1
2
3
4
5
6
7
8
9
10
67.5
59.9
53.4
47.0
35.6
26.5
26.4
26.0
24.8
21.2
Coca-Cola
Microsoft
IBM
GE
Intel
Nokia
Disney
McDonald’s
Toyota
Marlboro
Rank
11
12
13
14
15
16
17
18
19
20
Company
Brand
value
($bn.)
Mercedes Benz
20.0
Citi
20.0
Hewlett-Packard 18.9
American Express 18.6
Gillette
17.5
BMW
17.1
Cisco
16.6
Louis Vuitton
16.1
Honda
15.8
Samsung
15.0
Source: Interbrand
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
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
A Hierarchy of Capabilities:
A Telecom Manufacturer
CROSS FUNCTIONAL
CAPABILITIES
New product
development
capability
Customer
support
capability
BROAD FUNCTIONAL
CAPABILITIES
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
Printed
circuit-board
assembly
Telset
assembly
System
assembly
Automated
through-hole
component
insertion
Manual
insertion of
components
ACTIVITY RELATED
CAPABILITIES
(Operations related
only)
SPECIALIZED
CAPABILITIES
(Manufacturing related
only)
SINGLE-TASK
CAPABILITIES (Only
those related to PCB
assembly)
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
Transferability
Replicability
Property rights
APPROPRIABILITY
Relative
bargaining power
Embeddedness
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
Amoco’s Appraisal of Organizational Capabilities
(illustrative only)
Superfluous
strengths
Superior
Key strengths
6
9
4
5
Parity
2
Inconsequential
weaknesses
11
3
1
10
Deficient
Not
important
7
1
Needed
to play
Importance
8
Key weaknesses
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) Acquire and develop the underlying resources. Especially
human resources
--Externally (hiring)
--Internally through developing individual skills
2) Acquire/access capabilities externally through acquisition or
alliance
3) Greenfield development of capabilties in separate
organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)
4) Build team-based capabilities through training and team
development (i.e. develop organizational routines)
5) Align structure & systems with required capabilities
6) Change management to transform values and behaviors (GE,
BP)
7) Product sequencing (Intel , Sony, Hyundai)
8) Knowledge Management (systematic approaches to acquiring,
storing, replicating, and accessing knowledge)
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
What Determines Organizational
Capability in Football?
Who are the
outstandingly
successful team
managers
(coaches) in
British football?
Matt Busby
Alf Ramsey
Bill Shankley
Manchester U.
Ipswich
Liverpool
1945-70
1955-64
1959-74
Jock Stein
Brian Clough
Bob Paisley
Alex Ferguson
Glasgow Celtic
Derby/Notts F.
Liverpool
Aberdeen
Manchester U.
1965-78
1972-84
1974-83
1980-86
1986-
Arsene Wenger Monaco
Arsenal
Jose Mourinho Porto
Chelsea
1985-95
19962000-04
2004-
Building Team Capabilities in Soccer:
Alex Ferguson at Manchester United
•Find/develop young players
•Training
•Developing coordination
•Structuring the team
•Cross-functional integration
Scouting staff doubled— “find the best.”
Building youth team—1992 youth team
included Ryan Giggs, David Beckham, Paul
Scholes, Nicky Butt, Gary Neville
•State-of-the-art training complex
•Rigorous training schedule (+war on booze)
•Training for team skills
•Building team spirit—“team functions with
single spirit & constant flow of mutual
support”; “Talent without unity of purpose
is hopeless”
Build a core of group internally
Supplement with key purchases
•Blending personalities as well as skills
•Player rotation for experimentation &
flexible coordination
Building the wider team—coaches,
scouts, physiotherapists,
psychologists, even cleaners
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?
Intellectual
Courses & Seminars
On-theCapital
Data
job
Accounting
mining
Benchmarkin
Training
Intellectual
g
Property
IT
New Product
Protection
Development
Customer &
Best
Communications
Market Analysis
Practice
Strategic Alliances
Scenario
Transfer
T
Q
M
Lesson
Analysis
s
ERP
Research
CRM
learned
Definition:
“The systematic leveraging of information and expertise
to improve organizational innovation, responsiveness,
productivity and competency.”
(Lotus division of IBM)
Types & Levels of Knowledge
(and Knowledge Conversion)
Levels of knowledge
Individual
Explicit
Information
Facts
Scientific kn.
Organization
Databases
Systems & procedures
Intellectual property
Types
of
Knowledge
Tacit
Skills
Know-how
Organizational
routines
Replication through Knowledge Systematization
Levels of knowledge
Individual
Explicit
Types
of
Knowledge
EXAMPLES
• Ford
• McDonalds
• Starbucks
•Accenture
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
--Accenture: 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