analyzing resources & capabilities the role of resources and capabilities in strategy...
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Analyzing Resources & Capabilities
Analyzing Resources & Capabilities
• 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.
OUTLINE
THE FIRM
Goals and Values
Resources andCapabilities
Structure and Systems
THE INDUSTRYENVIRONMENT
•Competitors•Customers•Suppliers
STRATEGYSTRATEGY
The Firm-Strategy
Interface
TheEnvironment-Strategy
Interface
Shifting the Focus of Strategy Analysis:From the External to the Internal Environment
Shifting the Focus of Strategy Analysis:From the External to the Internal Environment
Rationale for the Resource-based Approach to Strategy
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
1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000
HondaTechnicalResearchInstitutefounded
1st motorcycle:98cc, 2-cycle
Dream D
4 cycle engine
405ccmotorcycle
Power products:ground tillers, marineengines, generators,pumps, chainsaws
snowblowers
First product: Model A
clip-on enginefor bicycles
The 50ccSupercub
N360 minicar
1000ccGoldwing
touringmotor cycle
Acura Cardivision
Competes inIsle of Man TT
motorcycleraces
4-cylinder750cc
motorcycle
Portablegenerator
Enters Formula 1Gran Prix racing
HondaCivic Enters Indy
car racing
1st gasoline-poweredcar to meet US Low
Emission Vehicle Standard
Civic GS(natural
gaspowered)
Civic Hybrid(dual gasoline/
electric)
Home co-generation
system
Honda FCXfuel cell
car
The Evolution of Honda Motor Company The Evolution of Honda Motor Company
Precision Mechanics
Fine Optics
Micro-Electronics
35mm SLR cameraCompact fashion cameraEOS autofocus camera
Digital cameraVideo still camera
Plain-paper copierColor copier
Color laser copier Laser copierBasic fax
Laser faxMask aligners
Excimer laser alignersStepper aligners
Inkjet printerLaser printer
Color video printerCalculator
Notebook computer
Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities
Links between Products & Capabilities: Capability-Based Strategy at 3M
Carborundummining
Carborundummining
SandpaperSandpaper
ScotchtapeScotchtape
Road signs& markings
Road signs& markings
Post-it notesPost-it notes
Audio tapeAudio tape
Surgical tapes& dressings
Surgical tapes& dressings
VideotapeVideotape
Acetate film
Acetate film
Floppy disks & data storage
products
Floppy disks & data storage
products
PharmaceuticalsPharmaceuticals
Housewares/kit-chen products
Housewares/kit-chen products
AbrasivesAbrasives AdhesivesAdhesivesNew-product
development &introduction
New-productdevelopment &introduction
Thin-film technologies
Thin-film technologies
PRODUCTSPRODUCTS
CAPABILITIES
CAPABILITIES
Materials sciencesMaterials sciences
Health sciencesHealth sciences
MicroreplicationMicroreplication
Flexiblecircuitry
Flexiblecircuitry
Carborundummining
Carborundummining
SandpaperSandpaper
ScotchtapeScotchtape
Road signs& markings
Road signs& markings
Post-it notesPost-it notes
Audio tapeAudio tape
Surgical tapes& dressings
Surgical tapes& dressings
VideotapeVideotape
Acetate film
Acetate film
Floppy disks & data storage
products
Floppy disks & data storage
products
PharmaceuticalsPharmaceuticals
Housewares/kit-chen products
Housewares/kit-chen products
AbrasivesAbrasives AdhesivesAdhesivesNew-product
development &introduction
New-productdevelopment &introduction
Thin-film technologies
Thin-film technologies
PRODUCTSPRODUCTS
CAPABILITIES
CAPABILITIES
Materials sciencesMaterials sciences
Health sciencesHealth sciences
MicroreplicationMicroreplication
Flexiblecircuitry
Flexiblecircuitry
Evolution of Capabilities and Products: 3MEvolution of Capabilities and Products: 3M
Eastman Kodak’s Dilemma
1980’s
1990’s
Resources & Capabilities Businesses
Chemical Imaging•Organic Chemistry
•Polymer technology
•Optomechtronics
•Thin-film coatings
Brands
Global Distribution
Film
Cameras
DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics
Need to build digital imaging capability
Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film
Fine Chemicals
Pharmaceuticals
Diagnostics
STRATEGY
INDUSTRY KEYSUCCESS FACTORSCOMPETITIVE
ADVANTAGE
ORGANIZATIONALCAPABILITIES
RESOURCESTANGIBLE INTANGIBLE HUMAN
•Financial•Physical
•Technology•Reputation•Culture
•Skills/know-how•Capacity for communication & collaboration•Motivation
The Links between Resources, Capabilities and Competitive Advantage
The Links between Resources, Capabilities and Competitive Advantage
Appraising ResourcesAppraising Resources
RESOURCE CHARACTERISTICS INDICATORS
Financial Borrowing capacity Debt/ Equity ratioInternal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of size, location, technology fixed assets.flexibility. Scale of plantsLand and buildings. Alternative uses forRaw materials. fixed assets
Technology Patents, copyrights, know how No. of patents ownedR&D facilities. Royalty income
Intangible Technical and scientific R&D expenditureResources employees R&D staff
Reputation Brands. Customer loyalty. Company Brand equityreputation (with suppliers, customers, Customer retentiongovernment) Supplier loyalty
Human Training, experience, adaptability, Employee qualifications,
Resources commitment and loyalty of employees pay rates, turnover.
Firms with the Highest Ratios of Market Value to Book ValueFirms with the Highest Ratios of Market Value to Book Value
Accenture 27.6 ConsultingGillette 17.9 Personal careAnheuser Busch 16.8 BrewingGap 17.0 RetailingKellogg 16.0 FoodDell Computer 15.9 ComputersOracle 12.2 SoftwareGlaxoSmithKline 11.0 DrugsHennes & Mauritz 10.5 RetailingSAP 10.1 SoftwareSCM 10.0 ComputersPfizer 9.9 DrugsUnilever 9.6 Consumer goodsCoca-cola 9.3 Soft drinksSysco 9.1 Food servicesForest Labs 8.5 DrugsEBay 8.2 E-businessPepsico 8.0 Soft drinksMedtronic 7.9 Medical
equipment3M 7.8 DiversifiedProcter & Gamble 7.8 Consumer goodsFrance Telecom 7.6 TelecomSmith & Nephew 6.7 DrugsJohnson & Johnson 6.7 Drugs
Source: BusinessWeek, July 2003
The World’s Most Valuable Brands, 2003The World’s Most Valuable Brands, 2003
Rank Company Brand Rank Company Brand value value($bn.) ($bn.)
1 Coca-Cola 70.45 11 Toyota 20.78 2 Microsoft 65.17 12 Hewlett-Packard 19.86 3 IBM 51.76 13 Citibank 18.57
4 GE 42.34 14 Ford 17.07 5 Intel 31.11 15 American Express 16.29 6 Nokia 29.44 16 Gillette 15.98 7 Disney 28.03 17 Cisco 15.57 8 McDonald’s 24.69 18 Honda 15.63 9 Marlboro 22.18 19 BMW 15.1110 Mercedes 21.31 20 Sony 13.15
Source: Interbrand
Identifying Organizational Capabilities:A Functional Classification
Identifying Organizational Capabilities:A Functional Classification
FUNCTION CAPABILITY EXEMPLARSCorporate Financial management ExxonMobil, GEManagement Strategic control IBM, Samsung
Coordinating business units BP, P&GManaging acquisitions Citigroup, Cisco
MIS Speed and responsiveness through Wal-Mart, Dell rapid information transfer Capital One
R&D Research capability Merck, IBMDevelopment of innovative new products Sony, 3M
Manufacturing Efficient volume manufacturing Briggs & StrattonContinuous Improvement Nucor, Harley-DFlexibility Zara, Southwest Air
Design Design Capability Apple, Nokia
Marketing Brand Management P&G, LVMH, PepsiCoQuality reputation Johnson & JohnsonResponsiveness to market trends MTV, L’Oreal
Sales, Distribution Sales Responsiveness PepsiCo, Pfizer& Service Efficiency and speed of distribution Amazon, Dell
Customer Service Singapore AirlinesCaterpillar
The Value Chain: The McKinsey Business System
The Value Chain: The McKinsey Business System
TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE
The Porter Value Chain The Porter Value Chain
FIRM INFRASTRUCTURE
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
PRIMARY ACTIVITIES
SUPPORT ACTIVITIES
WINNING TEAMS 1998-
2003
EXPENDITURES ON KEY PLAYERS, 1998-2003
Valencia (Sp) Pablo Aimar ($20.4m), Ruben Baraja ($12m)
Real Madrid (Sp)
Zinedine Zidane ($68m), Luis Figo ($55m), Ronaldo ($43m), Nicolas Anelka ($36m), David Beckham ($26m),
Deportivo La Coruna (Sp)
Sergio Gonzales ($16m), Alberto Luque ($15m)
Juventus (It) Gianluigi Buffon ($49m), Pavel Nedved ($38m), Lilian Thuram ($33m), David Trezeguet ($21m), Marco de Viao ($10m)
AC Milan (It) Rui Costa ($42m), Alessandro Nesta ($30m), Andriy Shevchenko ($24m), Andrea Pirlo ($16m), Kaka ($9m)
Parma (It) Hidetoshi Nakata ($30m), Sdrian Mutu ($9m)
Manchester United (Eng)
Rio Ferdinand ($45m), Juan Veron ($42m), Ruud van Nistelrooy ($30m), Cristiano Ronaldo ($18m), Fabien Bartez ($12m), Diego Forlan ($10m), Kleberson ($9m), Mikael Silvestre ($6m) Arsenal (Eng) Sylvain Wiltord ($20m), Thierry Henry ($16m), Dennis Bergkamp ($12m), Nwankwo Kanu ($7m), Gilberto Silva ($7m), Patrick Vieira ($6m)
Liverpool (Eng)
Emile Heskey ($16m), El Hadji Diouf ($15m), Dietmar Hamann ($12m), Chris Kerkland ($8m), Harry Kewell ($8m), Salif Diao ($8m)
HIGHEST EXPENDITURES ON NEW PLAYERS (Top 3in Spain, Italy & England)
1. Barcelona2. Chelsea3. Lazio4. Manchester United5. Inter Milan6. Juventus7. AC Milan8. Arsenal9. Real Betis
Superior Resources do not necessarily mean Superior Capabilities: Transfer Fees and Team
Performance in European Soccer
Superior Resources do not necessarily mean Superior Capabilities: Transfer Fees and Team
Performance in European Soccer
Note: Spain, Italy &England only).
The Architecture of Organizational Capability
The Architecture of Organizational Capability
SKILLS &KNOWLEDGE
VALUES & NORMS
MANAGERIALSYSTEMS
TECHNICALSYSTEMS
Dorothy Leonard “Core Capabilities & Core Rigidities”
A modified view
RESOURCES•Human skills & know-how
•Technology•Culture (values, norms)
ManagementSystems
OrganizationStructure
ORGANIZATIONAL CAPABILITY
A Hierarchy of Capabilities: A Telecom Manufacturer
A Hierarchy of Capabilities: A Telecom Manufacturer
A u to m a tedth rou g h-h o leco m p o ne n t
in se rt ion
P rin tedc ircu it-b o a rd
a s se m b ly
M a nu fa c tu ringca p a b ility
o p era tio nsca p a b ility
N e w p ro d u ctd e ve lop m e nt
ca p a b ility
C u s to m ersu pp o rt
ca p a b ility
M a n u a lin se rtio n o f
co m p o ne n ts
T e ls e ta s se m b ly
M a te ria lsm an a ge m e nt
ca p a b ility
R & D a ndd e sign
ca p a b ility
S u rfa cem ou ntin g o fco m p o ne n ts
W a veso lde ring
S ys tema s se m b ly
P ro ce sse n g in e ering
ca p a b ility
M ISca p a b ility
P ro du cte n g in e ering
ca p a b ility
M a rke tinga n d sa lesca p a b ility
T e s te n g in e ering
ca p a b ility
H u m anre so urce m g t.
ca p a b ility
Q u a litym an a ge m e nt
ca p a b ility
CROSS FUNCTIONAL CAPABILITIES
BROAD FUNCTIONAL CAPABILITIES
ACTIVITY RELATED CAPABILITIES (Operations related only)
SPECIALIZED CAPABILITIES (Manufacturing related only)
SINGLE-TASK CAPABILITIES (Only those related to PCB assembly)
INDIVIDUALS’ SPECIALIZED KNOWLEDGE
Scarcity
Relevance
Durability
Transferability
Replicability
Property rights
Relative bargaining power
Embeddedness
THE EXTENT OF THE COMPETITIVE ADVANTAGE
ESTABLISHED
SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE
APPROPRIABILITY
THE PROFITEARNING POTENTIALOF A RESOURCE OR
CAPABILITY
The Rent-Earning Potential of Resources and Capabilities
The Rent-Earning Potential of Resources and Capabilities
ImportanceVW’s
Relative Strength
C1. Product development
9 4
C2. Purchasing 7 5
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 5
R3. Plant and equipment 8 8
R4. Location 7 4
R5. Distribution 8 5
RESOURCES CAPABILITIES
Assessing a Companies Resources and Capabilities: The Case of VW
Assessing a Companies Resources and Capabilities: The Case of VW
Rel
ativ
e S
tren
gth
Strategic Importance
Superfluous Strengths Key Strengths
Zone of Irrelevance Key Weaknesses
1
1
5 10
5
10
R1
R2
R3
R4
R5
C1
C2
C3
C4
C5C6 C7
C8
Appraising VW’s Resources and Capabilities Appraising VW’s Resources and Capabilities
(Hypothetical only)
Appraising the Capabilities of a Business School
Appraising the Capabilities of a Business School (illustrative only)
Re
lati
ve
Str
en
gth
Superior
Parity
Deficient
Not important
Critically important
5
6
9
3
2
4 8
10 7
1
C1 Alumni relationsC2 Student
placementC3 TeachingC4.AdministrationC5 Course devlpmntC6 Student
recruitmentC7 ResearchC8 Corporate
relationsC9 MarketingC10 ITC11 PRC12 HRM
Importance
Key weaknessesKey weaknesses
Key strengthsKey strengthsSuperfluousstrengths
Superfluousstrengths
Inconsequentialweaknesses
Inconsequentialweaknesses
11
12
Amoco’s Appraisal of Organizational Capabilities(illustrative only)
Re
lat i
ve
St r
en
gt h
Superior
Parity
Deficient
Not important
Needed to play
Needed to win
5
6
9
4
2
3 11
101 8
1
1. Effective deal making
2. Rapid new product development
3. Relentless cost forms
4. Product quality5. JV management 6. Superior EH&S
management7. Managing culturally
diverse workforce8. Fast decision
making9. Customer
segmentation10.Capture synergies
across divisions11. Effective
procurement
ImportanceImportance
Key strengthsKey strengths
Key weaknessesKey weaknesses
Superfluousstrengths
Superfluousstrengths
Inconsequentialweaknesses
Inconsequentialweaknesses
7
2
Distinctive Capabilities as a Consequence of Childhood Experiences
Distinctive Capabilities as a Consequence of Childhood Experiences
Company Capability Past HistoryExxon Financial Exxon’s predecessor, Standard Oil (NJ)
management was the holding co. for Rockefeller’s Standard Oil Trust
RD/ Coordinating Shell a j-v formed from Shell T&T founded to
Shell decentralized sell Russian oil in China, and Royal Dutch global empire founded to exploit Indonesian reserves
BP “Elephant Discovered huge Persian reserves, went on to
hunting” find Forties Field and Prudhoe Bay
ENI Deal making in The Enrico Mattei legacy; the challenge of politicized managing government relations in post-war environments Italy
Mobil Lubricants Vacuum Oil Co. founded in 1866 to supply patented petroleum lubricants
Approaches to Capability DevelopmentApproaches to Capability Development
1) Linking strategy to Human Resource Management—modeling & developing individual competencies
2) Greenfield development in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)
3) Change management to transform values and behaviors (GE, BP)
4) Product sequencing (Intel , Sony, Hyundai)
5) Knowledge Management (e.g. lessons learned, best practices transfer, etc.)
1) Linking strategy to Human Resource Management—modeling & developing individual competencies
2) Greenfield development in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn)
3) Change management to transform values and behaviors (GE, BP)
4) Product sequencing (Intel , Sony, Hyundai)
5) Knowledge Management (e.g. lessons learned, best practices transfer, etc.)
Product Sequencing to Build Capabilities: Hyundai
Product Sequencing to Build Capabilities: Hyundai
•Assembly•Production engineering•Local marketing
•Assembly•Production engineering•Local marketing
•Auto styling &design•Casting & forging•Chassis design•Tooling•Body production•Export mktg.
•Auto styling &design•Casting & forging•Chassis design•Tooling•Body production•Export mktg.
•FWDengineering•CAD/CAM•Assemblycontrolsystems•Advancedcomponenthandling
•FWDengineering•CAD/CAM•Assemblycontrolsystems•Advancedcomponenthandling
•Hydrodynamics•Thermodynamics•Fuel engineering •Emission control•Lubrication•Kinetics& vibration•Ceramics•Electronic controlsystems
•Hydrodynamics•Thermodynamics•Fuel engineering •Emission control•Lubrication•Kinetics& vibration•Ceramics•Electronic controlsystems
•Large-scale design integration•Global logistics•Lifecycle engineering
•Large-scale design integration•Global logistics•Lifecycle engineering
SKD CKDFord Cortina
SKD CKDFord Cortina PonyPony Accent
AvanteSonanta
AccentAvante
Sonanta
ExcelExcel
ProductsProducts
CapabilitiesCapabilities
‘Alpha’engine
‘Alpha’engine
1968 1970 1974 1985 1994-95
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
CAPABILITIES
RESOURCES
POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE
Summary: A Framework for Analyzing Resources and CapabilitiesSummary: A Framework for Analyzing Resources and Capabilities
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.
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.
OUTLINE
Knowledge Management and the Knowledge-based View of the Firm
Knowledge Management and the Knowledge-based View of the Firm
Knowledge Creation
• Research
KnowledgeAcquisition
Knowledge Generation
(“Exploration”)
• Training• Recruitment• Intellectual property licensing• Benchmarking
Knowledge Application
(“Exploitation”)
KnowledgeIntegration
• New product development• Operations
KnowledgeSharing
• Strategic planning• Communities of practice
Knowledge Storage &
Organization
Knowledge Replication
• Best practices transfer• On-the-job training
• Databases• Standard operating practices
Knowledge Measurement
• Intellectual capital accounting• Competency modeling
KnowledgeIdentification
• Project reviews• Competency modeling
Knowledge Processes within the Organization
TO
FROM
TacitKnowledge
ExplicitKnowledge
TacitKnowledge
ExplicitKnowledge
SOCIALIZATIONSharing of tacit knowledge among individuals and from the organization to the individual
EXTERNALIZATION The articulation and systematization of tacit into explicit knowledge. Use of metaphor to communicate tacit concepts
INTERNALIZATIONInstructions and principles are converted into intuition and routines
COMBINATIONA key role of information systems is to combine different units of information and other forms of explicit knowledge
Nonaka’s Knowledge Conversion MatrixNonaka’s Knowledge Conversion Matrix
What is Knowledge Management?What is Knowledge Management?
Definition:“The systematic leveraging of information and expertise to improve organizational innovation, responsiveness, productivity and competency.” (Lotus division of IBM)
I T
I T
On-the-job
Training
On-the-job
Training
New Product Development
New Product Development
Benchmarking
Benchmarking
ResearchResearch
Customer &Market Analysis
Customer &Market Analysis
Intellectual Property
Protection
Intellectual Property
Protection
BestPracticeTransfer
BestPracticeTransfer
CommunicationsCommunications
ScenarioAnalysis
ScenarioAnalysis
Strategic AlliancesStrategic Alliances
IntellectualCapital
Accounting
IntellectualCapital
AccountingCourses & SeminarsCourses & Seminars
T Q MT Q MLessons
learned
Lessons
learned CRMCRM
Data mining
Data mining
E R PE R P
IndividualIndividual OrganizationOrganization
ExplicitExplicit
TacitTacit
InformationFacts
Scientific kn.
DatabasesSystems & procedures
Intellectual property
Skills Organizational capabilities
CRAFTENTERPRISES
‘INDUSTRIAL’ ENTERPRISESTypes
ofKnowledge
Types of
Knowledge
Levels of knowledgeLevels of knowledge
Knowledge Types and Knowledge ConversionKnowledge Types and Knowledge Conversion
Knowledge Transfer MechanismsKnowledge Transfer MechanismsDISSEMINATION
BREADTH
Many
Few
ABILITY TO CODIFYHigh (explicit
kn.. & informationLow (know-how &
contextual kn..)
Personneltransfer
Internalconsultants
On-the job training
Trainingseminars
&courses
Communities-of-practice
Communities -of-interest
Informalvisits
Dataexchange
Shared data
bases
E-mailGroup-ware
Telephone
Fax
Videoconferencing
Meetings
Rules, procedures & directives
Manuals &reportsModular integration
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