Internal Analysis: 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 worka how-to guide Creating new capabilities.

Does Industry Matter?

Percentage of variance in firms return on assets explained by: Industry Firm-specific Unexplained effects effects variance

Rumelt (1991) McGahan & Porter (1997) Hawawini et al (2003)

4.0% 18.7% 8.1%

44.2% 31.7% 35.8%

44.8% 48.4% 52.0%

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

Competitors Customers Suppliers

The Firm-Strategy Interface

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 Honda example

The Evolution of Honda Motor Company

Honda Technical Research Institute founded
1st Competes in Isle of Man TT motorcycle races 4-cylinder 750cc motorcycle Portable generator 1st gasoline-powered car to meet US Low Emission Vehicle Standard Power products: ground tillers, marine engines, generators, pumps, chainsaws snowblowers Civic Hybrid (dual gasoline/ electric) Civic GS (natural gas powered)

motorcycle: 98cc, 2-cycle Dream D

405cc motor cycle

1946 1950
4 cycle engine

1955

1960

1965

1970

1975

1980

1985

1990

1995

2000

The 50cc Supercub

N360 mini car Honda Civic 1000cc Goldwing touring motor cycle

Acura Car division

Home cogeneration system

First product: Model A clip-on engine for bicycles

Enters Formula 1 Gran Prix racing

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
Sandpaper Road signs Videotape & markings Floppy disks & Scotchtape Audio tape data storage products Acetate Post-it notes film Housewares/kitchen products Surgical tapes & dressings Pharmaceuticals
Materials sciences Health sciences Flexible circuitry Microreplication

PRODUCTS

CAPABILITIES Abrasives Adhesives

Thin-film technologies

New-product development & introduction

The Links between Resources, Capabilities and Competitive Advantage

COMPETITIVE ADVANTAGE

STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES

INDUSTRY KEY SUCCESS FACTORS

TANGIBLE Financial Physical

INTANGIBLE Technology Reputation Culture

HUMAN

Skills/know-how Capacity for communication & collaboration Motivation

Appraising Resources
RESOURCE
Financial Tangible Resources

CHARACTERISTICS
Borrowing capacity Internal funds generation Plant and equipment: size, location, technology flexibility. Land and buildings. Raw materials. Patents, copyrights, know how R&D facilities. Technical and scientific employees Brands. Customer loyalty. Company reputation (with suppliers, customers, government) Training, experience, adaptability, commitment and loyalty of employees

INDICATORS
Debt/ Equity ratio Credit rating Net cash flow Market value of fixed assets. Scale of plants Alternative uses for fixed assets No. of patents owned Royalty income R&D expenditure R&D staff Brand equity Customer retention Supplier loyalty Employee qualifications, pay rates, turnover.

Physical

Technology Intangible Resources Reputation

Human Resources

Two approaches to identifying an organizations resources and capabilities

Starting from the inside Starting from the outside
Key Success Factors From industry analysis Opportunities and threats

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT FINANCIAL MANAGEMENT & CONTROL

SUPPORT ACTIVITIES

INBOUND LOGISTICS

OPERATIONS OUTBOUND LOGISTICS

MARKETING & SALES

SERVICE

What resources & capabilities do we need to deliver these KSFs?

PRIMARY ACTIVITIES

Identifying Organizational Capabilities: A Functional Classification

FUNCTION Corporate Management CAPABILITY Financial management Strategic control Coordinating business units Managing acquisitions Speed and responsiveness through rapid information transfer Research capability Development of innovative new products Efficient volume manufacturing Continuous Improvement Flexibility Design Capability Brand Management Quality reputation Responsiveness to market trends Sales Responsiveness Efficiency and speed of distribution Customer Service EXEMPLARS ExxonMobil, GE IBM, Samsung BP, P&G Citigroup, Cisco Wal-Mart, Dell Merck, IBM Apple, 3M YKK Nucor, Harley-D Zara, Four Seasons Apple, Nokia P&G, LVMH Johnson & Johnson MTV, LOreal PepsiCo, Pfizer LL Bean, Dell Singapore Airlines Caterpillar

MIS R&D Manufacturing

Design Marketing

Sales, Distribution & Service

Assessing a Companys Resources and Capabilities: The Case of VW

RESOURCES
Importance VWs Relative Strength 4 5 8 CAPABILITIES Importance VWs Relative Strength 4 5 9 7 3 4 4

R1. Finance R2. Technology R3. Plant and equipment

6 7 8

C1. Product development C2. Purchasing C3. Engineering C4. Manufacturing

9 7 7 8 6 6 9

R4. Location R5. Distribution

7 8

4 5

C5. Financial management

C6. R&D C7. Marketing & sales C8. Government relations

Appraising VWs Resources and Capabilities

10

Superfluous Strengths
C8

Key Strengths
C3 R3 C4 C2

Relative Strength

5
R1 C6

R2 R4 C5

R5 C1 C7

1 1

Zone of Irrelevance 5

Key Weaknesses 10

Strategic Importance

Appraising the Capabilities of a Business School

Superfluous strengths

Superior

Key strengths
6 9 3

Relative Strength

Parity Inconsequential weaknesses 8 12 11 10 7

5 2 4 1

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

Key weaknesses
Critically important

Deficient Not important

Importance

Approaches to Capability Development

1) Acquire and develop the underlying resources. Especially human resources
--Externally (hiring) --Internally through developing individual skills (TSMG, TAS)

2) Acquire/access capabilities externally through acquisition or alliance

3) Greenfield development of capabilities 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)

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 outsource activities that can be better performed by other organizations. --How can weaknesses be corrected through acquiring and developing resources and capabilities? 3. Appraise the firms resources and capabilities in terms of: (a) strategic importance (b) relative strength 2. Explore the linkages between resources and capabilities

STRATEGY

POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE

CAPABILITIES

1. Identify the firms resources and capabilities

RESOURCES