Business, Operations and Supply Chain Strategy (BOSCS) Business and Operations Strategy: Resource-based View & Capabilities-based View (part 1) BOSCS Resource-based View & Capabilities-based View (1)

Teaching schedule for business and operations strategy Topic Case studies 1 Introduction to business strategy 2 Key models in business strategy: activity-system view 3 resource-based view & capabilities-based view 4 Introduction to operations strategy Practice case study 5 Strategic management of operations technology 6 Strategic management of operations capacity BOSCS Introduction to Business Strategy & Activity-System View

An expanded map of business strategy 1. Industry & market environment 2. Business strategy 5. Business performance 8. Distinctive capabilities 3. Activities 4. Organisation of business processes 4. Organisation 6. Endowments of tangible & intangible resources 7. Resource commit-ments BOSCS Resource-based View & Capabilities-based View (2)

Inside-out versus outside-in Two key determinants of business profitability: ‘industry’ effects that are related the attractiveness of a particular industry; ‘business-specific’ effects that are related to the competitive advantage that a particular business has over its rivals in the industry. Inside-out perspective: first evaluate the resources or capabilities possessed by the business, and then select the industry and market environments in which these resources can be exploited in the most profitable manner. BOSCS Resource-based View & Capabilities-based View (1)

Endowments of tangible resources [Concept #6 in the map] ‘Transforming’ resources (durable resources or ‘assets’ ): land buildings machines (capital equipment) ‘To-be-transformed’ resources (non-durable resources): materials Money (financial resources) is the ultimate ‘all-purpose’ type of asset. BOSCS Resource-based View & Capabilities-based View (1)

Intangible resources (intangible assets) Relational assets Skills and competences

Relational assets Relationships with (internal) employees - based on implicit as well as explicit employment contracts. Relationships with (external) suppliers of materials, as well as suppliers of tangible assets. Relationships with (external) customers – principally in the form of the ‘reputation’ of the business, which may be made more tangible in consumer brands owned by the business. BOSCS Resource-based View & Capabilities-based View (1)

Skills and competences (technological or organisational) Explicit knowledge - which may be made more tangible in patents owned by the business or in manuals containing standard operating procedures. (Implicit or ‘tacit’) routines - that is, standardised , but typically tacit , rules and procedures for carrying out certain tasks.   Employee attitudes or, more broadly speaking, organisational culture – that is, fundamental shared values and beliefs of the employees, as well as the special language used, mental models employed and norms of behaviour followed among employees.

Role of human resources Many, if not most, intangible assets are somehow embodied in people (in particular, employees of the business). To be truly durable , these assets should not be lost to any substantial degree if individual people leave their employment.

Commitments of resources [Concept #7 in the map] Resource commitment : commitment of a durable resource (asset) – either in its original form or after conversion to a more specialised form – to a specific range of tasks in line with the business strategy. A resource commitment implies a relatively high degree of ‘specificity’ and ‘irreversibility’, and is a form of ‘specific investment’: the increase in productivity is counterbalanced by a potential loss of flexibility.

Transaction -specificity (or relationship- specificity) Types of specificity Usage -specificity Caused by specialisation Productivity of the asset is much greater in a particular use than in the next best alternative Transaction -specificity (or relationship- specificity) Firm -specificity

Transaction-specific resources (assets) ‘Transaction-specific’ (or ‘relationship- specific’ ) asset: productivity of the asset would be much lower when used outside the particular transaction (or relationship) in which it is currently used. Important cause: ‘co-specialisation’ of two (or more) assets, each of which is independently owned.

Hold-up Threat that the other party (or parties) involved in the transaction or relationship that governs the use of a particular asset or set of assets, might terminate that relationship. The other party might use this threat to appropriate a greater share of the added value created by the use of the asset(s) than was initially agreed – leaving the business worse off. Hold-up is a serious potential threat is when the asset in question is somehow ‘mobile’.

Firm-specific resources (assets) Resource commitments that create or further develop intangible assets constitute specific investments, involving firm-specificity as well as (or even instead of) usage-specificity. Typically, the more intangible an asset, the more firm-specific it is likely to be. Firm-specificity neither implies nor excludes usage-specificity. Assets that are firm-specific but not usage- specific give rise to ‘economies of scope’ and ‘core competences’ .

Sources of uniqueness Outside-in, activity-system perspective: clear trade-off decisions (reflecting choice of generic strategy); tight fit between activities making up the activity system. Inside-out, resource-based perspective: endowments of, and investments in, firm-specific assets; especially those intangible assets that – being firm- specific, but not usage-specific – give rise to economies of scope in general, and core competences in particular; the attractiveness of any particular industry is rather less important than possessing the core competences to compete in a range of markets.

Threats to the advantage gained from firm-specific resources Threats to the added value created by the use of a particular resource: imitation substitution  Threats to the appropriability by the business of the added value created (if the resource is not owned, or its use fully controlled, by the business): ‘hold-up’ ‘slack’

Strategic assets In the resource-based view, uniqueness is primarily derived from firm-specific assets in general, and core competences in particular. But a basis for competitive advantage may also be derived from ‘strategic assets’ : durable tangible or intangible resources that are unique to the business that possesses them (e.g. monopoly position or cost advantage based on ‘sunk costs’); less firm-specific (but maybe more usage-specific) than core competences – therefore, competitive advantage tends to be less sustainable.

Capabilities-based view as a synthesis Activities and resources are complementary components of business processes, each of which must be organised into a coherent whole. They should not be analysed in isolation, but only in relation to the organisation of the overall production system. Therefore, the outside-in, activity-system and the inside-out, resource-based views should not be seen as mutually exclusive, but as largely complementary instead. We shall refer to the resulting synthesis as the capabilities-based view.

Organisation of business processes [Concept #4 in the map] ‘PARC’ view of business organisation (Roberts, 2004): ‘People’ refers to the skills, beliefs, attitudes and objectives of the set of people (owners, employees, contractors) who are part of the organisation. ‘Architecture’ refers to both ‘hard’ and ‘soft’ features of the organisation. ‘Routines’ refers to managerial, work and support processes.  ‘Culture’ refers to the fundamental shared values, beliefs, special language, mental models, and norms of behaviour of the people in the business. In the above list, people, architecture, routines and culture are all sources of firm-specific intangible assets (that is, skills & competences and relational assets). More particularly, Roberts’ concept of ‘routines’ refers to the ways in which business processes are organised and repetitively enacted. BOSCS Resource-based View & Capabilities-based View (1)

Definition of a business process A business process is a set or sequence of complementary activities of a repetitive nature that is intended to achieve a specified set of performance objectives. In a general sense, these objectives relate to the capabilities of the process to add value to the to- be-transformed resources flowing through it. The key components of a business process are: activities (or tasks), resources (including assets), and the way in which these activities and resources are organised into a coherent whole. MBP - Lecture 1-1 - Review of business processes

Importance of complementarities Complementary activities (Milgrom & Roberts, 1992) are ones for which increases in the level of some of the activities raise the marginal effectiveness of the others. In other words, complementary activities are mutually reinforcing. Therefore, to manage a business process effectively, one should look at the process as a whole, rather than at individual activities in isolation.

Elements of process design Key elements in the design of business processes: Task design Workflow design Organisational design

Task and workflow design Task design consists of: definition of the tasks necessary to achieve specified performance objectives; allocation of transforming resources to tasks (or, conversely, allocation of tasks to transforming resources). Workflow design consists of: determination of the flows of to-be-transformed resources; location of the storage points of to-be-transformed resources.

Organisational design Organisational design consists of: coordination (or integration ) of tasks and workflows: planning of tasks and workflows: setting performance objectives control of tasks and workflows: monitoring the achievement of performance objectives and taking corrective action where necessary motivation (or reward ) of human resources participating in tasks and workflows. BOSCS Resource-based View & Capabilities-based View (1)

Choices in organisational design Specialisation : Task specialisation Resource specialisation Standardisation : Task standardisation Resource standardisation Centralisation : The focus of authority to make decisions Configuration : The relationships between organisational positions or jobs (as expressed in a chart of the organisational hierarchy)

Definition of capabilities [Concept #8 in the map] Capabilities can be defined as: firm-specific intangible assets that emerge from the organisation and repetitive enactment of a coherent set of business processes constituting a production system. Capabilities enable the business to add value to the to-be-transformed resources (materials, customers, information) flowing through it. In other words, capabilities enable the business to achieve specific performance objectives in terms of customer service and/or the efficiency of resource utilisation. BOSCS Resource-based View & Capabilities-based View (1)

Durability of capabilities The durability of the capabilities (as threatened by imitation and substitution, as well as hold-up and slack) appears to be strongly related to two key aspects of the business system: the fit among the activities (tasks) that the business undertakes (according to the activity-system view); the durability of the intangible resources that it possesses (according to the resource-based view). Both fit and durability ultimately depend on how effectively the organisation of the production system reflects the complementarities between the different (strategic) choice variables relating to activities and resources.

Importance of systems effects A production system can be regarded as a coherent set of (cross-functional) business processes. The design of any production system comprising complementary processes must take account of all their mutually reinforcing interrelationships to be effective. Complementarities between strategic choice variables give rise to systems effects , with the whole being more than the sum of the parts. Complementarities may result in multiple coherent patterns (‘configurations’) of choice variables. In practice, there is unlikely to be ‘one best way’ to do things.

Distinctive capabilities The key attributes of distinctive capabilities are: uniqueness durability leverage Important questions: Are there likely to be significant trade-offs between distinctive capabilities in practice, ? Or would it be possible to construct a ‘world- class’ production system in which such trade- offs have essentially been overcome?