MKT 450 Strategic Management Mishari Alnahedh

LECTURE 3: RESOURCES & CAPABILITIES

What are the drivers of sustainable competitive advantage? Learning Objectives Mishari Alnahedh What are the drivers of sustainable competitive advantage? How do firms create capabilities? What are four criteria used to determine if a firm’s resources are core competencies? How is value-chain analysis related to “core competencies?” How can a firm prevent core competencies from becoming core rigidities?

Environment-Strategy Analyzing Resources & Capabilities Mishari Alnahedh Shifting the Focus of Strategy Analysis: From the external to the internal environment THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers THE FIRM Goals and Values Resources and Capabilities Structure and Systems STRATEGY STRATEGY The Firm-Strategy Interface The Environment-Strategy Interface © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Rationale for the Resource-based Approach to Strategy Mishari Alnahedh 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

Differentiation Advantage Competitive Advantage Through Resources & Capabilities Mishari Alnahedh Cost Advantage Technology Manufacturing Organization and Culture Differentiation Advantage Marketing, Sales and Service Brand Name Capital Product Development Organization

COMPETITIVE ADVANTAGE COMPETITIVE ADVANTAGE Appraising the Strategic Importance of Resources & Capabilities Mishari Alnahedh THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED Scarcity Relevance Durability THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability Replicability Property rights Relative bargaining power APPROPRIABILITY Embeddedness © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Links between Resources, Capabilities & Competitive Advantage Mishari Alnahedh COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE INTANGIBLE HUMAN Financial Physical Technology Reputation Culture Skills/Know how Capacity for communication & collaboration Motivation © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Precision Fine Mechanics Optics Micro- Electronics Canon : Products & Core Technical Capabilities Mishari Alnahedh Precision Mechanics Fine Optics 35mm SLR camera Compact fashion camera EOS autofocus camera Digital camera Video still camera Video security systems Camcorders Plain-paper copier Color copier Color laser copier Laser copier Basic fax Laser fax Scanners Binoculars Mask aligners Excimer laser aligners Stepper aligners Inkjet printer Laser printer Color video printer Digital commercial printer Calculator Notebook computer Micro- Electronics © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

3M: Evolution of Products & Capabilities Mishari Alnahedh Road signs & markings Videotape Sandpaper Carborundum mining Floppy disks & data storage products Scotchtape Audio tape Acetate film Post-it notes Housewares/kit- chen products PRODUCTS Surgical tapes & dressings Pharmaceuticals Materials sciences Flexible circuitry Health sciences CAPABILITIES Microreplication New-product development & introduction Thin-film technologies Abrasives Adhesives © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

A Hierarchy of Capabilities: A Telecom Manufacturer Mishari Alnahedh © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Appraising Resources Resource Characteristics Indicators Mishari Alnahedh Resource Characteristics Indicators Tangible Resources Financial Borrowing capacity Internal funds generation Debt/Equity ratio Credit rating Net cash flow Physical Plant and equipment: Size, location, technology flexibility. Land and buildings Raw materials Market value of fixed assets. Scale of plants Alternative uses for fixed assets Intangible Resources Technology Patent, 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 Human Resources Training, experience, adaptability, commitment and loyalty of employees Employee qualifications, Pay rates, turnover © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

How Do Resources Lead to Competitive Advantage ? Mishari Alnahedh How Do Resources Lead to Competitive Advantage ? Valuable Does it create “value” for the customer? Rare Do other firms have similar resources? Difficult to Imitate/Substitute Unique Historical Conditions Causal Ambiguity Organization Are you organized to take advantage of your resources?

Value Chain Analysis Mishari Alnahedh Using Value Chain Analysis to Determine The Sources of Competitive Advantage Value chain represents the internal activities a firm engages in when transforming inputs into outputs. Value chain analysis is a process where a firm identifies its primary and support activities that add value to its final product and then analyze these activities to reduce costs or increase differentiation. Beyond simply using a value chain analysis to “map out” the sequence of activities, we need to ask the following: What is the cost structure of each of these activities? How do we compare with other competitors in each of these areas? What are our strengths and weaknesses?

The Porter Value Chain Mishari Alnahedh Identifying a Firm’s Resources & Capabilities Through Value Chain Analysis What sequence of activities are involved in creating value? Firm Infrastructure Human Resource Management Technology & Product Development Purchasing & Inbound Logistics Production Distribution Marketing & Sales Service MARGIN © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Value Chain Analysis : Example Mishari Alnahedh An automobile manufacturing company © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Value Chain Analysis : Example Mishari Alnahedh WashyWashy Inc. © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

Value Chain Analysis Mishari Alnahedh Outsourcing is the purchase of a value creating activity from an external supplier Nissan Motor Co. has signed a $1 billion contract with IBM. Covering a 9-year period, the arrangement calls for IBM to manage Nissan’s North American computer systems. ● IBM will handle software and hardware for various functions, including payroll, human resources, and car distribution. Nissan expects its outsourcing decision to reduce its costs.

Value Chain Analysis Mishari Alnahedh Outsourcing activities in which it lacks capabilities, the firm can concentrate fully on those areas in which it can create value. For example, Dell Computer Corporation outsources most of its manufacturing and customer service activities, so it can concentrate on creating value through its distribution channels.

Value Chain Analysis Mishari Alnahedh Outsourcing activities can have the unintended consequence of damaging the firm’s potential to evaluate continuously its key assumptions, learn, and create new capabilities and core competencies. Therefore, managers should verify that the firm does not outsource activities that stimulate the development of new capabilities and competencies.

Summary: The Framework for Analyzing Resources & Capabilities Mishari Alnahedh 3. Develop strategy implications: (a) How can strengths be exploited most effectively? (b) In relation to weaknesses: --Which activities can be outsourced? --Can a strategy that minimizes the impact of weaknesses be selected? --Can resources/capabilities be strengthened by investment? STRATEGY POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE 2. Appraise the firm’s resources and capabilities in terms of: (a) strategic importance (b) relative strength CAPABILITIES 1. Identify the firm’s resources and capabilities RESOURCES © 2013 Robert M. Grant www.contemporarystrategyanalysis.com

The downside of the resource-based approach: Inertia & Flexibility Mishari Alnahedh The downside of the resource-based approach: The Problem of Inertia Prior Strategic Commitments Overcoming these Obstacles Experimentation and Renewal

Case: Eastman Kodak’s Quest for a Digital Fortune NEXT CLASS ! Case: Eastman Kodak’s Quest for a Digital Fortune Often, we learn from failures more than from successes Focus on resources and capabilities