Garry Carr

Analysing 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. 2

Environment-Strategy Shifting the Focus of Strategy Analysis: From the External to the Internal Environment THE FIRM Goals & Values Resources & Capabilities Structure & Systems THE INDUSTRY ENVIRONMENT Competitors Customers Suppliers STRATEGY   STRATEGY The Firm-Strategy Interface The Environment-Strategy Interface 3 5

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 4

The evolution of Honda Motor Company Technical Research Institute founded Competes in Isle of Man TT motorcycle races 4-cylinder 750cc motorcycle 1st gasoline-powered car to meet US Low Emission Vehicle Standard Civic Hybrid (dual gasoline/ electric) Portable generator Power products: ground tillers, marine engines, generators, pumps, chainsaws snowblowers Honda wins Indy Championship Civic GS (natural gas powered) 1st motorcycle: 98cc, 2-cycle Dream D 405cc motor cycle 1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006 Acura Car division N360 mini car Home co- generation system 4 cycle engine The 50cc Supercub 1000cc Goldwing touring motor cycle Honda Civic Enters Indy car racing Enters Formula 1 Gran Prix racing First product: Model A clip-on engine for bicycles Begins production of diesel engines 5 2 2

Canon: Products and Core Technical Capabilities 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 6 4 4

Links between Products & Capabilities: Capability-Based Strategy at 3M 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 7

Evolution of Capabilities and Products: 3M 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 8

The Links between Resources, Capabilities and Competitive Advantage INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE INTANGIBLE HUMAN Financial Physical Skills/know-how Capacity for communication & collaboration Motivation Technology Reputation Culture 9

Appraising Resources 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 10

The World’s Most Valuable Brands, 2008 Rank Brand Brand value in 2008, $ bill. Change from 2007 Country of origin 1 Coca-Cola 66.7 -1% USA 2 IBM 59.0 +11% 3 Microsoft -2% 4 GE 53.1 +14% 5 Nokia 35.9 +35% Finland 6 Toyota 34.1 +37% Japan 7 Intel 31.3 6% 8 McDonald’s 31.0 0% 9 Disney 29.3 10 Google 25.6 +96% 11 Mercedes Benz +28% Germany 12 Hewlett-Packard 23.9 +26% 13 BMW 23.3 +36% 14 Gillette 22.1 +5% 15 American Express 21.9 +18% 16 Louis Vuitton 21.6 +34%. France 17 Cisco 21.3 +22% 18 Marlboro 19 Citi 20.2 +1% 20 Honda 19.1 +21% 11 Source: Interbrand

Identifying Organizational Capabilities: A Functional Classification CAPABILITY EXEMPLARS CORPORATE FUNCTIONS Financial control Management development Strategic innovation Multidivisional coordination Acquisition management International management Exxon Mobil, PepsiCo General Electric, Shell Google, Haier Unilever, Shell Cisco Systems, Luxottica Shell, Banco Santander MANAGEMENT INFORMATION Comprehensive, integrated MIS network linked to managerial decision making Wal-Mart, Capital One, Dell Computer R&D Research Innovative new product development Fast-cycle new product development IBM, Merk 3M, Apple Canon, Inditex (Zara) OPERATIONS Efficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response Briggs & Stratton, YKK Toyota, Harley-Davidson Four Season Hotels PRODUCT DESIGN Design capability Nokia, Apple MARKETING Brand management Building reputation for quality Responsiveness to market trends Procter & Gamble, Altria Johnson & Johnson MTV, L’Oreal SALES AND DISTRIBUTION Effective sales promotion and execution Efficiency and speed of order processing Speed of distribution Customer service PepsiCo, Pfizer L. L. bean, Dell Computer Amazon.com Singapore Airlines, Caterpillar 12

A Hierarchy of Capabilities: A Telecom Manufacturer 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) New product development capability Customer Support capability Quality management capability Operations Capability R&D and design capability MIS capability Marketing and sales capability HR management 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 Wave soldering Surface mounting of components INDIVIDUALS’ SPECIALIZED KNOWLEDGE 13 7 7

The Rent-Earning Potential of resources and Capabilities 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 14 8 8

Starting from the inside Starting from the outside Two Approaches to Identifying an Organization’s Resources and Capabilities Starting from the inside Starting from the outside Key Success Factors How do customers choose? What do we need to survive competition? What resources & capabilities do we need to deliver these KSFs? 15

Summary: a Framework for Analysing 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? STRATEGY POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE 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 CAPABILITIES 1. Identify the firm’s resources and capabilities RESOURCES 16 10 10