DEVELOPING STRATEGIES FOR COMPETITIVE ADVANTAGE Session 4 Analyzing Resources and Capabilities Session 4 Analyzing Resources and Capabilities 1

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. OUTLINE Analyzing Resources & Capabilities 2

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

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 Rationale for the Resource-based Approach to Strategy 4

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

Precision Mechanics Fine Optics Micro- Electronics 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 Mask aligners Excimer laser aligners Stepper aligners Inkjet printer Laser printer Color video printer Digital commercial printer Calculator Notebook computer Binoculars Canon: Products and Core Technical Capabilities 6

Carborundum mining Carborundum mining Sandpaper Scotchtape Road signs & markings Road signs & markings Post-it notes Audio tape Surgical tapes & dressings Surgical tapes & dressings Videotape Acetate film Acetate film Floppy disks & data storage products Floppy disks & data storage products Pharmaceuticals Housewares/kit- chen products Housewares/kit- chen products Abrasives Adhesives New-product development & introduction New-product development & introduction Thin-film technologies Thin-film technologies PRODUCTS CAPABILITIES Materials sciences Health sciences Microreplication Flexible circuitry Flexible circuitry Links between Products & Capabilities: Capability-Based Strategy at 3M Links between Products & Capabilities: Capability-Based Strategy at 3M 7

Carborundum mining Carborundum mining Sandpaper Scotchtape Road signs & markings Road signs & markings Post-it notes Audio tape Surgical tapes & dressings Surgical tapes & dressings Videotape Acetate film Acetate film Floppy disks & data storage products Floppy disks & data storage products Pharmaceuticals Housewares/kit- chen products Housewares/kit- chen products Abrasives Adhesives New-product development & introduction New-product development & introduction Thin-film technologies Thin-film technologies PRODUCTS CAPABILITIES Materials sciences Health sciences Microreplication Flexible circuitry Flexible circuitry Evolution of Capabilities and Products: 3M 8

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

Appraising Resources RESOURCECHARACTERISTICSINDICATORS 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

CompanyValuation ratio CountryCompanyValuation ratio Country Yahoo! Japan72.0JapanCoca-Cola7.8US Colgate-Palmolive20.8USDiageo7.4UK Glaxo Smith Kline13.4UK3M7.3US Anheuser-Busch12.6USNokia6.7Finland eBay11.2USSanofi-Aventis6.3France SAP10.8GermanyAstraZeneca5.9UK Yahoo!10.7USJohnson & Johnson5.7US Dell Computer10.0USBoeing5.7US Sumitomo Mitsui Financial8.8JapanEli Lily5.6US Procter & Gamble8.4USCisco Systems5.5US Qualcomm8.3USRoche Holding5.5Switz. Schlumberger8.2USL’Oreal5.3France Unilever8.1Neth/UKAltria5.2US PepsiCo8.0USNovartis5.1Switz. Firms with the Highest Ratios of Market value to Book Value (December 2006) Firms with the Highest Ratios of Market value to Book Value (December 2006) 11

Source: Interbrand RankBrandBrand value in 2008, $ bill. Change from 2007 Country of origin 1Coca-Cola66.7-1%USA 2IBM %USA 3Microsoft59.0-2%USA 4GE %USA 5Nokia %Finland 6Toyota %Japan 7Intel31.36%USA 8McDonald’s31.00%USA 9Disney %USA 10Google %USA 11Mercedes Benz %Germany 12Hewlett-Packard %USA 13BMW %Germany 14Gillette22.1+5%USA 15American Express %USA 16Louis Vuitton %.France 17Cisco %USA 18Marlboro21.30%0%USA 19Citi20.2+1%USA 20Honda %Japan The World’s Most Valuable Brands,

Identifying Organizational Capabilities: A Functional Classification Identifying Organizational Capabilities: A Functional Classification FUNCTIONCAPABILITYEXEMPLARS 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&DResearch Innovative new product development Fast-cycle new product development IBM, Merk 3M, Apple Canon, Inditex (Zara) OPERATIONSEfficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response Briggs & Stratton, YKK Toyota, Harley-Davidson Four Season Hotels PRODUCT DESIGNDesign capabilityNokia, Apple MARKETINGBrand 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 13

TECHNOLOGYPRODUCT DESIGNMANUFACTURINGMARKETINGDISTRIBUTIONSERVICE The Value Chain: The McKinsey Business System The Value Chain: The McKinsey Business System 14 ©

FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUNDOPERATIONSOUTBOUNDMARKETINGSERVICE LOGISTICSLOGISTICS& SALES PRIMARY ACTIVITIES SUPPORT ACTIVITIES The Porter Value Chain 15

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 A Hierarchy of Capabilities: A Telecom Manufacturer A Hierarchy of Capabilities: A Telecom Manufacturer New product development capability Customer Support capability Quality management capability Operations Capability Marketing and sales capability MIS capability HR management capability R&D and design capability Test engineering capability Product engineering capability Process engineering capability Materials management capability Manufacturing capability System assembly Printed circuit- board assembly Telset assembly Surface mounting of components Wave soldering Manual insertion of components Automated through-hole component insertion 16

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 PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY The Rent-Earning Potential of resources and Capabilities The Rent-Earning Potential of resources and Capabilities 17

Relative Strength Strategic Importance Superfluous Strengths Key Strengths Zone of IrrelevanceKey Weaknesses R1 R2 R3 R4 R5 C1 C2 C3 C4 C5C6 C7 C8 (Hypothetical only) Appraising VW’s Resources and Capabilities C9 R6 18

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 Capabilities 19