Ellen Drost, 2014 Internal Analysis: Analyzing Resources and Capabilities Dr. Ellen A. Drost

Ellen Drost, 2014 Outline   Understanding resources and capabilities and core competency   Functional perspective and the value chain   How to assess a capability   How to sustain/develop a capability

Ellen Drost, 2014 Resources and Capabilities of the Firm   How do companies use their resources, capabilities, and core competencies to create value for customers?   Will changes in the environment make companies core competencies obsolete?   Are substitutes available for their core competencies?   Are core competencies easily imitated?

Ellen Drost, 2014 Competing on Resources   Case: – –Consider the competitive conditions in which whole-sale or warehouse type businesses compete. – –The industry-based view suggests that all firms “ stuck ” in this industry are likely to suffer.   Question: – –How can Wal-Mart and Target consistently do well in such an unattractive industry even during periods of recession?

Ellen Drost, 2014 Competing on Resources (cont’d)   Answer: – –There must be resources and capabilities specific to successful firms like Wal-Mart and Target that are not shared by their unsuccessful competitors in the same industry.   This insight has been developed into a resource-based view, which has emerged as one of the two leading perspectives on strategy.

Ellen Drost, 2014 Competing on Resources (cont’d)   Focus of the industry-based view: – –How “average” firms within an industry compete.   Focus of the resource-based view: – –How individual firms differ from each other within an industry and can outperform the industry average consistently and significantly.

Ellen Drost, 2014 Resources and Capabilities   The Resource-based View – –A firm consists of a bundle of productive resources and capabilities.   Resources – –The tangible and intangible assets a firm uses to choose and implement its strategies.   Capabilities – –The skills a firm can use to bring its resources to bear. “a firm’s capacity to deploy resources for a desired end result” (page 122, Grant & Jordan, 2012)

Ellen Drost, 2014 Resources of the Firm   Tangible – –Resources and capabilities that are observable and easily quantified – –Broadly organized in four categories:   Financial   Physical   Organizational   Intangible –Resources and capabilities not easily observed or difficult (or impossible) to quantify –Examples include:  Human  Technological –innovation  Reputation

Ellen Drost, 2014 RESOURCECHARACTERISTICS INDICATORS FinancialBorrowing capacityDebt/ Equity ratio Internal funds generationCredit rating TangibleNet cash flow Resources PhysicalPlant and equipment:Market value of size, location, technologyfixed assets. flexibility.Scale of plants Land and buildings.Alternative uses for Raw materials.fixed assets TechnologyPatents, copyrights, know howNo. of patents owned R&D facilities.Royalty income IntangibleTechnical and scientificR&D expenditure ResourcesemployeesR&D staff ReputationBrands. Customer loyalty. CompanyBrand equity reputation (with suppliers, customers,Customer retention government)Supplier loyalty HumanTraining, experience, adaptability,Employee qualifications, Resourcescommitment and loyalty of employeespay rates, turnover. Identifying Resources

Ellen Drost, 2014 Identifying Capabilities   What is a capability?   A firm’s capacity to undertake a particular productive activity   An activity that creates competitive advantage   Distinctive competence or core competence   Capability as a routine   Classify capabilities   Functional analysis   Value chain analysis

Ellen Drost, 2014 FUNCTIONCAPABILITYEXEMPLARS CorporateFinancial managementExxonMobil, GE ManagementStrategic controlIBM, Samsung Coordinating business units BP, P&G Managing acquisitionsCitigroup, Cisco MISSpeed and responsiveness throughWal-Mart, Dell rapid information transferCapital One R&DResearch capabilityMerck, IBM Development of innovative new productsSony, 3M ManufacturingEfficient volume manufacturingBriggs & Stratton Continuous ImprovementNucor, Harley-D Flexibility Zara, Southwest Air Design Design CapabilityApple, Nokia Marketing Brand ManagementP&G, LVMH, PepsiCo Quality reputationJohnson & Johnson Responsiveness to market trendsMTV, L’Oreal Sales, Distribution Sales ResponsivenessPepsiCo, Pfizer & ServiceEfficiency and speed of distributionAmazon, Dell Customer ServiceSingapore Airlines Caterpillar is Identifying Capabilities – Functional Analysis

Ellen Drost, 2014 Value Chain Analysis Value Chain Analysis FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUNDOPERATIONSOUTBOUNDMARKETINGSERVICE LOGISTICSLOGISTICS& SALES PRIMARY ACTIVITIES SUPPORT ACTIVITIES

Ellen Drost, 2014 Value Chain Analysis   Shows how a bundle of resources and capabilities come together to add value. – –Forces strategists to think about firm resources and capabilities at a micro-activity-based level. – –The key is to examine whether the firm has the resources and capabilities to perform a particular activity in a manner superior to competitors.   Requires that strategists ascertain a firm’s strengths and weaknesses on an activity-by-activity basis, relative to rivals, in a SWOT analysis.

Ellen Drost, 2014 Value Chains are Part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Each firm must at some point in time find a way to become a part of a buyer’s value chain A critical basis for differentiation is the ability to play a role in a buyer’s value chain

Ellen Drost, 2014 The Nature of Capability   Capabilities are the outcomes of processes or routines – –Organizational processes – –Routinization   Hierarchy of capabilities – –Specialization – –Cross-functional

Ellen Drost, 2014 Appraising Resources and Capabilities   Establishing competitive advantage – –Scarcity – –Relevance   Sustaining competitive advantage – –Durability – –Transferability – –Replicability

Ellen Drost, 2014 Analyzing Resources and Capabilities   Identify   Appraise   Assessing importance   Assessing relative strength

Ellen Drost, 2014 Developing Resources and Capabilities   Company’s capabilities today are the result of its history (path dependency)   Linkage between resources and capabilities   Dynamic capabilities – –Ability to integrate, integrate and reconfigure internal and external competences to address rapidly changing environments

Ellen Drost, Summer 2007 Dynamic Capabilities in Slow- and Fast-Moving Industries Table 3.3

Approaches to Capability Development   Acquisition   Internal development – –Focus and sequencing   Incremental development

Internal Development of Capability   Integrating resources into capabilities, requires organizational processes which are facilitates by organization culture and strategic intent.   These processes, which are a combination of human and non-human resources, perform a capability which becomes a core capability through routinization, management systems supported by appropriate strategic intent (adapted from Grant & Jordan, 2012, page 152)