Ch. 3: Resources and Capabilities Cristian Marsico - Larry Griffin - Beau Gould Teresita Pinon

Opening Thoughts In this chapter, our focus shifts from the external environment from Ch. 2 to the internal environment We’ll look within the firm and concentrate our attention on the resources and capabilities that firm possesses Examples being used: Hyundai case analysis (from FS book) Realogy Holdings Corp.

Role of Resources and Capabilities in Strategy Formulation Reasons for shift to internal focus: 1.Firms’ industry environments are unstable -> Firms see resources and capabilities as a secure base in strategy formulation 2.It’s apparent that competitive advantage rather than industry attractiveness is the primary source of profitability

THE FIRM ●Goals and Values ●Resources and Capabilities ●Structure and Systems Strategy THE INDUSTRY ENVIRONMENT ●Competitors ●Customers ●Suppliers The Firm- Strategy Interface The Environment- Strategy Interface Interface between strategy and firm

Resource-Based View Rule of thumb: The greater the rate of change in a firm’s external environment, the more likely the “resource-based view” strategy will be used Important to Note: Resources - are the productive assets owned by the firm Capabilities - are what the firm can do

Hyundai Case Analysis Main Points: Started producing cars in 1967; relatively late in car industry In 2009 Hyundai double its net profit; increased sales by 11% and became a world-class car producer Created a series of phased developments; 2 main phases “Knowledge Generation” and “Knowledge Application” Chung, the chairman, faced two main challenges: Building production/research capabilities abroad and enhancing the company’s market knowledge and skills His solution: Entering a joint- venture with a domestic firm and recruiting talented individuals Hyundai overcame perceptions of poor quality with its 10yr/100,000 mile warranty

Realogy Holdings Corp. Realogy Holdings Corp. (NYSE: RLGY) is a global leader in residential real estate franchising and brokerage with many of the best-known industry brands

Realogy Holdings Corp.

Principle Factors Realogy’s business model is structured around their unique "Value Circle" approach. The integration of their company’s services provides their “business units” with excellent cross-selling opportunities while enabling customers to enjoy the convenience of a single-source solution for all their real estate needs. Your Real Estate One Stop Shop!

Identifying the Organization’s Resources Tangible Resources Intangible Resources Human Resources

Identifying the Organization’s Capabilities Organizational Capability - a firm’s capacity to deploy resources for a desired end result Distinctive Competency Core competences

Classifying Capabilities 1.Functional Analysis 2.Value Chain Analysis

Developing Resources and Capabilities The resources/capabilities linkage Path dependency in capability development

Approaches to Capability Development Mergers, acquisitions, and alliances ▫Relational capability Internal Development ▫Best strategy is to develop capabilities sequentially

Hyundai’s Capability Development Assembly and manufacturing Global logistics and lifecycle engineering

Realogy - Development of Capabilities Vertical Integration Strategic Leadership Ethical Responsibility

Appraising Resources and Capabilities Establishing a Competitive Advantage Scarcity Relevance Sustaining a Competitive Advantage Durability Replicability Transferability ▫Geography ▫Imperfect Information ▫Complementarity ▫Organizational Capabilities Incumbency Advantage Strong initial position in technology, distribution channels, reputation, etc. Diseconomy of compressed time strategic moves

Book Example, Hyundai Early Issues Easy to acquire capital, technology, equipment, etc. Developing capabilities in product design and quality assurance Incumbency advantage Creating and Sustaining their Competitive Advantage Chaebol system Continuing Issues Damaged brand due to early issues Had to commit additional funds to marketing and quality assurance

Realogy Holdings Industry Obstacles Fragmented Market General Economic Trends Low Barrier to Entry Franchise model Seasonal Buying Current Model Expected to Die Competitive Advantages Strategic Leadership ▫ Richard Smith Vertical/Horizontal Integration ▫ Title company ▫ Mortgage brokerage ▫ Technology company ▫ Brand Prestige Industry Diversification ▫ CBRE- Commercial focus ▫ JLL- Copr./Investor focus ▫ Stewart- Services focus

Putting Capability Analysis to Work 1. Identify key resources/capabilities 2. Appraise resources/capabilities a.Assess importance b.Assess relative strengths c.Bring it together 3. Develop Strategy Implications a.Exploiting strengths b.Managing weaknesses c.Superfluous strengths?

Book Example, Hyundai ResourcesImportanceStrength R. Finance66 R. Technology74 R. Plant/Equipment89 R. Location45 R. Distribution87 R. Brands64 C. Product Dev89 C. Strategy79 C. Supply Chain78 C. Engineering75 C. Manufacturing88 C. Financial65 C. R&D54 C. Sales/Mktng97 C. Govt.48

Realogy Holdings ResourcesImportanceRelative Strngth R. Finance86 R. Technology77 R. Plant/Equipment25 R. Location35 R. Distribution98 R. Brands88 C. Product Dev55 C. Strategy79 C. Supply Chain75 C. Engineering25 C. Manufacturing25 C. Financial79 C. R&D35 C. Sales/Mktng99 C. Govt.25

Take Aways from Analysis Strengths Distribution Brands Strategic Management Financial Management Sales/Marketing Technology Contributing Reasons Richard Smith, CEO Diversified Company Holdings Company Acquisitions ▫ Zip Realty ▫ Better Homes & Garden Size ▫ 13,500 offices ▫ 255,00 sales associates ▫ 27% of home transactions