Analyzing 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 worka practical guide
 Some game theory observations
Is the simulation game turning out to be a prisoners dilemma,
battle of the sexes, or game of chicken coordination problem?
Consider the recent behavior of some builders
pedal to the metal
Quiet Defect Her Way His Way Chicken Aggressor

Q 1, 1 -2, 2 Her 1, 0 -1, -1 C 0, 0 -2, 2

D His A
2, - 2 -1, -1 -1, -1 0, 1 2, -2 -10, -10

Defect or not His choice or her choice Swerve or not

 Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment

THE FIRM THE

Goals and INDUSTRY
Values ENVIRONMENT
Resources and
Capabilities STRATEGY Competitors
STRATEGY
Structure and Customers
Systems Suppliers

The The
Firm-Strategy Environment-Strategy
Interface Interface
 Rationale for the Resource-based
Approach to Strategy

More variation in profitability within an industry

than between industries (see simulation!)
Still variations in profit within the same strategic group
who are deploying similar assets, follow similar
strategies and have the same mobility barriers
If industry or group doesnt drive profitability then what
does?
Rumelts isolating mechanisms
Resources and capabilities as the primary sources of
profitability embedded in products and services
Also, when the external environment is subject to
rapid change, internal resources and capabilities
may offer a more secure basis for strategy than
market focus.
 The Links between Resources, Capabilities
and Competitive Advantage

INDUSTRY KEY
COMPETITIVE SUCCESS FACTORS
STRATEGY
ADVANTAGE
ORGANIZATIONAL What you do with resources
CAPABILITIES

PROFITS Acronym
Physical RESOURCES
Reputational TANGIBLE INTANGIBLE HUMAN
Organizational
Financial Financial Skills/know-how
Technology Capacity for
Informational Physical
Technological Reputation communication
Skills Culture & collaboration
Motivation
 The Rent-Earning Potential
of Resources and Capabilities

What is rent? THE EXTENT OF THE Scarcity

COMPETITIVE ADVANTAGE
ESTABLISHED Relevance

Durability
THE PROFIT
EARNING POTENTIAL SUSTAINABILITY OF THE Transferability
OF A RESOURCE OR COMPETITIVE
CAPABILITY ADVANTAGE Replicability

Property rights

Relative
APPROPRIABILITY bargaining power

Other frameworks Embeddedness

VRIO/VRINE (Barney, 1991/2003)
Heterogeneity, ex-ante/ex-post/imperfect mobility/ (Peteraf, 1993)
 Competitive Advantage
Scarcity and relevance
All value (rent) comes from scarcity relative to demand (Lewin and
Phelan)
Oxygen on moon, Worlds oldest janitor
Monopoly rent=artificial scarcity, Ricardian rent=natural scarcity
Differential rent = difference in the quality between resources (talent, fertility)
Marshallian or entrepreneurial rent = temporary scarcity
Quasi-rents relates to generating more rent in one use than another (Jordan
with Bulls), see also X-inefficiency or infra-marginal efficiency
Asset accumulation (Dierickx & Cool, 1986)
Not all rare assets are tradeable must be accumulated (built) over time
Reputation, brand name, tacit knowledge stocks and flows
Samurai swords, English country gardens
Implication
Acquire or develop scarce resources to create value
Recognize that competitors might have superior resources
Resources can earn more rent in some uses than others
 Sustainability of Rents
Durability longer lived assets produce more rents (rents
are a flow, value is a stock)
Ex-post limits to competition (I in VRIO)
Why doesnt supply increase?
Naturally (or artificially) scarce
(BLM) land, Michael Jordans quasi-rents (until cloning)
Information or time
Time compression diseconomies or causal ambiguity
Lack of close substitutes
Questions:
Why do business professors earn more than liberal arts professors?
Why do professors at Harvard earn more than professors at UNLV?
 Appropriability
Who claims the rent stream?
Importance of property rights
Contracts, rule of law as engine of economic growth
Firms/owners as residual claimants
Strategic Factor Markets (Barney, 1986)
Superior information or luck (Peteraf ex-ante limits to competition)
Utah Railroad Game
Labor and mobility (Peteraf imperfect mobility)
Culkin, Home Alone
Bargaining power and value-added again
Resources will flow to maximise quasi-rents
Champion team versus team of champions
Superior coordination and cooperation (culture) advantages (the O in
Barneys VRIO)
 Appraising Resources
RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternative uses for
Raw materials. fixed assets

Technology Patents, copyrights, know how No. of patents owned

R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure
Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity

reputation (with suppliers, customers, Customer retention
government) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.
 Capabilities
A firms capacity to deploy resources for a
desired end result
Core competences make a disproportionate
contribution to ultimate customer value
(products)
Honda engine tech for instance.
Capabilities as routines
Hierarchy of capabilities
 Identifying Organizational Capabilities:
A Functional Classification
FUNCTION CAPABILITY EXEMPLARS
Corporate Financial management ExxonMobil, GE
Management Strategic control IBM, Samsung
Coordinating business units BP, P&G
Managing acquisitions Citigroup, Cisco
MIS Speed and responsiveness through Wal-Mart, Dell
rapid information transfer Capital One
R&D Research capability Merck, IBM
Development of innovative new products Apple, 3M
Manufacturing Efficient volume manufacturing Briggs & Stratton
Continuous Improvement Nucor, Harley-D
Flexibility Zara, Four Seasons
Design Design Capability Apple, Nokia
Marketing Brand Management P&G, LVMH
Quality reputation Johnson & Johnson
Responsiveness to market trends MTV, LOreal
Sales, Distribution Sales Responsiveness PepsiCo, Pfizer
& Service Efficiency and speed of distribution LL Bean, Dell
Customer Service Singapore Airlines
Caterpillar
 Eastman Kodaks Dilemma

Resources & Capabilities Businesses

Chemical Imaging Film
1980s Organic Chemistry Cameras
Polymer technology Fine Chemicals
Optomechtronics
Pharmaceuticals
Thin-film coatings
Brands Diagnostics
Global Distribution

1990s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital Digital Imaging

imaging capability Products (e.g. Photo CD
System; Advantix
cameras & film
Evolution of Capabilities and Products: 3M

Sandpaper Road signs Videotape

Carborundum & markings Floppy disks &
mining Scotchtape Audio tape data storage
products
Acetate
Post-it notes
film Housewares/kit-
PRODUCTS
Surgical tapes chen products
& dressings
Pharmaceuticals
Materials sciences
Flexible
Health sciences circuitry
CAPABILITIES Microreplication
New-product
Abrasives Adhesives Thin-film development &
technologies introduction
 The Value Chain:
The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

 The Porter Value Chain

FIRM INFRASTRUCTURE
SUPPORT
HUMAN RESOURCE MANAGEMENT ACTIVITIES
TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY
ACTIVITIES
 The Architecture of Organizational Capability

ORGANIZATIONAL
CAPABILITY

SKILLS &
KNOWLEDGE Organization Management
Structure Systems
VALUES
TECHNICAL & NORMS RESOURCES
MANAGERIAL
SYSTEMS Human skills & know-how
SYSTEMS Technology
Culture (values, norms)

Dorothy Leonard Core Capabilities

A modified view
& Core Rigidities
 Two approaches to identifying an
organizations resources and capabilities

Starting from the inside Starting from the outside

Key Success Factors

How do customers choose?
FIRM INFRASTRUCTURE
What do we need to survive
SUPPORT
HUMAN RESOURCE MANAGEMENT ACTIVITIES competition?
TECHNOLOGY DEVELOPMENT
FINANCIAL MANAGEMENT & CONTROL

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE What resources & capabilities

LOGISTICS LOGISTICS & SALES
do we need to deliver these
KSFs?
PRIMARY
ACTIVITIES
 Assessing a Companies Resources
and Capabilities: The Case of VW
Importance VWs VWs
RESOURCES CAPABILITIES Importance Relative
Relative
Strength Strength

C1. Product
R1. Finance 6 4 9 4
development

R2. Technology 7 5 C2. Purchasing 7 5

R3. Plant and equipment 8 8 C3. Engineering 7 9

C4. Manufacturing 8 7
R4. Location 7 4
C5. Financial
6 3
management
R5. Distribution 8 5
C6. R&D 6 4

C7. Marketing &

9 4
sales

C8. Government
4 8
relations
 Appraising VWs Resources and Capabilities

(Hypothetical only)

10 Key Strengths
Superfluous Strengths
C3
R3
Relative Strength

C8
C4

C2
R2 R5
5
R1 R4 C1
C6 C7
C5

Zone of Irrelevance Key Weaknesses

1
1 5 10
Strategic Importance
 Appraising the Capabilities of a
Business School (illustrative only)
C1 Alumni relations
C2 Student
Superior Superfluous Key strengths placement
strengths 6 C3 Teaching
C4.Administration
C5 Course devlpmnt
9
Relative Strength

C6 Student
3 recruitment
C7 Research
C8 Corporate
Parity 5 relations
Inconsequential 2 C9 Marketing
weaknesses 8 C10 IT
4 C11 PR
12 C12 HRM
1
11
7 Key weaknesses
Deficient 10

Not Critically
important important
Importance
 Case
What is basis of competitive advantage in
soccer?
What is the relationship between strategy
and financials?
What resources and capabilities should Man
U develop?