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Analyzing Resources & Capabilities The role of resources and capabilities in strategy formulation. The resources of the firm Organizational capabilities.

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Presentation on theme: "Analyzing Resources & Capabilities The role of resources and capabilities in strategy formulation. The resources of the firm Organizational capabilities."— Presentation transcript:

1 Analyzing Resources & Capabilities The role of resources and capabilities in strategy formulation. The resources of the firm Organizational capabilities Appraising the profit potential of resources and capabilities Creating new capabilities. OUTLINE

2 THE FIRM Goals and Values Resources and Capabilities Structure and 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 Shifting the Focus of Strategy Analysis: From the External to the Internal Environment

3 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 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 Honda FCX fuel cell car The Evolution of Honda Motor Company

5 Precision Mechanics Fine Optics Micro- Electronics 35mm SLR camera Compact fashion camera EOS autofocus camera Digital camera Video still camera Plain-paper copier Color copier Color laser copier Laser copier Basic fax Laser fax Mask aligners Excimer laser aligners Stepper aligners Inkjet printer Laser printer Color video printer Calculator Notebook computer Canon: Products and Core Technical Capabilities

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

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 Eastman Kodak’s Dilemma 1980’s 1990’s Resources & CapabilitiesBusinesses Chemical Imaging Organic Chemistry Polymer technology Optomechtronics Thin-film coatings Brands Global Distribution Film Cameras DIVESTS : Eastman Chemical, Sterling Winthrop, Diagnostics Need to build digital imaging capability Digital Imaging Products (e.g. Photo CD System; Advantix cameras & film Fine Chemicals Pharmaceuticals Diagnostics

9 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 The Links between Resources, Capabilities and Competitive Advantage

10 Appraising Resources 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.

11 Firms with the Highest Ratios of Market Value to Book Value Accenture 27.6Consulting Gillette17.9Personal care Anheuser Busch16.8Brewing Gap17.0Retailing Kellogg16.0Food Dell Computer15.9Computers Oracle 12.2Software GlaxoSmithKline 11.0Drugs Hennes & Mauritz10.5Retailing SAP10.1Software SCM10.0Computers Pfizer 9.9Drugs Unilever 9.6Consumer goods Coca-cola 9.3 Soft drinks Sysco 9.1Food services Forest Labs 8.5 Drugs EBay 8.2E-business Pepsico 8.0Soft drinks Medtronic 7.9Medical equipment 3M 7.8Diversified Procter & Gamble 7.8Consumer goods France Telecom 7.6Telecom Smith & Nephew 6.7Drugs Johnson & Johnson 6.7Drugs Source: Business Week, July 2003

12 The World’s Most Valuable Brands, 2003 Rank CompanyBrand Rank Company Brand value ($bn.) 1Coca-Cola Toyota Microsoft Hewlett-Packard IBM Citibank GE Ford Intel American Express Nokia Gillette Disney Cisco McDonald’s Honda Marlboro BMW Mercedes Sony Source: Interbrand

13 Identifying Organizational Capabilities: A Functional Classification 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

14 The Value Chain: The McKinsey Business System TECHNOLOGYPRODUCT DESIGNMANUFACTURINGMARKETINGDISTRIBUTIONSERVICE

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

16 WINNING TEAMS EXPENDITURES ON KEY PLAYERS, Valencia (Sp)Pablo Aimar ($20.4m), Ruben Baraja ($12m) Real Madrid (Sp) Zinedine Zidane ($68m), Luis Figo ($55m), Ronaldo ($43m), Nicolas Anelka ($36m), David Beckham ($26m), Deportivo La Coruna (Sp) Sergio Gonzales ($16m), Alberto Luque ($15m) Juventus (It)Gianluigi Buffon ($49m), Pavel Nedved ($38m), Lilian Thuram ($33m), David Trezeguet ($21m), Marco de Viao ($10m) AC Milan (It)Rui Costa ($42m), Alessandro Nesta ($30m), Andriy Shevchenko ($24m), Andrea Pirlo ($16m), Kaka ($9m) Parma (It)Hidetoshi Nakata ($30m), Sdrian Mutu ($9m) Manchester United (Eng) Rio Ferdinand ($45m), Juan Veron ($42m), Ruud van Nistelrooy ($30m), Cristiano Ronaldo ($18m), Fabien Bartez ($12m), Diego Forlan ($10m), Kleberson ($9m), Mikael Silvestre ($6m) Arsenal (Eng)Sylvain Wiltord ($20m), Thierry Henry ($16m), Dennis Bergkamp ($12m), Nwankwo Kanu ($7m), Gilberto Silva ($7m), Patrick Vieira ($6m) Liverpool (Eng) Emile Heskey ($16m), El Hadji Diouf ($15m), Dietmar Hamann ($12m), Chris Kerkland ($8m), Harry Kewell ($8m), Salif Diao ($8m) HIGHEST EXPENDITURES ON NEW PLAYERS (Top 3 in Spain, Italy & England) 1.Barcelona 2.Chelsea 3.Lazio 4.Manchester United 5.Inter Milan 6.Juventus 7.AC Milan 8.Arsenal 9.Real Betis Superior Resources do not necessarily mean Superior Capabilities: Transfer Fees and Team Performance in European Soccer Note: Spain, Italy & England only).

17 The Architecture of Organizational Capability SKILLS & KNOWLEDGE VALUES & NORMS MANAGERIAL SYSTEMS TECHNICAL SYSTEMS Dorothy Leonard “Core Capabilities & Core Rigidities” A modified view RESOURCES Human skills & know-how Technology Culture (values, norms) Management Systems Organization Structure ORGANIZATIONAL CAPABILITY

18 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) INDIVIDUALS’ SPECIALIZED KNOWLEDGE

19 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

20 Importance VW’s Relative Strength C1. Product development 94 C2. Purchasing75 C3. Engineering79 C4. Manufacturing87 C5. Financial management 63 C6. R&D64 C7. Marketing & sales 94 C8. Government relations 48 ImportanceVW’s Relative Strength R1. Finance64 R2. Technology75 R3. Plant and equipment88 R4. Location74 R5. Distribution85 RESOURCES CAPABILITIES Assessing a Companies Resources and Capabilities: The Case of VW Assessing a Companies Resources and Capabilities: The Case of VW

21 Relative Strength Strategic Importance Superfluous Strengths Key Strengths Zone of IrrelevanceKey Weaknesses R1 R2 R3 R4 R5 C1 C2 C3 C4 C5 C6C7 C8 Appraising VW’s Resources and Capabilities (Hypothetical only)

22 Appraising the Capabilities of a Business School (illustrative only) Relative Strength Superior Parity Deficient Not important Critically important C1 Alumni relations C2 Student placement C3 Teaching C4.Administration C5 Course devlpmnt C6 Student recruitment C7 Research C8 Corporate relations C9 Marketing C10 IT C11 PR C12 HRM Importance Key weaknesses Key strengths Superfluous strengths Superfluous strengths Inconsequential weaknesses Inconsequential weaknesses 11 12

23 Amoco’s Appraisal of Organizational Capabilities (illustrative only) Relative Strength Superior Parity Deficient Not important Needed to play Needed to win Effective deal making 2. Rapid new product development 3. Relentless cost forms 4. Product quality 5. JV management 6. Superior EH&S management 7. Managing culturally diverse workforce 8. Fast decision making 9. Customer segmentation 10.Capture synergies across divisions 11. Effective procurement Importance Key strengths Key weaknesses Superfluous strengths Superfluous strengths Inconsequential weaknesses Inconsequential weaknesses 7

24 2 Distinctive Capabilities as a Consequence of Childhood Experiences Company Capability Past History Exxon Financial Exxon’s predecessor, Standard Oil (NJ) management was the holding co. for Rockefeller’s Standard Oil Trust RD/ Coordinating Shell a j-v formed from Shell T&T founded to Shell decentralized sell Russian oil in China, and Royal Dutch global empire founded to exploit Indonesian reserves BP “Elephant Discovered huge Persian reserves, went on to hunting” find Forties Field and Prudhoe Bay ENI Deal making in The Enrico Mattei legacy; the challenge of politicized managing government relations in post-war environments Italy Mobil Lubricants Vacuum Oil Co. founded in 1866 to supply patented petroleum lubricants

25 Approaches to Capability Development 1)Linking strategy to Human Resource Management—modeling & developing individual competencies 2)Greenfield development in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) 3)Change management to transform values and behaviors (GE, BP) 4)Product sequencing (Intel, Sony, Hyundai) 5)Knowledge Management (e.g. lessons learned, best practices transfer, etc.) 1)Linking strategy to Human Resource Management—modeling & developing individual competencies 2)Greenfield development in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) 3)Change management to transform values and behaviors (GE, BP) 4)Product sequencing (Intel, Sony, Hyundai) 5)Knowledge Management (e.g. lessons learned, best practices transfer, etc.)

26 Product Sequencing to Build Capabilities: Hyundai Assembly Production engineering Local marketing Assembly Production engineering Local marketing Auto styling &design Casting & forging Chassis design Tooling Body production Export mktg. Auto styling &design Casting & forging Chassis design Tooling Body production Export mktg. FWD engineering CAD/CAM Assembly control systems Advanced component handling FWD engineering CAD/CAM Assembly control systems Advanced component handling Hydrodynamics Thermodynamics Fuel engineering Emission control Lubrication Kinetics& vibration Ceramics Electronic control systems Hydrodynamics Thermodynamics Fuel engineering Emission control Lubrication Kinetics& vibration Ceramics Electronic control systems Large-scale design integration Global logistics Lifecycle engineering Large-scale design integration Global logistics Lifecycle engineering SKDCKD Ford Cortina SKDCKD Ford Cortina Pony Accent Avante Sonanta Accent Avante Sonanta Excel Products Capabilities ‘ Alpha’ engine ‘ Alpha’ engine

27 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

28 1)Why the surge of interest in knowledge management (KM)? --kn. as the key resource of the firm --giving us a better understanding of management 2) What is KM? 3) What progress have we made, what are the key gaps, which areas are likely to add most value? 4) Developing strategy: Exploiting strengths, protecting and eliminating weaknesses 5) Building the capability base: Can it be done? How? 6) What can be learn from Knowledge Management? 7) Implications for organizational structure. 1)Why the surge of interest in knowledge management (KM)? --kn. as the key resource of the firm --giving us a better understanding of management 2) What is KM? 3) What progress have we made, what are the key gaps, which areas are likely to add most value? 4) Developing strategy: Exploiting strengths, protecting and eliminating weaknesses 5) Building the capability base: Can it be done? How? 6) What can be learn from Knowledge Management? 7) Implications for organizational structure. OUTLINE Knowledge Management and the Knowledge-based View of the Firm Knowledge Management and the Knowledge-based View of the Firm

29 Knowledge Creation Research Knowledge Acquisition Knowledge Generation (“Exploration”) Training Recruitment Intellectual property licensing Benchmarking Knowledge Application (“Exploitation”) Knowledge Integration New product development Operations Knowledge Sharing Strategic planning Communities of practice Knowledge Storage & Organization Knowledge Replication Best practices transfer On-the-job training Databases Standard operating practices Knowledge Measurement Intellectual capital accounting Competency modeling Knowledge Identification Project reviews Competency modeling Knowledge Processes within the Organization

30 TO FROM Tacit Knowledge Explicit Knowledge Tacit Knowledge Explicit Knowledge SOCIALIZATION Sharing of tacit knowledge among individuals and from the organization to the individual EXTERNALIZATION The articulation and systematization of tacit into explicit knowledge. Use of metaphor to communicate tacit concepts INTERNALIZATION Instructions and principles are converted into intuition and routines COMBINATION A key role of information systems is to combine different units of information and other forms of explicit knowledge Nonaka’s Knowledge Conversion Matrix

31 What is Knowledge Management? Definition: “The systematic leveraging of information and expertise to improve organizational innovation, responsiveness, productivity and competency.” (Lotus division of IBM) I T On-the- job Training On-the- job Training New Product Development New Product Development Benchmarkin g Research Customer & Market Analysis Customer & Market Analysis Intellectual Property Protection Intellectual Property Protection Best Practice Transfer Best Practice Transfer Communications Scenario Analysis Scenario Analysis Strategic Alliances Intellectual Capital Accounting Intellectual Capital Accounting Courses & Seminars T Q M Lesson s learned Lesson s learned CRM Data mining E R P

32 Individual Organization Explicit Tacit Information Facts Scientific kn. Databases Systems & procedures Intellectual property Skills Organizational capabilities CRAFT ENTERPRISES ‘INDUSTRIAL’ ENTERPRISES Types of Knowledge Types of Knowledge Levels of knowledge Knowledge Types and Knowledge Conversion Knowledge Types and Knowledge Conversion

33 Knowledge Transfer Mechanisms DISSEMINATIONBREADTHDISSEMINATIONBREADTH ManyMany FewFew ABILITY TO CODIFY High (explicit kn.. & information Low (know-how & contextual kn..) Personnel transfer Internal consultants On-the job training Training seminars & courses Communities -of-practice Communities -of-interest Informal visits Data exchange Shared data bases Group -ware Telephone Fax Video conferencing Meetings Rules, procedures & directives Manuals & reports Modular integration

34 Designing a Knowledge Management System What kn. processes which are critical to creating value & competitive advantage? --Dow: creating and exploiting patents --McKinsey & Co.: sharing kn. & retaining experienced consultants --Accenture: systematization.) What are the characteristics of the relevant kn.? What mechanisms are needed for the generation and application of the relevant kn.? What organizational conditions need to be in place in order for knowledge management mechanisms to work? ---Organizational structures ---Incentives to contributors and users ---Behavioral norms and values


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