1. 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 work—a practical guide

2. Some game theory observations
Is the simulation game turning out to be a prisoner’s 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
1, 1
-2, 2
1, 0
-1, -1 Q
Her C
0, 0
-2, 2 A D
His
2, - 2
-1, -1
-1, -1
0, 1
2, -2
-10, -10
Defect or not
His choice or her choice
Swerve or not

3. Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment
THE FIRM
Goals and
Values
Resources and
Capabilities
Structure and
Systems
THE
INDUSTRY
ENVIRONMENT
Competitors
Customers
Suppliers
STRATEGY
STRATEGY
The
Firm-Strategy
Interface
The
Environment-Strategy
Interface 5

4. 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 doesn’t drive profitability then what does?
Rumelt’s 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.

5. The Links between Resources, Capabilities and Competitive Advantage
INDUSTRY KEY
SUCCESS FACTORS
COMPETITIVE
ADVANTAGE
STRATEGY
ORGANIZATIONAL
CAPABILITIES
What you do with resources
“PROFITS” Acronym
Physical
Reputational
Organizational
Financial
Informational
Technological
Skills
RESOURCES
TANGIBLE INTANGIBLE HUMAN
Financial
Physical
Skills/know-how
Capacity for communication & collaboration
Motivation
Technology
Reputation
Culture

6. The Rent-Earning Potential of Resources and Capabilities
What is rent?
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED
Scarcity
Relevance
Durability
THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY
SUSTAINABILITY OF THE
COMPETITIVE ADVANTAGE
Transferability
Replicability
Property rights
Relative
bargaining power
APPROPRIABILITY
Other frameworks
VRIO/VRINE (Barney, 1991/2003)
Heterogeneity, ex-ante/ex-post/imperfect mobility/ (Peteraf, 1993)
Embeddedness 8 8

7. Competitive Advantage
Scarcity and relevance
All value (rent) comes from scarcity relative to demand (Lewin and Phelan)
Oxygen on moon, World’s 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

8. 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 doesn’t supply increase?
Naturally (or artificially) scarce
(BLM) land, Michael Jordan’s 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?

9. 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 Barney’s VRIO)

10. 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.

11. Capabilities
A firm’s 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

12. 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, L’Oreal
Sales, Distribution Sales Responsiveness PepsiCo, Pfizer
& Service Efficiency and speed of distribution LL Bean, Dell
Customer Service Singapore Airlines
Caterpillar

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

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

15. The Value Chain: The McKinsey Business System
TECHNOLOGY
PRODUCT DESIGN
MANUFACTURING
MARKETING
DISTRIBUTION
SERVICE 5 5

16. The Porter Value Chain FIRM INFRASTRUCTURE SUPPORT
HUMAN RESOURCE MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND OPERATIONS OUTBOUND MARKETING SERVICE
LOGISTICS LOGISTICS & SALES
SUPPORT
ACTIVITIES
PRIMARY
ACTIVITIES 6 6

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

18. Two approaches to identifying an
organization’s resources and capabilities
Starting from the inside
Starting from the outside
Key Success Factors
How do customers choose?
What do we need to survive
competition?
What resources & capabilities
do we need to deliver these
KSFs?

19. Assessing a Companies Resources and Capabilities: The Case of VW
Importance
VW’s Relative Strength
R1. Finance 6 4
R2. Technology 7 5
R3. Plant and equipment 8
R4. Location
R5. Distribution
Importance
VW’s Relative Strength
C1. Product development 9 4
C2. Purchasing 7 5
C3. Engineering
C4. Manufacturing 8
C5. Financial management 6 3
C6. R&D
C7. Marketing & sales
C8. Government relations
RESOURCES
CAPABILITIES

20. Appraising VW’s Resources and Capabilities
(Hypothetical only) 10
Key Strengths
Superfluous Strengths C3 R3 C8 C4 C2
Relative Strength R2 R5 5 R1 C1 R4 C6 C7 C5
Zone of Irrelevance
Key Weaknesses 1 1 5 10
Strategic Importance 9

21. Appraising the Capabilities of a Business School
(illustrative only)
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 5 6 9 3 2 4 8 10 7 1
Superfluous
strengths
Key strengths
Superior
Relative Strength
Parity
Inconsequential
weaknesses 12 11
Key weaknesses
Deficient
Not important
Critically important
Importance

22. 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?