The Role of Resources and Capabilities in Strategy Formulation

Internal Environment Analysis of the Internal Environment has been concerned with issues of strategy implementation: appropriate organisational structure systems of control top management structure and style

“concentration of strength against weakness.” Internal Environment Liddell Hart, a prominent military historian, argued that there is only one underlying principle of war: “concentration of strength against weakness.”

Resource-based Strategy What is our business? Who are our customers? Which of their needs are we seeking to serve?

In general ... the greater the rate of change in a company’s external environment, the more it must seek to base long-term strategy upon its internal resources and capabilities than upon an external market focus.

Resource as the basis for corporate profitability Conventional approaches to competitive advantage focus upon the “generic” sources (cost, differentiation) Resource-based view concentrates upon the resources and capabilities that underlie these advantages.

Resource as the Basis for Corporate Profitability Other structural sources of market power are similarly based upon firms’ resources: Monopolistic price-setting power depends upon market share that is a consequence of cost efficiency, financial strength, or some other resource.

Resources as the Basis of Superior Profitability Patents Brands Retaliatory capacity Barriers to Entry Industry Attractiveness Market Share Monopoly Rate of Profit in Excess of the Competitive Level Firm Size Financial Resources Vertical Bargaining Power Process Technology Size of Plants Access to Low-cost Inputs Cost Advantage Competitive Advantage Differentiation Advantage Brands Product Technology Marketing, Distrib., Service Capabilities

A Resource-based Approach Comprises Three Key Elements Selecting a strategy that exploits a company’s principle resources and capabilities, e.g Sony, Black&Decker, Marks & Spencer, BMW, Motorola

A Resource-based Approach Comprises Three Key Elements Ensuring that the firm’s resources are fully employed and its profit potential is exploited to the limit. Walt Disney’s remarkable turnaround between 1980 and 1990 involved very little change in basic strategy.

A Resource-based Approach Comprises Three Key Elements Building the company’s resource base. Resource analysis is not just about deploying assets; it is crucially concerned with filling current resource gaps and building company’s future resource base. Procter & Gamble, Johnson & Johnson, Motorola.

The starting point for analysis is to identify and assess the resources and capabilities that the firm has available to it.

The Resources of the Firm - at two levels of aggregation Individual resources; items of capital equipment, the skills of individual employees, patents, brand names, etc. How the resources work together to create capabilities and competitive advantage

INDUSTRY KEY SUCCESS FACTORS COMPETITIVE ADVANTAGE STRATEGY ORGANISATIONAL CAPABILITIES RESOURCES Tangible Intangible Human Physical Financial Technology Culture Reputation Specialised skills & knowledge Communicative Motivation & interactive abilities

Financial Resources Main characteristics Key indicators The firm’s borrowing capacity and its internal funds generation determine its investment capacity and its cyclical resilience. Key indicators Debt/equity ratio. Ratio of net cash to capital expenditure. Credit rating.

Physical Resources Main characteristics Key indicators The size, location, technical sophistication, and flexibility of plant and equipment, location and alternative uses for land and buildings, reserves of raw materials ... Key indicators Resale values of fixed assets Vintage of capital equipment Scale of plants Alternative uses of fixed assets.

Human Resources Main characteristics Key indicators The training and expertise of employees determine the skills available to the firm. The adaptability of employees determines the strategic flexibility of the firm. The commitment and loyalty of employees determines the firm’s ability to maintain competitive advantage. Key indicators Educational, technical, professional qualifications of employees. Pay rates relative to industry average.

Technological Resources Main characteristics Stock of technology including proprietary technology (patents, copyrights, trade secrets) and expertise in its application of know-how. Resources for innovation (research facilities, technical and scientific employees). Key indicators Number and significance of patents. Revenue from patent licenses. R&D staff as a percentage of total employment.

Reputation Main characteristics Key indicators Reputation with customers through the ownership of brands, established relationships with customers, the association of the firm’s products with quality, reliability, etc. The reputation of the company with the suppliers of components, finance, labour services, and other inputs. Key indicators Brand recognition. Price-premium over competing brands. Percentage of repeat buying. Objective measures of product performance. Level and consistency of company performance.