1. Chapter 3 Resources and Capabilities
Rachel Parrish
Nikki Chaib
Banner Owen
Alex Gonzalez

2. In this chapter…
Shifting focus from the external environment to the internal environment
Concentrating on the resources and capabilities that firms possess
Building foundations for our analysis of competitive advantage

3. Shifting from the external to the internal
Emphasis towards the interface between strategy and the resources and capabilities of the firm
The trend over time from seeing sources of profit as lying mainly in the external environment, to seeing sources of profit being located within the firms
Chapter 1 and 2 dealt with strategy and the external environment of the firm. In this chapter, we are shifting towards strategy and the internal environment (resources & capabiltiies).
The theme mentioned in chapter 1 is the trend over time from seeing….

4. Figure 3.3 Competition Strategy Customers Suppliers
Goals & Values
Resources & Capabilities
Structure & Systems
Strategy
Competition
Customers
Suppliers
The firm-strategy interface
The Environment-Strategy Interface

5. Two reasons for the shift
Firms’ industry environments have become more unstable
It has become increasingly apparent that competitive advantage rather than industry attractiveness is the primary source of superior profitability.
With the external environment being unstable, internal resources and capabilities have been viewed as a more secure base for formulating strategy.

6. Resource-Based View
Resources and capabilities are the principal basis for firm strategy and the primary source of profitability.
Firms typically start strategy formulation with a mission statement
Firms have answered the questions:
“What is our business?”
“Who are our customers?”
“Which of their needs are we seeing to serve?”
Mission statement – some statement of the firms identity and purpose
In a world where customer preferences are volatile and the identity of customers and the technologies for serving them are changing, the firm itself and its resources & capabilities may be a more stable basis to define its identity.

7. Rationale for Resource-Based View
In general, the greater the range of change in a firm’s external environment, the more likely that it is that internal resources & capabilities rather than external market focus will provide a secure foundation for long-term strategy. Example: Kodak dominated the world market, but trying to keep up with the change to digital imaging has hurt their profits and market leadership.

8. Resources vs. Capabilities
Resources are the productive assets owned by the firm
Capabilities are what the firm can do
Resources must work together to create organizational capability, and capability is the essence of superior performance
Now, you might be wondering what resources and capabilities of firms even are? Resources, capabilities, industry key success factors all form the strategy, and that strategy gives a firm a competitive advantage. Look at the chart and try to remake it.

9. Figure 3.4 Industry Key Success Factors Competitive Advantage Strategy
Resources
Organizational Capabilities
Strategy
Industry Key Success Factors
Competitive Advantage
Team of resources must work together, and the organizational capabilities of the firm deploy the resources for a desired result.

10. Capacity for Communication and Collaboration
Resources
Tangible
Financial
Physical
Intangible
Technology
Reputation
Culture
Human
Skills/know-how
Capacity for Communication and Collaboration
Motivation
The best way to identify a firms resources is to look at three principal types: tangible, intangible, human
Financial resources – cash, securities, borrowing capacity
Physical resources – plant equipment, land, etc
Technology – patents, copyrights
Reputation – brands, relationships
Tangible are the easiest to identify and evaluate. These are identified and valued in the financial statements of the firm.

11. Tangible Resources Easiest to identify and evaluate
Firm’s financial statements
Once we have information on tangible resources, we explore how we create additional value from them and address two key questions:
What opportunities exist for economizing on their use?
What are the possibilities for employing existing assets more profitably?
Question 1: It may be possibly to use fewer resources to support the same level of business, or same amount of resources to support a larger volume of business
Question 2: changing the way we use our assets to possibly enable higher profitability. The book uses British airways for an example, and they ask if british airways could generate better returns on some of their planes by redeploying them into cargo carrying? Firms need to see if their assets are being used to their full profit generating potential.

12. Intangible Resources
More valuable than tangible resources for most companies
Largely invisible on financial statements
Brand names, a reputational asset, derives its value from the confidence it instills in customers.
Intellectual property
Copyright, patent, trademark
Technological and artistic resources where ownership is defined in law.
Brand loyalty is a huge thing, and with a customer base that is loyal to your brand can be a huge asset.
IP is not found on financial statements, but if a firm has it it can be a huge resource to use to help define strategy.

13. Human Resources
Comprised of the expertise and effort offered by employees.
Also not visible on financial statements, but are included in a firm’s resources because of their stability.
Firms evaluate their human resources through competency modelling and organizational culture.

14. Human Resources Competency Modelling Organizational Culture
Identifying the set of skills, content knowledge, attitudes, and values associated with superior performers, and assessing each employee against that profile.
‘Hire for attitude; train for skills’
Organizational Culture
Organization’s values, traditions, and social norms.
Peters and Waterman believed ‘firms with sustained financial performance typically are characterized by a strong set of core managerial values that define the ways they conduct business’
Being able to identify employees strengths and capabilities, and tying that in with a great organizational culture is the best way to identify the human resources of an organization and how they help form the strategy.

15. Organization’s Capabilities
Resources are not productive on their own. To perform a task, a team of resources must work together.
Organizational Capability: firm’s capacity to deploy resources for a desired end result
Primary interest are those capabilities that provide a basis for competitive advantage

16. Capabilities
Distinctive competence: the things that an organization particularly well relative to its competitors.
Hamel and Prahalad:
Core competences: made a disproportionate contribution to ultimate customer value, or to the efficiency with which that value is delivered; and provide a basis for entering new markets

17. Prahalad and Hamel
Criticize U.S. companies for emphasizing product management over competence management.
Sony vs RCA
RCA failed and ended its venture into home video systems
Sony failed but continued to develop its capabilities in video technology and produced many successful video products

18. Classifying Capabilities
Functional Analysis: identifies organizational capabilities in relation to each of the principal function areas of the firm.
Corporate functions: financial control
Management Functions: integrated MIS network lined to management decision making
Research and Development: innovate new product development
Operations: Efficiency in volume management
Products Design: design capability
Marketing: brand management and reputation
Sales and Distribution: customer service

19. Classifying Capabilities
Value Chain Analysis: Separates the activities of the firm into a sequential chain
Distinguishes between primary and support activities
Threshold capabilities: capabilities that are common to all to an industry because they comprise the essential set of capabilities that any firm needs to compete and survive in its chosen industry

20. Capability As Process & Routine
Organizational Process: the sequence of actions through which a specific task is performed
In order to be productive, company’s use Routinization.
It’s an essential step in translating directions and operating practices into capabilities
Continuous repetition

21. Video

22. Establishing Competitive Advantage

23. To Establish a Competitive Advantage
For a resource or capability to establish a competitive advantage two conditions must be present:
Scarcity
Relevance

24. The Conditions
Scarcity – if a resource or capability is widely available within the industry, then it may be essential to compete, but it will not be sufficient basis for competitive advantage.
Relevance – a resource or capability must be relevant to the key success factors in the market.

25. Sustaining a competitive advantage
Profits earned depend not just on ability to establish Competitive Advantage
But also on how long the advantage can be sustained

26. Sustaining Competitive Adv. Cont.
Sustaining depends on durability, and if rivals can transfer, and replicate resources and capabilities.
Durability – leads to a more secure basis for CA.
Transferability – must be mobile between companies.
Replicability – if a firm cannot buy it, it must build it.

27. Appropriating the returns to Competitive Advantage
Who gains the returns generated by superior capabilities?
Normally, to the owner of the capability
But it’s not always that simple
Capabilities depend heavily on the skills and efforts of employees – who are not owned by the firm.

28. Putting Analysis into Practice
It is a step by step approach to:
How a company can appraise its resources and capabilities
Then use the appraisal to guide strategy formulation

29. Step One Identify the key resources and capabilities
Either begin from outside or inside the firm
Hyundai example
External factors – new product development capability, effective supply chain management, global distribution, brand strength and so on.
Internal function – is either a functional approach or the value chain approach.

30. Step Two Appraising resources and capabilities
Appraised against two key criteria
Assessing Importance
Which resources and capabilities are most important in keeping a competitive advantage
Assessing Relative Strengths
Where are the strengths and weaknesses as compared to competitors
Bringing together importance and relative strength – highlights key strengths and key weaknesses

31. Step 3: Developing Strategy implications
How can we exploit our key strengths?
How do we upgrade our weaknesses? Reducing vulnerability?
What are our inconsequential strengths? Can we deploy them better?

32. Exploiting Key strengths
We want to deploy our strengths to the greatest effect.
Ex.- Hyundai’s product development
Strategies will be different within each company.
Ex.- Toyota’s outstanding manufacturing capability
Each company is striving after a distinctly different strategy.

33. Managing Key Weaknesses
Converting a weakness to a strength is likely to be a long term process.
The most successful approach to these weaknesses is to outsource. As seen in the car industry.

34. Ford was completely vertically integrated in the 1930’s.
Examples
Ford was completely vertically integrated in the 1930’s.
In 2004 with the opening of their Dearborn truck plant they have outsourced very many key aspects of production.
Nike itself only handles design, marketing, and overall system integration. But every other aspect even manufacturing is outsourced.

35. Superfluous Strengths
Having strengths that are not vital to the companies main focus.
Recognizing these strengths, and how the opportunity cost is leading elsewhere.
Thus reinvesting the capital in somewhere that can improve profit or production.
Ex.- Capcom realizing that developing was their key strength rather than manufacturing.

36. Developing resources and capabilities
As time passes companies must deal with change.
Firms must develop new resources and capabilities.
(Tangible or intangible)
It has shown throughout sports and in many different industries that it does not necessarily mean being the biggest or most affluent will make you the best.
Ex.- GM and Honda, Pixar and Aardman Animations over Walt Disney, and soccer teams Arsenal vs. Chelsea.

37. Organizational capability
Organizational capability is path dependent.
Meaning capabilities are developed over time.
The company’s capabilities today are the result of its history.

38. The link between resources and capabilities
Two factors that contribute to efficiency and effectiveness of teams.
The first being organizational learning.
The second is culture.

39. Are organizational capabilities rigid or dynamic?
The more rigid a firm is the harder to adapt to new circumstances. (referencing culture)
Flexibility in organizational routines- studies have shown that even the most basic operations have the capacity to adapt.
Dynamic Capability- refers to the firms ability to adapt and integrate external competences to address the rapidly changing environment.
This all depends if the change is competence enhancing or destroying.

40. Acquiring Capabilities
To develop your capabilities as a company you can add to your repertoire by three means.
Mergers, acquisitions, and alliances.
These are very risky and costly but in the long run can be very beneficial.
Relational Capability- comes into play when the firm is need of building upon relationships across its vast network.

41. Internal Development: focus and sequencing
Once all resources or capabilities have been attained the hard part is to focus on integration
It is a very hard task but if performed, you can see systematic progress throughout the firm.
Focus should be developed in sequences giving pretense to vital objectives and so forth.
A targeted approach to the use of your resources is needed.

42. Thank you!
Questions?