Ch05

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 Putting resource and capability analysis to work—a practical guide Creating new capabilities. OUTLINE

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

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

The Evolution of Honda Motor Company 1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 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

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 a nd Core Technical Capabilities

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

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

Eastman Kodak’s Dilemma 1980’s 1990’s Resources & Capabilities Businesses 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

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

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.

Firms with the Highest Ratios of Market Value to Book Value (December 2005) Switz. 5.1 Novartis US 8.0 PepsiCo US 5.2 Altria Neth/UK 8.1 Unilever France 5.3 L’Oreal US 8.2 Schlumberger Switz. 5.5 Roche Holding US 8.3 Qualcomm US 5.5 Cisco Systems US 8.4 Procter & Gamble US 5.6 Eli Lily Japan 8.8 Sumitomo Mitsui Financial US 5.7 Boeing US 10.0 Dell Computer US 5.7 Johnson & Johnson US 10.7 Yahoo! UK 5.9 AstraZeneca Germany 10.8 SAP France 6.3 Sanofi-Aventis US 11.2 eBay Finland 6.7 Nokia US 12.6 Anheuser-Busch US 7.3 3M UK 13.4 Glaxo Smith Kline UK 7.4 Diageo US 20.8 Colgate-Palmolive US 7.8 Coca-Cola Japan 72.0 Yahoo! Japan Country Valuation ratio Company Country Valuation ratio Company

The World’s Most Valuable Brands, 2006 Rank Company Brand Rank Company Brand v alue value ($bn.) ($bn.) 1 Coca-Cola 67.5 11 Mercedes Benz 20.0 2 Microsoft 59.9 12 Citi 20.0 3 IBM 53.4 13 Hewlett-Packard 18.9 4 GE 47.0 14 American Express 18.6 5 Intel 35.6 15 Gillette 17.5 6 Nokia 26.5 16 BMW 17.1 7 Disney 26.4 17 Cisco 16.6 8 McDonald’s 26.0 18 Louis Vuitton 16.1 9 Toyota 24.8 19 Honda 15.8 10 Marlboro 21.2 20 Samsung 15.0 Source : Interbrand

Identifying Organizational C apabilities: 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

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

The Porter Value Chain FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND OPERATIONS OUTBOUND MARKETING SERVICE LOGISTICS LOGISTICS & SALES PRIMARY ACTIVITIES SU P PORT ACTIVITIES

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

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

The Rent-Earning Potential of Resources and Capabilities 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

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

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

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

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 Inconsequential weaknesses 11 12 5 6 9 3 2 4 8 10 7 1

Amoco’s Appraisal of Organizational Capabilities (illustrative only) Relative Strength Superior Parity Deficient Not important Needed to play Needed to win 1. 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 Inconsequential weaknesses 7 5 6 9 4 2 3 11 10 1 8 1

Distinctive Capabilities as a Consequence of Childhood Experiences 2 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

Approaches to Capability Development Acquire and develop the underlying resources. Especially human resources --Externally (hiring) --Internally through developing individual skills Acquire/access capabilities externally through acquisition or alliance Greenfield development of capabilties in separate organizational unit (IBM & the PC, Xerox & PARC, GM & Saturn) Build team-based capabilities through training and team development (i.e. develop organizational routines ) Align structure & systems with required capabilities Change management to transform values and behaviors (GE, BP) Product sequencing (Intel , Sony, Hyundai) Knowledge Management (systematic approaches to acquiring, storing, replicating, and accessing knowledge)

Product Sequencing to Build Capabilities: Hyundai Assembly Production engineering Local marketing Auto styling &design Casting & forging Chassis design Tooling Body production Export mktg. FWD engineering CAD/CAM Assembly control systems Advanced component handling Hydrodynamics Thermodynamics Fuel engineering Emission control Lubrication Kinetics& vibration Ceramics Electronic control systems Large-scale design integration Global logistics Lifecycle engineering SKD CKD Ford Cortina Pony Accent Avante Sonanta Excel Products Capabilities ‘ Alpha’ engine 1968 1970 1974 1985 1994-95

What Determines Organizational Capability in Football? Who are the outstandingly successful team managers (coaches) in British football? Matt Busby Manchester U. 1945-70 Alf Ramsey Ipswich 1955-64 Bill Shankley Liverpool 1959-74 Jock Stein Glasgow Celtic 1965-78 Brian Clough Derby/Notts F. 1972-84 Bob Paisley Liverpool 1974-83 Alex Ferguson Aberdeen 1980-86 Manchester U. 1986- Arsene Wenger Monaco 1985-95 Arsenal 1996- Jose Mourinho Porto 2000-04 Chelsea 2004-

Building Team Capabilities in Soccer: Alex Ferguson at Manchester United Find/develop young players Scouting staff doubled— “find the best.” Building youth team—1992 youth team included Ryan Giggs, David Beckham, Paul Scholes, Nicky Butt, Gary Neville Training State-of-the-art training complex Rigorous training schedule (+war on booze) Developing coordination Training for team skills Building team spirit—“team functions with single spirit & constant flow of mutual support”; “Talent without unity of purpose is hopeless” Structuring the team Build a core of group internally Supplement with key purchases Blending personalities as well as skills Player rotation for experimentation & flexible coordination Building the wider team—coaches, scouts, physiotherapists, psychologists, even cleaners Cross-functional integration

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

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 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

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

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 New Product Development Benchmarking Research Customer & Market Analysis Intellectual Property Protection Best Practice Transfer Communications Scenario Analysis Strategic Alliances Intellectual Capital Accounting Courses & Seminars T Q M Lessons learned CRM Data mining E R P

Individual Organization Explicit Tacit Information Facts Scientific kn. Databases Systems & procedures Intellectual property Skills Know-how Organizational routines Types of Knowledge Levels of knowledge Types & Levels of Knowledge (and Knowledge Conversion)

Individual Organization Explicit Tacit Information Facts Scientific kn. Databases Systems & procedures Intellectual property Skills Organizational capabilities CRAFT ENTERPRISES ‘ INDUSTRIAL’ ENTERPRISES Types of Knowledge Levels of knowledge Replication through Knowledge Systematization EXAMPLES Ford McDonalds Starbucks Accenture

Knowledge Transfer Mechanisms D I S S E M I N A T I O N B R E A D T H M a n y F e w 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 E-mail Group -ware Telephone Fax Video conferencing Meetings Rules, procedures & directives Manuals & reports Modular integration

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

Ch05

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Ch05

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