Analyzing Analyzing Resources Resources & & Capabilities 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 • Creating new capabilities Shifting Shifting the the Focus Focus of of Strategy StrategyAnalysis: Analysis: From From the the External External to to the the Internal Internal Environment Environment THE FIRM THE INDUSTRY ENVIRONMENT Goals and Values Resources and Capabilities Structure and Systems STRATEGY STRATEGY The Firm-Strategy Interface •Competitors •Customers •Suppliers The Environment-Strategy Interface Rationale Rationale for for the the Resource-based Resource-based Approach Approach to to Strategy 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 The Evolution Evolution of of Honda Honda Motor Motor Company Company Honda Technical Research Institute founded Competes in Isle of Man TT motorcycle races motorcycle: 98cc, 2-cycle Dream D st 1946 1950 cycle engine First product: Model A clip-on engine for bicycles 1955 4-cylinder 750cc motorcycle 1st gasoline-powered car to meet US Low Emission Vehicle Standard Portable generator Power products: ground tillers, marine engines, generators, pumps, chainsaws snowblowers 405cc motor cycle 1960 The 50cc Supercub 1965 1970 1975 N360 mini car Enters Formula Gran Prix racing Honda Civic 1980 Civic Hybrid (dual gasoline/ electric) Civic GS (natural gas powered) 1985 1990 1995 Acura Car division 1000cc Goldwing touring motor cycle 2000 Home cogeneration system Enters Indy car racing Honda FCX fuel cell car Canon: Canon: Products Products and and Core Core Technical Technical Capabilities Capabilities Precision Mechanics Fine Optics 35mm SLR camera Plain-paper copier Compact fashion camera Color copier EOS autofocus camera Color laser copier Digital camera Basic fax Laser copier Video still camera Laser fax Mask aligners Inkjet printer Excimer laser aligners Laser printer Color video printer Stepper aligners Calculator Notebook computer MicroElectronics Links between Products & Capabilities: Capability-Based Strategy at 3M Road signs Videotape Sandpaper Sandpaper Road signs Videotape Carborundum &&markings Carborundum markings Floppy Floppydisks disks&& mining mining Scotchtape data storage Scotchtape Audio Audiotape tape data storage products products Acetate Acetate Post-it Post-itnotes notes film Housewares/kitfilm Housewares/kitPRODUCTS PRODUCTS chen Surgical chenproducts products Surgicaltapes tapes &&dressings dressings Pharmaceuticals Pharmaceuticals Materials Materialssciences sciences Flexible Flexible Health Healthsciences sciences circuitry circuitry Microreplication Microreplication CAPABILITIES CAPABILITIES Abrasives Abrasives Adhesives Adhesives Thin-film Thin-film technologies technologies New-product New-product development development&& introduction introduction Evolution Evolution of of Capabilities Capabilities and and Products: Products: 3M 3M Road signs Videotape Sandpaper Sandpaper Road signs Videotape Carborundum &&markings Carborundum markings Floppy Floppydisks disks&& mining mining Scotchtape data storage Scotchtape Audio Audiotape tape data storage products products Acetate Acetate Post-it Post-itnotes notes film Housewares/kitfilm Housewares/kitPRODUCTS PRODUCTS chen Surgical chenproducts products Surgicaltapes tapes &&dressings dressings Pharmaceuticals Pharmaceuticals Materials Materialssciences sciences Flexible Flexible Health Healthsciences sciences circuitry circuitry Microreplication Microreplication CAPABILITIES CAPABILITIES Abrasives Abrasives Adhesives Adhesives Thin-film Thin-film technologies technologies New-product New-product development development&& introduction introduction Eastman Kodak’s Dilemma Resources & Capabilities 1980’s Chemical Imaging Businesses Film •Organic Chemistry •Polymer technology Cameras Fine Chemicals •Optomechtronics •Thin-film coatings Pharmaceuticals Brands Diagnostics Global Distribution 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 The The Links Links between between Resources, Resources, Capabilities Capabilities and and Competitive CompetitiveAdvantage Advantage COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE •Financial •Physical INTANGIBLE •Technology •Reputation •Culture HUMAN •Skills/know-how •Capacity for communication & collaboration •Motivation Appraising Appraising Resources Resources RESOURCE CHARACTERISTICS INDICATORS Financial Borrowing capacity Debt/ Equity ratio Internal funds generation Credit rating Tangible Net cash flow Resources Physical Plant and equipment: size, location, technology fixed assets flexibility Scale of plants Land and buildings Alternative uses for Raw materials fixed assets Market value of 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 Assessing AssessingaaCompanies CompaniesResources Resources and and Capabilities: Capabilities:The TheCase Caseof ofVW VW   RESOURCES Importance VW’s Relative Strength C1 Product development C2 Purchasing C3 Engineering C4 Manufacturing C5 Financial management C6 R&D C7 Marketing & sales C8 Government relations Importance VW’s Relative Strength R1 Finance R2 Technology R3 Plant and equipment R4 Location R5 Distribution  CAPABILITIES Appraising Appraising VW’s VW’sResources Resourcesand and Capabilities Capabilities (Hypothetical only) 10 Key Strengths Superfluous Strengths Relative Strength C3 R3 C8 C4 C2 R2 R1 R5 R4 C6 C1 C7 C5 Zone of Irrelevance 1 Key Weaknesses Strategic Importance 10 Appraising Appraising the the Capabilities Capabilities of of aa Business Business School School (illustrative only) Superfluous Superfluous strengths strengths Relative Strength Superior Key Keystrengths strengths Parity Inconsequential Inconsequential weaknesses weaknesses 12 11 Deficient 10 Not important Key Keyweaknesses weaknesses Critically important Importance 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 Amoco’s Appraisal of Organizational Capabilities (illustrative only) Superfluous Superfluous strengths strengths Superior Key Keystrengths strengths Relative Strength Parity Inconsequential Inconsequential weaknesses weaknesses 11 10 Deficient Not important Needed to play Importance Importance Key Keyweaknesses weaknesses Needed to win Effective deal making Rapid new product development Relentless cost forms Product quality JV management Superior EH&S management Managing culturally diverse workforce Fast decision making Customer segmentation 10.Capture synergies across divisions 11 Effective procurement Distinctive Distinctive Capabilities Capabilities as as aa Consequence Consequence of of Childhood Childhood Experiences Experiences Company Capability Past History Exxon Financial management Exxon’s predecessor, Standard Oil (NJ) was the holding co for Rockefeller’s Standard Oil Trust RD/ Shell Coordinating decentralized global empire Shell a j-v formed from Shell T&T founded to sell Russian oil in China, and Royal Dutch founded to exploit Indonesian reserves BP “Elephant hunting” Discovered huge Persian reserves, went on to find Forties Field and Prudhoe Bay ENI Deal making in politicized environments The Enrico Mattei legacy; the challenge of managing government relations in post-war Italy Mobil Lubricants Vacuum Oil Co founded in 1866 to supply patented petroleum lubricants Approaches Approaches to to Capability Capability Development Development 1) 1) Linking Linkingstrategy strategyto to Human HumanResource Resource Management Management —modeling —modeling&&developing developing individual individualcompetencies competencies 2) 2) Greenfield Greenfield development developmentin inseparate separate organizational organizational unit unit(IBM (IBM&&the the PC, PC,Xerox Xerox&& PARC, PARC, GM GM&& Saturn) Saturn) 3) 3) Change Changemanagement managementto to transform transformvalues valuesand and behaviors behaviors(GE, (GE,BP) BP) 4) 4) Product Productsequencing sequencing(Intel (Intel,,Sony, Sony,Hyundai) Hyundai) 5) 5) Knowledge Knowledge Management Management(e.g (e.g.lessons lessonslearned, learned, best bestpractices practicestransfer, transfer, etc.) etc.) Product Product Sequencing Sequencing to to Build Build Capabilities: Capabilities: Hyundai Hyundai Capabilities Capabilities ••Assembly Assembly ••Production Production engineering engineering ••Local Local marketing marketing ••Hydrodynamics Hydrodynamics ••Thermodynamics Thermodynamics ••Fuel ••Auto Fuelengineering engineering Auto ••Emission styling Emissioncontrol control styling ••FWD ••Lubrication &design FWD Lubrication &design engineering •Kinetics& vibration ••Casting Casting&& engineering •Kinetics& vibration ••CAD/CAM forging CAD/CAM ••Ceramics Ceramics forging ••Assembly ••Chassis Assembly ••Electronic Electroniccontrol control Chassis control systems design control systems design ••Large-scale systems ••Tooling systems Large-scale Tooling ••Advanced design ••Body Advanced designintegration integration Body ••Global component production Globallogistics logistics production component ••Lifecycle handling ••Export handling Lifecycle Export engineering mktg engineering mktg SKD SKD CKD CKD Ford FordCortina Cortina Products Products 1968 Pony Pony 1970 Excel Excel 1974 ‘Alpha’ ‘Alpha’ Accent Accent engine Avante engine Avante Sonanta Sonanta 1994- 1985 95 Summary: Summary:AAFramework Frameworkfor forAnalyzing AnalyzingResources Resourcesand andCapabilities Capabilities 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? Appraise the firm’s resources and capabilities in terms of: (a) strategic importance (b) relative strength Explore the linkages between resources and capabilities Identify the firm’s resources and capabilities STRATEGY POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE CAPABILITIES RESOURCES Knowledge Knowledge Management Management and and the the Knowledge-based Knowledge-based View View of of the the Firm Firm OUTLINE 1) 1) Why Whythe thesurge surgeof ofinterest interestin inknowledge knowledgemanagement management(KM)? (KM)? kn kn.as asthe thekey keyresource resourceof ofthe thefirm firm giving givingus usaabetter betterunderstanding understandingof ofmanagement management 2) 2)What Whatis isKM? KM? 3) 3)What Whatprogress progresshave havewe wemade, made,what whatare arethe thekey keygaps, gaps,which which areas areasare arelikely likelyto toadd addmost mostvalue? value? 4) 4)Developing Developingstrategy: strategy:Exploiting Exploitingstrengths, strengths,protecting protectingand and eliminating eliminatingweaknesses weaknesses 5) 5)Building Buildingthe thecapability capabilitybase: base:Can Canititbe bedone? done?How? How? 6) 6)What Whatcan canbe belearn learnfrom fromKnowledge KnowledgeManagement? Management? 7) 7)Implications Implicationsfor fororganizational organizationalstructure structure Knowledge Processes within the Organization Knowledge Generation (“Exploration”) Knowledge Creation • Training Knowledge Acquisition Knowledge Integration Knowledge Sharing Knowledge Application (“Exploitation”) • Research Knowledge Replication Knowledge Storage & Organization • Recruitment • Intellectual property licensing • Benchmarking • New product development • Operations • Strategic planning • Communities of practice • Best practices transfer • On-the-job training • Databases • Standard operating practices Knowledge Measurement • Intellectual capital accounting • Competency modeling Knowledge Identification • Project reviews • Competency modeling Nonaka’s Nonaka’sKnowledge Knowledge Conversion ConversionMatrix Matrix Tacit Knowledge Tacit Knowledge TO SOCIALIZATION Sharing of tacit knowledge among individuals and from the organization to the individual FROM Explicit Knowledge INTERNALIZATION Instructions and principles are converted into intuition and routines Explicit Knowledge EXTERNALIZATION The articulation and systematization of tacit into explicit knowledge Use of metaphor to communicate tacit concepts COMBINATION A key role of information systems is to combine different units of information and other forms of explicit knowledge What Whatis isKnowledge KnowledgeManagement? Management? Intellectual Intellectual Courses On-theCapital Courses&&Seminars Seminars On-theCapital Data Data job Accounting job Accounting mining Benchmarkin mining Benchmarkin Training Intellectual II TT Training Intellectual gg Property Property New Product New Product Protection Protection Development Development Customer Customer&& Best Best Communications Communications Market Analysis Market Analysis Practice Practice Strategic Alliances Scenario Transfer Strategic Alliances Scenario Transfer T Q M Lesson T Q M Analysis Lesson Analysis ss EERRPP Research Research CRM CRM learned learned Definition: “The systematic leveraging of information and expertise to improve organizational innovation, responsiveness, productivity and competency.” (Lotus division of IBM) Knowledge Knowledge Types Types and and Knowledge Knowledge Conversion Conversion Levels Levelsof ofknowledge knowledge Individual Individual Explicit Explicit Types Types of of Knowledge Knowledge Tacit Tacit Information Facts Scientific kn Organization Organization Databases Systems & procedures Intellectual property ‘INDUSTRIAL’ ENTERPRISES CRAFT ENTERPRISES Skills Organizational capabilities D I S S E M I N A T I O N B R E A D T H Knowledge Knowledge Transfer Transfer Mechanisms Mechanisms M a n y Rules, procedures & directives Modular integration Manuals & reports Communities Communities -of-interest -of-practice F e w E-mail Group -ware Internal consultants Personnel transfer Shared data bases Training seminars Video & conferencing courses Meetings On-the job training Informal visits Data exchange Fax Telephone Low (know-how & contextual kn ) ABILITY TO CODIFY High (explicit kn & information 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 ... Co founded in 1866 to supply patented petroleum lubricants Approaches Approaches to to Capability Capability Development Development 1) 1) Linking Linkingstrategy strategyto to Human HumanResource... Resources and Capabilities Structure and Systems STRATEGY STRATEGY The Firm -Strategy Interface •Competitors •Customers •Suppliers The Environment -Strategy Interface Rationale Rationale for for... Resource-based Approach Approach to to Strategy Strategy • When the external environment is subject to rapid change, internal resources and capabilities offer a more secure basis for strategy than market