Internal

Internal Analysis:
Analysis: 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
Putting resource and capability analysis to work
a how-to guide
Creating new capabilities.

Does
Does Industry
Industry Matter?
Matter?
Percentage of variance in firms return on assets
explained by:
Industry
Firm-specific
Unexplained
effects
effects
variance

Rumelt (1991)

4.0%

44.2%

44.8%

McGahan &
Porter (1997)
Hawawini et al
(2003)

18.7%

31.7%

48.4%

8.1%

35.8%

52.0%

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
Goals and
Values
Resources and
Capabilities
Structure and
Systems

THE
INDUSTRY
ENVIRONMENT

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 Honda example

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

1 motorcycle:
98cc, 2-cycle
Dream D
st

1946 1950
4 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 1
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

The
The Links
Links between
between Resources,
Resources, Capabilities
Capabilities
and
and Competitive
Competitive Advantage
Advantage
COMPETITIVE
ADVANTAGE

INDUSTRY KEY
SUCCESS FACTORS

STRATEGY
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE

INTANGIBLE

HUMAN

Financial
Physical

Technology
Reputation
Culture

Skills/knowhow
Capacity for
communicatio
n&
collaboration
Motivation

Appraising
Appraising Resources
Resources
RESOURCE

Tangible
Resources

Intangible
Resources

CHARACTERISTICS

INDICATORS

Financial Borrowing capacity

Debt/ Equity ratio
Internal funds generation
Credit rating
Net cash flow
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
Technical and scientific
R&D expenditure
employees
R&D staff
Reputation Brands. Customer loyalty. Company Brand equity
reputation (with suppliers, customers,
Customer retention
government)
Supplier loyalty

Human
Resources

Training, experience, adaptability,

Employee qualifications,
commitment and loyalty of employees
pay rates, turnover.

The
The Profit-Earning
Profit-Earning Potential
Potential
of
of Resources
Resources and
and Capabilities
Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED

THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY

Scarcity
Relevance
Durability

SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE

Transferability
Replicability
Property rights

APPROPRIABILITY

Relative
bargaining power
Embeddedness

Resource
Resource Imitability
Imitability
Cannot be imitated:
Patents
Unique location
Unique assets
(e.g. Mineral rights)

Difficult to Imitate:
Brand Loyalty
Favorable cost position
Employee Satisfaction
Reputation for Fairness

Easy to Imitate:
Cash
Commodities

Can be Imitated (but may not

be):
Capacity Pre-emption
Economies of Scale

Source: Collis and Montgomery, Corporate Strategy (1997).

Two
Two approaches
approaches to
to identifying
identifying an
an
organizations
organizations resources
resources and
and capabilities
capabilities
Starting
Startingfrom
fromthe
theinside
inside

Starting
Startingfrom
from the
theoutside
outside
Key Success Factors
From industry analysis
Opportunities and threats

What resources & capabilities

do we need to deliver these
KSFs?

Identifying
Identifying Organizational
Organizational Capabilities:
Capabilities:
A
AFunctional
Functional Classification
Classification
FUNCTION
Corporate
Management

CAPABILITY
Financial management
Strategic control
Coordinating business units
Managing acquisitions

EXEMPLARS
ExxonMobil, GE
IBM, Samsung
BP, P&G
Citigroup, Cisco

MIS

Speed and responsiveness through

rapid information transfer

R&D

Research capability
Merck, IBM
Development of innovative new products Apple, 3M

Wal-Mart, Dell

Manufacturing/Ops
Efficient volume manufacturing
YKK
Continuous Improvement
Nucor, Harley-D
Flexibility
Zara, Four Seasons
Design
Marketing

Design Capability

Apple, Nokia

Brand Management
P&G, LVMH
Quality reputation
Johnson & Johnson
Responsiveness to market trends
MTV, LOreal

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

Distinctive
Distinctive Capabilities
Capabilities as
as aa
Consequence
Consequence of
of Childhood
Childhood Experiences
Experiences
Company Capability

Past History

Exxon

Financial
Exxons predecessor, Standard Oil (NJ)
management
was the holding co. for Rockefellers
Standard Oil Trust

RD/
Shell

Coordinating
decentralized
global empire

BP

Elephant
hunting

ENI

Deal making in
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

Shell a j-v formed from Shell T&T founded to

sell Russian oil in China, and Royal Dutch
founded to exploit Indonesian reserves
Discovered huge Persian reserves, went on to
find Forties Field and Prudhoe Bay

A
AHierarchy
Hierarchy of
of Capabilities:
Capabilities:
A
ATelecom
Telecom Manufacturer
Manufacturer
CROSS FUNCTIONAL
CAPABILITIES

N e w p ro d u c t
d e v e lo p m e n t
c a p a b ility

C u s to m e r
s u p p o rt
c a p a b ility

BROAD FUNCTIONAL
CAPABILITIES

o p e r a tio n s
c a p a b ility

R & D and
d e s ig n
c a p a b ility

M IS
c a p a b ility

M a r k e t in g
a n d s a le s
c a p a b ility

H um an
r e s o u r c e m g t.
c a p a b ility

M a n u f a c tu r in g
c a p a b ility

M a t e r i a ls
m anagem ent
c a p a b ility

P ro c e s s
e n g in e e r in g
c a p a b ility

P ro d u c t
e n g in e e r in g
c a p a b ility

Test
e n g in e e r in g
c a p a b ility

P r in t e d
c ir c u it - b o a rd
a s s e m b ly

T e ls e t
a s s e m b ly

S y s te m
a s s e m b ly

A u to m a te d
t h r o u g h - h o le
com ponent
in s e r t io n

M anual
in s e r tio n o f
c o m p o n e n ts

ACTIVITY RELATED
CAPABILITIES
(Operations related
only)
SPECIALIZED
CAPABILITIES
(Manufacturing related
only)
SINGLE-TASK
CAPABILITIES

Q u a lity
m anagem ent
c a p a b ility

S u rfa c e
m o u n t in g o f
c o m p o n e n ts

W ave
s o ld e r in g

INDIVIDUALS SPECIALIZED KNOWLEDGE

Assessing
AssessingaaCompanys
CompanysResources
Resources
and
andCapabilities:
Capabilities: The
TheCase
Caseof
of VW
VW
Importance

VWs
Relative
Strength

C1. Product
development

C2. Purchasing

C3. Engineering

C4. Manufacturing

C5. Financial
management

C6. R&D

C7. Marketing &

sales

C8. Government
relations

Importance

VWs
Relative
Strength

R1. Finance

R2. Technology

R3. Plant and equipment

RESOURCES

R4. Location
R5. Distribution

7
8

CAPABILITIES

4
5

Appraising
AppraisingVWs
VWsResources
Resourcesand
and Capabilities
Capabilities

10

Key Strengths

Superfluous Strengths

Relative Strength

C3
R3

C8

C4
C2
R2

5
R1

R5

R4

C6

C1
C7

C5

Zone of Irrelevance

1
1

Key Weaknesses
5

Strategic Importance

10

Approaches
Approaches to
toCapability
CapabilityDevelopment
Development
1)
1) Acquire
Acquireand
anddevelop
developthe
theunderlying
underlyingresources.
resources.Especially
Especially
human
humanresources
resources
--Externally
--Externally(hiring)
(hiring)
--Internally
--Internallythrough
throughdeveloping
developingindividual
individualskills
skills (TSMG,
(TSMG,TAS)
TAS)

2)
2) Acquire/access
Acquire/accesscapabilities
capabilitiesexternally
externallythrough
throughacquisition
acquisitionor
or
alliance
alliance
3)
3) Greenfield
Greenfielddevelopment
developmentof
ofcapabilities
capabilitiesin
inseparate
separate
organizational
organizationalunit
unit(IBM
(IBM&&the
thePC,
PC,Xerox
Xerox&&PARC,
PARC,GM
GM&&Saturn)
Saturn)
4)
4) Build
Buildteam-based
team-basedcapabilities
capabilitiesthrough
throughtraining
trainingand
andteam
team
development
development(i.e.
(i.e.develop
developorganizational
organizationalroutines)
routines)
5)
5) Align
Alignstructure
structure&&systems
systemswith
withrequired
requiredcapabilities
capabilities
6)
6) Change
Changemanagement
managementto
totransform
transformvalues
valuesand
andbehaviors
behaviors(GE,
(GE,
BP)
BP)

7)
7)
8)
8)

Product
Productsequencing
sequencing(Intel
(Intel, ,Sony,
Sony,Hyundai)
Hyundai)
Knowledge
KnowledgeManagement
Management(systematic
(systematicapproaches
approachesto
toacquiring,
acquiring,
storing,
storing,replicating,
replicating,and
andaccessing
accessingknowledge)
knowledge)

Summary:
Summary:AAFramework
Frameworkfor
forAnalyzing
AnalyzingResources
Resourcesand
andCapabilities
Capabilities
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 outsource
activities that can be better
performed by other organizations.
--How can weaknesses be corrected
through acquiring and developing
resources and capabilities?
3. Appraise the firms resources and
capabilities in terms of:
(a) strategic importance
(b) relative strength
2. Explore the linkages between resources
and capabilities

1. Identify the firms resources and

capabilities

STRATEGY

POTENTIAL FOR
SUSTAINABLE
COMPETITIVE
ADVANTAGE

CAPABILITIES

RESOURCES