BY: SPENCER BROWN, LAURA CARR, IKE HUESTIS, BRAD KLINGBERG, TREANNE

TURNER

Foundations of Strategy Chapter 3

Resources and Capabilities

Summary

The Role of Resources and Capabilities in Strategy Formulation

Emphasis on correlation between strategy and the internal environment of a firm

Relationship between strategy and the resources and capabilities of a firm

Two main reasons for this change Internal resources and capabilities are more secure

when forming a strategy Competitive advantage has become the source of

profitability

Resource-based view

Tangible Financial (cash,

securities, borrowing capacity)

Physical (plant equipment, land, mineral reserves)

Intangible• Technology

(patents, copyrights, trade secrets)

• Reputation (brands, relationships)

• Culture

Human• Skills/know-

how• Capacity for

communication and collaboration

• Motivation

Resources

Organizational Capabilities

StrategyCompetitive Advantage Industry Key Success Factors

Identifying Resources

Tangible Resources Easiest to identify and evaluate Financial resources and physical assets are located in

a firm’s financial statements

How does a firm create additional value? Improving efficiency Using existing assets more profitably

Identifying Resources

Intangible Resources Brand names and trade marks are a form of

reputational asset Value lies in the confidence it instills in customers Technological and artistic resources

Patents Copyrights Trade secrets Trade marks

Identifying Resources

Human Resources Comprised of the expertise of employees Most firms devote considerable time into improving

HR Competency Modeling

Comparing potential employees to a set of skills they are looking for

Company Culture Organization’s values and traditions

Classifying Capabilities

Organizational Capability Using resources to attain desired goals

Must find a firm’s distinct and core competencies What a firm does to make them superior relative to

competitors Important success factors a firm competes on

Classifying Capabilities

Identifying a firm’s capabilities Functional Analysis

Identifies capabilities in relation to certain functional areas

Value Chain Analysis Determine capabilities according to the sequential chain

of activities of the firm

Functional

Functional Area Capability Example

Corporate Functions Financial Control Exxon Mobil

Management Information

Comprehensive MIS network

Wal-Mart

Research and Development

Innovative Product Development

Apple

Operations Efficiency in Volume Briggs and Stratton

Product Design Design Capability Nokia, Apple

Marketing Brand Management Proctor and Gamble

Sales and Distribution

Customer Service Caterpillar

Value Chain

Type of Activity Generic Value Chain Label

Examples of Activities

Primary Activities Logistics Purchasing, SCM

Operations Design, Assembly, Quality Control

Marketing and Sales Market Research, Ads, Promoting,

Pricing

Service Warranties, Parts, Recycling

Support Activities Infrastructure Global Communications, Risk Management

HR Management Training, Recruitment

Technology Development

Technology managed design and

manufacture

Procurement Database and Inventory

management

Profit-Earning Potential of a Resource/Capability

The extent of the competitive advantage established

The sustainability of the competitive advantage

Appropriability of the returns

Establishing Competitive Advantage

Scarcity Resource/capability must be widely unavailable within

the industry

Relevance Resource/capability must be relevant to the key

success factors in the market

Sustaining Competitive Advantage

Durability Resource/capability must have a useful lifespan

Transferability Resource/capability must be mobile between

companies

Replicability Product can not be imitated by competitors

Appropriating the Returns to Competitive Advantage

Property rights

Relative bargaining power with determining the division of returns between the

firm and its individual members

Embeddedness Deeply embedded individual skills and knowledge

leads to dependence on corporate systems and reputation

Competitive Advantage: Gucci

French retailer PPR acquires Gucci Group in 2001.

Chairman Domenico De Sole and vice chairman Tom Ford leave Gucci in 2004.

The duo had masterminded Gucci’s transformation into a Global style leader, and the combination of talented CEO and designer proved to be a competitive advantage for the company.

As a result, Gucci’s share price fell from $86.10 to around $75, losing the company an estimated $1.2 billion.

Putting Analysis Into Practice

Step 1: Identify the key resources and capabilities

Step 2: Appraising resources and capabilities which resources are most important in conferring

sustainable competitive advantage? what are the firms strengths/weaknesses compared to its

competitors?

Step 3: Developing strategy implications Exploiting key strengths Managing key weaknesses Utilizing inconsequential strengths

Organizational Capabilities

Develop over long time periods Can be traced back to prevailing circumstances during

the founding and early development of a company.

Embodied within organizational structure The more complex the task, the greater the gains from

learn-by-doing.

Embedded with organizational culture Collaboration without managerial direction depends

upon shared perceptions, common values and behavioral norms.

Approaches to Capability Development

Acquiring Capabilities acquisitions and alliances

Internal Development focus and sequencing

Acquiring Capabilities

Acquisitions Can help fast track the

process of capability development, especially in technological environments.

However, major risks include culture clashes, expenses, and surpluses.

Alliances Quick and low-cost

means of extending capabilities available to a firm.

However, building trust and managing alliance relationships is critically important.

Internal Development

Focus Must limit the number and scope of the capabilities

that it is attempting to create at any point of time.

Sequencing Develop capabilities incrementally through several

stages, and target no more than a few capabilities in each time period.

Comparison

20 Mile March Elements

Performance markersSelf-imposed constraintsTailored to the enterpriseLies largely within your controlA proper timeframeDesigned and self-imposed by the enterpriseMust be achieved with great consistency

• GREAT BY CHOICE

Why it Wins

It builds confidence in your ability to perform well in adverse circumstances

It reduces the likelihood of catastrophe when you’re hit by turbulent disruption

It helps you exert self-control in out-of-control environments

• GREAT BY CHOICE

Six Paths Framework

Path 1: Look across alternative industries Path 2: Look across strategic groups within

industryPath 3: Look across the chain of buyersPath 4: Look across complementary product

and service offeringsPath 5: Look across emotional or functional

appeal to buyersPath 6: Look across time

• BLUE OCEAN STRATEGY

Classes

Economics

Competitive advantage An advantage that a firm has over its competitors,

allowing it to generate greater sales or margins and/or retain more customers than its competition. Example: firm's cost structure, product offerings,

distribution network and customer support.

Strategy An adaption or complex of adaptions that serve an

important function Identify means of resources

Human Resource Development

Human Resources Current Trends in HR Training

Leading and Managing ChangeMotivation

Employee Engagement

Accounting

Intangible AssetsTangible Assets Profit Earning PotentialStrategic Analysis

Financial AnalysisAssessing worth of on Asset

Functional Areas Capability Exemplars

Corporate functions Financial control Exxon Mobil, PepsiCo

Management development

General Electric, Shell

Strategic innovation Google, Haier

Multidivisional coordination

Unilever, Shell

Acquisition management

Cisco, Systems, Luxottica

International Management

Shell, Banco Santander

Management information

Comprehensive, integrated MIS network linked to managerial decision making

Wal-Mart, Capital One, Dell Computer

Examples of Hyundai’s Capabilities by function

Corporate functionsManagement informationResearch and Development Operations Product DesignMarketing

Our Company:Dick’s Sporting

Goods

Resources: Tangible

Financial 2012: $5.64 Billion in revenue $294.49M Total cash on hand

Physical 511 Stores in 44 states

Resources: Intangible

Relationships with high margin brands, such as Nike and Under Armour.

Private brands that create customer loyalty.Reputation for customer service.

Resources: Human

Stores employ experts in their fields PGA and LPGA golf pros Certified fitness trainers Specialty trained footwear sales associates Professional fisherman and kayakers

Capabilities

Specialty shops within stores. Dicks combines their tangible resources (massive

stores) with intangible resources (relationships with high margin brands) to create specialty shops to help promote brands.

Currently have 45 Under Armour All-American shops and 105 Nike Field House shops

Capabilities - Continued

Specialty stores also include more specialized markets

The Lodge

Fitness

Footwear

Appraising Resources

Resource Importance Relative Strength

Finance 8 9

Technology 2 3

Location 7 9

Distribution 8 4

Brands 8 10

Appraising Resources

1 2 3 4 5 6 7 8 90

2

4

6

8

10

12

Superfluous Strengths Key Strengths

Zone of Irrelevance

Key Weaknesses

Dealing With Key Weaknesses

Currently has only three distribution centers, barely enough to keep up with current stores.

Plans to build a new 600,000 square foot distribution center that will allow for about 250 more stores.

Questions?