CONTEMPORARY STRATEGY ANALYSIS tenth edition Robert M. Grant John Wiley & Sons Ltd., 2019 Chapter 5 Analyzing Resources and Capabilities 1 Analyzing Resources & Capabilities OUTLINE • The role of resources and capabilities in strategy formulation • Identifying resources and capabilities • Appraising resources and capabilities • Developing strategy implications Copyright © 2019 John Wiley & Sons, Inc. 2 THE ROLE OF RESOURCES AND CAPABILITIES IN STRATEGY FORMULATION Shifting the Focus from the External to the Internal Environment THE FIRM THE INDUSTRY ENVIRONMENT • Goals & Values • Resources & Capabilities STRATEGY • Structure & Systems The Firm-Strategy Interface Copyright © 2019 John Wiley & Sons, Inc. •Competitors •Customers •Suppliers The Environment-Strategy Interface THE ROLE OF RESOURCES AND CAPABILITIES IN STRATEGY FORMULATION Rationale for the Resource-based Approach to Strategy • When the industry environment is volatile, internal resources and capabilities offer a more stable basis for strategy than an external market focus • Resources and capabilities are the primary sources of competitive advantage—and, therefore, profitability Copyright © 2019 John Wiley & Sons, Inc. THE ROLE OF RESOURCES AND CAPABILITIES IN STRATEGY FORMULATION Product Evolution at Honda Motor Company Honda Technical Research Institute founded Model A clip-on bicycle engine Enters motorcycle racing 50cc Super -cub 98cc, 2stroke Dream motorcycle 1946 1950 Enters Formula 1 racing N360 minicar 4-cylinder 750cc 405cc motorcycle motor cycle Portable generator 1960 Copyright © 2019 John Wiley & Sons, Inc. 1970 Marine engines, generators, pumps, chainsaws, snowblowers, ground tillers, Honda Civic 1000cc Goldwing motorcycle Home cogeneration system Enters Indy car racing 1990 Honda business jet Fuel cell car Civic Hybrid Acura Car division 1980 Variable Cylinder Management Production of diesel engines 2000 GEHonda turbofan engine 2010 2018 THE ROLE OF RESOURCES AND CAPABILITIES IN STRATEGY FORMULATION Canon: Products and Technical Capabilities 1980-2000 Precision Mechanics Fine Optics 35mm SLR camera Compact fashion camera Plain-paper copier EOS autofocus camera Color copier Digital camera Color laser copier Video still camera Laser copier Video security systems Camcorders Binoculars Basic fax Mask aligners Laser fax Inkjet printer Excimer laser aligners Scanners Laser printer Stepper aligners Color video printer Calculator Digital commercial Notebook computer Microprinter Electronics Copyright © 2019 John Wiley & Sons, Inc. THE ROLE OF RESOURCES AND CAPABILITIES IN STRATEGY FORMULATION Evolution of Capabilities and Products: 3M Floppy disks & data storage products Road signs & markings Audio tape Sandpaper PRODUCTS Carborundum mining 1902 Abrasives TECHNICAL CAPABILITIES Insulation products Pharmaceuticals Post-it notes Adhesive chemistry Drug delivery systems Videotape Acetate film Scotch -tape LED lighting Surgical tapes & dressings Anticorrosion coatings Homecare & kitchen products Polymers Materials sciences Coatings & thin-film technologies 2018 Flexible electronics Surface modification Nanotechnology Micro-replication Sensors Health sciences Copyright © 2019 John Wiley & Sons, Inc. Display screens IDENTIFYING RESOURCES AND CAPABILITIES The Links between Resources, Capabilities, and Competitive Advantage COMPETITIVE ADVANTAGE STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE INTANGIBLE HUMAN • Financial • Technology • Physical • Reputation • Skills/know-how • Capacity for communication & collaboration • Motivation • Culture Copyright © 2019 John Wiley & Sons, Inc. IDENTIFYING RESOURCES AND CAPABILITIES Appraising Resources RESOURCE Tangible Resources CHARACTERISTICS INDICATORS Financial Borrowing capacity Internal funds generation Debt/Equity ratio Credit rating Net cash flow Physical Plant and equipment: Size, location, technology flexibility. Land and buildings Raw materials Market value of fixed assets. Scale of plants Alternative uses for fixed assets Technology Patent, copyrights, know how, R&D facilities Technical and scientific employees No. Of patents owned Royalty income R&D expenditure R&D staff Reputation Brands. Customer loyalty, company reputation (with suppliers, customers, government) Brand equity Customer retention Supplier loyalty Training, experience, adaptability, commitment and loyalty of employees Employee qualifications, Pay rates, turnover Intangible Resources Human Resources Copyright © 2019 John Wiley & Sons, Inc. IDENTIFYING RESOURCES AND CAPABILITIES Large Companies with the Highest Valuation Ratios (Sept. 2017) Company Nationality Lockheed Martin Corp. Home Depot, Inc. Netflix, Inc. Amazon.com MasterCard, Inc. AbbVie, Inc. Glaxo Smith Kline NVIDIA Corp. PepsiCo, Inc. Novo Nordisk A/S Celgene Corp. Naspers Ltd. Starbucks Inc. Tencent Holdings Accenture plc 3M Company Alibaba Roche Coca-Cola Co. Altria Inc. USA USA USA USA USA USA UK USA USA Denmark USA S. Africa USA China UK USA China Switzerland USA USA Market cap. ($ bn.) 88 189 80 472 152 140 96 102 164 95 111 100 77 408 88 125 449 175 199 120 Market-tobook ratio 40.8 27.8 26.0 22.8 22.8 22.0 14.9 14.5 13.4 13.1 12.8 12.4 12.2 12.0 10.5 10.5 10.4 9.1 8.9 8.8 IDENTIFYING RESOURCES AND CAPABILITIES The World’s Most Valuable Brands, 2017 Rank Brand Value, 2017 ($ bn.) Change from 2016 (%) 1 Google 246 +7.1 2 Apple 235 +2.7 3 Microsoft 143 +17.6 4 5 Amazon Facebook 139 130 +40.7 +26.6 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 AT&T Visa Tencent IBM McDonald's Verizon Marlboro Coca-Cola Alibaba Wells Fargo UPS China Mobile Disney General Electric Mastercard 115 111 108 102 98 89 88 78 59 58 58 57 52 50 50 +7.2 +10.1 +27.5 +18.4 +10.2 -4.2 +4 -2.7 +19.9 -0.2 +17.0 +1.1 +5.7 -7.2 +8.2 Copyright © 2019 John Wiley & Sons, Inc. IDENTIFYING RESOURCES AND CAPABILITIES Two Approaches to Identifying an Organization’s Resources and Capabilities Starting from the inside Starting from the outside Key Success Factors • How do customers choose? • What do we need to survive competition? What resources & capabilities do we need to deliver these KSFs? Copyright © 2019 John Wiley & Sons, Inc. 12 IDENTIFYING RESOURCES AND CAPABILITIES Porter’s Value Chain FIRM INFRASTRUCTURE SUPPORT ACTIVITIES HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND OPERATIONS LOGISTICS OUTBOUND MARKETING LOGISTICS & SALES SERVICE PRIMARY ACTIVITIES Copyright © 2019 John Wiley & Sons, Inc. IDENTIFYING RESOURCES AND CAPABILITIES A Hierarchy of Capabilities: An Oil and Gas Company Exploration Capability Negotiating Capability Geological Capability Directional Drilling Capability Seismic Capability Well Logging Capabilit y Copyright © 2019 John Wiley & Sons, Inc. Drilling Capability Deepwater Drilling Capability Well Construction Capability Well Casing Capability Partnering Capability Hydraulic Fracturing Capability Procurement Capability APPRAISING RESOURCES AND CAPABILITIES Appraising the Strategic Importance of Resources and 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 Copyright © 2019 John Wiley & Sons, Inc. 15 APPRAISING RESOURCES AND CAPABILITIES Who Appropriates the Returns from Organizational Capabilities? Employees vs. Shareholders at Goldman Sachs Data for 2016 Net income $7.1 bn. Dividends to shareholders $1.1 bn. Total employee compensation $11.7 bn. Average compensation per employee $338,576 Copyright © 2019 John Wiley & Sons, Inc. APPRAISING RESOURCES AND CAPABILITIES Resource and Capability Appraisal: Grant vs. Barney GRANT: Strategic Importance Criteria BARNEY: VRIO Criteria Comparison Establishing competitive advantage • Relevance • Valuable Similar: both about creating customer value • Scarcity • Rare Identical: scarcity = rareness Sustaining competitive advantage • Durability • Transferability • Replicability Appropriating competitive advantage Copyright © 2019 John Wiley & Sons, Inc. No equivalent criterion in VRIO Imitable • Organization Similar: imitation requires either buying (i.e. transfer) or replicating a resource/capability Similar: appropriating value requires being organized for value capture APPRAISING RESOURCES AND CAPABILITIES Relative Strength High The Framework for Appraising Resources and Capabilities Superfluous Strengths Key Weaknesses Low Zone of Irrelevance Key Strengths Low High Strategic Importance Copyright © 2019 John Wiley & Sons, Inc. DEVELOPING STRATEGY IMPLICATIONS High Deriving Strategy Recommendations from Resource/Capability Analysis: Icelandair Group Superfluous Relative Strength Strengths ▪ Maintenance Key Strengths ▪ General management ▪ Human resources ▪ Cabin services ▪ Flight operations ▪ Marketing • ▪ 0Financial resources Inconsequential Weaknesses Low ▪ Fleet ▪ Brand Low Key Weaknesses ▪ Location ▪ Route network ▪ Landing slots Strategic Importance Copyright © 2019 John Wiley & Sons, Inc. STRATEGY: ▪ Iceland location means small domestic market and limited appeal as international hub. ▪ Hence, airline must utilize its operational, service, and HR strengths to offset these disadvantages. ▪ Core strategy: o Collaborate to develop Iceland as a year-round tourist destination o Develop vacation destinations for domestic customers High o Use to low fares and superior customer experience to compete on North Atlantic routes o Use general management strengths for flexible responses to emerging opportunities, e.g. new routes DEVELOPING STRATEGY IMPLICATIONS Deriving Strategy Recommendations from Resource/Capability Analysis Exploiting Key Strengths: • Target market/customer segments where core strengths have biggest impact, e.g. Virgin America focuses on long-haul routes where its differentiated offering has greatest customer • Replicate in new locations, e.g. Disney theme parks in Tokyo, Paris, Hong Kong, Shanghai • Exploit key strengths by diversifying into new markets, e.g. Fuji Film entered cosmetics to exploit capabilities in coatings, collagen, and nanotechnology Key Weaknesses • Invest in weaknesses—but (a) may require investment over a long period; (b) not effective when weaknesses are based on deep-seated cultural factors • Outsource to firms with strengths in these activities, e.g. Apple outsources manufacturing to Foxconn • Partner with firms with complementary resources and capabilities • Target market/customer segments where core weaknesses have smallest impact, e.g. Harley-Davidson’s technological weakness has encouraged its focus on retro-styled, heavyweight cruiser bikes Superfluous Strengths • Seek innovative ways to exploit seemingly unimportant strengths. Copyright © 2019 John Wiley & Sons, Inc. SUMMARY The Framework for Analyzing Resources and Capabilities 3. Develop strategy implications: (a) How can strengths be exploited most effectively? (b) In relation to weaknesses: --Can they be offset by investment? --Can they be outsourced? --In which segments do they least impact? 2. Appraise the firm’s resources and capabilities in terms of: (a) strategic importance (b) relative strength STRATEGY POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE CAPABILITIES 1. Identify the firm’s resources and capabilities RESOURCES Copyright © 2019 John Wiley & Sons, Inc.
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