Chapter 3- Resources and Capabilities

The strategic importance of R&C In Establishing Competitive Advantage

- Scarcity - Relevance

Routinization

- essential step in translating practices into capabilities - the 'trade-off' here is the ability to remain flexible in adapting routines to changing circumstances - only by becoming routine do processes become efficient and reliable.

Successful strategies are built on WHAT

- exploiting existing resources and capabilities - upgrading them as needed, and - acquiring additional resources and capabilities as needed.

Tangible resources

- financial resources (cash, securities, borrowing capacity) - physical assets (plant, equipment, land) - capital assets

Classifying capabilities into what 2 things

- functional analysis - value chain analysis

Primary activities of value chain analysis

- inbound logistics - operations - outbound logistics - marketing and sales - service

Example of a resource that has both tangible and intangible characteristics

land is both tangible (has physical properties that satisfy functional needs) and intangible (location as offering unique proximity attractive to drawing business)

Operations

may include machining, assembling, and any other activities that transform inputs into a final product

Inbound logistics

may include receiving, warehousing, inventory control of material inputs

Outbound logistics

may include warehousing, order fulfillment and other activities that get the product or service to the customer

Marketing and sales

may include: - channel selection - advertising - pricing - and other activities associated with getting customer to purchase a product or service

Service

may include: - customer support - repair services - any other activities that maintain and enhance the produce/service's value to the customer.

Support services

o PROCUREMENT may include purchasing of raw materials, components, supplies, equipment o TECHNOLOGY DEVELOPMENT may include R&D, process automation or other technological developments o HR MANAGEMENT may include recruiting, hiring, training, development and compensating employees o COMPANY INFRASTRUCTURE may include finance, legal, quality management, information systems, organizational structure, control systems, company culture, etc.

Key questions regarding tangible resources

o What opportunities exist for economizing on their use? o What are the possibilities for employing existing assets more profitably?

Resources

productive assets owned by the firm and the inputs that firms use to create the goods and services that customers demand

Distinctive competence

refers to those things that a firm does particularly well (e.g., Amazon's sourcing, online sales & delivery; Apple's innovative technologies) - set a company apart from its competitors

relational capability

the ability to build and maintain social relationships, in particular by building trust, developing inter-firm knowledge sharing routines, and establishing mechanisms for coordination

Inimitable

the ability to replicate the resource would require a competitor to expend the same amount of time

incumbency advantage

the advantages experienced by existing competitors in an industry or market relative to newcomers

organizational capability

the firm's capacity to deploy resources for a desired end result

benchmarking

the process by which an organization gathers information from other organizations in order to evaluate and improve its own performance

Organizational process

the sequence of actions through which a specific task is performed

organizational process

the sequence of events of actions through which a specific task is performed

Relevance

A R/C must be relevant in relation to key success factors in the market

How can value be increased?

by getting customers to pay more by providing them with more desirable products or services or by lowering the cost of providing the same product or service.

Valuable

does it improve the effectiveness and efficiency of the operations in the organization?

Rare

does their existence rest with a relatively small number of industry players?

Functional analysis

identifies organizational capabilities in relation to each of the principal functional areas of the firm.

Replicability

- If a firm cannot buy a desired R/C, they can try to build it. It is more difficult to replicate capabilities that are based on complex organizational routines (e.g. FedEx's delivery system). - Even if a capability can be replicated, an incumbency advantage generally resides with the original firm given their strong initial position and the often disproportionate costs of attempting to replicate, especially under a compressed time frame that often erodes productivity.

Relative bargaining power

- The less clearly defined property rights are, the more important relative bargaining power in determining the division of returns. - The more closely an organizational capability is identified with the expertise of individual employees (e.g., think Steve Jobs, Richard Branson, David Beckham) and the more effective those employees are at deploying their bargaining power, the better able those employees are to appropriate surpluses.

VRINO Model (Barney)

- Valuable - Rare - Inimitable - Non-Substitutable - Organized to exploit

Core competencies

- central to the firm's principle lines of business - fundamental to a firm's success - contribute to customer value, or to the efficiency with which that value is delivered - make entry into new markets possible

The strategic importance of R&C In Sustaining Competitive Advantage

- durability - transferability - reblicability

Durability

- more durable = more secure - The increased pace of technological change is shortening the useful lifespan of most resources such as capital equipment. - some resources are more durable than others (e.g. brands are more resilient over time than capital resources which may become obsolete with technological change)

Intangible resources

- more valuable than tangible - technology (patents, copyrights) - reputation (brand names, trademark, relationships) - culture - their value is in the confidence they in still in customers - organizational culture is being seen as a valuable intangible resource

The strategic importance of R&C In Appropriating Competitive Advantage

- property rights - relative bargaining power - embeddedness

Human resources

- stable - skills/know-how - long-term employment contracts - hiring people - establishing employee development plans - capacity for communication and collaboration - motivation

Value chain analysis

- takes the view that a firm's profit depends on the activities it performs - uses a sequential chain to separate the firm's activities into primary activities (inputs transformation and customer interface) and support activities. - By exploring the different activities and, most importantly, the links between them we can get some sense of the firm's main capabilities.

Scarcity

- the more scarce the resource or capability, the greater its strategic importance. - if a R/C is widely available within the industry, then it may be essential to compete, but not enough to have competitive advantage - "needed to play, not sufficient to win"

Conventionally, firms have focused on what 3 questions?

- what is our business? - who are our customers? - which of their needs are we trying to satisfy?

Capabilities

- what the firm can do - skill/competencies that enable the business to coordinate and exploit its resources - may be possessed by individuals or may be embedded in organizational processes, systems, routines

Transferability

-The more mobile the R/C, the easier it is to transfer. -Some R/C's are not easily transferred as they are 'firm specific' or their value depreciates upon transfer. - Some sources of immobility are: -->geography (e.g. natural resources), imperfect information (e.g. buyer beware re: quality or productivity), -->complementarity (e.g. detaching one resource or capability from others may depreciate its value or productivity). -->Organizational capabilities are less transferable as they are based on teams of resources, posing difficulties for recreating the capabilities in a new setting.

Value chain analysis serves four purposes

1. Can help management determine how CHANGING ACTIVITIES can increase the value the firm creates 2. Can explain why companies in the same industry and with the same activities create different amounts of value 3. Can determine which activities to outsource 4. Can help corporate management find synergies generated by SHARING or combining activities across business units.

2 main reasons why the shift from profit as external to internal has occurred

1. as industry environment becomes more unstable, R&C have been viewed as more secure for formulating a strategy. 2. competitive advantage rather than industry attractiveness is the primary source of superior profitability.

3 types of resources

1. tangible 2. intangible 3. human

The profit potential from a firm's resources and capabilities depends on three factors

1. the ability to establish competitive advantage 2. the ability to sustain that advantage, and 3. the appropriation of returns to that competitive advantage.

What is the primary source of profitability?

Competitive advantage

Organized to exploit

Is the firm organized, ready, and able to exploit (get benefits from) the resource/capability? Is the firm organized to capture value

R&C must work together to create WHAT

Organizational capability - organizational capabilities are used on a daily basis to produce goods and services

Steps in putting R&C analysis to work

Step 1- identify key resources and capabilities Step 2- appraising resources and capabilities • Assessing importance • Assessing relative strength Step 3- Developing strategy implications • SWOT

Embeddedness

The more deeply embedded individual skills and knowledge are within organizational routines and the more these routines depend on corporate systems and reputation, the weaker the employee is relative to the firm.

Benchmarking

Tool for quantitative assessment of performance relative to that of competitors. It's the process of identifying, understanding, and adapting outstanding practices from organizations to help improve performance - Plan - Gather data - Analyze - Take action - Review results - Refine and reiterate

Property rights

Who owns the IP? Capabilities depend heavily on the skills and efforts of employees who are not owned by the firm. As such, mobility of key employees is a constant threat for those firms that depend on employee creativity and know-how. Important therefore that the firm protect IP through contractual arrangements with employees and wherever possible through patents.

Dynamic capabilities

are a firm's ability to modify, reconfigure and upgrade resources and capabilities to strategically respond to or generate environmental changes. They are used to renew or change a firm's set of organizational capabilities so that it can continue to deliver new and innovative products and services

Non-substitutable

when it is combined with the characteristics of being valuable, rare, and inimitable, it has contributed to the firms sustaining competitive advantage