CHAPTER 4 – INTERNAL ANALYSIS: RESOURCES AND CAPABILITIES

Strategy is concerned with matching a firm’s resources and capabilities to the opportunities that arise in
the external environment.

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 competitive advantage and profitability.

SUCCESS BASED ON CAPABILITIES

HONDA

It’s the world’s biggest motorcycle producer and leading supplier of automobiles.

Since its founding in 1948, its strategy has been built around its expertise in the development of engine
manufacturing.

CANON

It had its first success in producing 35 mm cameras, and later went on to fax machines, calculators, copy
machines, printers, video cameras, semiconductor manufacturing equipment.

All based on three technological capabilities:

 Precision mechanics
 Microelectronics
 Fine optics

RESOURCE-BASED VIEW OF THE FIRM

RBV has profound implications for companies’ strategy formulation. It emphasizes the uniqueness of
each company and suggests that the key to profitability is not through doing the same thing as the other
firms but rather exploiting differences.

Establishing competitive advantage involves formulating and implementing a strategy that exploits a
firm’s unique strengths (key resources and capabilities).

RESOURCES VS. CAPABILITIES

 Resources are the productive assets owned by the firm.

 Capabilities are what the firm can do with the available resources.

Individual resources do not confer competitive advantage; they must work together to create it.
RESOURCES-CAPABILITIES AND COMPETITIVE ADVANTAGE

APPRAISAL OF RESOURCES

TANGIBLE RESOURCES

Once we have fuller information on a company’s tangible resources, we explore how we can create
additional value form then. This requires that we address one question:

What opportunities exist for economizing on their use?

It may be possible to use fewer resources to support the same level of business, or to use the same level
of resources to support a larger volume of business.

INTANGIBLE RESOURCES

They are usually more valuable than intangible resources. This is the major reason for the divergence
between a firm’s “book value” and its stock-market value.

Brand name is one of the main intangible resources. The value of a company’s brands can be increased
by extending the range of products over which a company markets its brands.

Ex: Samsung

These firms derive considerable economies from applying a single brand to a wide range of products.
HUMAN RESOURCES

The firm’s human resources comprise the expertise and effort offered by employees. Usually, it’s a
stable resource.

Most firms devote considerable effort to appraising their human resources. This can be observed during
the hiring stage. These purposes of appraisal are to assess past performance for the purposes of
compensation and promotion (larger focus on management by objectives).

“Hire for attitude, train for skills”

ORGANIZATIONAL CAPABILITIES

Resources are not productive on their own. An “organizational capability” is a firm’s capacity to deploy
resources for a desired end result.

Core competencies are those capabilities that make a disproportionate contribution to ultimate
customer value, or to the efficiency with which that value is delivered.

There are two approaches used for classifying core and distinctive capabilities:

a) A functional analysis

b) A value chain analysis

A company’s value chain identifies the primary activities that create customer value and related
to support activities.
Ex:
- Primary activities and cost of a hotel: reservation and hotel operations (check-in, check-
out, maintenance, housekeeping).
- Principal support activities: accounting, hiring and training staff, and general
administration.
PORTER’S GENERIC VALUE CHAIN VALUE CHAIN ANALYSIS EXAMPLE

USING THE VALUE CHAIN

The value chain is used to identify the core competencies of the firm and also to discover those activities
in which the firm can generate competitive advantage:

 Cost leadership: understanding costs might help to reduce them.

 Differentiation: to focus on those activities that could give a competitive advantage if they are
performed better than competitors.

IDENTIFYING ORGANIZATIONAL CAPABILITIES

Usually, the identified capabilities are likely to be broadly defined:

 Operational capability
 Marketing capability
 Supply chain management capability

Organizational capabilities are usually the outcome of processes and routines, and the firm’s capabilities
can be disaggregated into more specialist capabilities.

Ex: Toyota  Its origin lies in lean manufacturing, which integrates capabilities relating to the
manufacture of components and sub-assemblies, supply-chain management, production scheduling,
quality control procedures, managing innovations and inventory control.
A HIERARCHY OF CAPABILITIES: A TELECOM MANUFACTURER

APPRAISING THE IMPORTANCE OF RESOURCES AND CAPABILITIES

VRIO FRAMEWORK

It’s a tool used to analyse firm’s internal resources and

capabilities to find out if they can be a source of sustained
competitive advantage.

RESOURCE AND CAPABILITIES IDENTIFICATION

RESOURCES AND CAPABILITIES IN PROFESSIONAL SOCCER

BUILDING TEAM CAPABILITIES:

MANCHESTER UNITED

 Finding/developing young players

o Scouting staff doubled  “Find the best”
o Building youth team  ex: 1992 youth team
included Ryan Giggs, David Beckham, Paul
Scholes, Nicky Butt, Gary Neville.
 Training
o State-of-the-art training complex
o Rigorous training schedule (+ war on booze)
 Developing coordination
OBJECTIVE oAPPRAISAL OFteam
Training for RESOURCES
skills AND
CAPABILITIES: BENCHMARKING
o Building team spirit  “team functions with
single spirit and constant flow of mutual
Benchmarking is a potential tool for learning which companies
support”, “talent without unity of purpose is
are the best at performing particular activities and then using
hopeless”
their techniques (or “best practices”) to improve the cost and
 Structuring the team: build a core group internally
effectiveness of a company’s own internal activities. It also
and supplement with key purchases
enables an objective appraisal of the firm’s capabilities.
o Blending personalities as well as skills
o in Player
The key stages rotation for experimentation
the benchmarking process are: and
flexible coordination
1. Deciding what tointegration
 Cross-functional benchmark
2. Identifying partners
o Building the wider team  coaches, scouts,
3. Establishing benchmark metrics
physiotherapists, psychologists, even
4. Gathering data
cleaners
5. Analysis
IDENTIFYING AN ORGANIZATION’S RESOURCES AND CAPABILITIES

A FRAMEWORK TO ANALYZE R&C

DEVELOPING RESOURCES AND CAPABILITIES

1. Acquire capabilities through mergers, acquisitions, and alliances (UbiSoft).
2. Internal development: focus and sequencing (Intel, Sony, Hyundai).
3. Incubating in separate organizational units  joint ventures.
4. Knowledge management: systematic approaches to acquiring, storing, replicating, and
accessing knowledge.