Chapter 3 – Resources and Capabilities

1. Chapter 3 – Resources and Capabilities Daniel Crawford Alex Bregger Chase Barlow Mark Angelhardt

2. In This Chapter… • The role of resources and capabilities in strategy formation • Identifying the organizations resources • Identifying the organizations capabilities • Appraising resources and capabilities • Developing resources and capabilities • Putting Resource and capability analysis to work: a practical guide.

3. Opening Case: Hyundai Motor Company A man goes into a parts’ garage: Man: ‘Can I have a windshield wiper for a Hyundai, please? Parts Man: ‘Yeah that seems like a fair swap’ Question: Why do Hyundai's have heated rear windows? Answer: To keep your hands warm whilst you’re pushing it!

4. Opening Case: Hyundai Motor Company • Started making cars in 1967 on knockdown basis. • Within 30 years they were able to acquire capability to develop its own cars, launching the Accent in 1994 and the Avante in 1995. • As a latecomer to the market, Hyundai recognized its need to acquire key capabilities and set out to obtain these through a series of phased developments.

5. Key Phases in Hyundai's development process Capabilities CastingChassis Tooling Body production export marketing Hydrodynamics Thermodynamics Fuel engineering Emission control Lubrication Kinetics Ceramics Electronic control FWD engineering CAD/CAM Assembly control system Advanced handling Large scale design Global logistics Lifecycle engineering Assembly Production engineering Local Marketing Accent Avante Sonanta “Alpha Engine” SKD/CKD Ford Cortina Excel Pony Products 1968 1970 1974 1985 1994-95

6. Hyundai’s International Expansion • Chung Moo Koo takes over as Chairman • Needed to gain sales outside the small market of South Korea • Faced two problems: building capabilities abroad, and marketing skills and knowledge.(shoddy image).

7. What they did… • Hired talent with knowledge of the car industry. • Established production plants in India, USA, Europe and China. Customized products for each country. • Introduced 10-year 100,000 mile warranties for vehicles, to overcome perceptions of poor quality.

8. Opening Case: Hyundai Motor Company • 2009 Hyundai Automotive group over takes Ford to become the worlds largest car manufacturer by sales. • Despite being in a recession, Hyundai manages to increase sales by 11% • Hyundai’s emergence as a world class car producer is a remarkable example of capability development over a short period of time.

9. The Role of Resources and Capabilities in Strategy • As we saw in chapter 1, strategy is concerned with matching a firms resources and capabilities to the opportunities that arise in the external environment. • In this chapter we move from the external environment towards the internal environment

10. The Internal Environment • The unstable nature of the external causes the internal to be more secure for formulating strategy. • Use of the resources and capabilities as a base for profitability is called Resource Based View • In a world where consumer preferences are volatile, amarket based view may not provide the stability to base a long term strategy on

11. Support for a Resource Based View • 3M corporation, expanded from sandpaper to adhesive tape • Product list now compromises over 30,000 products • Strategy is set on key technologies relating to adhesives. • Canon Inc., first success was cameras but now makes faxes, calculators, prints, and video • Strategy is built around three things: Precision mechanics, microelectronics, and fine optics • Honda Motor Company, worlds biggest motorcycle producer and lead supplier of cars. • Never defined itself as either motor cycle or vehicle company • Strategy has been built on its development and expertise in the manufacturing of engines.

12. Identifying Your Resources • Tangible Resources • Intangible Resources • Human Resources

13. Tangible Resources • Can be located on the firm’s financial statements • The firms physical assets

14. Intangible Resources • Brand names • Patents • Reputation • Technology • Intangible resources remain largely invisible on financial statements

15. Human Resources • The expertise and effort offered by employees • Competency modeling • Organizational culture

16. Identifying Your Capabilities • “A firms capacity to deploy resources for a desired end result” • Distinctive competence vs. Core competences

17. Functional Analysis • Identifies organizational capabilities in relation to each of the principal functional areas of the firm • Identifies the capabilities of each business function

18. Value Chain Analysis • Separates the activities of the firm into a sequential chain • Distinguishes between primary activities and support activities

19. Appraising Resources and Capabilities Emphasis: strategy is a quest for profit • Profit depends on 3 factors: • Establishing a Competitive Advantage • Sustaining that Competitive Advantage • Appropriate the returns to that Competitive Advantage

20. Competitive Advantage • Two necessary conditions • Scarcity: resource is scare; not widely available to anyone • Relevance: must be relevant to the market and still able to differentiate your market position • Sustaining the Competitive Advantage • Resources must avoid imitation (transferability & replicability ) and maintain durability • Ex: Kellogg’s’ cereals, Heinz Sauces, Coca-Cola

21. Appropriating Returns • Maintaining the Competitive Advantage relies heavily on individual employees • Appropriate your returns to maintain your most successful and innovative employees • Ex: Domencio de Sole (Chairman) & Tom Ford (Vice chairman) leave Gucci in 2004 • In just 3 days the Co. is worth $1.2 BILLION less than it was with the two

22. Developing Resources and Capabilities • Difficult to understand the linkage between resources and capabilities • Companies rich in resources don’t always perform the best • Ex: Soccer teams with modest budgets (Arsenal, Bayern Munich, and Valencia) often out perform the star-studded teams (Chelsea, Real Madrid, Man. City) • At Beijing Olympics the U.S. sprint relay team did not win a single medal despite having some of the world’s fastest runners

23. Path Dependency and the Role of Early Experiences

24. Core Capabilities: Rigid or Dynamic? “Core capabilities are simultaneously core rigidities – they inhibit firms’ ability to access and develop new capabilities” • This idea is challenged from two directions • Flexibility in routines: avoid fixed patterns of response; even basic operations must display capacity to adapt • Dynamic Capability: a firm’s ability to integrate, reconfigure internal/external competencies, to adapt to rapidly changing environments

25. Putting Resources and Capability Analysis to work

26. Step 1: Identifying resources and Capabilities World Car Industry • Manufacturing capability • NPD • Effective supply chain management • Global distribution • Brand strength • Scale-efficient plants • Up-to-date capital investment • Strong balance sheet • To draw up a list of the key resources and capabilities, we first start from outside the firm. • We look at other successful firms in the industry, and determine what resources or capabilities allow for this success

27. Step 2: Appraising resources and capabilities Assessing Importance • bear in mind, objective is establish completive advantage, not attract customers. • Many resources and capabilities are not scarce and therefore are not as important. TQM and technological advances become diffused into industries. These are needed to play but not needed to win. • Brand strength, global distribution networks and fast-cycle NPD are harder to acquire or develop internally Assessing Relative Strengths • Need to avoid the tendency towards arrogance (ignore past glories) • Benchmarking • About insight and understanding • Resources and capabilities need to be appraised against two criteria • Importance: which R’s and C’s are most important in conferring sustainable competitive advantage. • Strengths and Weaknesses as compared to competitors

28. Step 3: Developing strategy implications Superfluous Strengths • Resources or Capabilities where a company has particular strengths, but they don’t seem vital to competitive advantage • Can’t ignore, initiating innovative development to an apparent inconsequential strength can become a valuable resource • Capcom • Exploiting Strengths: Formulate strategy to ensure that resources are deployed to the greatest effect • Managing Weaknesses: most decisive (and often most successful) solution is to outsource.

29. Developing Resources and Capabilities • GM has four times the output and four times the R&D expenditure, yet Honda has been the world leader in power train technology for 30 years. • You don’t have to be the firm with the most or best resources • One resource needed: managers with requisite knowledge for capability building. • Best-performing firms are often those whose founders had prior experience in closely related sectors

30. Organizational Capabilities Approaches • Acquiring: mergers, acquisitions and alliances • Internal Development: Focus and Sequencing • Does organizational structure narrow its repertoire and make it difficult to adapt to new circumstances • Dynamic Capability, (Teece& friends) refers to a firm’s ability to integrate, build and reconfigure competences to address rapidly changing environments • Don’t be rigid.