Chapter 5 ANALYZING A FIRM’S CAPABILITIES AND RESOURCES

Chapter 5

ANALYZING A FIRM’S CAPABILITIES AND RESOURCES

Organizational Analysis

Strategic management is about creating and sustaining competitive advantage.

Competitive advantage can be understood in the relationship of three constructs: Use value-subjective valuation of a product; “worth”Exchange value-objective price at the time of

exchangeConsumer surplus-net value a customer derives

from a purchaseThink of “buyer’s remorse” as negative consumer

surplus

Competitive Advantage

Total Cost

To the Firm

Profit

This area represents the firm’s total costs in presenting the product or service for sale. To create new value, the firm must cover its total costs.

Use Value

Consumer Surplus

This area represents the value created in each profitable sale and consists of both profit for the firm and surplus for the customer.

Exchange Value


When a customer chooses to purchase from Firm A rather than Firm B, the following are true: There was some difference in the consumer surplus offered by

Firm A and Firm B That difference gives Firm A a competitive advantage over

Firm B That competitive advantage can be attributed to Firm A’s

capabilities and resources

This is a simplified statement of the resource based view used in conducting the organizational side of strategic analysis.

Superior capabilities

and resources

Greater consumer surplus

Competitive

advantage


The Resource-Based View (RBV)

Firms are constantly seeking to gain advantage and to translate that advantage into earnings.

Firms must appear more attractive than other options in the eyes of customers at the moment that customers decide to purchase.

To do this, firms make deliberate decisions about the procurement, development, and deployment of assets and resources used to produce advantage.


The RBV holds that competitive advantage emerges from resources and capabilities that meet four criteria:

ValueRarityInimitabilityNon-substitutability

Organizational AnalysisTwo types of resources

Tangible resources—physical resources that can be readily seen, touched, and/or quantified Plant, property, and equipment, cash, etc.

Intangible resources—non-physical resources that can be difficult to quantify or be seen Patents, trademarks, “secret family recipes”, etc.

Capabilities—what organizations can do based on what resources they possessNew product development, customer service, etc.Dynamic capabilities—a unique ability to create new

capabilities; ability to “update” capabilities


ValueValuable resources are resources that

consumers desire or resources that give a firm an ability to produce products and services that consumers want. A good location for a retail outletA good credit rating A key technology

Valuable resources can be both tangible and intangible.


RarityConsider three coffee shops in a two-block area of

the same downtown. Each offers a slightly different location, a slightly different atmosphere; each has different personnel, different history, different reputation, and a historically different clientele.

For different segments of the market, each offers a uniquely different combination of products and services, a rare bundle of resources.

What specifically are these rare resources? The answer lies in the eyes of any customer who

would value any one of these stores over the others.


InimitabilityAdvantage from valuable and rare resources

will diminish if imitated by competitors.Diffusion of key capabilities can undermine

competitive advantage.Outsourcing can yield benefits. However,

while the savings from outsourcing are appealing, it is important to consider the long term implications for imitability and rarity.


InimitabilityIs Sam’s Cola an effective imitation of Coca-

Cola?

It depends upon who you ask; for consumers who see little difference in the use value of different sodas, Sam’s Cola is an effective imitation.

Understanding what is or is not an effective imitation means understanding the nature of the value that the product or service provides.


Non-SubstitutabilityImitating a valuable and rare resource can be

difficult. Thus, it can makes sense to substitute it with some equivalent resource.

The ability to substitute the value generating function of a resource reduces its value and its ability to sustain competitive advantage.

Resources, Capabilities, and Competitive Advantage

Sustainable competitive advantage emerges from resources that are:

Valuable

Valuable resources are used by firms to create products and services that customers find desirable. They allow firms to exploit opportunities and to respond to threats

Rare

Resources that are rare are held by just a very few. As such, when valuable resources are also rare, they are likely to be in great demand

Inimitable

Inimitability simply means difficult, costly, or impossible to imitate or develop. Resources that are inimitable are not likely to lose their value through diffusion

Non-Substitutable

Resources that have no obvious or direct equivalents are difficult or costly to substitute

Learning from Harley-Davidson

What was the cause of Harley-Davidson’s decline and how did the company recover?

How would you quantify the power of the Harley- Davidson brand?

What do you think are Harley-Davidson’s distinctive competencies?


The Value ChainA tool for decomposing the value generating

activities of an organization.

Term reflects that at each step, the product or service becomes more valuable

The value chain is based on a simple but powerful idea, that the value customers see and the value that leads to profits result from a series of distinct but interconnected activities.

The Value Chain

Margin

Mar

gin

Firm Infrastructure

Human Resource Management

Information Technology

Physical Plant & Maintenance

Inbound

LogisticsOperations

Outbound

Logistics

Marketing

& Sales

The Value ChainPrimary Activities: actions that are directly

involved in creating and distributing goods and services (creating value!)Inbound Logistics—the arrival of raw materialsOperations—the actual production processOutbound Logistics—the movement of finished

products to customersMarketing & Sales—work to attract customers

and convince them to make purchasesService—the extent to which a firm provides

assistance to their customers

The Value ChainSupport Activities: structures that provide

underlying support primary activitiesFirm Infrastructure—how the firm is

organized (structure)Human Resource Management—involves

the recruitment, training, and compensation of employees

Technology—use of computerization and telecommunications to support activities

Procurement—process of negotiating for and purchasing raw materials

The Marketing MixThe marketing mix (a.k.a.—4 P’s) provides

important insights into how to leverage resources and capabilities into goods and services people will buyProduct—the good(s)/service(s) a firm sells

Price—the price at which goods/services are offered

Place—the location of offerings or distribution channels

Promotion—the communication s used to market a product (e.g., advertising, public relations, other forms of direct or indirect sales)

The marketing mix is critical to a firm’s survival and competitive advantage

Competitive Profile Analysis


Combines value chain analysis ,with the VRIN criteria and the outputs from the environmental analysis.

Based upon the environmental analysis and the mission and goals of the firm, an ideal value chain is developed.

That ideal profile provides the benchmark against which the current value chain is evaluated.

The gap between the ideal and the current guides the development of new strategy.


Function/Resources

Value Rareness Inimitability Substitutability Rating

Inbound Logistics

High Very High Very High Modest 9

Operations Modest Low Low Modest 5

Outbound Logistics

Modest Low Low Modest 4

Sales & Marketing

Modest High Modest Low 8

Service Modest Modest Modest Low 6

Firm Infrastructure

High Modest Modest Low 5

HR Management

High Modest Modest Low 8

TechnologyVery High

Low Low Modest 5

Physical/Plant

Low Low Low High 3

CPA for textbook industry

Constraints AnalysisA constraints analysis helps identify root

causes of problems that restrict an ideal outcomeSimple process

1. Identify problems that you believe restrict the outcome

2. Draw causal arrows from one problem to another if you believe that they are causal

3. The problems that have no arrows pointing at them are root causes and should be dealt with first

Constraints Analysis

Cause A

Problem

Cause E

Cause B

Cause C

Cause D

Cause F Cause G

Final Thoughts & Caveats

The Fallacy of the Better MousetrapBetter mousetrap fallacy –

“if a man can write a better book, preach a better sermon, or make a better mousetrap than his neighbor, though he builds his house in the woods, the world will make a beaten path to his door.”

While an appealing idea, research in the field of entrepreneurship underscores the reality that a better mousetrap, a better invention, a better technology, a better product, or a better service will not necessarily make a better or more profitable business.


The Fallacy of the Better Mousetrap Successes reflect timely interactions between the

products and services that customers find attractive and a host of contextual circumstances that make those products and services valuable and difficult for other firms to imitate.

Even a truly better mousetrap might be ignored if it is never noticed by the market or if it is improperly marketed to consumers who do not have mouse problems!


The Challenge of a Sustainable Advantage

Things change and resources that are valuable and rare today may be less so tomorrow, while resources that have no value today could be very valuable in the future.

Sustained competitive advantage is built upon resources that are valuable, rare, inimitable and non-substitutable. However, over time, few resources retain their value and few will remain highly rare if they are highly valued.


The Challenge of Sustainable Advantage

So, is any competitive advantage truly sustainable?

The answer is that it is all a matter of perspective.

Sustaining an advantage, even for a short time, is still an important achievement as it allows a firm to reap greater profits and to realize greater returns.

At the same time, no competitive advantage is sustainable indefinitely.

Temporary advantage research suggests firms are better off concatenating short-term advantages into a sustainable path


Ambiguity and Social Complexity

The relationship between competitive advantage and the resources that enable it is complex and difficult to discern, embedded in human interactions, historical endowments, and networks of tacit knowledge.

The process of gathering resources and creating from them competitive advantage is an imperfect one and cannot be reduced to a simple and generalizable formula.



Social complexity simply means beyond the ability of most to understand or influence.

Competitive advantage is socially complex:It is typically embedded in bundles of resources

that connect to one another and to the people and operations of a firm in complex ways. As a result, competitive advantage is rarely attributable to any single, solitary resource or ability.



Causal ambiguity exists when the connections between a firm’s resources and its competitive advantage are not well understood.

So, it is difficult to know which resources produce which outcomes. As a result, the process of resource acquisition and development becomes much more imprecise, uncertain, and expensive.

Three Final Caveats

Ambiguity and Social Complexity Thus…

Competitive advantage is not a commodity that can be bought and sold.

Rather, it must be crafted, cultivated, and maintained.

“Firms cannot purchase sustained competitive advantage on open markets” – Barney (1986)

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Chapter 5 ANALYZING A FIRM’S CAPABILITIES AND RESOURCES