The Resources and Capabilities of the Corporationmba7.tistory.com/attachment/cfile26.uf@1934CB444D1... · isolated by value chain analysis must possess in order to be the ... Google,

Fredrik Tell, Linköping University 1

The Resources and Capabilities of the Corporation

Strategising ”inside out”?

Why should we care about Strategic Management?

What is it? Let’s ask Jay Barney: http://www.youtube.com/watch_popup?v=-

KN81_oYl1s&vq=small



The traditional strategy view •  Market models •  Industry structure and competition •  What gives rise to competitive advantage? •  Strategy = opportunity for making...

”An enterprise has Competitive Advantage if it is able to create more economic value than the marginal (break even) competitor in its product market” (Peteraf and Barney, 2003: 314, Barney & Clark, 2007: 24) ”Economic rents are defined as returns to factor in excess of its opportunity costs.”, Barney & Clark, 2007: 28)


Strategy (1): outside-in •  Economic rents can be maintained by industry structures, e.g.

monopoly •  Industries: made up by products and differ in character! •  How are industrial structures formed and maintained? •  The formulation of strategy begins in the position of the

product on the market (2P)


Market structure => competitive performance

Market structure in this perspective is determined by factors such as: •  The number of producing (selling) firms, and the number of buyers and their

relative sizes. •  The degree of product differentiation. •  Existing barriers to entry end exit. •  The emerging demand of single corporate products. •  The character of international competition. •  The cost and production structures of firms. •  The financial conditions of firms. •  The economic characteristics of goods produced.

(Adapted from: Mason 1939; Bain 1968; Caves 1984; Andersson, Bjuggren, and Ohlsson 1990)


Implications for the corporation

•  The development of the M-form and conglomerates

•  Business unit strategies •  Increasing autonomy of divisions and SBUs


Strategic Management as portfolio management


Strategic process: Outside-in

•  Market entry process: 1.  Pick an industry based on its ”structural

attractiveness” 2.  Choose an entry strategy based upon conjectures

about competitors’ rational strategies 3.  Acquire or otherwise obtain the requisite assets to

compete in the market (Teece DJ, Pisano G & Shuen, A (1997) Dynamic capabilities and strategic management, Strategic Management Journal, 18(7), 509-531)


Strategy (2): Inside-out

•  What gives rise to competitive advantage?

•  What determines strategic direction? •  The resources of the firm

•  The capabilities of the firm


Strategy: a complementary (or substituting?) view

•  Strategy: Not only a positioning of the products of the firm (outputs).

•  Strategic choices depend upon an evolving resource-base of the firm.

•  Strategy is a about finding and building an approporiate resource base. Competition takes place on the level of resources & capabilities (inputs).

•  Successful strategies require integration of resources and knowledge.


Why focus on resources and capabilities?

•  Source of direction –  What business are we in?

•  Especially in volatile markets •  Difficulties in defining markets

•  Source of competitive advantage –  What gives rise to above-normal rents?

•  Intra-industry differences greater than inter-industry differences •  Competitive position on the market rests on firm resources and

capabilities

(Grant, 1991)

Do industries matter?


Percentage of variance in firms’ return on assets explained by: Industry effects (%)

Firm effects (%)

Unexplained variance (%)

Schmalensee (1985) 19.6 0.6 79.9

Rumelt (1991) 4.0 44.2 44.8

McGahan & Porter (1997)

18.7 31.7 48.4

Hawawini et al. (2003)

8.1 35.8 52.0

Roquebert et al. (1996)

10.2 55.0 32.0

Misangyi et al. (2006)

7.6 43.8 n.a.


Strategic analysis: Inside-out

•  Resources •  Capabilities •  Profit potential •  Formulate a strategy •  Identify resource gaps and develop a resource-

base


Strategy formulation

Resources

Capabilities

Competitive advantage

Strategy

1. Identify and classify the firm’s resources. (relative to competitors)

2. Identify the firm’s capabilities. (relative to competitors)

3. Appraise the rent-generating potential of resources and capabilities in terms of: a) their potential for sustainable advantage b) the appropriability of their returns

4. Select a strategy which best exploits resources and capabilities relative to external opportunities.

5. Identify resource gaps which need to be filled. Invest in replenishining, augmenting & upgrading the firm’s resource-base

(Robert Grant, 1991)


Strategic process: Inside-out

•  Market entry process: 1.  Identify your firm’s uniques resources 2.  Decide in which market those resources can earn the

highest rents 3.  Decide whether the rents from those assets are most

effectively utilized by –  Integrating into relevant markets –  Selling the relevant output to related firms –  Selling the assets themselves to a firm in a related business (Teece, Pisano & Shuen, 1997: 514)

Being best: inside-out and outside-in?


Key Success Factors • How do customers choose? • What do we need to survive competition?

What resources & capabilities do we need to deliver these KSFs?

Starting from the inside Starting from the outside


Which are the firm’s resources?

Tangible •  Financial •  Physical

Intangible •  Technology •  Reputation •  Culture

Human •  Skills/know-how •  Communication and collaboration •  Motivation


RESOURCE CHARACTERISTICS INDICATORS

Tangible Resources

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

Intangible Resources

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

Human Resources Training, experience,adaptability, commitment and loyalty of employees

Employee qualifications, Pay rates, turnover


Why do resources give rise to competitive advantage?

•  Scarcity or rareness: these resources give rise to ex ante advantages. (Peteraf 1993)

•  Reproducibility: these resources give rise to advantages of scale and scope (Chandler 1990).

•  Relatedness or linkability: these resources creates by their ”fit” into the overall value creation system synergy effects (Prahalad and Hamel 1990; Conner 1991).

•  Idiosyncrasy: resources become company specific and ”sticky” by the way firms learn how to use them (Penrose 1959; Mahoney and Pandian 1992).

•  Imitability or substitutability: hard-to-imitate resources give rise to ex post advantages (Dierickx and Cool 1989). Related to this is also the durability of resources (Grant 1991; 1996b).

•  Valuability: resources and the output they create must be of value for someone on the market (De Gregori 1988; Prahalad and Hamel 1990)


RBT and internal analysis

•  ”First this model assumes that firms within an industry (or group) may be heterogeneous with respect to the resources they control. Second, this model assumes that these resources may not be perfectly mobile across firms, and thus heterogeneity may be long lasting.” (Barney & Clark, 2007: 51)

•  ”…Porter (1985) introduced the value chain to assist managers in isolating potential resource-based advantages for their firms. The resource-based theory developed here simply pushes the value chain logic further, by examining the attributes that resources isolated by value chain analysis must possess in order to be the sources of sustained competitive advantage.” (Barney & Clark, 2007: 56-57)


Assessing firm resources

Resources and Competitive advantage: –  Are they Scarce and Relevant?

Sustainability of resources: –  Are they Durable? –  Are they Transferable? –  Are they Replicable?

Appropriability of returns: •  Are they protected by property rights? •  What is our relative bargaining power? •  How embedded are resources?

Resources’ contribution to competitive advantage


Scarcity

Relevance

Durability

Transferability

Replicability

Property rights

Relative bargaining power

Embeddedness

THE EXTENT OF THE COMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE

APPROPRIABILITY

THE PROFIT EARNING POTENTIAL OF A RESOURCE OR

CAPABILITY


Resource-based rents

•  Resource heterogeneity, creating Ricardian or monopoly rents.

•  Ex post limitations to competition, preventing the obtained rents to be competed away.

•  Imperfect factor mobility, securing the valuable resources for the firm.

•  Ex ante limits to competition, keeping costs from offsetting rents.

(Peteraf, 1993)


Capabilities, organisation & strategy

•  A firm’s competitive advantage stems from its resources

•  The ability to exploit its resources hinges upon firm capabilities

•  What is a capability? •  What means exist for taking advantage of

capabilities?


Core competencies & capabilities

•  Corporate span •  Temporal dominance •  Learning by doing •  Competitive locus ”...concept of core competencies admits a proactive

construction of competence, sees competence as spanning multiple businesses, and, most importantly, sees competition as being over the acquisition and development of competence.”

(Rumelt, 1994)

Organizational capability as knowledge integration

“Integration of specialists knowledge to perform a discrete productive task is the essence of organizational capability, defined as a firm’s ability to perform repeatedly a productive task which relates either directly or indirectly to a firm’s capacity for creating value through effecting the transformation of inputs into outputs.” (Grant, 1996, p. 377)



CROSS FUNCTIONAL CAPABILITIES

BROAD FUNCTIONAL CAPABILITIES

ACTIVITY RELATED CAPABILITIES (Operations related only)

SPECIALIZED CAPABILITIES (Manufacturing related only)

SINGLE-TASK CAPABILITIES (Only those related to PCB assembly)

INDIVIDUALS’ SPECIALIZED KNOWLEDGE

New product development capability

Customer Support capability

Quality management capability

Operations Capability

Marketing and sales capability

MIS capability

HR management capability

R&D and design capability

Test engineering capability

Product engineering capability

Process engineering capability

Materials management capability

Manufacturing capability

System assembly

Printed circuit-board assembly

Telset assembly

Surface mounting of components

Wave soldering Manual insertion of components

Automated through-hole component insertion


Identifying capabilities

•  Potential access to a number of markets, technologies or products.

•  Value-adding for the customer in the end-product.

•  Hard to imitate •  Few

(Prahalad & Hamel, 1990)

The Corporate Strategy Landscape



FUNCTION CAPABILITY EXEMPLARS

CORPORATE FUNCTIONS

Financial control Management development Strategic innovation Multidivisional coordination Acquisition management International management

Exxon Mobil, PepsiCo General Electric, Shell Google, Haier Unilever, Shell Cisco Systems, Luxottica Shell, Banco Santander

MANAGEMENT INFORMATION

Comprehensive, integrated MIS network linked to managerial decision making

Wal-Mart, Capital One, Dell Computer

R&D Research Innovative new product development Fast-cycle new product development

IBM, Merk 3M, Apple Canon, Inditex (Zara)

OPERATIONS Efficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response

Briggs & Stratton, YKK Toyota, Harley-Davidson Four Season Hotels

PRODUCT DESIGN Design capability Nokia, Apple

MARKETING Brand management Building reputation for quality Responsiveness to market trends

Procter & Gamble, Altria Johnson & Johnson MTV, L’Oreal

SALES AND DISTRIBUTION

Effective sales promotion and execution Efficiency and speed of order processing Speed of distribution Customer service

PepsiCo, Pfizer L. L. bean, Dell Computer Amazon.com Singapore Airlines, Caterpillar


Implications for strategy •  Corporate organisation: A part of Strategic Management •  http://www.youtube.com/watch_popup?v=UEl0V5PXwHE&vq=medium •  What assets are related to organisational capabilities?

–  End products –  Core products –  Core capabilities

•  The tree metaphor! •  How to organise for continuing renewal of capabilities (dynamic

capabilities)?

Products and capabilities at 3M


Carborundum mining

Sandpaper

Scotchtape

Road signs & markings

Post-it notes

Audio tape

Surgical tapes & dressings

Videotape

Acetate film

Floppy disks & data storage

products

Pharmaceuticals

Housewares/kit- chen products

Abrasives Adhesives New-product

development & introduction

Thin-film technologies

PRODUCTS

CAPABILITIES

Materials sciences Health sciences

Microreplication

Flexible circuitry


Corporate growth: Resources and diversification

•  Resources and the services they render •  The firm develops unique services (capabilities) out of

its resources (managerial competence) •  The “routinization” of managerial competence allow for

new ventures and diversification •  Due to the development of managerial capabilities out

existing resources, related diversification tend to be more frequent than unrelated

(Penrose, 1959)

Starting point

•  Rumelt (1974) investigated diversification strategies among Fortune 500 in 1969 and distinguished between: –  Specialized (Dominant): 52% –  Related-constrained: 24% –  Related-linked: 20% –  Conglomerate: 12%



Diversification

Whittington et al (1999) Industrial and Corporate Change

•  Studied strategies of top 100 industrial firms in France, Germany and UK between 1950-1993, using interviews and documents. They found related diversification growing, but so did also conglomerates (unrelated diversification). Related diversification was also the most stable strategy.


Related vs. Unrelated diversification

•  Undiversified •  Single (>95% single type of activity) •  Dominant (70-95%)

•  Diversified (no single core > 70%) •  Related •  Unrelated

•  Diversification dominating •  Both unrelated and related increasing (Wittington et al, 1999)


Diversification among Swedish firms

(Bengtsson and Kalling, 2007)


Issues in RBV of competitive advantage

•  Is this strategy or operational effectiveness? •  What are resources and capabilities (risk of circularity)? •  Downsides of capabilities •  Is it a dynamic or static theory? •  Are capabilities core or distributed? •  A theory of strategy or a theory of the firm? •  Does resources or industry conditions determine

profitability?


What is strategy?

•  Operational effectiveness is necessary but not sufficient for sustainable competitive advantage

•  Strategy rests on unique activities •  A sustainable strategic position requires trade-

offs •  Fit drives both competitive advantage and

sustainability (Porter, 1998)


Circular definitions?

•  Capabilities and resources often defined as ”capacity to do things”: How to measure?

•  Often outcomes are measured, rather than the organizational processes underlying capabilities (learning) (Prencipe and Tell, 2001)


Downsides?

•  Core capabilities becomes core rigidities (Leonard-Barton, 1992; Levinthal & March, 1993)

•  Path dependency (David, 1985; Arthur, 1989) •  Locking into customers: Innovators Dilemma

(Christensen, 1997) •  Reduction of variety and ”closed innovation” (in

opposition to ”open innovation”) (Chesbrough, 2003) •  In contrast to what one could expect, core competence

would hence not be a source of dynamic capabilities (cf. Wednesday’s lecture)


Dynamics?

•  How have resources been measured in empirical studies?

•  How are markets conceived? •  How are above normal returns maintainable?


Core or distributed capabilities?

•  Granstrand et al (1997) performed a study of the patenting patterns of 440 large diversified firms

•  Questioned the notion of core technologies –  Firms were patenting in a large and increasing

number of technological fields


Why distributed capabilities?

•  Facilitates corporate growth •  Drives up R&D investment •  Enables diversification •  Facilitates new linkages within the firm •  Makes the firm more respondent to

discontinuous change => But managerially challenging

Theory of strategy?

•  Theory of competitive advantage •  Theory of the firm


Back to square 1?

•  What determines profitability of firms? •  Industry, resources/capabilities, luck, or all of

these? (see numerous special issues of Strategic

Management Journal)



A more balanced view?

”For the firm, resources and products are two sides of the same coin. Most products require the services of several resources and most resources can be used in several products.”

(Birger Wernerfelt, 1984)

SWOT and beyond?

Documents

The Resources and Capabilities of the Corporationmba7.tistory.com/attachment/cfile26.uf@1934CB444D1... · isolated by value chain analysis must possess in order to be the ... Google,