5 Analyzing Resources and Capabilities Y Analysts have tended to define assets too narrowly, identifying only those that can be measured, such as plant and equipment, Yet the intangible assets, such as a particular technology, accumulated consumer information, brand name, reputa- tion, and corporate culture, are invaluable to the firm's competitive power. In fact, these invisible assets are often the only real source of competitive edge that can be sustained over time. HIROYUKI TAM MOBILIZING INVISIBLE ASSETS You've gotta do what you do well, —LUCINO NOTO, FORMER VICE CHAIRMAN, BOXONMOBIL OUTLINE + Introduction and Objectives «Appraising the Relative Strength ofa Firms Resources and Capabilities # The Role of Resources and Capabilities in Strategy : seal Formulation ‘ Developing Strategy Implications ‘+ Basing Strategy on Resources and Capabilities + Exploiting Key Strengths + Resources and Capabilities as Sources of Profit «Managing Key Weaknesses ‘© Identifying Resources and Capabil «What about Superfluous Strengths? «+ Identifying Resources ‘Choosing the Industry Context ‘+ Identifying Organizational Capabilities ¢ Summary + Appraising Resources and Capabilities © Self-Study Questions ‘Appraising the Strategic Importance of Resources. @ ‘Notes and Capabolities—_ nz parr it THE TOOLS OF STRATEGY ANALYSIS; Introduction and Objectives In Chapter 1, | noted that the focus of strategy thinking has been shifted from the external environ ment toward its internal environment. In this chapter, we will make the same transition. Looking within the firm, we will concentrate our attention on the resources and capabilities that firms po sess. In doing so, we shall build the foundations for our analysis of competitive advantage (which began in Chapter 3 with the discussion of key success factors) By the time you have completed this chapter, you willbe able to: ‘¢ appreciate the role of a firm's resources and capabilities asa basis for formulating strategy; identify and appraise the resources and capabilities of a firm; ‘@ evaluate the potential fora firm's resources and capabilites to confer sustainable competi tive advantage; use the results of resource and capability analysis to formulate strategies that exploit inter: nal strengths while defending against internal weaknesses. We begin by explaining why a company’s resources and capabilities are so important to is strategy. in Strategy Formulation The Role of Resources and Capabilities Strategy is concemed with matching a firm’s resources and capabilities to the opportu- nities that arise in the external environment. So far, the emphasis of the book has been ‘on the identification of profit opportunities in the external environment of the firm. In this chapter, our emphasis shifts from the interface between strategy and the extemal environment toward the interface between strategy and the internal environment of the firm—more specifically, with the resources and capabilities of the firm (Figure 5.0. Increasing emphasis on the role of resources and capabilities as the basis for strat- egy is the result of two factors. First, as firms’ industry environments have become more unstable, so internal resources and capabilities rather than external market focus have been viewed as comprising more secure base for formulating strategy. Second, it has become increasingly apparent that competitive advantage rather than industry attractiveness is the primary source of superior profitability. Let us consider each of these factors. Basing Strategy on Resources and Capabilities s and capabilities as the lesced into During the 1990s, ideas concerning the role of resoure principal basis for firm strategy and the primary source of profitability coa what has become known as the resource-based view of the firm.!CHAPTERS ANALYZING RESOURCES AND CAPAD FIGURE 5.1 Analyzing resources and capabilities: The interface between strategy and the firm THE INDUSTRY ENVIRONMENT THE FIRM * Goals and Values + Resources and Capabilities + Structure and Systems * Competitors * Customers * Suppliers STRATEGY The Firm-Strategy Enviconment-Strategy Interface Interface To understand why the resource-based view has had a major impact on strategy thinking, let us go back to the starting point for strategy formulation: the underlying purpose of the firm which can be answered by posing the question: “What is our business?” Conventionally, this question has been answered in terms of the market being served: “Who are our customers?” and “Which of their needs are we seeking to serve? However, in a world where customer preferences are volatile and the identity of customers and the technologies for serving them are changing, a market- focused strategy may not provide the stability and constancy of direction needed to guide strategy over the long term. When the external environment is in a state of flux, the firm itself, in terms of the bundle of resources and capabilities it possesses, may be a much more stable basis on which to define its identity. This emphasis on resources and capabilities as the foundation of firm strategy was popularized by C. K. Prahalad and Gary Hamel in their 1990 landmark pap. “The Core Competence of the Corporation.”* ‘The potential for capabilities to be the “roots of competitiveness,” the sources of new products, and the foundation for strategy is exemplified by several companies, for example: © Honda Motor Company is the world's biggest motorcycle producer and a leading supplier of automobiles but it has never defined itself either as a motorcycle company or a motor vehicle company, Since its founding in 1948, its strategy has been built around its expertise in the development and manu- facture of engines; this capability has successfully carried it from motorcycles to a wide range of gasoline-engine products (Figure 5.2). © Canon Inc. had its first suecess producing 35 mm cameras. gone on to develop fax machines, calculators, copy machines, printers, video cameras, camcorders, semiconductor manufacturing equipment, and many other products. Almost all of Canon’s products involve the application of three areas of technological capability: precision mechanics, microelectronic and fine optics. ince then, it has © 3M Corporation expanded from sandpaper into adhesive tapes, audio and videotapes, road signs, floppy disks, and medical and household products. Its product list comprises over 30,000 separate items. Is it a conglomerate? Certainly not, claims 3M. Its vast product range rests on a foundation of core Wies 118