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Exhibit 3. 1 Strategic capabilities and competitive advantage Exhibit 3. 2 Strategic capability: the terminology Exhibit 3. 3 Sources of cost efficiency Exhibit 3. 4 The experience curve Exhibit 3. 5 Criteria for inimitability of strategic capabilities Analyzing Resources Capabilities OUTLINE †¢ The role of resources and capabilities in strategy formulation. †¢ The resources of the firm †¢ Organizational capabilities †¢ Appraising the profit potential of resources and capabilities †¢ Putting resource and capability analysis to work—a practical guide †¢ Creating new capabilities. Shifting the Focus of Strategy Analysis: From the External to the Internal Environment THE FIRM Goals and Values Resources and Capabilities Structure and Systems THE INDUSTRY ENVIRONMENT STRATEGY STRATEGY †¢Competitors †¢Customers †¢Suppliers The Firm-Strategy Interface The Environment-Strategy Interface Rationale for the Resource-based Approach to Strategy †¢ 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 profitability The Evolution of Honda Motor Company Honda Technical Research Institute founded 1st Competes in Isle of Man TT motorcycle races 4-cylinder 750cc motorcycle 1st gasoline-powered car to meet US Low Emission Vehicle Standard Civic Hybrid (dual gasoline/ electric) motorcycle: 98cc, 2-cycle Dream D Portable generator 405cc motor cycle 1955 1960 1965 1970 Power products: ground tillers, marine engines, generators, pumps, chainsaws snowblowers Civic GS (natural gas powered) 1946 1950 1975 1980 1985 1990 1995 2000 4 cycle engine The 50cc Supercub N360 mini car Honda Civic 1000cc Goldwing touring motor cycle Acura Car division Home cogeneration system First product: Model A clip-on engine for bicycles Enters Formula 1 Gran Prix racing Enters Indy car racing Honda FCX fuel cell car Canon: Products and Core Technical Capabilities Precision Mechanics 35mm SLR camera Compact fashion camera EOS autofocus camera Digital camera Video still camera Fine Optics Plain-paper copier Color copier Color laser copier Laser copier Basic fax Laser fax Mask aligners Inkjet printer Excimer laser aligners Laser printer Color video printer Stepper aligners Calculator Notebook computer MicroElectronics Links between Products Capabilities: Capability-Based Strategy at 3M Carborundum mining Sandpaper PRODUCTS Videotape Floppy disks Scotchtape Audio tape data storage products Acetate Post-it notes film Housewares/kitchen products Surgical tapes dressings Pharmaceuticals Materials sciences Health sciences Flexible circuitry Road signs markings CAPABILITIES Abrasives Adhesives Microreplication Thin-film technologies New-product development introduction Evolution of Capabilities and Products: 3M Sandpaper Videotape Floppy disks Scotchtape Audio tape data storage products Acetate Post-it notes film Housewares/kitchen products Surgical tapes dressings Pharmaceuticals Materials sciences Health sciences Flexible circuitry Carborundum mining Road signs markings PRODUCTS CAPABILITIES Abrasives Adhesives Microreplication Thin-film technologies New-product development introduction Eastman Kodak’s Dilemma Resources Capabilities 1980? s Chemical Imaging †¢Organic Chemistry †¢Polymer technology †¢Optomechtronics †¢Thin-film coatings Businesses Film Cameras Fine Chemicals Pharmaceuticals Diagnostics Brands Global Distribution 1990? s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics Need to build digital imaging capability Digital Imaging Products (e. g. Photo CD System; Advantix cameras film The Links between Resources, Capabilities and Competitive Advantage COMPETITIVE ADVANTAGE INDUSTRY KEY SUCCESS FACTORS STRATEGY ORGANIZATIONAL CAPABILITIES RESOURCES TANGIBLE †¢Financial †¢Physical INTANGIBLE †¢Technology †¢Reputation †¢Culture HUMAN †¢Skills/know-how †¢Capacity for communication collaboration †¢Motivation Appraising Resources RESOURCE Financial CHARACTERISTICS Borrowing capacity Internal funds generation Plant and equipment: size, location, technology flexibility. Land and buildings. Raw materials. Patents, copyrights, know how RD facilities. Technical and scientific employees Brands. Customer loyalty. Company reputation (with suppliers, customers, government) Training, experience, adaptability, commitment and loyalty of employees INDICATORS Debt/ Equity ratio Credit rating Net cash flow Market value of fixed assets. Scale of plants Alternative uses for fixed assets No. of patents owned Royalty income RD expenditure RD staff Brand equity Customer retention Supplier loyalty Employee qualifications, pay rates, turnover. Tangible Resources Physical Technology Intangible Resources Reputation Human Resources Firms with the Highest Ratios of Market Value to Book Value (December 2005) Company Valuation Country ratio 72. 0 20. 8 13. 4 12. 6 11. 2 10. 8 10. 7 10. 0 8. 8 8. 4 8. 3 8. 2 8. 1 8. 0 Japan US UK US US Germany US US Japan US US US Neth/UK US Company Valuation Country ratio 7. 8 7. 4 7. 3 6. 7 6. 3 5. 9 5. 7 5. 7 5. 6 5. 5 5. 5 5. 3 5. 2 5. 1 US UK US Finland France UK US US US US Switz. France US Switz. Yahoo! Japan Colgate-Palmolive Glaxo Smith Kline Anheuser-Busch eBay SAP Yahoo! Dell Computer Sumitomo Mitsui Financial Procter Gamble Qualcomm Schlumberger Unilever PepsiCo Coca-Cola Diageo 3M Nokia Sanofi-Aventis AstraZeneca Johnson Johnson Boeing Eli Lily Cisco Systems Roche Holding L’Oreal Altria Novartis The World’s Most Valuable Brands, 2006 Rank Company Brand value ($bn. ) Rank Company Brand value ($bn. ) 1 2 3 4 5 6 7 8 9 10 Coca-Cola Microsoft IBM GE Intel Nokia Disney McDonald’s Toyota Marlboro 67. 5 59. 9 53. 4 47. 0 35. 6 26. 5 26. 4 26. 0 24. 8 21. 2 11 12 13 14 15 16 17 18 19 20 Mercedes Benz 20. 0 Citi 20. 0 Hewlett-Packard 18. 9 American Express 18. 6 Gillette 17. 5 BMW 17. 1 Cisco 16. 6 Louis Vuitton 16. 1 Honda 15. 8 Samsung 15. 0 Source: Interbrand Identifying Organizational Capabilities: A Functional Classification FUNCTION Corporate Management CAPABILITY Financial management Strategic control Coordinating business units Managing acquisitions Speed and responsiveness through rapid information transfer Research capability Development of innovative new products Efficient volume manufacturing Continuous Improvement Flexibility Design Capability Brand Management Quality reputation Responsiveness to market trends EXEMPLARS ExxonMobil, GE IBM, Samsung BP, PG Citigroup, Cisco Wal-Mart, Dell Capital One Merck, IBM Apple, 3M Briggs Stratton Nucor, Harley-D Zara, Four Seasons Apple, Nokia PG, LVMH Johnson Johnson MTV, L’Oreal MIS RD Manufacturing Design Marketing Sales, Distribution Service Sales Responsiveness Efficiency and speed of distribution Customer Service PepsiCo, Pfizer LL Bean, Dell Singapore Airlines Caterpillar The Value Chain: The McKinsey Business System TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE The Porter Value Chain FIRM INFRASTRUCTURE HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT SUPPORT ACTIVITIES INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING SALES SERVICE PRIMARY ACTIVITIES The Architecture of Organizational Capability ORGANIZATIONAL CAPABILITY SKILLS KNOWLEDGE VALUES NORMS TECHNICAL MANAGERIAL SYSTEMS SYSTEMS Organization Structure Management Systems RESOURCES †¢Human skills know-how †¢Technology †¢Culture (values, norms) Dorothy Leonard â€Å"Core Capabilities Core Rigidities† A modified view A Hierarchy of Capabilities: A Telecom Manufacturer CROSS FUNCTIONAL CAPABILITIES New product development capability Customer support capability Quality management capability BROAD FUNCTIONAL CAPABILITIES operations capability R D and design capability MIS capability Marketing and sales capability Human resource mgt. capability ACTIVITY RELATED CAPABILITIES (Operations related only) SPECIALIZED CAPABILITIES (Manufacturing related only) SINGLE-TASK CAPABILITIES (Only those related to PCB assembly) Manufacturing capability Materials management capability Process engineering capability Product engineering capability Test engineering capability Printed circuit-board assembly Telset assembly System assembly Automated through-hole component insertion Manual insertion of components Surface mounting of components Wave soldering INDIVIDUALS? SPECIALIZED KNOWLEDGE The Rent-Earning Potential of Resources and Capabilities THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED Scarcity Relevance Durability SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Transferability THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY Replicability Property rights APPROPRIABILITY Relative bargaining power Embeddedness Two approaches to identifying an organization? s resources and capabilities Starting from the inside Starting from the outside Key Success Factors †¢How do customers choose? †¢What do we need to survive competition? What resources capabilities do we need to deliver these KSFs? Assessing a Companies Resources and Capabilities: The Case of VW RESOURCES Importance VW’s Relative Strength 4 5 8 CAPABILITIES Importance VW’s Relative Strength R1. Finance R2. Technology R3. Plant and equipment 6 7 8 C1. Product development C2. Purchasing C3. Engineering C4. Manufacturing 9 7 7 8 6 6 9 4 5 9 7 3 4 4 R4. Location R5. Distribution 7 8 4 5 C5. Financial management C6. RD C7. Marketing sales C8. Government relations 4 8 Appraising VW’s Resources and Capabilities (Hypothetical only) 10 Superfluous Strengths Key Strengths C3 Relative Strength C8 C2 R2 R1 C6 R4 C5 Zone of Irrelevance 1 5 R3 C4 R5 C1 C7 5 1 Key Weaknesses 10 Strategic Importance Appraising the Capabilities of a Business School (illustrative only) Superfluous strengths Key strengths 6 9 3 Parity Inconsequential weaknesses 8 12 11 Deficient Not important 10 7 5 2 C1 Alumni relations C2 Student placement C3 Teaching C4. Administration C5 Course develpment C6 Student recruitment C7 Research C8 Corporate relations C9 Marketing C10 IT C11 PR C12 HRM Superior Relative Strength 4 1 Key weaknesses Critically important Importance Amoco’s Appraisal of Organizational Capabilities (illustrative only) 1. Effective deal making 2. Rapid new product Key strengths development 3. Relentless cost forms 4. Product quality 5. JV management 4 6. Superior EHS management 7. Managing culturally diverse workforce 2 8. Fast decision 3 making 9. Customer 1 segmentation 10. Capture synergies across divisions 8 Key weaknesses 11. Effective procurement Needed Superior Superfluous strengths 6 9 Parity 5 Inconsequential weaknesses 11 Deficient Not important 10 7 Needed to play 1 to win Importance Distinctive Capabilities as a Consequence of Childhood Experiences Company Capability Past History Exxon Financial management Exxon? s predecessor, Standard Oil (NJ) was the holding co. for Rockefeller? s Standard Oil Trust RD/ Shell Coordinating decentralized global empire Elephant hunting† Deal making in politicized environments Lubricants Shell a j-v formed from Shell TT founded to sell Russian oil in China, and Royal Dutch founded to exploit Indonesian reserves Discovered huge Persian reserves, went on to find Forties Field and Prudhoe Bay The Enrico Mattei legacy; the challenge of managing gover nment relations in post-war Italy Vacuum Oil Co. founded in 1866 to supply patented petroleum lubricants 2 BP ENI Mobil Approaches to Capability Development 1) Acquire and develop the underlying resources. Especially human resources Externally (hiring) Internally through developing individual skills 2) Acquire/access capabilities externally through acquisition or alliance ) Greenfield development of capabilties in separate organizational unit (IBM the PC, Xerox PARC, GM Saturn) 4) Build team-based capabilities through training and team development (i. e. develop organizational routines) 5) Align structure systems with required capabilities 6) Change management to transform values and behaviors (GE, BP) 7) Product sequencing (Intel , Sony, Hyundai) 8) Knowledge Management (systematic approaches to acquiring, storing, replicating, and accessing knowledge) Product Sequencing to Build Capabilities: Hyundai Capabilities †¢Auto styling design †¢Casting forging †¢Chassi s design †¢Tooling †¢Body production †¢Export mktg. †¢Assembly †¢Production engineering †¢Local marketing SKD CKD Ford Cortina †¢FWD engineering †¢CAD/CAM †¢Assembly control systems †¢Advanced component handling Hydrodynamics †¢Thermodynamics †¢Fuel engineering †¢Emission control †¢Lubrication †¢Kinetics vibration †¢Ceramics †¢Electronic control systems †¢Large-scale design integration †¢Global logistics †¢Lifecycle engineering „Alpha? engine Accent Avante Sonanta Pony Excel Products 1968 1970 1974 1985 1994-95 What Determines Organizational Capability in Football? Matt Busby Alf Ramsey Manchester U. Ipswich Liverpool Glasgow Celtic Derby/Notts F. 1945-70 1955-64 1959-74 1965-78 1972-84 1974-83 1980-86 19861985-95 19962000-04 2004- Who are the outstandingly successful team managers (coaches) in British football? Bill Shankley Jock Stein Brian Clough Bob Paisley Alex Ferguson Liv erpool Aberdeen Manchester U. Arsene Wenger Monaco Arsenal Jose Mourinho Porto Chelsea Building Team Capabilities in Soccer: Alex Ferguson at Manchester United †¢Find/develop young players Scouting staff doubled— â€Å"find the best. † Building youth team—1992 youth team included Ryan Giggs, David Beckham, Paul Scholes, Nicky Butt, Gary Neville †¢State-of-the-art training complex †¢Rigorous training schedule (+war on booze) †¢Training †¢Developing coordination †¢Training for team skills †¢Building team spirit—â€Å"team functions with single spirit constant flow of mutual support†; â€Å"Talent without unity of purpose is hopeless† Build a core of group internally Supplement with key purchases †¢Blending personalities as well as skills †¢Player rotation for experimentation flexible coordination †¢Structuring the team †¢Cross-functional integration Building the wider team—coaches, scouts, physiotherapists, psychologists, even cleaners Summary: A Framework for Analyzing Resources and Capabilities 4. Develop strategy implications: (a) In relation to strengthsHow can these be exploited more effectively and fully? (b) In relation to weaknesses Identify opportunities to outsourcing activities that can be better performed by other organizations. How can weaknesses be corrected through acquiring and developing resources and capabilities? 3. Appraise the firm’s resources and capabilities in terms of: (a) strategic importance (b) relative strength 2. Explore the linkages between resources and capabilities STRATEGY POTENTIAL FOR SUSTAINABLE COMPETITIVE ADVANTAGE CAPABILITIES 1. Identify the firm’s resources and capabilities RESOURCES Knowledge Management and the Knowledge-based View of the Firm OUTLINE 1) Why the surge of interest in knowledge management (KM)? kn. as the key resource of the firm giving us a better understanding of management 2) What is KM? 3) What progress have we made, what are the key gaps, which areas are likely to add most value? 4) Developing strategy: Exploiting strengths, protecting and eliminating weaknesses 5) Building the capability base: Can it be done? How? 6) What can be learn from Knowledge Management? 7) Implications for organizational structure. Knowledge Processes within the Organization Knowledge Creation †¢ Research †¢ Training †¢ Recruitment †¢ Intellectual property licensing †¢ Benchmarking †¢ New product development †¢ Operations †¢ Strategic planning †¢ Communities of practice †¢ Best practices transfer †¢ On-the-job training †¢ Databases †¢ Standard operating practices †¢ Intellectual capital accounting †¢ Competency modeling †¢ Project reviews †¢ Competency modeling Knowledge Generation (â€Å"Exploration†) Knowledge Acquisition Knowledge Integration Knowledge Sharing Knowledge Application (â€Å"Exploitation†) Knowledge Replication Knowledge Storage Organization Knowledge Measurement Knowledge Identification Nonaka? Knowledge Conversion Matrix Tacit Knowledge SOCIALIZATION Sharing of tacit knowledge among individuals and from the organization to the individual TO Explicit Knowledge EXTERNALIZATION The articulation an d systematization of tacit into explicit knowledge. Use of metaphor to communicate tacit concepts Tacit Knowledge FROM Explicit Knowledge INTERNALIZATION Instructions and principles are converted into intuition and routines COMBINATION A key role of information systems is to combine different units of information and other forms of explicit knowledge What is Knowledge Management? Data mining On-thejob Training Courses Seminars Benchmarking Intellectual Capital Accounting IT Communications New Product Development Intellectual Property Protection Best Practice Transfer CRM Strategic Alliances ERP Lessons learned Customer Market Analysis Scenario TQM Analysis Research Definition: â€Å"The systematic leveraging of information and expertise to improve organizational innovation, responsiveness, productivity and competency. † (Lotus division of IBM) Types Levels of Knowledge (and Knowledge Conversion) Levels of knowledge Individual Organization Databases Systems procedures Intellectual property Explicit Types of Knowledge Tacit Information Facts Scientific kn. Skills Know-how Organizational routines Replication through Knowledge Systematization Levels of knowledge Individual Organization Databases Systems procedures Intellectual property ‘INDUSTRIAL’ ENTERPRISES Explicit Types of Knowledge EXAMPLES †¢ Ford †¢ McDonalds †¢ Starbucks †¢Accenture Information Facts Scientific kn. CRAFT ENTERPRISES Tacit Skills Organizational capabilities Knowledge Transfer Mechanisms D I S S E M I N A T I O N B R E A D T H M a n y Rules, procedures directives Modular integration Manuals reports Communities Communities -of-interest -of-practice Internal consultants Group -ware Training seminars courses Informal visits Telephone Low (know-how contextual kn.. ) Shared data bases E-mail Video conferencing Data exchange F e w Personnel transfer Meetings On-the job training Fax ABILITY TO CODIFY High (explicit kn.. information Designing a Knowledge Management System †¢ What kn. processes which are critical to creating value competitive advantage? Dow: creating and exploiting patents McKinsey Co. : sharing kn. retaining experienced consultants Accenture: systematization. ) †¢ What are the characteristics of the relevant kn.? †¢ What mechanisms are needed for the generation and application of the relevant kn.? †¢ What organizational conditions need to be in place in order for knowledge management mechanisms to work? Organizational structures Incentives to contributors and users Behavioral norms and values Exhibit 3. 6 The value chain within an organisation Source: Adapted with the permission of The Free Press, a Division of Simon Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superio r Performance by Michael E. Porter. Copyright  © 1985, 1998 by Michael E. Porter. All rights reserved Exhibit 3. 7 The value network Source: Adapted with the permission of The Free Press, a Division of Simon Schuster Adult Publishing Group, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright  © 1985, 1998 by Michael E. Porter. All rights reserved