FIGURE 5.1 Analyzing resources and capabilities: the interface between strategy and the firmHonda First gasoline- ‘Technical Competes in 4-cylinder powered car Civic Hybrid Research Isle of Man TT 750cc ‘to meet U.S. (dual gasoline) Institute motorcycle motorcycle Low Emission lectrie) founded races Vehicle Standard Portable generator Power products: Honda wins ground tillers, marine Indy ‘engines, generators, 40sec lumps, ehansaws, “nese motor snowblowers cycle a 1946 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006 The I U mini ‘Acura Car == co- Supercub ar divson | generation system =) Begins production of diesel engines crore | Honda Enters Indy Cwie ‘arracing First product: SaParns | Formula 1 1000cc Model A Grand Perec Prix racing Gold Wing clip-on engine touring for bicycles motorgycle FIGURE 5.2 Honda Motor Company: product development milestonesINDUSTRY KEY, COMPETITIVE SUCCESS FACTORS ADVANTAGE J STRATEGY SHER | ORGANIZATIONAL CAPABILITIES RESOURCES, TANGIBLE INTANGIBLE HUMAN © Financial (cash, © Technology © Skills/know-how securities, borrowing (patents, copyrights, © Capacity for capacity) ‘ade secrets) communication © Physical (plant, © Reputation (brands, and collaboration equipment, land, felationships) © Motivation mineral reserves) ees FIGURE 5.3 The links among resources, capabilities and competitive advantageTABLE 5.1 Major companies with the highest market-to-book ratios, December 2006 Valuation Valuation Company Ratio Country Company Ratio Country Yahoo! Japan 72.0 Japan Coca-Cola 78 US. Colgate-Palmolive 208 Us Diageo 74 UK. GlaxoSmithKline 13.4 U. 3M 73 US. Anheuser-Busch 12.6 US. Nokia 67 Finland eBay 2 US. Sanofi-Aventis 63 France SAP 108 Germany AstraZeneca 59 UK. Yahoo! 10.7 US. Johnson & Johnson 57 US. Dell Computer 10.0 Boeing 57 US. Sumitomo Mitsui Financial 88 Eli Lily 5.6 US. Procter & Gamble 84 US. Cisco Systems 55 US. Qualcomm 83 Us. Roche Holding 55 Switz. Schlumberger 8.2 US. UOréal 53 France Unilever 8.1 Neth/UK. Altria 52 US. Pepsico 8.0 US. Novartis 51 switz. Note: The table includes companies with the highest market capitalization as a proportion of balance sheet net asset value among the top 200 companies of the world with the largest market capitalization at the end of 2006TABLE 5.2 The world’s most valuable brands, 2008 Brand value Change Country Rank Brand in 2008, $ billion from 2007 _— off origin 1 Coca-Cola 66.7 -1% US. 2 18M 59.0 +11% US. 3 Microsoft 59.0 -2% US. 4 GE 53.1 +14% US. 5 Nokia 35.9 +35% Finland 6 Toyota 34.1 +37% Japan 7 Intel 31.3 6% US. 8 McDonald's 31.0 0% US. 9 Disney 29.3 +11% US. 10 Google 25.6 +96% US. 1" Mercedes Benz 25.6 +28% Germany 12 Hewlett-Packard 23.9 +26% US. 13 BMW 23.3 +36% Germany 14 Gillette 22.1 +5% us. 15 American Express 21.9 +18% US. 16 Louis Vuitton 21.6 +34% France 7 Cisco 21.3 +22% US. 18 Marlboro 213 0% US. 19 ith 20.2 41% US. 20 Honda 19.1 +21% Japan Note: Brand values are calculated as the net present value of future earnings generated by the brand, Source:InterbrandTABLE 5.3 A functional classification of organizational capabilities Functional area Capability Exemplars CORPORATE FUNCTIONS MANAGEMENT INFORMATION RESEARCH AND DEVELOPMENT OPERATIONS PRODUCT DESIGN MARKETING SALES AND DISTRIBUTION Financial control Management development Strategic innovation Multidivisional coordination Acquisition management International management Comprehensive, integrated MIS network linked to managerial decision making Research Innovative new product development Fast-cycle new product development Efficiency in volume manufacturing Continuous improvements in operations Flexibility and speed of response Design capability Brand management Building reputation for quality Responsiveness to market trends Effective sales promotion and execution Efficiency and speed of order processing Speed of distribution Customer service ExxonMobil, PepsiCo General Electric, Shell Google, Haier Unilever, Shell Gisco Systems, Luxottica Shell, Banco Santander Wal-Mart, Capital One, Dell Computer IBM, Merck, 3M, Apple Canon, Inditex (Zara) Briggs & Stratton, YKK Toyota, Harley-Davidson Four Seasons Hotels Nokia, Apple Procter & Gamble, Altria Johnson & Johnson MTV, LOréal PepsiCo, Pfizer LL. Bean, Dell Computer Amazon.com Singapore Airlines, CaterpillarFIRM INFRASTRUCTURE SUPPORT ACTIVITIES: HUMAN RESOURCE MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT INBOUND LOGISTICS OPERATIONS OUTBOUND LOGISTICS MARKETING AND SALES SERVICE PRIMARY ACTIVITIES FIGURE 5.4 Porter’s value chain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) New product development ‘capability Customer Quality Support management capability ‘capability, —— Operations ‘capability R&D and desi capability Marketing ‘and sales. capability Human management ‘capability eo Manufacturing capability Materials Process management engineering capability capability Product engineering capability Test ‘engineering ‘capability -——_ Printed circuit-board assombly Telset assembly System assembly -———_—_, Automated through-hole ‘component insertion aH Manual Wave insertion of components ae = = INDIVIDUALS’ SPECIALIZED KNOWLEDGE J FIGURE 5.5 The hierarchical nature of capabilities: a manufacturer of PBXsTHE EXTENT OF Scarcity | THE COMPETITIVE ——— ADVANTAGE ESTABLISHED Relevance | Durability | THE PROFIT-EARNING POTENTIAL OF A RESOURCE OR CAPABILITY SUSTAINABILITY OF THE COMPETITIVE Transferability | ADVANTAGE Replicability | Property rights | APPROPRIABILITY Relative bargaining power Embeddedness | FIGURE 5.6 Appraising the strategic importance of resources and capabilitiesTABLE 5A Appraising VW's resources and capabilities Importance’ VWs relative strength? Comments RESOURCES Ri. Finance 6 6 Credit rating is above average for the industy but free cash flow remains negative 2. Technology 7 5 Despite technical strengths, WY is not a leader in automotive technology R3. Pant and equipment 8 8 Has invested heavily in upgrading plants A, Location 4 4 Plants in key low-cost, growth markets (China, Mexico, Brazil) but German manufacturing base is very expensive RS. Distribution 8 5 Geographically extensive distribution with special strength in emerging (Gealership netweark) ‘markets, Historically weak position within the U.S. 6. Brands 6 5 \Wwy, Au, Bentley and Bugatti are strong brands but, together with Skoda and Seat, VW's brand portfolio lacks coherence and clear market positioning CAPABILITIES CC, Product development 9 4 Tragitionally weak at VW. Despite a few big hits: Beetle (introduced 1938), Golf (1974, Passat (1974), Vanagon (1979), VW still not an industry leader in new product development 2, Purchasing 7 5 Tacitionally weak—strengthened by senior hires from Opel and elsewhere 3, Engineering 7 8 The core technical strength of VW C&, Manufacturing 8 4 Wis a high-cost producer, but struggles to attain above average quality CS, Financial management 6 4a Has traditionally lacked a strong financial orientation 5. RED 5 4 Despite several technical strengths, VW is not a leader in automotive innovation C7. Matketing and sales 9 4 Despite traditional weakness in recognizing and meeting customer ‘needs in different national markets, VW has increased its sensitivity to ‘the market, improved brand management, and managed its advertising and promotion with increasing dexterity B, Government relations 4 8 Important in emerging markets 9, Strategic management 7 4 Effective restructuring and cost cutting, But lack of consistency and ‘consensus at top management level Beth scales range from 1 to 10(1 = vary low, 10 = very high Vokswagen's rescurces and capabilities are compared with those of GM, Ford, Toyota, DaimlerChrysler, Nissan, Honda, iat, and PSA, where S represents parity. The ratings are based on the authors subjective judgment.Superfluous Strengths Key Strengths -— @ Os mrep a. mays) yal Relative Strength wu 1 Zone of irrelevance Key Weaknesses 1 5 Strategic Importance Note: Figure 5.7 is based on the ratings of resources and capabilities in Table 5.4. FIGURE 5.7 Appraising VW’s resources and capabilities (hypothetical)4, Develop strategy implications. (a) In relation to strengths — How can these be exploited more effectively and fully? (b) In relation to weaknesses — Identify opportunities to outsource STRATEGY 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 POTENTIAL FOR in terms of: SUSTAINABLE (a) strategic importance COMPETITIVE ADVANTAGE (b) relative strength 2. Explore the linkages between resources and capabilities CAPABILITIES RESOURCES FIGURE 5.8 Summary: a framework for analyzing resources and capabilities 1. Identify the firm’s resources and capabilities