Unlocking Competitive Advantage: Identifying a Firms Strategic Resources and Capabilities

Abstract

MGMT 475 RESOURCES AND CAPABILITIES ANALYSIS Another dimension of internal analysis focuses on identifying the firm’s most valuable strengths. We call these their sources (causes) of competitive advantage. These will be things the firms HAS or DOES that best explain their ability to achieve competitive advantage. What is it that makes them special and enables them to achieve superior performance? Now if a firm is not achieving good performance, that focus shifts a bit to ask “does the firm have any strengths that should be used as the basis for improving performance…i.e. do they have potential sources of competitive advantage? Overall, we need to distinguish strategic assets from non-strategic assets. An asset is anything that is useful, i.e. that serves a purpose. I need a chair and a desk and a computer with software to type this right now. I also must have knowledge and skill to think, construct the sentences, use grammar, etc. I have those assets. Strategic assets are more specific – they have value and purpose toward executing a strategy. Firms have assets such as furniture and file cabinets and offices, but those are not really directly relevant to effectively executing their strategy. Even employees (in general)…some employees HURT execution of strategy!! Thus, what we are after here is the strategic assets the firm possesses that enable – or can enable if not being used correctly now – execution of their strategic choices that can lead to superior performance. Strategic assets, what Barney (2005) and management scholars refer to generally as resources (as in resource-based theory), are things the firm possesses or things they perform regularly (so, they possess a ‘resource’ as an ability to perform an important activity well). Let’s keep working to be clear on the difference between resources (things they HAVE) versus capabilities (activities/routines they DO). This guide can help you be more comprehensive and organized in your work to identify, describe, and prioritize a firm’s most important resources and capabilities, that is – to identify the most valuable internal ‘strengths’ of the firm relevant to executing their competitive strategy. Recall that performance is a function of strategic alignment and competitive advantage. Our analysis must therefore assess (a) if the firm possess the resources and capabilities necessary to execute their strategy and (b) which resources and capabilities they possess best explain their current advantages. To do this analysis step, we need to identify and prioritize those resources and capabilities that are most important and relevant to the firm’s strategy. To simplify our analysis, let’s break it into two categories: inputs and activities. Inputs are latent assets…they don’t provide value just by themselves; they must be transformed somehow. Activities require specific and relevant inputs. A great location (resource) won’t lead a restaurant to superior performance if it has no staff or has poor supplies of food for the kitchen. The ability of a restaurant to deliver the best steaks doesn’t just happen because they have a good chef…they need capabilities to buy the right amounts of beef and other ingredients, they need to right type of kitchen equipment, they need quality waitstaff, etc. Resources and capabilities work together in an operating system to execute strategic choices…ideally with everything needed and everything working well together to execute for superior outcomes (competitive advantage!). Be careful not to confuse OUTCOMES/results (such as customer loyalty, consistent growth, profitability, innovative products, or employee satisfaction) with either resources or capabilities. Achievements, performance, and accomplishments are the outcomes that we are trying to explain by understanding the firm’s important resources and capabilities. Knowing that a firm has or can achieve a desired goal isn’t enough; we need to understand the underlying cause of that desired result…what is it they have and/or do that produces that desired outcome. RESOURCES are those things that the firm possesses or has access to that are inputs that get transformed into desired results. Not every asset is really a resource, however (e.g. office furniture). We are looking for productive assets that relate to the firm’s ability to compete (i.e. key inputs that are transformed into desirable results). Recall that as inputs, resources have ‘latent’ value (meaning they aren’t worth anything until something is done with them…until they are exploited). Resources can be categorized broadly as tangible or intangible. Because resources are ‘things’ the firm has and has access to, they are typically described as nouns. Here are a few examples of strategic resources: Tangible:Physical resources: Retail stores, distribution centers, factories. Advanced R&D equipment. Computer systems; manufacturing machinery Intangible:Technological and informational assets: Patents, designs, copyrights, logos, formulas, and recipes. Websites. Databases. Relational assets: Supplier and distributor network relationships. Joint ventures/partnerships. Reputational assets: Well known brand names; positive reputation Financial assets (since firms rarely keep ‘tangible’ cash anymore, this goes best here): Strong credit rating/low debt position/borrowing capacity; Spendable reserves Human assets (intangible because it is knowledge and skill, not the physical body that is valuable): *be specific about who and why valuable*: Experienced top leadership; motivated salesforce; well-trained customer support personnel; innovative R&D technicians CAPABILITIES are things the firm does well/competently that contribute to its ability to compete and be successful. These are best described using verb-based ‘action’ sentences. Capabilities are things the firm does repeatedly…not one-time actions. Think of these as processes or regular activities that go on within the firm regularly. Capabilities transform the raw inputs (resources) into desired outcomes and can almost always be best described with a sentence such as this: “The firm has a capability to {verb-tense description} which leads to {outcome}”. Examples: The firm has the capability to incentivize and motivate salespeople which leads to a high level of new account acquisition. The firm has the capability to effectively train and manage telephone customer service agents which leads to a superior level of customer satisfaction and loyalty. The capabilities in these examples would be to incentivize and motivate salespeople to open new accounts and to effectively train and manage telephone customer service staff and operations. Two good ways to break down the firm to identify important capabilities is to think through each functional area (marketing, manufacturing, purchasing, R&D, finance, IT, HR, etc.) and see if there is something going on in that area that stands out as important. Another approach is to think through three broad value-chain areas: Operations, Customer-facing, and Innovative. That is, think about the regular operations, about how the firm interacts with customers, and about the firm’s creation of new products or services….identify what, if anything, in those areas goes on all the time that seems important to their success. WORDING must be carefully chosen!! Be careful not to be too general. Example – “They have a capability to grow sales”…that says they can achieve desired results but it doesn’t explain what they DO. Outcomes come as a result of capabilities….so you’ve got to explain what action is performed, not that they are able to achieve outcomes. It helps, therefore, to always begin the description of a capability with a verb. Here are a few examples of strategic capabilities: The ability to: Identify and capture the best retail locations Develop and launch innovative new designs Customize product features to the specific needs of a client Negotiate sponsorship contracts with professional athletes Respond to customer service needs quickly and effectively Develop and implement retail merchandising campaigns Create and exploit innovative advertising campaigns Optimize purchases and inventory management Operate a consumer finance division enabling customers to purchase on credit Adjust capacity utilization in the factory based on accurate demand fluctuations All firms, except those destined to fail, have many different resources and capabilities. If you do a thorough job of identifying all the strategic resources (those being used and those with potential value), you can develop quite a long list of items. So, what do with do with now? You need to find which have the greatest value toward competitive advantage…in other words, you...