8/22/2020 OneNote

*ask bus800 group to meetup on the

Week 5 19th*
February 10, 2020 1:28 PM

-Understand the role of resources and capabilities in formulating strategy and creating
competitive advantage `
-Explain the value chain
-Identify SWOT

IDENTIFYING THE ORGANIZATION'S CAPABILITIES

• Organizational Capability: a firm's capacity to deploy resources for a desired end
result.
○ Capability = Competence
• Distinctive competence: things that an organization does particularly well compared to
its competitors.
• Core Competencies: those that
○ Make a disproportionate contribution to ultimate customer value, or to the efficiency
with which that value is delivered; and
○ Provide a basis for entering new markets

Classifying Capabilities
1. Functional analysis: identifies organizational capabilities in relation to each of the
principal functional areas of the firm.

2. Value Chain Analysis: separates the firm's activities into a sequential chain.
• Porter's generic value chain identifies a few broadly defined activities that can be
separated to provide a more detailed identification of the firm's activities (and the
capabilities that correspond to each activity)

The Nature of Capability

Capability As Process & Routine

• Organizational capability requires the efforts of various individuals to be integrated
with one another and with capital equipment, technology, and other resources.
• Organizational Process: the sequence of actions which a specific task is performed.
• Routinization: an essential step in translating directions and operating practices into
capabilities.

https://ryersonprod-my.sharepoint.com/personal/nilagan_ryerson_ca/_layouts/15/Doc.aspx?sourcedoc={3d66f282-ce6b-49a4-8aba-055af4c43362}&a… 1/5
8/22/2020 OneNote

○ Organizational routines: regular and predictable behavioural patterns

(compromising) repetitive patterns of activity -> viewed as fundamental building
blocks of what firms are and what they do
○ Organizational skills are learn by doing
○ There may be a trade-off between efficiency and flexibility

The Hierarchy of Capabilities

• Operational capability, marketing capability, and supply chain management capability.
• More general, broadly defined capabilities are formed from the integration of more
specialized capabilities:
○ E.g., a hospital's capability in treating heart disease depends on capabilities relating
to patient diagnosis, physical medicine, cardiovascular surgery, and pre-, and post-
operative care, as well as capabilities relating to training, information technology,
and various admin and support functions.

Appraising Resources and Capabilities

• The profits that a firm obtains from its resources and capabilities depend on 3 factors:
their abilities to establish a competitive advantage, to sustain that competitive advantage,
to sustain that competitive advantage, and to appropriate the returns to that competitive
advantage.

Establishing Competitive Advantage

• Two conditions must be present:
1. Scarcity: refers to the basic economic problem, the gap between limited - scarce -
resources & theoretically limitless wants --> requires decisions how to allocate resources
efficiently
• If a resource or capability is widely available within the industry, then it may be essential
to compete, but it will not be a sufficient basis for competitive advantage.
2. Relevance: the quality or state being closely connected or appropriate
• A resource of capability must be relevant to the key success factors in the market.

Sustaining Competitive Advantage

• The profits earned from resources and capabilities depend not just on their ability to
establish competitive advantage, but also depend on how long that advantage can be
sustained depending on if resources and capabilities are durable and whether rivals can
imitate the competitive advantage they offer.
• Resources and capabilities are imitable if they are transferable or replicable.
1. Durability: Assurance or probability that an equipment, machine, or material will have a
relatively long continuous useful life, without requiring an inordinate degree of
maintenance.
2. Transferability: The extent to which it is mobile between companies.
• The most simplest means of acquiring the resources and capabilities necessary for
imitating another firm's strategy is to buy them.
• Sources of immobility:
○ Geographical immobility of natural resources, large items of capital equipment, and
some types of employees.
○ Imperfect information regarding the quality and productivity of resources creates
risks for buyers.
○ Complementary between resources means that the detachment of a resource form its
"home team" causes it to lose productivity & value.
○ Organizational capabilities, because they are based on teams of resources, are less
mobile than individual resources.
3. Replicability: property of an activity, process, or test result that allows it to be duplicated
at another location or time.
• If a firm cannot buy a resource or capability, it must build it.
• Even where replication is possible, incumbent firms benefit from the fact that resources
and capabilities that have been accumulated over a long period can only be replicated at
disproportionate cost by would-be imitators.
• Two sources of incumbency advantage:

https://ryersonprod-my.sharepoint.com/personal/nilagan_ryerson_ca/_layouts/15/Doc.aspx?sourcedoc={3d66f282-ce6b-49a4-8aba-055af4c43362}&a… 2/5
8/22/2020 OneNote

○ Asset mass efficiencies occur where a strong initial position in technology,

distribution channels, or reputation facilities the subsequent accumulation of these
resources.
○ Time compression diseconomies are the additional costs incurred by imitators when
attempting to accumulate rapidly a resource, or capability.

Appropriating the Returns to Competitive Advantage

• Capabilities depend heavily on the skills and efforts of employees, who are not owned by
the firm.
• The prevalence of partnerships (rather than joint-stock companies) in professional service
industries (lawyers, accountants, and management consults) reflect the desire to avoid
conflict between a company's owners and human resources.
• The less clearly defined property rights are in resources and capabilities, the greater the
importance of relative bargaining power in determining the division of returns between
the firm and its individual members.
• The more closely an organizational capability is identified with the expertise of individual
employees and the more effective those employees are at deploying their bargaining
power, the better able the employees are to appropriate surpluses.

PUTTING RESOURCE AND CAPABILITY ANALYSIS TO WORK: A PRACTICAL

GUIDE
1. Step 1: Identify the Key Resources and Capabilities
• Can start from outside or inside the firm to draw up a list of the firm's resources and
capabilities.
• What factors determine why some firms in an industry are more successful than others
and on what resources and capabilities are these success factors based?
2. Step 2: Appraising Resources and Capabilities
• Resources and capabilities need to be appraised on importance (in conferring sustainable
competitive advantage) & strengths/weaknesses (compared w/ competitors)
• Assessing Importance
○ Concentrate on customer choice criteria
○ Goal to make superior profit through establishing a sustainable competitive
advantage
• Assessing Relative Strengths
○ Organizations frequently fall victim to past glories, hopes for the future, and wishful
thinking.
○ To identify & appraise a company's capabilities, managers must look both inside
and outside.
• Internal discussion can be valuable in sharing insights and evidence and
building consensus regarding the organization's resource and capability
profile.
○ Benchmarking is the process of identifying, understanding and adapting
outstanding practices from organizations anywhere in the world to help your
organization improve its performance.
○ In addressing which resources and capabilities are most important in conferring
sustainable competitive advantage and relative strengths and weaknesses compared
with competitors, the competitive strength assessment tool can be used.
• Allows for the comparison of a company with its competitors using the
resources and capabilities required to maintain a sustainable competitive
advantage.
○ Appraising resources and capabilities isn't about data, but about insight and
understanding.
• Bringing Together Importance and Relative Strength
○ Putting together two key criteria - importance and relative strength - allows us to
highlight a company's key strengths and key weaknesses.

3. Step 3: Developing Strategy Implications

• How do we exploit our key strengths most effectively? What do we do about our key
weaknesses in terms of both upgrading them and reducing our vulnerability to them?
What about our "inconsequential" strengths?

SWOT ANALYSIS
• The tool highlights the firm's resource strengths and competitive capabilities (S) and its
resource for weaknesses and competitive deficiencies (W).
• The firm's overall strength and weakness situation can be determined and related to
market opportunities (O) and external threats (T) can be identified.

https://ryersonprod-my.sharepoint.com/personal/nilagan_ryerson_ca/_layouts/15/Doc.aspx?sourcedoc={3d66f282-ce6b-49a4-8aba-055af4c43362}&a… 3/5
8/22/2020 OneNote

• Exploiting Key Strengths

○ Key task is to formulate our strategy to ensure that these resources are deployed to
the greatest effect.
• Managing Key Weaknesses
○ Converting weaknesses into strength is likely to be a long-term task for most
companies
○ In the short-term to medium term, a company is likely to be stuck with resources
and capabilities that it inherits from the previous period.
• What About SuperFluous Strengths?
○ Lower the level of investment from these resources and capabilities.
• The Vrin Model
○ Barney (1991) introduced the concept of sustaining a competitive advantage by
owning resources that are valuable, rate, inimitable, and non-sustainable (VRIN)
○ Those resources that are valuable relate to their ability to improve the effectiveness
and efficiency of the operations of the organization, in light of any external threats
or opportunities.
○ The resource must also be rare in order to begin the distinction between firms and
the ability to sustain a competitive advantage.
• Rate: their existence rests
• with a relatively small number of industry players
○ When a resource is deemed to be non-substitutable then, when combined w/
valuable, rate, and inimitable, it contributes to sustained competitive advantage.

DEVELOPING RESOURCES AND CAPABILITIES

• While there are undoubtedly many challenges faced in acquiring new resources, we
nonetheless know how to approach acquiring resources, be they tangible (e.g., acquiring
raw materials or plant and equipment), intangible (e.g., building a brand or managing
intellectual capital), or human (e.g., recruiting and retaining the services of talented
individuals).
• There is one resource critical to the development of capabilities: managers with the
requisite knowledge for capability building.
• Path Dependency and the Role of Early Experiences
○ Organizational capability is path dependent: a company's capabilities today are the
result of its history
○ In many cases we can trace the origins and distinctive capability to the
circumstances that prevailed during the founding & early development of the
company.
•
• age between Resources & Capabilities
○ Two factors contribute to the efficiency and effectiveness w/ which the team of
individuals perform these repetitive patterns of activity.
1. Organizational learning: coordination & repetition
2. Culture: capacity for organizational members to comprehend and collab

Are Organizational Capabilities Rigid Or Dynamic?

• Core capabilities are simultaneously core rigidities: they inhibit firm's ability to access
and develop new capabilities
• The idea that capabilities impose rigidities on firms have been challenged from:
○ Flexibility in organizational routines
○ Dynamic capability: the firm's ability to integrate, build, and reconfigure internal
and external competencies to address rapidly changing environments.

Approaches to Capability Development

• Acquiring Capabilities: Mergers, Acquisitions, and Alliances
○ Acquiring a company that has already developed the desired capability can short-
circuit the process of capability development.
○ Using acquisitions as a means of extending a company's capability base involves
major risks:
• Cost (expensive)
• Acquisition premium, additional resources
• Integration of acquiree's capabilities with its own
○ These costs and risks add to the attractions of strategic alliances as targeted and
cost-effective means to access another company's capabilities.
○ Key issue in the formation and management of strategic alliances is whether their
purpose is to gain access to the capabilities of the partner firm or to acquire those
capabilities through the partner learning from the other.
○ Relational capability comprises building trust, developing inter-firm knowledge-
sharing routines, and establishing mechanisms for coordination.
• Internal Development: Focusing and Sequencing
○ Integrating resources into capabilities, requires organization and management
systems and is facilitated by culture and strategic intent.
○ Implication that capability development needs to be systematic.

https://ryersonprod-my.sharepoint.com/personal/nilagan_ryerson_ca/_layouts/15/Doc.aspx?sourcedoc={3d66f282-ce6b-49a4-8aba-055af4c43362}&a… 4/5
8/22/2020 OneNote

• Needs to bring together the requisite human & non-human resources, locate
these resources within a suitable organizational unit, establish the process that
perform the capability, allow these processes to develop through routinization,
design management systems that support the capability, and lead the entire
effort through appropriate strategic intent.
○ An organization must limit number and scope of the capabilities that is attempting
to create at any point in time by resource leveraging
• First concentrating resources then accumulating resources
○ Companies find it helpful to focus their capability development efforts not on the
organizational capabilities themselves, but on developing and supplying the
products that utilize those capabilities.

https://ryersonprod-my.sharepoint.com/personal/nilagan_ryerson_ca/_layouts/15/Doc.aspx?sourcedoc={3d66f282-ce6b-49a4-8aba-055af4c43362}&a… 5/5