SG7001 / Managing Strategy, Operations and Partnerships

Topic Overview: Operations Performance, Strategy, Resources and Capabilities

5.1 Introduction

The most significant aspect of operations management is the process itself. How does Apple take a pile of chips,
glass, and plastic, and turn it into an iPhone? Their manufacturer in China is responsible for this process, but Apple
is involved every step of the way in order to ensure quality, reliability, and consistency. Process flow structures are
the different methods of production deemed appropriate for various manufacturing contexts. Does it make sense for
Apple to wait for 1 million orders, then make and ship them? Or should they instead produce iPhones based on
current demand and try to balance inventory? These are decisions that the COO must make as each process flow has
various costs associated with it.

Additionally, not every operations department is producing a good we can consume. Wall Street traders receive
orders from clients and must execute trades on open markets. The order itself may pass through dozens of people
before confirmation of the trade is sent back to the client. If you consider that "actual trade" to be the product, you
can design an operations process around the goal of executing the trade. The result is a process remarkably similar to
production. In this unit, you will learn how operations managers use long-term, strategic planning to manage internal
and external influences on the organization's resource base.

5.2 Learning Objectives

LO.1 Define the meaning and the role of operations management

LO.2 Identify the organizations’ resources and their role in strategy formulation
LO.3 Critically identify the organizations’ capabilities and their role in strategy formulation
LO.4 Explore ‘staging’

5.3 Operations, operations management and operations managers

Every organization has an operations function, whether or not it is called ‘operations’. The goal or purpose of most
organizations involves the production of goods and/or services. To do this, they have to procure resources, convert

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 1|Page

 SG7001 / Managing Strategy, Operations and Partnerships

them into outputs and distribute them to their intended users. The term operations embraces all the activities required
to create and deliver an organization’s goods or services to its customers or clients.

Within large and complex organizations operations is usually a major functional area, with people specifically
designated to take responsibility for managing all or part of the organization’s operations processes. It is an
important functional area because it plays a crucial role in determining how well an organization satisfies its
customers. In the case of private-sector companies, the mission of the operations function is usually expressed in
terms of profits, growth and competitiveness; in public and voluntary organizations, it is often expressed in terms of
providing value for money.

Operations management is concerned with the design, management, and improvement of the systems that create the
organization’s goods or services (Cox and Blackstone, 2002). The majority of most organizations’ financial and
human resources are invested in the activities involved in making products or delivering services. Operations
management is therefore critical to organizational success.

5.4 The historical development of operations management

Operations in some form have been around as long as human endeavour itself but, in manufacturing at least, it has
changed dramatically over time, and there are three major phases - craft manufacturing, mass production and the
modern period. Let's look at each of these briefly in turn.

5.4.1 Craft manufacturing

Craft manufacturing describes the process by which skilled craftspeople produce goods in low volume, with a high
degree of variety, to meet the requirements of their individual customers. Over the centuries, skills have been
transmitted from masters to apprentices and journeymen, and controlled by guilds. Craftspeople usually worked at
home or in small workshops. Such a system worked well for small-scale local production, with low levels of

competition. Some industries, such as furniture manufacture and clockmaking, still include a significant proportion
of craft working.

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 2|Page

 SG7001 / Managing Strategy, Operations and Partnerships

5.4.2 Mass production

In many industries, craft manufacturing began to be replaced by mass production in the 19th century. Mass
production involves producing goods in high volume with low variety – the opposite of craft manufacturing.
Customers are expected to buy what is supplied, rather than goods made to their own specifications. Producers
concentrated on keeping costs, and hence prices, down by minimizing the variety of both components and products
and setting up large production runs. They developed aggressive advertising and employed sales forces to market
their products.

An important innovation in operations that made mass production possible was the system of standardized and
interchangeable parts known as the ‘American system of manufacture’ (Hounshell, 1984), which developed in the
United States and spread to the United Kingdom and other countries. Instead of being produced for a specific
machine or piece of equipment, parts were made to a standard design that could be used in different models. This
greatly reduced the amount of work required in cutting, filing and fitting individual parts, and meant that people or
companies could specialize in particular parts of the production process.

A second innovation was the development by Frederick Taylor (1911) of the system of 'scientific management’,
which sought to redesign jobs using similar principles to those used in designing machines. Taylor argued that the
role of management was to analyze jobs in order to find the ‘one best way’ of performing any task or sequence of
tasks, rather than allowing workers to determine how to perform their jobs. By breaking down activities into tasks
that were sequential, logical and easy to understand, each worker would have narrowly defined and repetitious tasks
to perform, at high speed and therefore with low costs (Kanigel, 1999).

A third innovation was the development of the moving assembly line by Henry Ford. Instead of workers bringing all
the parts and tools to a fixed location where one car was put together at a time, the assembly line brought the cars to
the workers. Ford thus extended the ideas of scientific management, with the assembly line controlling the pace of
production. This completed the development of a system through which large volumes of standardized products
could be assembled by unskilled workers at constantly decreasing costs – the apogee of mass production.

5.4.3 The modern period

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 3|Page

 SG7001 / Managing Strategy, Operations and Partnerships

Mass production worked well as long as high volumes of mass-produced goods could be produced and sold in
predictable and slowly changing markets. However, during the 1970s, markets became highly fragmented, product
life cycles reduced dramatically, and consumers had far greater choice than ever before.

An unforeseen challenge to Western manufacturers emerged from Japan. New Japanese production techniques, such
as total quality management (TQM), just-in-time (JIT) and employee involvement, were emulated elsewhere in the
developed world, with mixed results. More recently, the mass production paradigm has been replaced, but there is as
yet no single approach to managing operations that has become similarly dominant. The different approaches for
managing operations that are currently popular include:

• Flexible specialisation (Piore and Sabel, 1984) in which firms (especially small firms) focus on separate parts
of the value-adding process and collaborate within networks to produce whole products. Such an
approach requires highly developed networks, effective processes for collaboration and the development
of long-term relationships between firms.
• Lean production (Womack et al., 1990) which developed from the highly successful Toyota Production
System. It focuses on the elimination of all forms of waste from a production system. A focus on driving
inventory levels down also exposes inefficiencies, reduces costs, and cuts lead times.
• Mass customisation (Pine and Davis’, 1993) which seeks to combine high volume, as in mass production,
with adapting products to meet the requirements of individual customers. Mass customisation is
becoming increasingly feasible with the advent of new technology and automated processes.
• Agile manufacturing (Kidd, 1994) which emphasizes the need for an organization to be able to switch
frequently from one market-driven objective to another. Again, agile manufacturing has only become
feasible on a large scale with the advent of enabling technology.
In various ways, these approaches all seek to combine the high volume and low cost associated with mass
production with the product customisation, high levels of innovation and high levels of quality associated with craft
production.

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 4|Page

 SG7001 / Managing Strategy, Operations and Partnerships

Figure 1: Factors that influence operations and processes

5.4.4 The role of the operations manager

Some people (especially those professionally involved in operations management!) argue that operations
management involves everything an organization does. In this sense, every manager is an operations manager, since
all managers are responsible for contributing to the activities required to create and deliver an organization’s goods
or services. However, others argue that this definition is too wide, and that the operations function is about
producing the right amount of a good or service, at the right time, of the right quality and at the right cost to meet
customer requirements.

5.5 Resources

What, exactly, do we mean by resources? Resources are the inputs that firms use to create goods or services. Some
resources are rather undifferentiated inputs that any firm can acquire. For instance, land, unskilled labour, debt
financing, and commodity-like inventory are inputs that are generally available to most firms. Other resources are
more firm-specific in nature (Teece, Pisano and Shuen, 1997). They are difficult to purchase through normal supply
chain channels. For instance, managerial judgment, intellectual property, trade secrets, and brand equity are
resources that are not easily purchased or transferred. From this description, it is clear that some resources have

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 5|Page

 SG7001 / Managing Strategy, Operations and Partnerships

physical attributes; these are referred to as tangible resources. Other resources, such as knowledge, organizational
culture, location, patents, trademarks, and reputation are intangible in nature. Some resources have both tangible and
intangible characteristics. Land, for instance, has physical properties and satisfies certain functional needs. At the
same time, some properties may have value as a resource by virtue of their location, which is an intangible benefit
arising from unique proximity to customers or suppliers due to preferences or relative location.

Because tangible resources are easier to identify and value, they may be less likely to be a source of competitive
advantage than intangible resources. This is because their tangible nature gives competitors a head starts on
imitation or substitution. But some tangible resources are quite instrumental in helping firms achieve favourable
competitive positions, partly because of their intangible benefits. Wal-Mart, for example, enjoys near-monopoly
status in many rural locations. As the first large retailer in a rural market, Wal-Mart has locked out potential
competitors who won’t build facilities in locations that can’t support two stores. Thus, one reason for Wal-Mart’s
formidable competitive position in rural markets is its tangible real estate. Similarly, Union Pacific Railroad’s
control of key rail property gives it a competitive advantage in the transportation of certain materials, such as
hazardous chemicals.

Likewise, McDonald’s controls much more than a valuable brand name (an intangible resource that does in fact
convey a significant advantage). Like Wal-Mart, it also controls a great deal of valuable real estate by virtue of its
location near high-traffic centres. Indeed, without its prime real-estate locations, McDonald’s would have a less
valuable brand name. Obviously, the pace at which McDonald’s grew required a certain capability in finding the
needed real estate.

5.6 Capabilities

Capabilities refer to a firm’s skill in using its resources (both tangible and intangible) to create goods and services. A
synonym that is often used to describe the same concept is competences. For simplicity, we use the term capabilities.
Capabilities may be possessed by individuals or embedded in company-wide rules and routines (Nelson and Winter,
1982). In essence, they are the combination of procedures and expertise that the firm relies on to engage in distinct
activities in the process of producing goods and services. Several examples of companies and their capabilities are
listed in Figure 2 (Stalk, Evans and Shulman, 1992; Makadok, 2003). For instance, Wal-Mart is widely regarded as
having excellent capabilities related to the management of logistics, which it uses to exploit resources such as large
stores, store locations, its trucking fleet, and massive distribution centres.

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 6|Page

 SG7001 / Managing Strategy, Operations and Partnerships

Figure 2: A few Extraordinary Capabilities

Capabilities span from the rather simple tasks that firms must perform to accomplish their daily business, such as
taking and fulfilling orders, to more complex tasks, such as designing sophisticated systems, creative marketing, and
manufacturing processes. Collectively, these capabilities are the activities that constitute a firm’s value chain. Not all
capabilities are of equal value to the firm − a fact that has, in turn, given rise to the rapid growth of outsourcing.
Outsourcing is contracting with external suppliers to perform certain parts of a company’s normal value chain of
activities. Later in the chapter, you will be introduced to a special class of capabilities known as dynamic
capabilities.

Two other special classes of capabilities with which you should be familiar, if for no other reason than that they are
part of the generally used business vocabulary, are distinctive competences and core competences. Distinctive
competences (or distinctive capabilities) are the capabilities that set a firm apart from other firms (Makadok, 2003).
They are the capabilities that are unique to the firm within its competitive landscape. Core competences (or core
capabilities) are those capabilities that are central to the main business operations of the firm; they are the
capabilities that are common to the principal businesses of the firm and that enable the firm to generate new
products and services in these businesses. Thus, a core competence at GE, which operates in many unrelated

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 7|Page

 SG7001 / Managing Strategy, Operations and Partnerships

businesses, is its general management capability; GE is able to manage a portfolio of businesses based on sound
business principles when most firms cannot manage such unrelated business simultaneously.

The relationship between resources and capabilities can be further illustrated by a few more examples. Intel’s
manufacturing capacity (i.e. its plants, equipment, and production engineers), its patented microprocessor designs,
and its well-established brand name are among its key resources. Like its capabilities in speed-to-market, these other
internal factors contribute to its strategic differentiators, in terms of the strategy diamond. Intel has also
demonstrated the organizational capability to design new generations of leading-edge microprocessors and to do so
rapidly. In addition, Intel has demonstrated marketing adroitness by creating the “Intel Inside” campaign, which
stimulated greater demand and higher switching costs among end users − the customers of Intel’s customers. This
clearly suggests a marketing capability. The combination of Intel’s resources and capabilities collectively comprise
its differentiators, and enable its managers to execute a value-creating strategy and achieve a formidable competitive
advantage in the microprocessor industry.

In the oil industry, too, we can see that resources and capabilities aren’t uniformly developed by all competitors.
Some firms, for example, are highly integrated. These integrated firms are involved in every stage of the value
chain, including risky and time-consuming oil exploration and extraction activities. BP, ChevronTexaco,
ExxonMobil, and Royal Dutch/Shell all possess significant capabilities in exploration and extraction, refining,
distribution, and marketing. As a result, they also own rights to significant petroleum deposits around the world, and
these reserves are potentially valuable tangible resources. In contrast, other oil companies are involved primarily in
“downstream activities.” These companies gear their capabilities to refining, distribution, and marketing. Valero
Energy and Sunoco, for instance, are the largest independent U.S. oil refiners and distributors. Neither, however, is
active in exploration. Their resources include refineries, pipelines, distribution networks, and equipment, but both
buy crude oil from other companies.

The important complementary relationship between one of McDonald’s tangible resources (real estate) and one of
its capabilities (its site-location skills) are highlighted in the following example. Few people go out for the sole
purpose of buying a hamburger or a taco. Most fast-food purchases are impulse buys, and this fact points to just one
reason why site location is so important in the fast-food industry. Like magazines and candies strategically placed at
supermarket checkout counters, fast-food outlets are situated by design. At one time, McDonald’s used helicopters
to assess the growth of residential areas: Basically, planners looked for cheap land alongside thoroughfares that
would one day run through well-populated suburbs.

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 8|Page

 SG7001 / Managing Strategy, Operations and Partnerships

Today, the site-location process is even more high-tech. In the 1980s, McDonald’s turned to satellite photography to
predict urban sprawl. The company has developed a software package called Quintillion, which integrates
information from satellite images, detailed maps, demographic information, CAD drawings, and sales data from
existing stores. With all of this information at its disposal, McDonald’s has taken the strategy of site location to new
heights. Prime locations, of course, command prime dollars: The difference between the cost of a prime location and
a mediocre site could be three times the price per square foot.

Figure 3: Analysing resources and capabilities

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 9|Page

 SG7001 / Managing Strategy, Operations and Partnerships

5.7 The VRINE Model

In a given industry, then, all competitors do not have access to the same resources and capabilities − a fact that
should have significant implications for the strategies that they develop. In addition, one firm’s resources or
capabilities aren’t necessarily as effective as another’s in helping it develop or sustain a competitive advantage. Why
do some resources and capabilities enable some firms to develop a competitive advantage? Figure 4 summarizes five
basic characteristics that determine whether a resource or capability can help a firm compete and, indeed, achieve

superior performance: (1) value, (2) rarity, (3) inimitability, (4) nonsubstitutability, and (5) exploitability (Barney,
1995).

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 10 | P a g e

 SG7001 / Managing Strategy, Operations and Partnerships

Figure 4: Applying the VRINE Model

According to the VRINE model (for value, rarity, inimitability, non-substitutability, and exploitability), resources
and capabilities contribute to competitive advantage to the extent that they satisfy the five components of the model.
VRINE analysis helps managers systematically test the importance of particular resources and capabilities and the
desirability of acquiring new resources and capabilities. VRINE analysis also suggest to you how a firm might use
its resources and capabilities to differentiate its products or services in valuable ways that competitors cannot
imitate; that is, it suggests what the firm might do in terms of the differentiator facet of the strategy diamond. In the
following sections, we’ll explain and provide examples of each VRINE characteristic.

5.7.1 Value

A resource or capability is valuable if it enables a firm to take advantage of opportunities or to fend off threats in its
environment (Barney, 1991). Union Pacific (UP) Railroad, for example, maintains an extensive network of rail-line
property and equipment on the U.S. Gulf Coast. It operates in the western two-thirds of the United States, serving 23
states, linking every major West Coast and Gulf Coast port and reaching east through major gateways in Chicago,
St. Louis, Memphis, and New Orleans. UP also operates in key north-south corridors. It’s the only U.S. railroad to
serve all six gateways to Mexico, and it interchanges traffic with Canadian rail systems.

5.7.2 Rarity

Rarity is defined as scarcity relative to demand. An otherwise valuable resource that isn’t rare won’t necessarily
contribute to competitive advantage: Valuable resources that are available to most competitors simply enable a firm
to achieve parity with everyone else. Sometimes such resources may be called table stakes, as in poker, because they
are required to compete in the first place. But when a firm controls a valuable resource that’s also rare in its industry,
it’s in a position to gain a competitive advantage. Such resources, for example, may enable a company to exploit
opportunities or fend off threats in ways that competitors cannot. When McDonald’s signs an agreement to build a
restaurant inside a Wal-Mart store, it has an intangible location advantage over Burger King and Wendy’s that is not
only valuable but also rare because it has an exclusive right to that geographic space.

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 11 | P a g e

 SG7001 / Managing Strategy, Operations and Partnerships

5.7.3 Inimitability and Non-substitutability

A valuable and rare resource or capability will grant an advantage only so long as competitors don’t gain possession
of it or find a close substitute. We review these two criteria jointly because they work in similar fashions. The
criterion of inimitability is satisfied if competitors cannot acquire the valuable and rare resource quickly or if they
face a cost disadvantage in doing so. The non-substitutability criterion is satisfied if a competitor cannot achieve the
same benefit using different combinations of resources and capabilities. When a resource or capability is valuable
and rare and contributes to a firm’s advantage, one can assume that competitors will do all they can to get it. Of
course, firms can acquire needed resources or capabilities in a number of different ways, including internal
investment, acquisitions, and alliances. They can, for instance, form alliances in order to learn from and internalize a
partner’s capabilities (Prahalad and Hamel, 1990).

5.7.4 Exploitability

The fifth and final VRINE criterion reminds us that mere possession of or control over a resource or capability is
necessary but not sufficient to gain a competitive advantage: A firm must be able to exploit it; that is, the firm must
be able to nurture and take advantage of the resources and capabilities that it possesses. The question of
exploitability is, of course, quite broad, but in this case, we’re focusing on a company’s ability to get the value out of
any resource or capability that it may generate. Thus, the issue of an organization’s exploitative capability
incorporates all of the dimensions of a firm’s value-adding processes. Although we may not deal directly with
organizational processes until the final criterion in the VRINE model, bear in mind that, without this skill, a firm
won’t get much benefit from having met any of the first four VRINE criteria. A valuable resource or capability that
is also possessed by many other competitors has the potential to give the firm competitive parity, but only if the firm
also has the exploitative capabilities to implement a strategy that utilizes the resource or capability. Likewise, a firm
that possesses a valuable and rare resource will not gain a competitive advantage unless it can actually put that
resource to effective use.

5.8 Pfizer and VRINE model

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 12 | P a g e

 SG7001 / Managing Strategy, Operations and Partnerships

The VRINE model can be used to assess any resource or capability in order to determine if it is a source or potential
source of competitive advantage and, if so, whether that advantage is likely to be temporary or sustained. To
illustrate how this is done, we use the VRINE model in Figure 5 to analyze Pfizer’s ownership of the patents for
Zoloft as a possible source of competitive advantage.

Figure 5: Putting Pfizer’s Drug Patents up to the VRINE Test

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 13 | P a g e

 SG7001 / Managing Strategy, Operations and Partnerships

5.9 Summary
This week we have analysed the core concepts of Operations Performance, Strategy, Resources and Capabilities. In
the next week, you will have to finalise and submit your answer of the 1st Assessment Point on Sunday (week 6).

References

Barney, J. B. (1991) ‘Firm Resources and Sustained Competitive Advantage’, Journal of Management, 17(1), pp.
99−120.

Barney, J. B. (1995) ‘Looking Inside for Competitive Advantage’, Academy of Management Executive, 9(4), pp.
49−61.

Cox, J.F. and Blackstone, J.H. (2002) APICS Dictionary. 10th edn. APICS Falls Church:VA.

Kanigel, R. (1999) The One Best Way: Frederick Winslow Taylor and the Enigma of Efficiency. Viking.

Kidd, P. T. (1994) Agile Manufacturing: Forging New Frontiers. Addison-Wesley.

Makadok, R. (2003) ‘Doing the Right Thing and Knowing the Right Thing to Do: Why the Whole Is Greater Than
the Sum of the Parts’, Strategic Management Journal, 24(10), pp. 1043−1054.

Nelson, R. R., and Winter S. G. (1982) ‘An Evolutionary Theory of Economic Change’, Harvard University Press.

Pine, B. J. II and Davis, S. (1993) ‘Mass Customization’, Harvard Business School Press.

Piore, M. J. and Sabel C. F. (1984) The Second Industrial Divide: Possibilities of Prosperity, Basic Books, New
York.

Prahalad, C. K. and Hamel, G. (1990) ‘The Core Competence of the Corporation,’, Harvard Business Review 68(3),
pp. 79−92.

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 14 | P a g e

 SG7001 / Managing Strategy, Operations and Partnerships

Stalk, G., Evans, P., and Shulman, L. E. (1992) ‘Competing on Capabilities: The New Rules of Corporate Strategy’,
Harvard Business Review 70(2), 54−65.

Taylor, F. (1911) The Principles of Strategic Management. New York: Harper.

Teece D. J., Pisano G., and Shuen A. (1997) ‘Dynamic Capabilities and Strategic Management’ Strategic
Management Journa,l 18, pp. 509−529.

Womack, J. P., Jones, D. T. and Roos, D. (1990) The Machine that Changed the World: The Story of Lean
Production. Harper Perennial.

WEEK 5 - Operations Performance, Strategy, Resources and Capabilities 15 | P a g e