Management Strategy/Analyzing Resources and Capabilities
The Role of Resource Analysis in Strategy Formulation
Intangible assets are often overlooked, but they are many times the only source of sustainable competitive advantage (ie. brand, technology, information, culture, etc).
Taking the lead from military campaigns in which the goal is to pitch "strength against weakness"(1), business strategy should be defined by resource analysis rather than the inverse. Firms that base their strategy on the development of specific capabilities have shown better adaptability than those that base their strategy on their customers or on how to serve them. One can take Merrill Lynch, American Express and Sears as having examples of failed strategies (being too broad and having an emphasis on customer needs), and Honda and 3M Corporation as having examples of successful strategies (with a focus on the capability of making engines and adhesives respectively).
Basically, any element that is traditionally considered to support competitive advantage can be seen as stemming from the correct acquisition and use of resources. For example, barriers to entry can be created by owning a strong brand, patents, or retaliatory capacity. A monopoly is nothing more than ownership of market share. Cost advantages come from process technology, size of plants, and access to low-cost inputs. Finally, Differentiation advantage comes from a brand, product technology, or marketing, distribution, and service capabilities.
Taking Stock of Resources and Capabilities
|Physical assets , financial assets||Human technology, reputation, skills|
Tangible resources are the easiest to evaluate since they are visible and quantifiable. Two key questions underlie this procedure(2):
- What opportunities exist for economizing on finance, inventories, and fixed assets?
- What are the possibilities for employing existing assets more profitable?
Much of a company's worth comes from less defined assets such as reputation, technology, or a particular set of cultural attributes within the company. Intel and American Express have successfully protected their intangibles, while Xerox has repeatedly over-looked its core assets. Brand is everything for Coca-Cola, and Gillette, while software and pharmaceutical companies depend mosty on their technology and patents.
People in companies provide skills, knowledge, intuition, and reasoning (known as human capital). Additionally, the culture inside an organization consists of relationships, values, and routines, and companies that have a strong set of managerial values have a strategic advantage over those that don't- through employees increased identity with corporation, increased stability and consistency as well as a guide for appropriate behaviour.
Hamel and Prahalad introduced the term "core competences" (3) in 1990 to describe those competences that a) "make a disproportionate contribution to ultimate customer value or to the efficiency with which that value is delivered," and b) "provide a basis for entering new markets."
So the question to ask in this case is "What can such and such firm do better than others?"
The process of identifying core capabilities can begin in many ways; the two more common ones are through a classification of all capabilities according to function, or through a value chain analysis that separates a firm into small sequential activities.
Example of a value chain:
Technology (patents) >> Product Design (quality) >> Manufacturing (assembly) >> Marketing (brand) >> Distribution (warehousing) >> Service (warranty)
Benchmarking is important because it brings objectivity into the process of identifying competences. It also brings vain imaginations down to the ground. To create a benchmark, one must identify areas of potential improvement; identify world-leading companies in each area; contact the companies (visit, talk to managers, discuss with workers); and define goals based on the learning done at those companies.
Appraising competitive advantage
A source of competitive advantage must be scarce, relevant, durable, immobile, and unreplicable.
Appraising Resources and Capabilities
Resources and capabilities need to be appraised against two key criteria. First is their importance: which resources and capabilities are most important in conferring sustainable competitive advantage? Second, where are our strengths and weaknesses as compared with competitors?
1. B.H. Liddell Hart, _Strategy_ (Praeger, New York, 1954), p.365
2. R.M. Grant, _Contemporary Strategy Analysis_ (Butler & Tanner LTD, Frome and London, 1991), p.102
3. C.K. Prahalad and G. Hamel, "The Core Competences of the Corporation" _Harvard Business Review_ (May-June 1990): 79-91
4. Grant (2008) Contemporary Strategy Analysis
5. V. Kuzevanov, S. Sizykh (2006)  "Botanic Gardens Resources:Tangible And Intangible Aspects of Linking Biodiversity and Human Well-Being", Hiroshima Peace Science, 28 (2006), pp.113–134