Chapter 4: Internal Analysis: Resources, Capabilities, and

Chapter 4: Internal Analysis: Resources, Capabilities, and Core Competencies

Chapter 4: Case Highlight Five Guys’ Core Competency: Make the best burgers; Don’t worry about the cost Five Guys claims the title of fastest-growing restaurant chain in the United States with some 1,500 locations worldwide and revenues of 2 billion. 1986: first store opened by Jerry Murrell in Arlington, VA 2003: 5 stores in Washington, D.C. area; started franchising 2010: beyond the United States to Canada 2013: to the UK 2015-2018: to France, Ireland, Kuwait, UAE, and Saudi Arabia Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 2

Inside the Firm: Core Competencies, Resources, and Capabilities Exhibit 4.2 McGraw Hill

What Are Core Competencies? Unique strengths Embedded deep within a firm Enables a firm to differentiate its products and services from those of its rivals Results in: – Creating higher value for the customer or – Offering products and services at lower cost Based on structures, processes, and routines Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Strategy Highlight 4.1 Dr. Dre’s Core Competence: Coolness Factor Dr. Dre (Andrew Young) – – – – – First hip-hop billionaire Successful music producer, rapper, and entrepreneur Strong work ethic, expects perfection One of the best-connected businesspeople in music Founded Beats Electronics in 2008: premium headphones Apple acquired Beats Electronics for 3 billion – Largest acquisition in Apple’s history – Hoping that some of Beats’ coolness will spill over to its brand Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 5

Strategy Highlight 4.1 Dr. Dre’s Core Competence: Coolness Factor Beats’ Coolness Factor – Celebrity endorsements Music celebrities wore them in their music videos. Famous athletes wear them in public. – Custom Beats created for stars Disruption in Content Delivery – Changing from downloads to streaming – Apple was lagging behind Pandora By 2019, Apple Music had surpassed market leader, Spotify. Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7 Examples of Core Competencies Five Guys Offers highest quality ingredients, wide range of free toppings. Chose not to have drive through or an expanded menu. Beats Electronics – Superior marketing, combining hardware and software Tesla Engineering expertise in designing battery powered motors and power trains. Netflix Creates proprietary algorithms-based on individual customer preferences. Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Canon: Canon: Products Products and and Core Core Technical Technical Capabilities Capabilities Precision Mechanics Fine Optics 35mm SLR camera Plain-paper copier Compact fashion camera Color copier EOS autofocus camera Color laser copier Digital camera Basic fax Laser copier Video still camera Laser fax Mask aligners Inkjet printer Excimer laser aligners Laser printer Color video printer Stepper aligners Calculator Notebook computer MicroElectronics 4–8

Role of Strategy in Business is to Generate and Sustain Value via the Linkages Between Positioning, Organization, and Resources Positioning Organization Resources

Positioning Scope of the Firm: Vertical integration (value chain) decisions Product-market scope: Choice of businesses (corporate portfolio analysis) Product market positioning within a business Geographic scope

Organization Structure Formal definition of authority Conflict resolution Systems Rules, routines, evaluation and rewards Processes Informal communication, networks, and recruitment

Resources: Tangible and Intangible Exhibit 4.5 McGraw Hill

Appraising Appraising Resources Resources RESOURCE Tangible Resources CHARACTERISTICS Financial Borrowing capacity Internal funds/ generation Physical Plant and equipment: size, location, technology flexibility. Land and buildings. Raw materials. Debt/ Equity ratio Credit rating Net cash flow Market value of fixed assets. Scale of plants Alternatives for fixed assets Technology Patents, copyrights, know how R&D facilities. Technical and scientific employees No. of patents owned. Royalty income R&D expenditure. R&D staff Reputation Brands. Customer loyalty. Company reputation (with suppliers, customers, government) Brand equity. Product price premium. Recognition. Training, experience, adaptability, commitment and loyability of customers Employee qualifications, pay rates, turnover. Intangible Resources Human Resources INDICATORS

Knowledge Knowledge Types Types and and Knowledge Knowledge Conversion Conversion Levels Levelsof ofknowledge knowledge Individual Individual Explicit Explicit Types Types of of Knowledge Knowledge Tacit Tacit Information Facts Scientific kn. Organization Organization Databases Systems & procedures Intellectual property ‘INDUSTRIAL’ ENTERPRISES CRAFT ENTERPRISES Skills Organizational capabilities

The Resource-based View Google Example Since 2015 a subsidiary of Alphabet Tangible resources valued at 59 billion Intangible brand valued at over 300 billion (p.126) Googleplex has both tangible and intangible aspects Competitive Advantage More Likely . From intangible resources (e.g., networks)

Two Critical Assumptions of the RBV Resource Heterogeneity Resource Immobility A firm is a unique bundle of resources, capabilities and competencies. Resources are “sticky,” and don’t move easily from firm to firm. These bundles differ across firms. Resources are difficult to replicate. Resources can last for a long time. McGraw Hill

The VRIO Decision Tree Exhibit 4.6 McGraw Hill

The The Rent-Earning Rent-Earning Potential Potential of of Resources Resources and and Capabilities Capabilities THE EXTENT OF THE COMPETITIVE ADVANTAGE ESTABLISHED THE PROFIT EARNING POTENTIAL OF A RESOURCE OR CAPABILITY Scarcity Relevance Durability SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE Mobility Replicability Property rights APPROPRIABILITY Relative bargaining power Embeddedness of resources

19 Isolating Mechanisms Barriers to imitation: protect resources and capabilities that underpin a firm’s competitive advantage. How: Causal ambiguity (i.e., cause and effect unclear) Social complexity (e.g., social and business systems interact) Intellectual property (IP) protection (e.g., patents) Path dependence (e.g., historical lock-in to older technology or historical development of technology; e.g., Honda’s development of gas engines took decades and was leveraged across multiple products) Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The The Evolution Evolution of of Honda Honda Motor Motor Company Company 50cc 2-cycle engine Founding of Honda motor company 1948 1950 First product: clip-on engine for bicycles 405cc motor cycle 4 cycle engines 1955 Related products: ground tillers, marine engines, generators, pumps, chainsaws 1960 The 50cc super -cub 1965 1970 N360 mini car 1975 1980 1000cc Goldwing touring motor cycle 1985 1990 Acura Car division 1995

Strategy Highlight 4.2 The Rise and Fall of Groupon (A VRIO VIEW) Based on the resource-based view and its framework of VRIO(N) --- Valuable, Rare, Inimitable, Organized to capture value, and Non-substitutable --explain the rise and fall of Groupon. Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 21

Strategy Highlight 4.2 The Rise and Fall of Groupon (A VRIO VIEW) A daily-deal website, offering group coupons Grew quickly – 260 million subscribers, 500,000 merchants – 6 billion buyout offer (Google 2011), was declined – Share price fell 90% It was valuable, and rare, but not costly to imitate. – More specialized local startups began Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

23 Dynamic Capabilities A firm’s ability to: – Create, deploy, modify, reconfigure, upgrade, and leverage its resources over time (e.g., Apple’s capabilities enabled it to redefine the markets for mobile devices and computing; in particular in music, smartphones, and media content). Helps prevent a core rigidity – A former core competency that turned into a liability as the environment changed. Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

24 Dynamic Capabilities at IBM Current disruptions: – Cloud computing – Systems of engagement – Big data and analytics Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

25 Resource Stocks and Flows Resource stocks – The firm’s current level of intangible resources Resource flows – The firm’s level of investments to maintain or build a resource – Note: The resource stock (e.g., historical advertising intensity or R&D intensity) impacts the current “flow” (of advertising and R&D intensity) Copyright 2017 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

The Bathtub Metaphor Exhibit 4.7 SOURCE: Figure based on metaphor used in I. Dierickx and K. Cool (1989), “Asset stock accumulation and sustainability of competitive advantage,” Management Science 35: 1504–1513. Access the text alternative for slide images. McGraw Hill

The Value Chain Primary Activities Add value directly in transforming inputs into outputs Raw materials through production to customers Support Activities Indirectly add value Provide support to the primary activities Information systems, human resources, accounting, etc. Managers can see how competitive advantage flows from a system of activities (using activity-based accounting).

A Generic Value Chain Exhibit 4.8 McGraw Hill

Hostess’s Cost Components 80 70 Profit Marketing: Promotions Cents per unit 60 Marketing: Advertising 50 Outbound logistics 40 30 Operations: Packaging 20 Operations: Ingredients 10 0 1999 Pankaj Ghemawat Operations: Manufacturing

Relative Cost Analysis 90 80 Profit 70 Marketing: Promotions Cents per unit 60 Marketing: Advertising 50 Outbound logistics 40 Operations: Manufacturing 30 20 Operations: Packaging 10 Operations: Ingredients 0 Hostess 1999 Pankaj Ghemawat Little Debbie Ontario Baking Savory Pastries

Strategic Coherence Combining activities that complement and reinforce one another. These activities dovetail together to help achieve the overall objectives of the firm. Such strategies, which may regarded as systems of activities are often more successful because they are more difficult to imitation. Thus, they can lead to a sustainable competitive advantage. Strategic coherence may not be a sufficient condition for attaining a competitive advantage, but it is often a necessary one.

Southwest Airline’s Activity System No baggage transfers No meals No seat assignments Frequent, reliable departures High compensation of employees Flexible union contracts 15-minute gate turnarounds Lean, highly productive ground and gate crews High level of employee stock ownership Limited passenger amenities Limited use of travel agents No connections with other airlines Standardized fleet of 737 aircraft Short-haul, point-to-point routes between midsize cities and secondary airports Automatic ticketing machines Very low ticket prices High aircraft utilization “Southwest, the low-fare airline” 32

Strategic Coherence The Logic of How The Business Fits Together: Southwest Airlines Low Price Short Routes No Frills Point-to-Point One Aircraft -Boeing 737 High number of Aircraft per Route No Meals Flexible/ Lower Staffing American Airlines Premium Price Short, Long, & Int’l Variety Hub and Spoke System Multiple Aircraft Low number of Aircraft per Route Meals and Service Higher Staffing

Links to Competitive Advantage and Superior Firm Performance McGraw Hill