Resources and Capabilities in Business

Resources & Capabilities

• Resources are tangible and intangible assets that allow companies to generate value for their customers.
• Tangible resources include physical assets like factories and equipment.
• Intangible resources include non-physical assets like brand reputation, know-how and intellectual property.
• Firms can create value by effectively managing their resources and capabilities, which differentiate them from competitors.
• Firms with resources creating high demand for their products can develop distinctive competencies.
• Capabilities are the firm’s ability to coordinate resources and put them to productive use.
• Capabilities emerge from a company's organizational structure, processes, and controls.
• Firms with firm-specific capabilities in managing resources also develop distinctive competencies.
• Distinctive competencies, like efficiency, quality, innovation, and customer responsiveness, allow companies to create competitive advantage.

Competitive Advantage & Profitability

• A company's profitability depends on the value it creates for customers, the price it charges, and the cost of creating its products.
• Value represents the utility consumers gain from a product.
• Companies can maximize profits by creating products with high utility, charging high prices, or having low production costs.
• Customer surplus is the difference between the value and price paid.
• Companies with higher customer surplus have more pricing options.

Innovation

• Innovation creates new products or processes.
• Product innovation creates products more valuable to customers or lowers production costs.
• Process innovation lowers production costs or creates more valuable processes.
• Both product and process innovation enhance a company's competitive advantage.

Responsiveness to Customers

• Superior responsiveness to customers helps companies create higher value than their competitors.
• Companies can satisfy customer needs better by providing higher quality, innovating, customizing goods, offering faster response times, or providing better service and support.
• Superior responsiveness leads to brand loyalty and allows higher premium pricing.

The Value Chain

• A company is a series of activities that transform inputs into outputs valued by customers.
• The value chain consists of primary activities and support activities.
• Primary activities are directly involved in creating and delivering products to customers.
• These activities include R&D, production, marketing & sales, and customer service.
• Support activities, like infrastructure, materials management, information systems, and human resources, support the primary activities.

Building Blocks of Competitive Advantage

• Companies can build a competitive advantage by developing distinctive competencies in efficiency, quality, innovation, and customer responsiveness.
• Superior efficiency allows companies to have low cost structures.
• Superior quality and innovation allow companies to differentiate themselves from competitors.
• Superior customer responsiveness builds brand loyalty and allows higher premium pricing.

Why Companies Fail

• Companies find it difficult to change their strategies and structures.
• Past commitments can restrict the company's ability to change and create competitive disadvantage.
• Companies can be specialized or inner-directed based on success and lose sight of market realities, known as the Icarus paradox.
• Companies can be classified as craftsmen, builders, pioneers, or salespeople.

Avoiding Company Failure & Sustaining Competitive Advantage

• Companies must focus on the building blocks of competitive advantage, including efficiency, quality, innovation, and customer responsiveness.
• Companies must encourage continuous improvement and learning.
• Companies must track best practices and benchmark against global competitors.
• Companies must overcome barriers to change, and proactively adapt to market changes.
• Companies must exploit opportunities to improve, but remember success is often a result of hard work, not just luck.

Value Creation per Unit

• Value creation is the difference between the value a customer places on a product and the cost to produce the product.
• Customer surplus is the difference between the value and price of a product.
• Profit margin is the difference between the price and cost of a product.

Comparing Toyota & General Motors

• Toyota has a larger value-price gap and a smaller cost compared to General Motors.
• This means Toyota creates more value, allows for higher prices, and has a lower cost structure than General Motors.

Analyzing Competitive Advantage & Profitability

• A company has a competitive advantage when its profitability is higher than the average of its competitors.
• Benchmarking compares company performance against its competitors and its historical performance.
• Return On Invested Capital (ROIC) measures a company's profitability, calculated by dividing net profit by capital invested.
• Net profit is the difference between total revenue and total costs.

Durability of Competitive Advantage

• The durability of a competitive advantage depends on barriers to imitation, competitor's learning capacity, and industry dynamics.
• Barriers to imitation hinder others from replicating a company's distinctive competencies.
• A company's ability to learn and adopt knowledge from competitors is called absorptive capacity.

Internal Analysis: A Three-Step Process

• Understand the process by which companies create value for customers and profit for themselves.
• Analyze the company’s strengths and weaknesses driving profitability.
• Identify opportunities for improvement in the company's strengths and weaknesses.

Competitive Advantage

• Competitive advantage: Firm's profitability is greater than the average of the industry
• Sustained competitive advantage: Firm maintains above average and superior profitability for years.
• The Primary Objective of Strategy: Achieving a Sustained Competitive Advantage resulting in Superior Profit and Profit Growth