1. .
Resources and Capabilities: The Roots of Business Models

2. Premise
A firm makes more money than its rivals if its business model creates and offers superior customer value (lower cost or more differentiated products than those of competitors) and positions the firm to appropriate the value.
This requires resources
E.g. Fly Dubai needs the landing rights for airports
Pfizer needs well equipped R&D laboratories, scientists and patents

3. Resources
By themselves do not produce customer value and profit
Firms must have the ability or the capacity to turn resources into customer value and profit
E.g. For Shell to make money from oil it needs not only resources such as exploration rights, sophisticated exploration equipment and geologists, but also the ability to find the oil and turn it into something that its customers want.
i.e. Resources and an ability to use them to underpin the value adding activities that a firm needs to perform so as to offer its customers the type of value they want.

4. Definition of resources and capabilities
Assets or resources can be categorised as
Tangible
Intangible
Human

5. Tangible Assets
Can be physical, such as plants and equipment, or financial such as cash.
These are the types of assets that are usually identified and accounted for in financial statements under the category assets

6. Intangible assets
These are non-physical and non-financial assets such as patents, brands, copyrights, trade secrets, market research findings, knowledge in etc. data bases, relationships with vendors
Usually not identified in financial statements, but can be an excellent source of profits
E.g. A patent or trade secret that gives a firm exclusive access to a product or process may allow the firm to be the only one producing a product with certain characteristics, thereby making the product highly differentiated and profitable

7. Human Assets
The skills and knowledge that employees carry with them

8. Capabilities and competences
It takes more than assets to offer value to customers
A firm needs to have the ability to convert its assets to customer value
E.g. Patients do not by patents or skilled scientists from pharmaceutical companies, they buy medicines that have been developed by skilled scientists using knowledge embedded in patents
Assets must be converted into something that customers want
A firms capacity to turn its resources into customer value is called a competence or capability

9. Capabilities and competences
Usually involve the integration of more than one asset
E.g. Intels ability to develop a microprocessor that exploit their copyrighted micro code and are compatible with its installed base of microprocessors is a competence
Also true of Coca Colas ability to turn its secret formula and brand into a product that many customers perceive as being preferable to its rivals products

10. Short vignette
http://www.youtube.com/watch?v=MOiP9FB4QPc

11. Assessing the profitability potential of resources
What types of resources are most likely to make a business model profitable?
VRISA analysis
Value
Rareness
Imitability
Substitutability
Appropriability analysis

12. VRISA analysis
5 basic questions
Does the resource make a significant contribution toward the value that customers perceive?
Is the resource rare? That is , is the firm the only one with the resource; if not is its level of resource higher than that of its competitors?
Is the resource difficult to imitate?
Is the resource difficult to substitute?
To what extent can the firm appropriate value from the resource?

13. VRISA Analysis
Value
Does the resource provide customers with something they value?
Rareness (uniqueness)
Is the firm the only one with the capability, if not is its level of capability higher than that of its competitors?
Imitability
Is it easy for other firms to imitate the resource?
Substitutability
Can another resource offer customers the same value that your firms resource does?
Appropriability
Who makes money from the resource?

14. Customer value
Does the resource make a significant contribution toward the value that customers perceive?
E.g. Honda recognised expertise in engine manufacture, contributes to sales of cars, motorcycles, lawn mowers, portable generators etc. i.e. the capability in building combustion engines makes a valuable contribution to the value that the companys customers perceive in its products
1980 /1990s Mercks R&D group developed a number of drugs that offered patients superior benefits e.g. The first of the statin drugs which significantly reduce cholesterol. As such Mercks R&D capabilities made an important contribution to the value that customers perceived in the firms products
CoCa Colas brand name reputation make a significant contribution to the value that customers perceive in the companys colas

15. Rareness
The contribution that the resource makes to customer value should be superior to that made by competitors resources
This will be the case if
The resource is uniquely held by the firm
If it is widely held, the firms level of the resource is higher than that of its competitors
Eli Lilys formula for Prozac was rare during the life of the drugs patent, a time when no-one could legally duplicate Prozacs chemical structure. There were no other patents for the particular chemical compound that makes up Prozac. When the patent expired competitors could offer generic versions of the drug, there bye matching a lot of the value that Prozac offered its customers
Many companies have internal combustion engine capabilities that are comparable to Honda. But Hondas level of capabilities is than these competitors

16. Rareness
Unless a firms resource is unique or its level of it is superior to that of competitors, a firm cannot make money from the resource
Offering superior value requires having unique or superior resources
http://www.youtube.com/watch?v=SDuHrRBki-M

17. Imitability
How long the resource can keep making its owner money is a function of its imitability the extent to which the resource can be imitated
If a resource can be copied, the owner of the resource will suddenly have many competitors whos resources make the same significant contribution to customer value as the owners resource does
This decreases the prices that the owner of the resources can charge for the value created or the quantity of its product that is demanded.
Imitability is said to be high if the resource cannot be imitated or substituted
E.g. Drug patents
Coca cola recipe

18. Why imitating a resource may be difficult
Historical context
Caterpillar earth mover machinery service network
Roots back to ww2, machinery of choice for land forces in Europe, many trained personnel, easy to replicate back to civilian life
Causal ambiguity
If a potential imitator cannot tell what exactly what it is that it wants to imitate about an industry leader, it is difficult for that potential imitator to imitate the leader
Success breeds success
Microsofts operating system sales are proportional to the firms installed base of Windows operating systems that customers already have. A start up that has a comparable operating system but no installed base is likely to sell only a negligible amount compared to Microsoft

19. Why imitating a resource may be difficult
Time compression difficulties
Building resources usually takes time and continuous reinforcement, thereby giving first movers an advantage that is difficult to overcome
Mercks R&D capability and ability to get its drugs through the US Food and Drug Administration (FDA) are outstanding
Partly attributed to the relationship that the firm has created over the years with various Doctors, Hospitals and Research Centres
Relationships created over a period of time, not easily broken, loyalty
Not easily speeded up process

20. Why imitating a resource may be difficult
Strategic stemming of erosion
The strategies that a firm can use to slow down imitation of its capabilities can also stem erosion
A firm can keep reinvesting in its resources to keep them from depreciating
In 1990s Coca Cola reinvested more than 40% of its revenues from concentrate in marketing and sales, largely to maintain the strength of its brand
Having a history of retaliating against imitators or new entrants to a firms product market place can reduce the number of attempts to imitate the firm and thereby stem erosion
http://www.youtube.com/results?search_query=coca+cola+drumming+gorilla&aq=f

21. Why imitating a resource may be difficult
Interconnectedness of resources
Toyotas superior product development and manufacturing capabilities are often associated with the network of relationships that it has with its suppliers
A new entrant may not be able to develop such product capabilities without first building relationships with a network of suppliers. But such relationships take time and trust to develop. This may make it difficult to imitate Toyota