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. Intel’s 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 Cola’s 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 company’s customers perceive in its products 1980 /1990’s Merck’s 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 Merck’s R&D capabilities made an important contribution to the value that customers perceived in the firm’s products CoCa Cola’s brand name reputation make a significant contribution to the value that customers perceive in the company’s 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 Lily’s formula for Prozac was rare during the life of the drug’s patent, a time when no-one could legally duplicate Prozac’s 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 Honda’s level of capabilities is than these competitors

16. Rareness Unless a firm’s 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 who’s resources make the same significant contribution to customer value as the owner’s 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 Microsoft’s operating system sales are proportional to the firm’s installed base of Window’s 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 Merck’s 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 1990’s Coca Cola reinvested more than 40% of it’s 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 Toyota’s 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