Project 2: Tool Analysis (Week 4)

Managing Firm Resources
LEARNING OBJECTIVES
After reading this chapter, you should be able to understand and articulate answers to the following
questions:

1. What is resource-based theory, and why is it important to organizations?
2. In what ways can intellectual property serve as a value-added resource for organizations?
3. How should executives use the value chain to maximize the performance of their organizations?
4. What is SWOT analysis and how can it help an organization?
   Southwest Airlines: Let Your LUV Flow
   Southwest Airlines’ acquisition of AirTran in 2011 may lead the firm into stormy skies.
   Chapter 4 from Mastering Strategic Management was adapted by The Saylor Foundation under
   a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 license without attribution as requested
   by the work’s original creator or licensee. © 2014, The Saylor Foundation.
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   Image courtesy of Stuart Seeger,http://en.wikipedia.org/wiki/File:Southwest_737_At_Burbank.jpg
   In 1971, an upstart firm named Southwest Airlines opened for business by offering flights between
   Houston, San Antonio, and its headquarters at Love Field in Dallas. From its initial fleet of three airplanes
   and three destinations, Southwest has grown to operate hundreds of airplanes in scores of cities. Despite
   competing in an industry that is infamous for bankruptcies and massive financial losses, Southwest
   marked its thirty-eighth profitable year in a row in 2010.
   Why has Southwest succeeded while many other airlines have failed? Historically, the firm has differed
   from its competitors in a variety of important ways. Most large airlines use a “hub and spoke” system.
   This type of system routes travelers through a large hub airport on their way from one city to another.
   Many Delta passengers, for example, end a flight in Atlanta and then take a connecting flight to their
   actual destination. The inability to travel directly between most pairs of cities adds hours to a traveler’s
   itinerary and increases the chances of luggage being lost. In contrast, Southwest does not have a hub
   airport; preferring instead to connect cities directly. This helps make flying on Southwest attractive to
   many travelers.
   Southwest has also been more efficient than its rivals. While most airlines use a variety of different
   airplanes, Southwest operates only one type of jet: the Boeing 737. This means that Southwest can service
   its fleet much more efficiently than can other airlines. Southwest mechanics need only the know-how to
   fix one type of airplane, for example, while their counterparts with other firms need a working knowledge
   of multiple planes. Southwest also gains efficiency by not offering seat assignments in advance, unlike its
   competitors. This makes the boarding process move more quickly, meaning that Southwest’s jets spend
   more time in the air transporting customers (and making money) and less time at the gate relative to its
   rivals’ planes.
   Organizational culture is the dimension along which Southwest perhaps has differed most from its rivals.
   The airline industry as a whole suffers from a reputation for mediocre (or worse) service and indifferent
   (sometimes even surly) employees. In contrast, Southwest enjoys strong loyalty and a sense of teamwork
   among its employees.
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   One tangible indicator of this culture is Southwest’s stock ticker symbol. Most companies choose stock
   ticker symbols that evoke their names. Ford’s ticker symbol is F, for example, and Walmart’s symbol is
   WMT. When Southwest became a publicly traded company in 1977, executives chose LUV as its ticker
   symbol. LUV pays a bit of homage to the firm’s humble beginnings at Love Field. More important,
   however, LUV represents the love that executives have created among employees, between employees and
   the company, and between customers and the company. This “LUV affair” has long been and remains a
   huge success. As recently as March 2011, for example, Southwest was ranked fourth
   on Fortune magazine’s World’s Most Admired Company list.
   In September 2010, Southwest surprised many observers when it announced that it was acquiring
   AirTran Airways for $1.4 billion. Southwest and AirTran both emphasized low fares, but they differed in
   many ways. AirTran routed most of its passengers through a hub-and-spoke system, and it relied on a
   different plane than Southwest, the Boeing 717. The acquisition of AirTran thus raised important
   questions about Southwest’s future. [1] How would AirTran’s hub-and-spoke system be integrated with
   Southwest’s nonhub approach? Could the airlines’ respective fleets of 737s and 717s be joined without
   losing efficiency? Perhaps most important, could Southwest maintain its legendary organizational culture
   while taking over a sizable rival and integrating AirTran’s thousands of employees? When the acquisition
   was finalized on May 2, 2011, it remained unclear whether Southwest was flying off course or whether
   Southwest’s “LUV story” would continue for many years.
   [1] Schlangenstein, M., & Hughes, J. 2010, September 28. Southwest risks keep-it-simple focus to spur growth.
   Retrieved from http://www.washingtonpost.com/wp-dyn/content/article/2010/09/28/AR2010092801578.html
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   4.1 Resource-Based Theory
   LEARNING OBJECTIVES
5. Define the four characteristics of resources that lead to sustained competitive advantage as articulated by
   the resource-based theory of the firm.
6. Understand the difference between resources and capabilities.
7. Be able to explain the difference between tangible and intangible resources.
8. Know the elements of the marketing mix.
   Four Characteristics of Strategic Resources
   Southwest Airlines provides an illustration of resource-based theory in action. Resourcebased theory contends that the possession of strategic resources provides an organization with a golden
   opportunity to develop competitive advantages over its rivals. These competitive advantages in turn
   can help the organization enjoy strong profits.[1]
   A strategic resource is an asset that is valuable, rare, difficult to imitate, and nonsubstitutable. [2] A
   resource is valuable to the extent that it helps a firm create strategies that capitalize on opportunities and
   ward off threats. Southwest Airlines’ culture fits this standard well. Most airlines struggle to be profitable,
   but Southwest makes money virtually every year. One key reason is a legendary organizational culture
   that inspires employees to do their very best. This culture is also rare in that strikes, layoffs, and poor
   morale are common within the airline industry.
   Competitors have a hard time duplicating resources that are difficult to imitate. Some difficult to imitate
   resources are protected by various legal means, including trademarks, patents, and copyrights. Other
   resources are hard to copy because they evolve over time and they reflect unique aspects of the firm.
   Southwest’s culture arose from its very humble beginnings. The airline had so little money that at times it
   had to temporarily “borrow” luggage carts from other airlines and put magnets with the Southwest logo
   on top of the rivals’ logo. Southwest is a “rags to riches” story that has evolved across several decades.
   Other airlines could not replicate Southwest’s culture, regardless of how hard they might try, because of
   Southwest’s unusual history.
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   A resource is nonsubstitutable when competitors cannot find alternative ways to gain the benefits that a
   resource provides. A key benefit of Southwest’s culture is that it leads employees to treat customers well,
   which in turn creates loyalty to Southwest among passengers. Executives at other airlines would love to
   attract the customer loyalty that Southwest enjoys, but they have yet to find ways to inspire the kind of
   customer service that the Southwest culture encourages.
   Southwest Airlines’ unique culture is reflected in the customization of their aircraft over the years, such as the “Lone Star
   One” design.
   Image courtesy of planephotoman,http://en.wikipedia.org/wiki/File:Southwest_737_Lonestar_One.jpg.
   Ideally, a firm will have a culture that embraces the four qualities. If so, these resources can provide
   not only a competitive advantage but also a sustained competitive advantage—one that
   will endure over time and help the firm stay successful far into the future. Resources that do not
   have all four qualities can still be very useful, but they are unlikely to provide long-term advantages.
   A resource that is valuable and rare but that can be imitated, for example, might provide an edge in the
   short term, but competitors can overcome such an advantage eventually.
   Resource-based theory also stresses the merit of an old saying: the whole is greater than the sum of its
   parts. Specifically, it is also important to recognize that strategic resources can be created by taking
   several strategies and resources that each could be copied and bundling them together in a way that
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   cannot be copied. For example, Southwest’s culture is complemented by approaches that individually
   could be copied—the airline’s emphasis on direct flights, its reliance on one type of plane, and its unique
   system for passenger boarding—to create a unique business model whose performance is without peer in
   the industry.
   Resource-based theory can be confusing because the term resources is used in many different ways within
   everyday common language. It is important to distinguish strategic resources from other resources. To
   most individuals, cash is an important resource. Tangible goods such as one’s car and home are also vital
   resources. When analyzing organizations, however, common resources such as cash and vehicles are not
   considered to be strategic resources. Resources such as cash and vehicles are valuable, of course, but an
   organization’s competitors can readily acquire them. Thus an organization cannot hope to create an
   enduring competitive advantage around common resources.
   On occasion, events in the environment can turn a common resource into a strategic resource. Consider,
   for example, a very generic commodity: water. Humans simply cannot live without water, so water has
   inherent value. Also, water cannot be imitated (at least not on a large scale), and no other substance can
   substitute for the life-sustaining properties of water. Despite having three of the four properties of
   strategic resources, water in the United States has remained cheap. Yet this may be changing. Major cities
   in hot climates such as Las Vegas, Los Angeles, and Atlanta are confronted by dramatically shrinking
   water supplies. As water becomes more and more rare, landowners in Maine stand to benefit. Maine has
   been described as “the Saudi Arabia of water” because its borders contain so much drinkable water. It is
   not hard to imagine a day when companies in Maine make huge profits by sending giant trucks filled with
   water south and west or even by building water pipelines to service arid regions.
   From Resources to Capabilities
   The tangibility of a firm’s resources is an important consideration within resource-based
   theory. Tangible resources are resources that can be readily seen, touched, and quantified. Physical assets
   such as a firm’s property, plant, and equipment, as well as cash, are considered to be tangible resources.
   In contrast, intangible resources are quite difficult to see, to touch, or to quantify. Intangible resources
   include, for example, the knowledge and skills of employees, a firm’s reputation, and a firm’s culture. In
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   comparing the two types of resources, intangible resources are more likely to meet the criteria for
   strategic resources (i.e., valuable, rare, difficult to imitate, and nonsubstitutable) than are tangible
   resources. Executives who wish to achieve long-term competitive advantages should therefore place a
   premium on trying to nurture and develop their firms’ intangible resources.
   Capabilities are another key concept within resource-based theory. A good and easy-to-remember way to
   distinguish resources and capabilities is this: resources refer to what an organization owns, capabilities
   refer to what the organization can do. Capabilities tend to arise over time as a firm takes actions that build on
   its strategic resources. Southwest Airlines, for example, has developed the capability of providing excellent
   customer service by building on its strong organizational culture. Capabilities are important in part because
   they are how organizations capture the potential value that resources offer. Customers do not simply
   send money to an organization because it owns strategic resources. Instead, capabilitiesare needed to bundle,
   to manage, and otherwise to exploit resources in a manner that provides value added to customers
   and creates advantages over competitors.
   Some firms develop a dynamic capability. This means that a firm has a unique capability of creating new
   capabilities. Said differently, a firm that enjoys a dynamic capability is skilled at continually updating its
   array of capabilities to keep pace with changes in its environment. General Electric, for example, buys and
   sells firms to maintain its market leadership over time, while Coca-Cola has an uncanny knack for
   building new brands and products as the soft-drink market evolves. Not surprisingly, both of these firms
   rank among the top thirteen among the “World’s Most Admired Companies” for 2011.
   Strategy at the Movies
   That Thing You Do!
   How can the members of an organization reach success “doing that thing they do”? According to resourcebased theory, one possible road to riches is creating—on purpose or by accident—a unique combination of
   resources. In the 1996 movie That Thing You Do!, unwittingly assembling a unique bundle of resources
   leads a 1960s band called The Wonders to rise from small-town obscurity to the top of the music charts.
   One resource is lead singer Jimmy Mattingly, who possesses immense musical talent. Another is guitarist
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   Lenny Haise, whose fun attitude reigns in the enigmatic Mattingly. Although not a formal band member,
   Mattingly’s girlfriend Faye provides emotional support to the group and even suggests the group’s name.
   When the band’s usual drummer has to miss a gig due to injury, the door is opened for charismatic
   drummer Guy Patterson, whose energy proves to be the final piece of the puzzle for The Wonders.
   Despite Mattingly’s objections, Guy spontaneously adds an up-tempo beat to a sleepy ballad called “That
   Thing You Do!” during a local talent contest. When the talent show audience goes crazy in response, it
   marks the beginning of a meteoric rise for both the song and the band. Before long, The Wonders perform
   on television and “That Thing You Do!” is a top-ten hit record. The band’s magic vanishes as quickly as it
   appeared, however. After their bass player joins the Marines, Lenny elopes on a whim, and Jimmy’s diva
   attitude runs amok, the band is finished and Guy is left to “wonder” what might have been. That Thing
   You Do! illustrates that while bundling resources in a unique way can create immense success, preserving
   and managing these resources over time can be very difficult.
   Liv Tyler plays Faye Dolan, the love interest of drummer Guy Patterson, in That Thing You Do!