Why is it important to know a firms source of capabilities and resources?

What is a Resources and Capabilities analysis?

When analyzing a company, one of the most important things you should find out is:

• What is this company good at?
• What can this company do that no other can?

These questions seem obvious but Analysts rarely cover them properly.

When analyzing a Company, 99% of Professionals just check the Balance Sheet to decide if it is a good Company or not… That is all.

A “Resources and Capabilities” analysis is a study about the potential of a company.

Instead of focusing on its results, it highlights the Tools and Internal Opportunities a company could use for maximizing its outcome.

As you may already know, we have been working in Venture Capital for years.

We are used to analyze companies in terrible situations and, to decide whether to invest in them or not, we have to find their hidden potential and see beyond their Balance Sheets.

• And the “Resources and Capabilities” analysis has always been one of our best Tools to do so.

We’ll now analyze different real companies in order to give you helpful practical examples.

But first, we have to answer the next questions:

• What is the difference between a resource and a capability?
• How can we classify the different resources a company may have?

Difference between Resources and Capabilities

A Resource is something a Company owns.

• In general, it refers to Money, Facilities… Although it can also refer to Internal Know-How.

A Capability is what a Company is able to do (with its Resources).

• Commonly, it refers to what a Company does better than others.

Difference between Capability and Competitive Advantage

Capabilities are usually confused with Competitive Advantages.

They are similar, but not the same.

• Check our “Competitive Advantages” Page.

A Competitive Advantage could be a Resource.

Example

If you own an Oil Well, you have a Competitive Advantage in the Energy sector, but maybe, you’re not Capable of obtaining profits out of it, if you didn’t have the proper technology.

We know it may seem confusing.

Let’s see it with another example:

Ferrari Resources and Capabilities - Example

Imagine that Ferrari chooses you for driving its car in the next F1 World championship.

Would you be able to win the competition?

Well… No.

You would have all the Resources of Ferrari:

• The Car.
• The Engineers.
• The Assistants.
• Even all its Know-How.

However, you would never be Capable of wining the F1 World Championship.

In this simple but effective example you can easily appreciate the difference between a Resource and a Capability.

You can also think about this:

• A Resource can be bought while a Capability is much more complicated to replicate.

Coca-Cola & Pepsi Resources and Capabilities - Example

Pepsi could buy Coca-Cola’s formula if Coca-Cola wanted to sell it.

But Pepsi would have it very difficult to replicate how customers perceive Coca-Cola.

• And their emotional bond with the brand.

Traditionally, Resources are classified into three categories:

• Tangible.
• Intangible.
• Human.

We personally consider that Human category should belong to Intangible, but sometimes, in small creative companies one or two gifted employees can make the difference, so we’ll maintain this classification.

Let’s analyze them in more detail:

Resources: Tangibles, Intangibles and Human

There are lots of different ways of sorting these Resources.

We propose you the next one:

Tangible Resources

Financial:

• Cash.
• Stock.
• Liquidity.

Facilities and Land:

• Manufacturing machinery.
• Land and Buildings.

Intangible Resources

Technology:

• Patents.
• Copyrights.
• Industrial secrets.

Marketing:

• Branding strategy.
• Marketing expertise.

Know-How:

• Corporate culture.
• Customer experience.
• R+D.

Human Resources

Human resources:

• Hiring policy.
• Recruitment process.

Employees:

• Motivation.
• Talent management.

As you can see, some of these factors are difficult not to be considered as a Capability.

However, all of them can be copied or bought.

Then, how can we sort the Capabilities?

We prefer not to do it: It is impossible to sort Capabilities correctly with a generic list.

The best way of describing a Capability is with numbers:

• Giving evidence of what the company is capable of, with the Resources it has.

We’ll explain it better with one example:

Star Wars and Disney - Resources and Capabilities example

Maybe this example makes some young fans angry but… sometimes, life is difficult.

When George Lucas filmed Star Wars more than 40 years ago, he didn’t have lots of Resources:

• His budget was limited.
• The sponsors were not convinced about the project.
• Nobody expected Star Wars to succeed.

A similar production, Star Trek, had been pretty disappointing so, Star Wars was expected to be a failure as well.

• The only question was how big.

What happened?

• George Lucas filmed one of the best movies ever created.

With very little Resources (compared to nowadays big productions) he was Capable to create a wonderful masterpiece.

Some decades later Disney bought Star Wars franchise (on 2012) for $4 billion.

• Disney has almost infinite Resources. Not joking.

They decided, of course, to release more Star Wars movies.

On 2015, Disney released “Star Wars episode VII: The force awakens“.

The movie was very successful, but it was not the masterpiece George Lucas created 40 years before with 7.5 times less budget.

• Star Wars episode IV (1977) budget: $11 million – Adjusted to inflation = $46 million.
• Star Wars episode VII (2015) budget: $306 million.

Moral of the Story:

Although Disney had much more Resourcesthan George Lucas had 40 years before they were not Capable of producing the masterpiece he created.

What about the Box office collection? Maybe Disney’s movie collected more money…

• Star Wars episode VII (2015) collected $2 billion worldwide.
• Star Wars episode IV (1977) collected $775 million that, adjusted to inflation = $3.2 billion.

This example is interesting for learning the difference between Resources and Capabilities.

As you can see, Capabilities should be measured as we did in this example:

• Comparing Resources and Outcome.

If a Company is good at something, its numbers will better than average in certain Services, Activities or Products.

Resources and Capabilities examples

Now, we’ll analyze different real companies in order to identify their Resources and Capabilities.

• In the first example, you’ll appreciate the importance of Capabilities.
• In the second example, we’ll focus on the Resources.

Let’s begin:

Nintendo - Resources and Capabilities Example

Nintendo is one of the best Companies for understanding the Resources and Capabilities Analysis.

Although it is a big company, it is pretty small when compared to its competitors:

• Sony and Microsoft.

However, it has been Capable of creating Innovative products and successful franchises such as Mario, Pokemon and Zelda

Let’s first look at its Main Resources:

Tangible:

• Although Nintendo has different Research and Development centers, they are not the “Main” key Resources of the company.

Intangible:

• Technological Patents:
  • Just look at the Nintendo Switch or the Wii: Nintendo has dozens of patents.
• Copyrights:
  • There is no need to mention Mario, Zelda, Pokémon, etc, etc.
  • Why is this not a Capability? A Capability is being able to do it but, once it has been done, it becomes a Resource.
    • Sony could buy these franchises if Nintendo wanted to sell them.
• Know How:
  • • How to develop a successful engaging franchise is something Nintendo knows better than anybody.
    • Surely they have “what to do and what not to do” internal guidelines.

Human:

• Shigeru Miyamoto:
  • This man deserves a whole section for him alone.
    • He created Mario and Zelda.

• Other Top designers and developers:
  • Maybe not as know as Miyamoto, but also very important.

• Recruitment process:
  • We don’t know whether they have a “secret recipe” for hiring new employees or not.
  • However, since lots of programmers have grown up with Mario and Zelda characters, we are sure that Nintendo receive some of the best Curriculum in Japan.

What about the Capabilities?

Aren’t Sony and Microsoft dominating the Gaming Console market?

Yes, but Nintendo has been able to produce the most valuable video-game franchises ever:

• That is its Capability.

If you check Wikipedia’s best-selling video game franchises list you’ll notice that:

• In the first position is Mario: 700 million copies sold.
• In the second position is Pokémon: 346 million copies sold.
• In the sixth position is Wii (its simulation games): with 200 million copies sold.

We find fascinating that 6th position: in few years Wii, reached the Top 10 of best-selling franchises ever.

Sony is a $80 billion Revenue company; 8 times bigger than Nintendo ($11 billion annual Revenues).

• Microsoft’s annual revenues = $125 billion.

However, their franchises are not as successful as Nintendo’s.

Money isn’t everything.

Now, you may be thinking that Capabilities are everything, but Resources are also necessary for succeeding.

We’ll give you an example of how, sometimes, Resources are not sufficiently considered:

Apple vs Google Maps - Resources and Capabilities Example

There is no need of introducing Google Maps: the best mapping system service ever created.

• It is easy to use, effective, helpful and extremely precise.

On 2010s, Apple realized that, in a world where data is everything, Google was the King.

• Google almost monopolized the Search engines, the data management, Geo-locations…

Since Apple was (and somehow it still is) the leading mobile-phone company (in prestige, not in market share) they decided to start “fighting” Google.

• In fact, Apple has a big problem: their results depend on their iPhone. It is by far, their main Income Source.
  • We talk about it in our “Product mix” Page.
• They probably wanted to diversify their Product Mix.

On 2012 they released Apple Maps: a direct competitor of Google Maps.

The result?

If you wanted to go from Los Angeles to San Francisco, Apple maps told you that the shorter route was through Paris.

Ok, that is a joke, but it made terrible mistakes.

What happened?

• Apple was (and still is) a super-powerful company with of some of the smarter people on earth.
• It has been the first company in history that reached $1 trillion of market capitalization.

What had Google (other big company that also has extremely smart people) that Apple didn’t?

Data.

The most important Resource Google had that Apple didn’t, was an enormous amount of data.

• Google had been mapping the whole world for years, studying how we move across the world.

Apple couldn’t obtain the same result in just few months.

Apple Maps’ mistakes were so big that the company encouraged its users to use other mapping application.

In this example you can appreciate how important Resources are.

You may have some of the best professionals in the world, but if you lack the Necessary Resources for Success… you’re doomed to fail.

Summarizing

When analyzing a company, it is very important to analyze its Resources and Capabilities deeply.

• Together, they can tell where a company hides its potential.

Resources are everything the company owns.

They can be divided into:

• TangibleResources.
• Intangible Resources.
• Human Resources.

Capabilities could be defined as:

• What the company can do with its Resources.

To think that one of them is more important than the other is a terrible common mistake.

• Resources need Capabilities and Capabilities without Resources is nonsense.
  • No matter how powerful a car is: without a driver it is just a bunch of steel.