Let's consider our approach for analyzing capabilities once again. The first critical step is to identify the value chain as a way to identify specific resources and capabilities that create value. The value chain is a classic idea in strategy and it's based on the idea of how you bring a product or service to fruition. So consider the automobile. Any automobile that you purchase on the market goes through a number of steps, arguably with a number of different organizations. So you start off with the processing of raw materials, iron ore that is turned into steel. Eventually that steel might be stamped into various body parts in the engine of the automobile. It might then eventually go to an assembler who pools all these components and parts together. Eventually it makes its way to a distributor, in this case an auto dealership. And then ultimately to the buyer, who then might also receive service and other types of things on the back end of that purchase. This, together, makes the value chain. So, what we want to ask ourselves is for the organization we're analyzing, where are they positioned within this value chain? Once we've done that, we want to then unpack the value chain within the organization. So let's start with some of the primary activities that the business might engage in. If we take our auto manufacturer example, in particular, let's think of an auto assembler, like a Ford, or a General Motors, or a Toyota. They have a number of inbound logistics, processing of components and supply. They assemble them together in their operations. They distribute them then to their dealer networks. And then ultimately we have sales and service on the back end. Those would be the primary activities of the organization. Those are supported by a set of secondary activities. These are everything from your human resource policies, to your R&D, to your top leadership team that, at the end of the day, provide valuable capabilities that support the entire operation. Now you'll see in the graph here that we had mentioned the margin. One thing you can do with a value chain, is you can actually begin to get a sense of where various costs are incurred within the organization and how they might affect the ultimate profitability. So, imagine taking the revenues of the organization, and using that to map out the entire area of this piece of the value chain. Then for each different element assigning a cost to that, and that in and itself will represent the area that it occupies. The margin, then, is the difference between the total cost, summed of each of these areas, and the revenues brought in from the organization. So let's return to Southwest. When we think about Southwest's value chain, there are a number of things that it is doing along those primary activities. It is clearly processing customers through ticketing and sales. It is running the airlines in a quick turn-around fashion and ultimately providing some service as you are on the airplane. These are then supported by a number of secondary activities, including perhaps some R&D that is done. But clearly, human resources, things like even the culture of the organization that support the underlying operations of the organization there. So, it's important once we identify those capabilities that are critical to the organization, to go one step further, to unpack the source of those capabilities. And what we would argue is you wanna think about peoples, systems, and processes that ultimately drive that. In the strategy literature, we often talk about a distinction between resources and capabilities. So capabilities are what you can achieve. Resources are the assets that allow you to have those capabilities. And so what we see here is a little two by two that just tries to map out some of those resources and assets that might be possessed by the firm. So first, we talk about tangible assets, those are things that you can really get your hands around and observe. So there are assets like people, of course, talent, those are tangible assets you might have in your organization. One could imagine, for example, an opera company. Their opera singers are clearly valuable talent that they would have for that organization. Things like cash is an asset that you have and can be valuable. Someone like Apple has a huge war chest, if you will, of cash that they can deploy in many different ways. The physical plant of a company is an asset that's important as well. This might be the manufacturing equipment, the plant that they own. Intellectual property, like patents, are another tangible asset that you can have. And in the case of patents, you can imagine can be bought and sold on a market. We also wanna think about systems and processes. These slightly higher order things that a company engages in, that allows for certain capabilities. Think of things like the IT system of an organization, or their ability to write contracts or form alliances, as tangible systems and processes that they have in place. As we move to the right we have intangible assets. These are the things that are a little more squishy, a little harder to get our hands around. Things like brands, reputation, the technical expertise that your talent has, customer loyalty, or employee loyalty to the organization. Finally, as we move down to the last quadrant, we have things like culture. The ability to acquire talent. Again, these are harder for us to observe and get our hands around, but often can be the source of capabilities that provide competitive advantage at the end of the day. So again, our first step in analyzing capabilities is use the value chain to articulate the capabilities of the firm. And then unpack those capabilities by understanding the people, processes, and systems that under-ride the ability to deliver those capabilities.
