AMR  CORPORATION  

Functional  Capability  and  Resource  Analysis  

Methodology  Report    

Brandon  Thomson  

10/31/2013  

 

 

 

A  methodology  report  based  on  the  functional  capability  and  resource  analysis  technique.    This  report  gives  a  brief  description  on  the  function  and  rationale  of  the  analytical  model.    Provides  critique  of  the  model’s  strengths,  weaknesses,  and  strategic  implications.    Model  is  then  applied  to  the  AMR  

Corporation,  specifically  American  Airlines,  to  further  determine  the  company’s  competitive  resources.  

Table  of  Contents  

I. Analytical  Model....................................................................................................................... 2  

II. Strategic  Implications………………………………………………………………………………………………………..….5  

III. Critique  of  the  Model………………………………………………………………………………………………………..….6  

IV. Application  to  American  Airlines .............................................................................................. 7  

 

 

THOMSON, Advanced Competitive Intelligence 31 October 2013 Functional Capability and Resource Analysis I. Analytical Model Description Functional capability and resource analysis views the firm as a collection of resources comprised of tangible and intangible assets as well as core capabilities. The model combines internal organizational analysis with external competitive analysis to determine if these assets are valuable resources that may drive the firm’s competitive advantage. The components of the functional capability and resource analysis model are: tangible assets, intangible assets, CSFs, capabilities, and core competencies. These various components have been grouped under one umbrella classification known as the Resource Base View (RBV) of the firm. The RBV theory integrates the components of internal scrutiny with external competitive analysis by placing them through the value, rareness, inimitability, and organization (VRIO) framework, thus determining their competitive value. The process for applying this technique is as follows: 1. Determine the Firm’s Critical Success Factors CSFs can be described as a limited number (between three and eight) of characteristics, conditions, or variables that have a direct and serious impact on the effectiveness, efficiency, and viability of an organization, program, or project.1 CSFs can be composed of a special skill, a competitive capability, or something a firm must do to satisfy customers. Excellent execution of CSFs will ensure a company’s competitiveness.

In general, there are four major sources of CSFs: • Macroenvironmental Characteristics – Changes in the firm’s social,

technological, environmental, ecological, or political environment may affect the firm’s CSFs.

• Industry Characteristics – CSFs are extremely industry specific, they are a function of industry structure and continue to change as industries evolve.

• Competitive Position – CSFs are a function of a company’s position with its rivals. Innovation or entrance by rivals may require a re-evaluation of current CSFs.

• Firm Specific – Firm specific CSFs are critical to the successful functioning of a firm’s internal organization. These CSFs must be well executed before considering any external CSFs.

Alternative models that may aid in the determining of CSFs are: environmental analysis (STEEP), industry analysis, Porter’s nine forces model, and internal analysis (Value chain analysis, business model analysis). Once CSFs have been determined, between three and eight of the most influential should be used for the rest of the model. 2. Identify the Firm’s Resources The RBV theory defines four broad categories of resources as potential sources of competitive advantage:

• Tangible Assets – Physical factors that directly aid in the delivery of customer value. Can usually be found on financial statements.

• Intangible Assets – Factors of production that cannot be seen or touched that contribute to the delivery of customer value. Examples include brand names, customer goodwill, corporate reputation, and copyrights.

• Organizational Capabilities – Processes and activities that transform tangible and intangible assets into goods and services.

• Core competencies – Human skill and talent, collective organizational capacity, and learning that allow a company to transform their tangible and intangible assets into competitively superior customer value.

It is extremely important that the resources being identified are crucial to achieving competitive advantage. Five or six resources key resources should be identified in this step. 3. Evaluate the Firm’s Resources In this step, the previously identified resources will be run through the VRIO framework to determine if they are indeed competitively valuable resources. The VRIO framework allows analysts to analyze individual resources as being catalysts of competitive advantage. To utilize the VRIO framework, the analysts must ask each of the four questions in regards to each resource:

• The Value Question – A resource adds value to a firm if it helps in the exploitation of an opportunity or the reduction of a threat. For a resource to be valuable, it must provide a net increase in revenues or a net decrease in costs.

• The Rareness Question – Resources are considered rare when they are not currently possessed by many other organizations. In general, a resource is considered rare if the number of firms that have the resource is small enough to allow for oligopolistic or monopolistic economic returns.2

• The Inimitability Question – Inimitability refers to the ability of other firms to copy the implementation of rare resources. Inimitability deals with the evolution of rare resources rather than current rare resources. Having inimitable resources is related to sustainability of competitive advantage.

• The Organization Question – Refers to the firm’s ability to take advantage of valuable, rare, and inimitable resources. In order to assess this, the analysts must consider technology, organization culture, values of the organization, and laws the directly impact the resource.

The resources that pass each of the four tests can be considered competitively valuable resources, capable of driving the firm’s competitive advantage. 4. Identify Gaps Between the Firm’s Resources and CSFs Once the firms resources have been identified and evaluated, they are to be compared to the CSFs in step one. Typically, a historically successful firms CSFs will align with their competitively valuable assets. If a firms CSFs and competitively valuable assets do not align, then this is a great diagnostic tool for determining where gaps exist. This information is crucial to forming RBV strategy. 5. Diagnose Current Strategy Based on the analysis in step four, the analyst is now capable of testing the competitive strength of the firm’s current strategy. If the firm’s current strategy is operating successfully, the analyst will now be able to devise strategies to protect these assets in order to extend competitive advantage. If a firm’s current strategy is unsuccessful, the analyst is able to highlight strategic gaps that currently exist between the firm’s resources, strategy, and competitive environment.

6. Formulate Rational Future Strategies Because the nature of competitive advantage is constantly changing, the firm’s stock of competitively valuable resources is at constant risk of becoming obsolete, bargained away, or surpassed by rivals. In addition, a firm will be exposed to potential directions to pursue growth and diversification. The analysis of functional capability and resources provides guidance for both of these strategic challenges through investing in, upgrading, or leveraging its competitively valuable resources. II. Strategic Implications

The functional capability and resource analysis model can be used by companies at any time and is encouraged to be used continuously. By continuously being aware of their firms competitively valuables resources, analysts are able to critique and develop their current and future strategies. The RBV theory can serve three important roles in the formulation of generic strategies: test the strength of the firm’s current strategy, test the viability of the firm’s planned strategy, and assist

in setting stretch goals. The functional capability and resource analysis model in combination with other industry, macroenvironmental, and internal analysis models, will allow an analyst to develop a strategy that will allow a company to be as competitive as their resources allow them to be.

III. Critique of the Model

Strengths

The strengths of the functional capability and resource analysis model include:

• Integrative – The greatest strength of the RBV theory is that it is able to cohesively integrate several models of strategic theory into one robust analytical framework. It combines competitive analysis, industry structure, and internal scrutiny.

• Disciplined, Realistic, Objective, and Actionable – The RBV theory is rigorous and filled with analytical insight that can quickly and easily be applied to current and future strategies.

• Growth and Diversification – RBV theory offers important insights into the strategic challenges of growth and diversification, based on the limits of resource support. RBV theory offers a secondary insight into growth and diversification coupled with previous theories.

Weaknesses

The weaknesses of the functional capability and resource analysis model include:

• Little Empirical Support – RBV theory is relatively new and is backed by little empirical evidence. Opposition to the theory claims that evidence is selectively cited to bolster the RBV theory.

• Redundancy – Critics of RBV theory claim that it incorporates circular logic. According to the theory strategic success is achieved through ownership of competitively valuable resources, yet firms need to acquire these resources to achieve strategic success.

• Complex and Ambiguous Taxonomy – The groupings used in RBV analysis are ambiguous and potentially allow inconsistencies between analysts. The broad integration of many theories and concepts are brought about by the diversities of contributors.

• Nothing New – Critics claim that calling RBV theory a “new paradigm of strategic management” is premature and untruthful. Some view RBV theory as nothing different from SWOT analysis.

Complementary Models

Complements to the functional capability and resource analysis model include models that pertain to industry, macroenvironmental, and internal analysis. Complementary models help aid in the ability to gather relevant information for the RBV theory, as well as help build analytical confidence in the results of the RBV theory.3 Some examples of these models include:

• Industry Analysis • STEEP Analysis • SWOT Analysis • Value Chain Analysis • Comparative Cost Analysis • Competitor Profiling

IV. Application to American Airlines

Critical Success Factors

Customer Service in Social Media

The emergence of social media is a macroenvironmental factor that many firms are relying on to bring value to their company. Social media is a cost effective way of advertising, marketing, and obtaining customer feedback. Almost all of the major airlines in the United States are adamant in using social media to their benefit, American Airlines included. Though American Airlines does have a strong presence in social media, they are not the leader, and in an essentially oligopolistic industry, this is a critical success factor. One of the main areas in which American Airlines lacks is their customer service through social media. Competitors of American Airlines, including JetBlue and Delta, have put a great amount of effort into using social media to solve customer problems. Consumers have responded extremely well to this service and are claiming that social media is changing airline customer service for the better.4

Route System

The number of routes in combination with the amount of passengers an airline is able to fly is a critical success factor in the airline industry. Currently, American Airlines load factor places them fourth in the airline industry in the United States. Ahead of American Airlines is the entire legacy carriers in which they are trying to compete with, with exception to US Airways who is fifth. If the merger between American Airlines and US Airways goes through, then American will take over as the airline with the largest load factor in the United States.5

This  table  shows  the  amount  of  enplaned  passengers  per  airline  in  the  year  2012.    Source:  

http://www.rita.dot.gov/bts/press_releases/bts016_13  

American  Airlines  fuel  savings  since  2003.    Source:  http://hub.aa.com/en/nr/media-­‐kit/operations/fuelsmart  

 

Service Product/Promotions

One of the most vital CSFs for airlines is the ability to differentiate and promote their products to consumers. American Airlines has recently launched their “new American” campaign in hopes to provoke consumer interest in American Airlines. Part of this campaign includes the purchasing of new, more technologically advanced airplanes that will greater increase the service and comfort offered to passengers. Furthermore, American Airlines’ AAdvantage Loyalty Program is the largest in the United States, ensuring that they have a steady consumer base that has remained loyal to their services.

Revenue/Cost Control

Competitive and innovating pricing schemes along with minimizing costs are one of the most effective ways to retain a profit in the airline industry. The nature of the airline industry is high-fixed costs, most notably fuel procurement, as well as the ability to price hedge during volatile periods. American Airlines implemented a Fuel Smart program in 2003 that was dedicated to safely reducing fuel consumption. Since its beginning, American Airlines has succeeded in saving 147 million gallons a fuel a year; this is equivalent to $464 million dollars.6 By lowering their fuel costs American Airlines will continue to increase their profit margin.

Financial Management

One of the most influential indicators of financial performance in the airline industry is net-unit revenue, which is net income divided by number of enplaned passengers. In 2012, American Airlines net unit revenue was -.02. In essence, this means that American Airlines made a negative income of $.02 for every passenger flown in 2012. This is accurately portrayed on American’s income statement, which shows that they netted -$1.8 billion dollars in 2012. A large amount of operational costs ($2.2 billion) were dedicated to restructuring in order to

emerge from bankruptcy.7 Until American Airlines can produce a profit, they are going to continue to struggle in the airline industry.

American Airline’s Resources

Tangible Assets

American Airlines has an extremely vast amount of tangible assets including airplanes, buildings, and inventory. Having a large fleet helps airlines to service more routes and carry more passengers, thus increasing their load factor. American Airline’s large fleet allows them to create customer value in their route system that is capable of matching customer demand.

Intangible Assets

American Airlines was founded in 1930 and by 1979 would become one of the largest airlines in the world. The size and reputation of American Airlines has allowed the brand name to become an intangible asset to the company.

Organizational Capabilities

On an average day American Airlines will fly about 275,000 passengers, receive more than 239,000 reservation calls, and fly about 3,400 flights. Currently, American Airlines has 608 planes in their fleet, only surpassed by Delta Airlines who has 690.8 Their large fleet in combination with their well-recognized brand name is a value adding organization capability.

Core Competencies

The core competencies for American Airlines are there AAdvantage frequent flier program and their involvement in the OneWorld Alliance. American Airlines AAdvantage loyalty program is the oldest and largest in the world. This program offers a great contribution to customer value with a wide array of incentives and perks. American Airlines involvement in the OneWorld Alliance provides potential access to a wide variety of markets. This further expands American’s target markets to international fliers.

Evaluation of American Airline’s Resources

Vast Fleet

American Airlines large fleet allows them to create customer value in their expansive route system and large number of enplaned passengers. American’s fleet size is not considered to be “rare” because it does not return oligopolistic or monopolistic returns. Furthermore, Airlines are continuing to expand upon their fleet sizes making this imitable. American Airlines has realized that their fleet is expansive and is exploiting this by filling as many seats as possible.

OneWorld Alliance

The OneWorld Alliance creates customer value by offering the highest level of service and convenience across almost 900 destinations worldwide. Involvement in the OneWorld alliance is rare because American Airlines is the only U.S. Airline involved. There is inimitability of this resource due to other U.S. Airlines not being capable of joining the OneWorld Alliance, at least without American’s approval. American Airlines has realized their opportunity with the OneWorld Alliance and is proactive in exploiting the benefits, most notably on their website.

AAdvantage Loyalty Program

American Airlines loyalty program is the largest and oldest airline loyalty program today. This creates customer value through brand loyalty. Loyalty programs are not rare in the airline industry and have been imitated. American Airlines has realized this opportunity and is exploiting their loyalty program in order to create return customers.

VRIO Analysis of American Airlines

Resource Valuable Rare Inimitable Organized to Exploit

1. Vast Fleet YES NO NO Realized

2. OneWorld Alliance YES NO YES Realized

3. AAdvantage Loyalty Program YES NO NO Realized

Gaps Between CSFs and the American Airline’s Resources

The one area in which American Airlines is reaching their CSFs is through their large amount of tangible assets (fleet) and their vast route system. American Airlines has shown to have the operational capabilities of a legacy carrier, but is failing to meet their other CSFs. The most influential gaps occur between American’s financial situation, and their revenue/cost control. Since 2008 American Airlines has consistently netted a negative income, which led to their filing for bankruptcy in 2011. Until American can successfully return a profit, they must focus on their critical success factors within their own company.

Analysis of Current Strategy

Based on the amount of gaps between American Airline’s CSFs as well as their resources, it can be concluded that their current strategy is running into difficulty. Their recent change in strategy which included the launching of the “new American” is a step in the right direction for American. This new strategy involves the marketing of their new airplanes which feature the most up to date technology, new seats, and improved fuel efficiency. Furthermore, American Airlines is currently in the process of merging with U.S. Airways. The reasoning behind this merger is to help lift American out of bankruptcy and to become the largest airline in the world.

Rational Future Strategies

American Airlines is likely to focus their attention into emerging from bankruptcy and returning a profit. If the merger with U.S. Airways goes through, it is likely that the combined airline will start to see increased revenues. Furthermore, if American continues to upgrade their resources and invest in more modern airplanes, they will save money on fuel costs, and would further improve upon their profit margin. It is likely that American will invest into their marketing resources to spread the word about the “new American”, including informing consumers about their enhanced in-flight experiences.

FAROUT Summary

The FAROUT rating system takes into account each analytical methods unique limitations. This system allows an analyst to determine what the strengths of this analytical method are. The following is the FAROUT summary for the functional capability and resource analysis model.

1 2 3 4 5 F A R O U T

Future Orientation – Medium to high, RBV analysis addressed the need to continuously monitor changes in the environment that affect the competitive value of resources.

Accuracy – Low to medium, often criteria is applied to liberally. Competitively valuable resources are extremely rare.

Resource Efficiency – High, can be conducted with minimal costs, much of the information is already readily available.

Objectivity – High, the market validation of the resource value tests introduce a high level of objectivity.

Usefulness – Medium to high, the focus on only competitively valuable resources reduces analysis from “nice to know” to “need to know.”

Timeliness – High, RB analysis can be performed in a short time period.

For questions or comments, please contact the author:

Email: bthoms45@lakers.mercyhurst.edu

Tel. #: 585-797-8979

Resources

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