Chapter 4

QUESTION 2: WHAT ARE THE COMPANY’S MOST IMPORTANT

RESOURCES AND CAPABILITIES, AND WILL THEY GIVE THE COMPANY
A LASTING COMPETITIVE ADVANTAGE OVER RIVAL COMPANIES?

A company’s resources and capabilities represent its competitive assets

and are determinants of its competitiveness and ability to succeed in the
marketplace.
A company’s resources and capabilities are its competitive assets and
determine whether its competitive power in the marketplace will be
impressively strong or disappointingly weak.

Resource and capability analysis provides managers with a powerful tool

for sizing up the company’s competitive assets and determining whether
they can provide the foundation necessary for competitive success in the
marketplace.
This is a two-step process:
 1) The first step is to identify the company’s resources and
capabilities.
2) The second step is to examine them more closely to ascertain
which are the most competitively important and whether they
can support a sustainable competitive advantage over rival
firms. This second step involves applying the
four tests of a resource’s competitive power.
A capability is the capacity of a firm to perform some internal activity
competently. Like resources, capabilities vary in form, quality, and
competitive importance, with some being more competitively valuable than
others. Apple’s product innovation capabilities are widely recognized as
being far superior to those of its competitors; Nordstrom is known for its
superior incentive management capabilities; PepsiCo is admired for its
marketing and brand management capabilities.
Organizational capabilities are developed and enabled through the
deployment of a company’s resources.

Types of Company Resources

Broadly speaking, resources can be divided into two main categories:
tangible and intangible resources.
The Four Tests of a Resource’s Competitive Power
The competitive power of a resource or capability is measured by how many
of four specific tests it can pass. These tests are referred to as the VRIN
tests for sustainable competitive advantage — VRIN is a shorthand
reminder standing for Valuable, Rare, Inimitable, and Nonsubstitutable.
The first two tests determine whether a resource or capability can
support a competitive advantage. The last two determine whether
the competitive advantage can be sustained.
1. Is the resource or capability competitively Valuable?
 To be competitively valuable, a resource or capability must be directly
relevant to the company’s strategy, making the company a more
effective competitor. Unless the resource or capability contributes to
the effectiveness of the company’s strategy, it cannot pass this first
test. An indicator of its effectiveness is whether the resource enables
the company to strengthen its business model by improving its
customer value proposition and/or profit formula. Companies have to
guard against contending that something they do well is necessarily
competitively valuable.
E.G. Apple’s operating system for its personal computers by some
accounts is superior to Microsoft’s Windows 8, but Apple has failed in
converting its resources devoted to operating system design into
anything more than moderate competitive success in the global PC
market.

2. Is the resource or capability Rare — is it something rivals lack?

Resources and capabilities that are common among firms and widely
available cannot be a source of competitive advantage. All makers of
branded cereals have valuable marketing capabilities and brands,
since the key success factors in the ready-to-eat cereal industry
demand this. They are not rare. However, the brand strength of Oreo
cookies is uncommon and has provided Kraft Foods with greater
market share as well as the opportunity to benefit from brand
extensions such as Double Stuff Oreos and Mini Oreos. A resource or
capability is considered rare if it is held by only a small number of firms
in an industry or specific competitive domain. Thus, while general
management capabilities are not rare in an absolute sense, they are
relatively rare in some of the less developed regions of the world and
in some business domains.

3. Is the resource or capability Inimitable — is it hard to copy?

The more difficult and more costly it is for competitors to imitate a
company’s resource or capability, the more likely that it can also
provide a sustainable competitive advantage. Resources and
capabilities tend to be difficult to copy when they are unique (a
fantastic real estate location, patent-protected technology, an
unusually talented and motivated labour force), when they must be
built over time in ways that are difficult to imitate (a well-known brand
name, mastery of a complex process technology, years of cumulative
experience and learning), and when they entail financial outlays or
large-scale operations that few industry members can undertake (a
global network of dealers and distributors). Imitation is also difficult for
 resources and capabilities that reflect a high level of social complexity
(company culture, interpersonal relationships among the managers or
R&D teams, trustbased relations with customers or suppliers) and
causal ambiguity, a term that signifies the hard-to-disentangle nature
of the complex resources, such as a web of intricate processes
enabling new drug discovery. Hard-to-copy resources and capabilities
are important competitive assets, contributing to the longevity of a
company’s market position and offering the potential for sustained
profitability.

4. Is the resource or capability Nonsubstitutable— is it invulnerable to

the threat of substitution from different types of resources and
capabilities?
Even resources that are competitively valuable, rare, and costly to
imitate may lose much of their ability to offer competitive advantage if
rivals possess equivalent substitute resources. For example,
manufacturers relying on automation to gain a cost-based advantage
in production activities may find their technology-based advantage
nullified by rivals’ use of low-wage offshore manufacturing. Resources
can contribute to a sustainable competitive advantage only when
resource substitutes aren’t on the horizon.

A company requires a dynamically evolving portfolio of resources and

capabilities to sustain its competitiveness and help drive improvements in its
performance. A dynamic capability is an ongoing capacity of a company to
modify its existing resources and capabilities or create new ones.
TABLE 4.3 What to Look for in Identifying a Company’s Strengths,
Weaknesses, Opportunities, and Threats.
Company Value Chain
Value Chain Analysis of Rival Firms
Facilitates a comparison, activity-by-activity, of how effectively and
efficiently a company delivers value to its customers, relative to its
competitors.
The Value Chain Analysis Process:
● Segregate the firm’s operations into different types of primary and
secondary activities to identify the major components of its internal cost
structure.
● Use activity-based costing to evaluate the activities.
● Do the same for significant competitors.
Value Chain System for an Entire Industry
♦ Industry Value Chain:
● The firm’s internal value chain
● The value chains of industry suppliers
● The value chains of channel intermediaries
♦ Effects of the Industry Value Chain:
● Costs and margins of suppliers and channel partners can affect prices to
end consumers.
● Activities of channel partners can affect industry sales volumes and
customer satisfaction.