BB835 The dynamics of strategy

3.1: Introduction to Unit 3

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3.1: Introduction to Unit 3

Contents
Introduction 2
Planning your work 2
Learning outcomes 3
Introducing the internal environment 3
Introducing the language of the RBV 4
Linking resources, capabilities and competitive advantage 5
The structure of the unit 6
Glossary 7
References 7
3.1: Introduction to Unit 3
Introduction

Introduction
Previous 2.6: Conclusion.
Welcome to Unit 3 Inside the organisation – analysing resources and capabilities. To start,
listen to an audio welcome from one of the authors of this unit, Maureen Meadows.

Audio content is not available in this format.

Planning your work

There are six sessions in this unit. You should allow about 33 hours over the next four
weeks to complete the readings and activities.

3.1: Introduction to Unit 3 Allow 2 hours

3.2: The origins of the RBV Allow 3 hours
3.3: The evolution of the RBV Allow 10 hours
3.4: Tools for identifying and evaluating resources Allow 6 hours
3.5: Further developments of the RBV Allow 6 hours
3.6: Managerial implications, strategic discourse and conclusion Allow 6 hours

You might also want to note the following tasks as part of managing your time:

l Sessions 3.3 and 3.5 involve some reading from your book Selected readings. This
material is also available electronically.
l In Activity 6.3 in Session 3.6 you will participate in a TGF session concerning the
managerial implications of what you have studied. You will need to allow time to
prepare for this session, to read other students’ posts and to comment. We suggest
that you aim to do this activity in week 10 – and you may want to negotiate with your
colleagues to find a convenient time so that you can all participate.
l Activities 2.1, 4.1, 5.2 and 5.3 include substantial online readings, so you should
allow time to read these. You may wish to download or print off these readings ahead
of Activities 2.1, 4.1, 5.2 and 5.3 and they are listed for you here:

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3.1: Introduction to Unit 3
Introducing the internal environment

l Prahalad, C. K. and Hamel, G. (1990) ‘The core competence of the corporation’,

Harvard Business Review, May–June, pp. 79–91. Go to the
Harvard Business Review archive. Select 1990, issue 3, and find article 9.
l
Grant, R.M. (1991) ‘The resource-based theory of competitive advantage:
implications for strategy formulation’, California Management Review, vol. 33,
no. 3, pp. 114–35.
l Eisenhardt, K. M. and Martin, J. A. (2000) ‘Dynamic capabilities: what are
they?’, Strategic Management Journal, vol. 21, issue 10/11, pp. 1105–21.
l Lockett, A., Thompson, S. and Morgenstern, U. (2009) ‘The development of the
resource-based view of the firm: a critical appraisal’, International Journal of
Management Reviews, vol. 11, issue 1, pp. 9–28.

Learning outcomes
By the end of this unit, you should be able to:

l understand the theory underpinning and the terminology used in the resource-based
view (RBV) of the firm, including being able to distinguish between a resource and a
capability
l understand and explain the importance of resources and capabilities for the
achievement of organisational objectives
l conduct a resource audit and a value chain analysis of an organisation
l continue to develop your own perspective on the critical issues facing an
organisation preparing to make a strategic choice.

For a reminder of the skills needed for this module, see ‘Skills in this module’ in Unit 1.

Introducing the internal environment

Having analysed the external environment in Unit 2, we turn now to the analysis of the
organisation itself, looking inward to determine how and why the attributes of an
organisation – its key resources and capabilities – should help direct the strategic choices
it makes. This will involve looking at a theory of the firm that is considered by some
authors to be still emerging – the resource-based view (RBV).
We mentioned the RBV in Session 2.4.
The RBV is a relatively recent development in the strategic management literature.
However, through the work of authors such as Edith Penrose (discussed in Session 3.2),
building on the theories of economists such as Joseph Schumpeter, a resource-based
perspective on the firm has a history stretching back to at least 1954.

Organisation, firm or company?

In this unit we tend to use the term ‘firm’, as this is the word used in the theory
associated with the RBV. All firms are organisations, but not all organisations are firms.
We therefore also discuss the RBV of not-for-profit organisations later in the unit.

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3.1: Introduction to Unit 3
Introducing the internal environment

The RBV has been portrayed as a critical response to industrial organisation (IO)
economics and its ‘positioning’ approach to strategy, championed by authors such as
Michael Porter. The initial motivation to offer an alternative perspective has evolved into a
considerable body of literature and theory development in its own right. A body of work on
the RBV has been developing since the early 1990s, and new concepts and
interpretations are still emerging. This unit will help you to understand how the tools
associated with the RBV can be useful to practitioners – in helping managers to identify
and evaluate the resources and capabilities of their own organisations, and to make
sound strategic choices based on this analysis.
You were introduced to IO in Units 1 and 2.
For a brief overview of the resource-based view and why it is important, listen to the
following discussion with Maureen Meadows and Rob Grant.

Audio content is not available in this format.

Introducing the language of the RBV

Because new work on the RBV is still emerging, you may find, as you read the articles and
undertake the activities in this unit, that the concepts behind the RBV are not as well
developed and extensively tested as, for example, Porter’s five forces model in the IO
literature. Critics of the RBV would suggest that there are several competing concepts and
different terminologies to describe more or less similar concepts. We shall seek to clarify
any potentially confusing terms throughout this unit – beginning with some clear
definitions in the box that follows. We hope you will agree that the key ideas behind this
important body of work are intuitively simple and obviously important, such as – what is a
resource? What is a capability? So this is where we shall begin.
You will have already come across at least some of these terms but it’s
helpful to review them here to show how they are linked to the RBV.

Let us be clear: some definitions to get us started

What is a resource? A firm’s resources are the productive assets that it owns and controls;
these include tangible resources (such as cash, equipment and land), intangible resources
(such as patents, reputation and culture) and human resources (such as skills and
motivation).

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Introducing the internal environment

What is a capability? A capability is an organisation’s capacity to deploy its resources.

Organisations ‘bundle’ resources to build capabilities. Put simply, it is how the resource is
used that represents the link between a resource and a capability.
What is competitive advantage? A firm possesses competitive advantage when it is
implementing a value-creating strategy that is not being implemented by its competitors.
The firm should thereby achieve superior performance compared with its competitors.
What is the RBV? The key concept behind the RBV, or resource-based view, of the firm is
that the basis for competitive advantage lies in the application of the valuable resources at
the firm’s disposal.
What is heterogeneity? Organisations possess different portfolios of resources and
capabilities (i.e., they are heterogeneous) and that may explain differences in organisa-
tional performance.
What is a core competence? In this unit we shall follow the approach adopted by Robert
Grant (2010) of using the terms ‘competence’ and ‘capability’ interchangeably. When you
read Prahalad and Hamel’s article (1990) in the first activity, you will see that these authors
use the term ‘core competence’ to distinguish those capabilities fundamental to a firm’s
strategy and performance. However, we suggest (following authors such as Grant, 2010)
that over the past 20 years, the debate has moved on to the point where we can say that a
core capability is the same as a core competence.
We shall define and discuss these key concepts in more detail later in the unit.

For a short discussion of the language of the resource-based view, listen to the following
discussion with Maureen Meadows and Rob Grant.

Audio content is not available in this format.

Linking resources, capabilities and competitive

advantage
It is useful, as we progress through this unit, if we have in mind a picture of how the
important concepts defined above, which are key to our understanding of the RBV, relate
to one another. Figure 1.1 below sets out to demonstrate the relationship between
resources, capabilities and key success factors (KSFs) in formulating a strategy that
offers the potential to achieve competitive advantage.

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3.1: Introduction to Unit 3
The structure of the unit

You met KSFs in Session 2.4. We shall be returning to the idea later in this
unit.
Here Grant offers us a very useful linking device – demonstrating how aspects of our
external analysis (which are helpful in identifying KSFs) can also be assessed in terms of
contributing to an internal strategy that builds on the resources and capabilities
possessed by the firm.

Video content is not available in this format.

In this figure, Grant’s message is that an organisation’s strategy should be based on its
capabilities (which are themselves based on their portfolio of resources). If the strategy
being followed meets industry KSFs, it creates the possibility (but only the possibility) of
competitive advantage. Grant’s approach seems to suggest that a strategy that is not
based on capabilities, or a strategy that is based on capabilities but does not match
industry KSFs, will fail to achieve competitive advantage.
We shall return to this diagram, and to the relationships between resources, capabilities
and other key concepts, in Session 3.3. For now, our aim is that you begin to develop your
understanding of these important ideas behind the RBV, and how they fit together.

The structure of the unit

The structure of the unit reflects the learning outcomes.

l The unit begins with a brief overview of how the RBV has emerged, and its
underpinning theory, in Session 3.2.
l In Session 3.3 we explore how the RBV has evolved over recent years. This session
introduces a range of terminology and concepts that are central to our understanding
of this particular view of strategy, and explains why they are so important in making
sense of the RBV.
l Session 3.4 introduces tools for identifying and evaluating the resources, which can
usefully be applied in organisations of all kinds. It sets out how to conduct a resource
audit, and gives a detailed example of value chain analysis.
l In Session 3.5 we look at current and future extensions to the RBV – in particular the
knowledge-based view of the firm and the ongoing debate about dynamic
capabilities. We follow this with some critical evaluation of the RBV.
l The unit ends with managerial implications: an opportunity for you to reflect on the
concepts covered in the unit, and how they might be used by practising managers.
As in the previous unit, you and your tutor group are encouraged to consider the
managerial implications of these ideas in your TGF.
Please note: you should be ready to participate in the final activity of the unit during
week 10.

As in the previous units, the concepts covered will be illustrated with examples from a
variety of industries and sectors. We would once again encourage you to contribute to this
process. If you can think of an example – perhaps from your own industry or country – that
might help to contextualise the core concepts of the module, please use the TGF to share
your thoughts with your tutor and your colleagues.

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3.1: Introduction to Unit 3
Glossary

When you are ready, please move on to 3.2: The origins of the RBV.

Glossary
Capability
A capability represents an organisation’s capacity to deploy its resources. It is how the
resource is used that represents the link between a resource and a capability.
Competitive advantage
The strategic advantage that one organisation has over its rival organisations within a
competitive industry. If an organisation can achieve competitive advantage, it has found
a better, stronger position for itself within its environment.
Core competence
A capability that is central to the way that an organisation works and critical to a
business achieving competitive advantage. It is difficult for other organisations to
imitate and it is usually of value across many of the organisation’s products/services or
markets. A core competence can take many forms, such as technical know-how, a
reliable process, a suitable culture or a close relationship with suppliers.
Emerging
When we say that the RBV is still emerging, we mean that it is continuing to become
more important or prominent in the world of strategy theory and practice. Key concepts
and terminology behind the RBV are still the subject of debate and clarification. New
arguments about, and perspectives on, the RBV are still being published today.
Heterogeneous/heterogeneity
The statement that organisations are heterogeneous in their resources and capabilities
means that they do not have the same resources and capabilities as each other. This
may explain differences in organisational performance.
Industrial organisation (IO) economics
A field of economics that studies the structure of and boundaries between firms and
markets and the strategic interactions of firms.
Resource
A firm’s resources include all the assets, attributes, information, knowledge, etc. that it
owns or controls – physical and human, tangible and intangible.
Resource-based view (RBV)
The key concept behind the RBV is that the basis for competitive advantage lies in the
application of the valuable resources at the firm’s disposal.

References
Grant, R.M. (1991) ‘The resource-based theory of competitive advantage: implications for
strategy formulation’, California Management Review, vol. 33, no. 3, pp. 114–35.
Penrose, E.T. (1959) The Theory of the Growth of the Firm, New York, John Wiley.
Prahalad, C.K. and Hamel, G. (1990) ‘The core competence of the corporation’, Harvard
Business Review, May–June, pp. 79–91.

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References

Schumpeter, J.A. (1954) History of Economic Analysis, London, Allen & Unwin.

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