Chapter 4

Firm Resources:
Competitiveness and Growth

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Learning Objectives

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Opening Case: SAP runs
businesses worldwide

Why is the SAP exhibit an

important destination for
business persons visiting
the world’s biggest
high-tech fair, CeBIT in
Hanover?

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Resource-based view
• The resource-based view, which has emerged as one of the
two core perspectives on global business.
– It focuses on the inside of the firm, complementing the
institutional view, which focuses on firms’ external
environment.
• This chapter introduces tools to address these sorts of
questions.
– We first define resources
– Then we introduce classification schemes for resources.
– We then focus on value (V), rarity (R), imitability (I) and
organization (O) through a VRIO framework.
– We apply these concepts in a value chain analysis on the
decision whether to keep an activity in-house or outsource
it.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Primary Resources
• Primary resources as the tangible and intangible assets
as well as the human resources that a firm uses to
choose and implement its strategies.
– Tangible assets are those items that are observable
and quantifiable.
– Financial assets include internal funds such as
shareholders’ capital and retained profits, as well as
external capital, like loans provided by banks.
– Physical assets include plants, offices, infrastructure
and equipment, as well as inventories of raw
materials, components and finished goods.

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Examples of Tangible Primary
Resources

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Intangible Resources
• Intangible assets are also found on companies’ balance sheets,
but they are harder to value.
– Technological resources include patents, trademarks and
copyrights that entitle the firm to intellectual property rights and
enable it to generate valuable products.
– Reputational resources are the firm’s goodwill, brand names
and business relationships.
• Goodwill is the value of abilities to develop and leverage the
firm’s reputation as a solid provider of goods and services,
an attractive employer and/or a socially responsible
corporate citizen.
• Reputation can be regarded as an outcome of
a competitive process in which firms signal their
attributes to constituents

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Intangible Resources
• Human resources (or human capital) are embedded in the
individuals working in an organization.
– individual employees’ skills, talent and knowledge,
– individual employees’ capacity for collaboration and
communication, and their abilities for interpersonal interaction
that are not captured by the firms’ formal systems and
structures.
– employees’ shared values, traditions and social norms within
an organization.
• Financial analysts may take human resources for granted.
• Many MNEs regard them as a foundation of their capabilities.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Capabilities
• Knowledge and associated routines
and practices are known as
capabilities. These are firm-specific
abilities to use resources to achieve
organisational goals.
– no firm is likely to generate
competitive advantage by relying
only on primary resources!
• most goods and services are
produced through a chain of vertical
activities (from upstream to
downstream) that add value – in
short, a value chain.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Value Chain
• Value Chain is a series of activities used in the production of goods
and services that make a product or service more valuable.
– What do you think are the most important activities in the value
chain in the production and sale of a common product, such as a
cup or tea?
• Value chain analysis forces managers to think about firm resources at
a very micro, activity-based level
• Benchmarking
– Examining whether a firm has resources and capabilities to
perform a particular activity in a manner superior to competitors.
• Commoditization
– Process of market competition through which unique products
that command high prices and high margins gradually lose their
ability to do so, thus becoming commodities

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Capabilities
• Many of the most important capabilities in today’s business world relate to abilities
to connect different stages of the value chain.
• Capabilities in innovation:
– firm’s assets and skills to (1) research and develop new products and services
and (2) innovate and change ways of organising.
• Capabilities in operations
– a firm’s ability to effectively implement its regular activities, notably the
manufacturing process.
• Capabilities in marketing
– enable firms to develop and sustain brands awareness and values and to
induce consumers to buy these brands.
• Capabilities in sales and distribution
– enable firms to manage interactions with (potential) customers and in bringing
products to the right customer at the right time.
• Capabilities in corporate functions
– include a firm’s planning, command, and control systems and
structures

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Capabilities in distribution: Wal-Mart

Wal-Mart today
is the biggest
retail company
in the world.

It does not
make a single
thing.

All it “makes” is
a hyper
efficient supply
chain’.

The most fundamental question is, do the resources add value? Do they
enable a firm to exploit an external opportunity and or neutralise and
external threat?

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 VRIO Framework
Resource-based view focusing on the value (V), rarity (R), imitability (I),
and organizational (O) aspects of resources and capabilities.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Benchmarking
• Benchmarking compares resources against those of your competitors
on two questions:
– Which resources are most important in conferring sustainable
competitive advantage in your industry?
– Where are your strengths and weaknesses as compared to your
competitors?
• Benching has 4 Steps
1. Choose a benchmark organisation to compare yourself with.
2. Identify the relevant resources.
3. Assess the importance of your resources. The VRIO framework
introduced can help you in this assessment.
4. Score and assess the relative strengths
• Be aware that benchmarking is a useful analytical tool – but not more.
– An inferior score suggests an issue may need to be addressed, but
it does not imply that the competitor’s structure and processes
should be imitated.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Application: Outsourcing

Outsourcing is turning over an organizational activity to an outside

supplier that will perform it on behalf of the focal firm. It is one way to
overcome a strategic weakness.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Application: Offshoring

Offshoring is when activities are moved from a firm’s main country of

operations to another country.

Outsourcing and offshoring have emerged rather recently.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Debates and Extensions
The offshore of high-end
services has become
controversial It starting
with IT and now
encompassing all sorts of
‘business process
outsourcing’ (BPO) to
countries led by India
Offshoring service
providers are gradually
moving up the value chain
as original equipment
manufacturers
(OEMs) become original
design manufacturers
(ODMs).

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Implications for Practice

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Closing Case:
Avon perfects direct selling

How did Avon

make the most
of its resources
and capabilities
when entering
China?

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Chapter Summary
1 Explain what firm resources are:
• Resources include primary resources and capabilities that provide the
basis for firms to attain competitive advantages, and to grow.
• Primary resources include tangible and intangible assets, as well as
human resources.
• Capabilities can be classified by their stage of the value chain, or their
function within the organization.
2 Assess the resources of a firm using the VRIO framework:
• A VRIO framework suggests that only resources that are value creating,
rare, hard to imitate and organizationally embedded will generate
sustainable competitive advantage.
3. Use benchmarking analysis outsourcing and offshoring decisions:
• Benchmarking is a technique of comparing a firm’s capabilities to its
rivals.
• Outsourcing is turning over all or part of an organizational activity to an
outside supplier.
• Offshoring is relocating an activity to another country, either in
house or with outsourcing, to take advantage of locational
advantages in that country.

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
 Chapter Summary continued
4 Participate in two debates on cross-border capabilities and offshoring:
• In the long run, is offshoring beneficial or detrimental for
Western firms and economies?
• In the long run, how can dynamic capabilities helps firms to
stay ahead in changing industries?
5 Draw implications for action:
• Managers need to understand their resources based on the
VRIO framework to optimize their resource exploitation.
• Managers need to continuously create new resources, in part
by benchmarking against the best, and in part by developing
entirely new capabilities that go beyond the competitors’
state-of-the-art.
• Students are advised to make themselves ‘untouchables’
whose jobs cannot be offshored.

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Critical Discussion

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by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning
Recommended Readings

For use with International Business

by Mike Peng and Klaus Meyer
1408019566 © 2011 Cengage Learning