Chapter 3

Evaluating a
Firm’s
Internal
Capabilities
Resource based view

 Differential performance of firms in the same

industry
 Firm profitability driven by structure of assets
within the firm
 Heterogenous and immobile assets
 Exploiting firm differences
 Dynamic capabilities view
 Internal view, whereas IO is an external view
2

2
The Resource-Based View
Resources and Capabilities
Resources:
• tangible and intangible assets of a firm
» tangible: factories, products intangible: reputation
• four general categories
(Financial, Physical, Human, and Organization
• used to conceive of and implement strategies
Capabilities:
• a subset of resources that enable a firm to
take full advantage of other resources
3
» marketing skill, cooperative relationships
3
The Resource-Based View
Resources and Capabilities
Are these resources
Firm Assets: or capabilities?

Machinery ?

Collective Product Design Skill ?

Recruiting Skill ?

Engineering Skill of Individuals ?

Mineral Deposits ?
4

4
Capabilities

Function Capability Example

Corporate HQ Expertise in General
management of multi- Electric,
business corporation ABB
R&D Speed of new product Canon,
development Sony
Manufacturing Continual improvements Toyota,
in production or Komatsu,
assembly process Dell
Marketing Brand management P&G,
Coke 5
Source:
Grant
5
RBV Assumptions
 Two critical assumptions of RBV:
 Resource Heterogeneity
 differences in resources among similar firms
 Resource Immobility
 costly for firms to acquire

 What do these assumptions mean?

 If one firm has resources that are valuable and other
firms don’t AND if other firms can’t imitate these
resources without incurring high costs, THEN the firm
possessing the valuable resources will likely gain a
sustained competitive advantage 6

6
The VRIO Framework

If a firm has resources that are:

• valuable,
• rare, and
• costly to imitate, and…
• the firm is organized to exploit these resources,
then the firm can expect to enjoy a sustained
competitive advantage.

7
Applying the VRIO Framework

The Question of Value

• in theory: Does the resource enable the firm

to exploit an external opportunity or neutralize
an external threat?

• the practical: Does the resource result in an

increase in revenues, a decrease in costs, or
some combination of the two? (Levi’s reputation
allows it to charge a premium for its Docker’s pants)
8

8
Applying the VRIO Framework

The Question of Rarity

• if a resource is not rare, then perfect competition
dynamics are likely to be observed (i.e., no
competitive advantage, no above normal profits)
• a resource must be rare enough that perfect
competition has not set in

• thus, there may be other firms that possess the

resource, but still few enough that there is scarcity
(several pharmaceuticals sell cholesterol-lowering
drugs, but the drugs are still scarce—look at prices)9
9
Applying the VRIO Framework

Valuable and Rare

If a firm’s resources are: The firm can expect:

Not Valuable Competitive Disadvantage

Valuable, but Not Rare Competitive Parity

Competitive Advantage
Valuable and Rare
(at least temporarily)
10

10
Applying the VRIO Framework

The Question of Imitability

• the temporary competitive advantage of valuable

and rare resources can be sustained only if
competitors face a cost disadvantage in imitating
the resource
» intangible resources are usually more
costly to imitate than tangible resources
and bundles of resources are more costly than
single resources
(Harley-Davidson’s styles may be easily
imitated, but its reputation cannot) 11

11
Costs of Imitation
 Unique Historical Conditions
 First mover advantages
 Path dependence

 Causal Ambiguity
 Causal links between resources and competitive advantage may not be
understood
 Bundles of resources fog these causal links

 Social Complexity
 The social relationships entailed in resources may be so complex that
managers cannot really manage or replicate them

 Patents
 Offer a period of protection if the firms is able to defend its patent rights
 Can be a two-edged sword as firms disclosure may decrease costs of
imitation by other firms
12

12
Applying the VRIO Framework

The Question of Organization

• a firm’s structure and control mechanisms
must be aligned so as to give people ability
and incentive to exploit the firm’s resources
• examples: formal and informal reporting structures,
management controls, compensation policies,
relationships, etc.
• these structure and control mechanisms complement
other firm resources—taken together, they can help a
firm achieve sustained competitive advantage
(3M Company – rewards innovation and risk-taking)13
13
 The VRIO Framework
Costly to Exploited by Competitive Economic
Valuable? Rare? Imitate? Organization? Implications Implications

No No Disadvantage Below
Normal

Yes No Parity Normal

Temporary Above
Yes Yes No Advantage Normal

Sustained Above
Yes Yes Yes Yes
Advantage Normal
14

14
Competitive Dynamics of Resource Imitation

Competitive Dynamics:
• the strategic decisions and actions of firms in
response to the strategic decisions and actions
of other firms
Firm B’s Possible Responses

Firm A No Response
(strategy decisions
Change Tactics
lead to competitive
advantage) Change Strategy
15

15
Competitive Dynamics

“No Action” Response (Rolex Casio)

A firm may decide to take no action because:

• the other firm is serving a different market

• a response may hurt its own competitive
advantage
• it does not have the resources and capabilities
to mount an effective response
• it wants to reduce or manage rivalry in the
market through tacit collusion
16

16
Competitive Dynamics

“Change” Responses
Tactics (Tide) Strategy (Monsanto)
• specific actions • a fundamental change
» tweaking product in a firm’s theory
characteristics • may be necessary if
• usually imitated so current strategy
quickly that there is becomes obsolete
no advantage • a mimetic change may
• a ‘leap frog’ move achieve parity, but not
may create advantage advantage 17

17
The Resource-Based View

Resources & Competitive

Capabilities Advantage

• Valuable CA will be sustained if:

• Rare • other firms’ costs of
• Costly to Imitate imitation are greater
than benefit of imitation
• Organized to Exploit
• the firm is organized
to exploit advantages
18

18
Entrepreneurial and International
Application of the VRIO Framework
The International Context

Two Reasons for International Expansion:

1) to exploit current resource and capability

advantages in a new market

2) to develop new resources and capabilities in

a foreign market

19

19
Entrepreneurial and International
Application of the VRIO Framework
The International Context

Critical Caveat:

• resources and capabilities that generate

an advantage in one market may or may
not generate an advantage in a new market

Firms should re-apply the VRIO framework

when entering new markets!!
20

20
Internal Analysis
Tells us:
• what the firm should do, given the relative
strengths and weaknesses of resources and
capabilities

Managers’ Job:

• bundle resources and capabilities to

achieve competitive advantage

VRIO Framework Helps Managers Recognize

Sources of Competitive Advantage
21

21