NBS-7025A

Lecture 6 -
Internal Analysis:
RBV, Value Chain and
Dynamic Capabilities

Prepared by:
Dr. Jun-Hwa (Jacky) Cheah
Dr. Nick Yip
Session Objectives

 Identify organisational resources and capabilities and how these

relate to the strategies of organisations.
 Analyse how resources and capabilities might provide sustainable
competitive advantage on the basis of their Value, Rarity,
Inimitability and Organisational support (VRIO).
 Diagnose resources and capabilities by means of VRIO analysis,
value chain analysis and activity systems mapping.
 Consider how resources and capabilities can be developed based
on dynamic capabilities.

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“The successful man is the one who finds
out what is the matter with his business
before his competitors do.”

Roy L. Smith

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your analysis of the
external
environment shows
you the
opportunity &
threats…

…but are you good

enough to capture
the opportunity
and overcome
threats? 4
 What is your
business good at?

For the entrepreneurs in you – what are you good at?

The Link Between The Firm & Its Environment
 Match the resources and activities of an organisation to the
environment – Strategic fit

THE FIRM THE INDUSTRY

 Goals & Values ENVIRONMENT
 Resources & STRATEGY  Competitors
Capabilities  Customers
 Structure &  Suppliers
Systems Environment-
Firm-Strategy
Strategy Interface
Interface
For e.g., Porter’s
For e.g., RBV
Five Forces

Don’t forget the digital space 6

Does Industry Matter, Really?
Percentage of variance in firm’s return on assets explained by:
Industry Effects (%) Firm-specific Effects Unexplained
(%) Variance (%)
Schmalensee (1985) 19.6 0.6 79.9
Rumelt (1991) 4.0 44.2 44.8
Roquebert et al. (1996) 10.2 55.0 32.0
McGahan and Porter (1997) 18.7 31.7 48.4
Hawawini et al. (2003) 8.1 35.8 52.0
Misangyi et al. (2006) 7.6 43.8 n.a.
Source: Grant (2013:89), Contemporary Strategy Analysis, Wiley.

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Are Industry Effects Important in Firm Performance?

The High profitability Low Profitability

Profitability Tobacco 33.5 Packaging and containers 10.2
Household and personal products 27.8 Automotive retailing and services 9.8
of US Pharmaceuticals 20.5 Food and drugs stores 9.6
Industries, Food consumer products 20.0 Insurance 9.1
2000-2010 Food services 19.9 Hotels, casinos, resorts 8.5
Medical products and equipment 18.5 Metals 8.2
Mining, crude oil production 16.3 Semiconductors and electronic components 7.7
Securities 15.9 Forest and paper products 7.3
Chemicals 15.7 Food production 5.2
Aerospace and defence 15.7 Telecommunications 5.8
Construction and farm equipment 14.5 Motor vehicles and parts 4.4
IT services 14.1 Airlines -11.3

Source: Grant (2013: 63), Contemporary Strategy Analysis 8

But Some Airline
(SOURCE: WWW.RITA.DOT.GOV)
are Profitable

Most profitable airlines in the world | Statista 9

Along Comes The Resource Based View
 Prahalad and Hamel (1990) ‘The Core Competence of the Corporation’ Harvard
Business Review, 68(3), 79-91
 Barney (1991) ‘Firm Resources and Sustained Competitive Advantage’, Journal of
Management, 17(1), 99‐120
 Wernerfelt (1984) ‘A Resource Based View of the Firm’, SMJ, 5, 171‐180
 Builds on work by Edith Penrose (1959) of firms as bundles of resources
 The dominant research agenda in strategic management:
 ‘A framework that has the potential to cut through much of this confusion is now
emerging from the strategy field ... The resource‐based view ... will be as powerful
and as important to strategy in the 1990s as industry analysis was in the 1980s’
(Collis & Montgomery 1995)
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Resource-based approach to strategy development

4. select a strategy to
best exploit resources Strategy
and capabilities

3. evaluate the unique 5. identify resource

profit-generating Competitive gaps to be filled.
potential of resources Advantage Invest in upgrading
and competencies the resource base

2. identify the firm’s Competencies

unique competencies and
resource inputs to these

1. identify and classify

firm resources. Evaluate Resources
strengths & weaknesses
Adapted from Robert Grant (1996)
Foundations of resources and capabilities

 The resources and capabilities of an organisation contribute to its

long-term survival and potentially to competitive advantage.
 Resources are the assets that organisations have or can call
upon (e.g. from partners or suppliers), that is ‘what we have’.
 Capabilities (sometimes referred to as competences) are the
ways those assets are used or deployed, that is ‘what we do
well’.
Resources of the organisation
Resource Characteristics Indicators
Tangible Financial Borrowing capacity Debt/Equity ratio
Resources Internal funds generation Credit rating
(Operand) Net cash flow
Physical Plant and equipment: Market value of fixed assets.
Size, location, technology flexibility. Scale of plants
Land and buildings Alternative uses for fixed assets
Raw materials
Intangible Technology Patent, copyrights, know how, R&D facilities No. of patents owned
Resources Technical and scientific employees Royalty income
(Operant) R&D expenditure
R&D staff
Reputation Brands, customer loyalty, company reputation Brand equity
(with suppliers, customers, government) Customer retention
Supplier loyalty

Human Resources Training, experience, adaptability, commitment Employee qualifications,

and loyalty of employees Pay rates, turnover
11/04/2024 Arvind Yadav 2020/21 NBS-UEA
Components of strategic capabilities
Threshold and Distinctive Capabilities
 Threshold capabilities are those needed for an organisation
to meet the necessary requirements to compete in a given
market and achieve parity with competitors in that market –
‘qualifiers’.
 Distinctive capabilities are those that are required to achieve
competitive advantage. Distinctive or unique capabilities that
are of value to customers and which competitors find difficult
to imitate – ‘winners’.

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Resources, competencies and competitive advantage

Same as competitors Better than competitors

or easy to imitate and difficult to imitate

Resources Threshold Resources Unique Resources

Competences Threshold Competences Unique Competences

The brave new world of capability – VALUE

Benefits
C KK
OO C
NLL
UUN
The nature of
service value
state-dependent
In the future
PRODUCT enhanced or
discounted
SERVICE

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SPIN-OFFS FROM RBV…
Core Prahalad & Core Competence provides access to a wide market, improves perceived
Competence Hamel, 1990 customer benefits, must be difficult for competitors to imitate – they grow
Perspective as you apply them – is at the root of competitive advantage

Combinative Kogut & A dynamic view of how firms create new knowledge (or innovations) – by
Capabilities Zander, 1992 recombining their current knowledge and capabilities – using both internal
and external learning

Natural Resource Hart, 1995 Strategy and competitive advantage in the coming years will be rooted in
Based View of capabilities that facilitate environmentally sustainable economic activity-
the firm focusses on managing the firms relationship with the natural environment –
the ability to deal with the constraints imposed by the environment

Knowledge Based Grant, 1996 Views firm as a knowledge-integrating institution – the primary role of
View (KBV) firms is in the application of existing knowledge to production of products
& services

Dynamic Teece et al., Firms ability to create, deploy, modify, reconfigure, upgrade or leverage its
Capabilities 1997 resources over time in its quest for competitive advantage

Barney, J. B., Ketchen, D. J. and Wright, M. (2011). The Future of Resource-Based Theory: Revitalization or
Decline? Journal of Management, 37(5), pp. 1299-1315.
NBS-5133A 2023/24 NBS-UEA
Competencies
 Distinctive competences draw on distinctive resources to achieve outcomes that are
prized by the customer (Ackermann and Eden 2011).
 Core competences describe competences that recur throughout an organisation,
underpinning value creation and strategy across all aspects of operations (Prahalad
and Hamel (1990).
 Core rigidities describes resources which were once valuable, and are still considered
so in strategy work, but which are in actuality a hindrance to organisational
performance.

Competencies refer to what an employee offers in relation to

knowledge, skills and personal attributes, while capabilities
refer to a person's direct ability to perform a task or job.1
Capabilities Vs Competencies

Competencies refer to what an employee offers in relation to

knowledge, skills and personal attributes, while capabilities refer
to a person's direct ability to perform a task or job.1

A capability is a combination of behaviours, skills, processes and

knowledge that affects an outcome. Competency is the measure of
how a person performs a capability. Both can be developed, but
only one has strategic impacts. Competence is best used to support
employee development.
The roots of strategic capability
Canon: Products & Core Technical Capabilities

Precision Fine
Mechanics Optics
35mm SLR camera
Compact fashion camera
EOS autofocus camera Plain-paper copier
Digital camera Color copier
Video still camera Color laser copier
Video security systems Laser copier
Camcorders
Basic fax
Binoculars
Mask aligners Laser fax
Excimer laser aligners Scanners Inkjet printer
Stepper aligners Laser printer
Calculator Color video printer
Notebook computer Digital commercial
Micro- printer

Electronics 22
3M: Evolution of Products & Capabilities
Sandpaper Road signs Videotape
Carborundum & markings Floppy disks &
mining Scotch tape data storage
Audio tape
products
Acetate
Post-it notes
film Housewares/kit-
PRODUCTS
Surgical tapes chen products
& dressings
Pharmaceuticals
Materials sciences
Flexible
Health sciences circuitry
CAPABILITIES Microreplication
New-product
Abrasives Adhesives Thin-film development &
technologies introduction

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Dynamic Capabilities (Teece et al. 1997)
 Dynamic capabilities are the means by which an organisation has the
ability to renew and recreate its strategic capabilities to meet the needs
of changing environments.
 Dynamic capability can be used to adjust the resource base in reaction to
environmental changes, or to modify the resource base to build new or
modified capabilities for anticipated future needs (Schoemaker et al.
2018).
 Dynamic capabilities are the subset of organisational capabilities
associated with managing or manipulating the resource base.

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Generic dynamic capabilities

 Three types of generic dynamic capabilities:

1. Sensing capabilities – constantly scanning and exploring new
opportunities across markets and technologies (e.g. R & D and market
research)
2. Seizing capabilities – addressing opportunities through new products,
processes and activities
3. Re-configuring capabilities – new products and processes may require
renewal and re-configuration of capabilities and investment in new
technologies
Developing strategic capabilities

 Internal capability development

 Building and recombining capabilities – this requires creative
entrepreneurial skills (e.g. a culture that promotes capability innovation)
 Leveraging capabilities – identifying capabilities in one part of the
organisation and transferring them to other parts (sharing best practice)
 Stretching capabilities – building new products or services out of existing
capabilities.
Developing strategic capabilities

 External capability development – adding capabilities through mergers,

acquisitions or alliances
 Ceasing activities – non-core activities can be stopped, outsourced or
reduced in cost
 Monitor outputs and benefits – to better understand sources of consumer
benefit and enhance anything that contributes to this
 Awareness development – recognising what enhances strategy. Training,
development and organisation learning are important.
LVMH – Capabilities & competencies

Source: MacKay et al. (2020)

Organisational Capabilities in These Firms..

Corporate leadership / financial management

Operations and supply

Design & development of innovative products

What are the key resources and capabilities?

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Resources and capabilities analysis
 At the centre of RBV theorising is a search for resources that comply with a set of
characteristics that give the organisation a possible competitive edge. This
crucial conceptual framework is known as the VRIO framework.
 Valuable: do resources and capabilities exist that are valued by customers and
enable the organisation to respond to environmental opportunities or threats?
 Rarity: do resources an capabilities exist that no (or few) competitors possess?
 Inimitability: are resources and capabilities difficult and costly for competitors
to imitate?
 Organisational support: is the organisation appropriately organised to exploit
the resources and capabilities?
Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal
of Management, vol. 17, no. 1 (1991), pp. 99–120
VRIO Analysis
V – Value of resources and capabilities
Strategic capabilities are of value when they:
 take advantage of opportunities and neutralise threats;
 provide value to customers;
 are provided at a cost that still allows an organisation to make an
acceptable return.
VRIO Analysis

R – Rarity
 Rare capabilities are those possessed
uniquely by one organisation or only by a
few others.
(e.g. a company may have patented
products, have supremely talented people
or a powerful brand.)
 Rarity could be temporary.
(e.g. Patents expire, key individuals can
leave or brands can be de-valued by
adverse publicity.)

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Top Influencers
VRIO Analysis
I – Inimitability
Inimitable capabilities are those that competitors find difficult and costly to
imitate, to obtain or to substitute.
 Competitive advantage can be built on unique resources (a key individual
or IT system) but these may not always be sustainable (key people leave or
others acquire the same systems).
 Sustainable advantage is more often found in competences (the way
resources are managed, developed and deployed) and the way
competences are linked together and integrated.
VRIO Analysis
Criteria for the inimitability of resources and capabilities

Degrees of resource and capability imitability

 Cannot be imitated: patents, unique assets,
unique locations
 Difficult to imitate: brand loyalty, employee
satisfaction, reputation for fairness
 Can be imitated (but may not be): capacity
preemption, economies of scale
 Easy to imitate: cash, commodities
VRIO Analysis

O – Organisational support
The organisation must be suitably organised to support the valuable, rare and
inimitable capabilities that it has. This includes appropriate processes and
systems.
The VRIO Framework: Performance Implications
Valuable? Rare? Inimitable Organised? Competitive Performance
? impact implications

No - - - Competitive Under industry

disadvantage average

Yes No - - Competitive parity Industry average

Yes Yes No - Short term Over industry

competitive average
advantage
Yes Yes Yes Yes Long term Over industry
competitive average
advantage

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Resources, Capabilities and Competitive Advantage

In pharmaceuticals
the KSFs is the
discovery and launch
of new drugs. This
requires high-quality
researchers, drug-
testing capability, and
marketing and
distribution capability.

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Internal sources of competitive advantage
Eg
 unique (differentiated) products
 brands / values
 timing (first-mover advantage)
 knowledge, skills, core competencies
 strategic assets
 relationships
 operations and business processes
 culture
 national origin
 information technology
…how long can they last?
 management and leadership …do they need to change?
Knowledge
 Why do organisations need to learn?
 Faulty psychology - biases, preconceptions, ‘dominant logics’
 Many industries are now knowledge industries
 All to often we don’t learn - and repeat the past over and over
 The speed of competition
Knowledge and information
= change
= competitive advantage

“Wisdom” insight, judgment, sagacity,

discerning use of knowledge

Knowledge result of analysis and processing

of information

Information relevant/timely/meaningful data

Data unprocessed raw facts, numbers, observations

Knowledge as a resource/competency/capability/dynamic
capability

 Tacit is “undocumented expertise in the heads of the

enterprise’s knowledge workers or external third party subject
or process experts”.

 Explicit is “structured and documented knowledge in the form

of written reports, computer databases, audio and video tapes
etc” (Kesner (2001)
 Culture as a resource/competence

 “…the sum total of learned beliefs, values, and

customs that serve to direct the … behaviour of
members of a particular society.” [Schiffman and
Kanuk]
 “The deeper level of basic assumptions and beliefs…
shared by members of an organisation, that operate
unconsciously and define a ‘basic taken for granted’
[that] fashions an organisation's view of itself and its
environment.” [Schien]
 “Culture is the way in which people solve problems”
[Trompenaars]
 Why can the Japanese
build cars that are more
reliable?

Section I — Long-Term Philosophy
Principle 1 - Base your
management decisions on a long-
term philosophy, even at the
expense of short-term financial
goals.
The Toyota Way
Section II — The Right Process Will
Produce the Right Results
Principle 2 - Create a continuous
process flow to bring problems to
the surface.
Principle 3 - Use "pull" systems to
avoid overproduction.
Principle 4 - Level out the workload (
heijunka). (Work like the tortoise,
not the hare).
Principle 5 - Build a culture of
stopping to fix problems, to get
quality right the first time.
Principle 6 - Standardized tasks and
processes are the foundation for
continuous improvement and
employee empowerment.
Principle 7 - Use visual control so no
problems are hidden.
Principle 8 - Use only reliable,
thoroughly tested technology that
serves your people and processes.
Section III — Add Value to the
Organization by Developing Your
People
Principle 9
Grow leaders who thoroughly
understand the work, live the
philosophy, and teach it to others.
Principle 10
Develop exceptional people and
teams who follow your company's
philosophy.
Principle 11
Respect your extended network of
partners and suppliers by
challenging them and helping them
improve.
Section IV — Continuously Solving
Root Problems Drives
Organizational Learning
Principle 12 - Go and see for yourself
to thoroughly understand the
situation (Genchi Genbutsu).
Principle 13 - Make decisions slowly
by consensus, thoroughly
considering all options; implement
decisions rapidly (nemawashi).
Principle 14 - Become a learning
organization through relentless
reflection (hansei) and continuous
improvement (kaizen).
Resource and capability analysis: VRIO analysis

1. Prepare a VRIO template

2. Evaluate each entry in the table against the VRIO criteria
3. Identify possible sources of competitive advantage
4. Identify options for actions to create, protect, or exploit
VRIO resources
LVMH – VIRO analysis
Resource and capability analysis:
Capability audit

1. Collate information about the activity outcomes achieved by the

organisation
2. Identify how activity outcomes were achieved
3. Organise the capabilities into categories
4. Draw implications and options for action
LVMH – Capabilities & competencies

Source: MacKay et al. (2020)

Resources and capabilities analysis
Value chain analysis
 The value chain describes the categories of activities within an
organisation which, together, create a product or service.
 Value chain analysis complements resource and capability analysis by
focusing on strategic activities

Generic value chain framework. Source: Porter, M. E. (1985).

Competitive Advantage: Creating and Sustaining Superior
Performance. New York: Free Press, p. 46, Figure 2.3.
Value chain analysis of LVMH
Mapping Activity Systems

 Identify ‘higher order strategic themes’, that is, how the organisation
meets the critical success factors in the market
 Identify the clusters of activities that underpin these themes and how
they fit together
 Map this in terms of how activity systems are interrelated.
Mapping activity systems (Southwest Airlines)
Summary of External + Internal Analysis
SWOT
 SWOT provides a general summary of the Strengths and Weaknesses
explored in an analysis of strategic capabilities, and the Opportunities
and Threats explored in an analysis of the external environment.

INTERNAL ANALYSIS = STRENGTHS

WEAKNESSES

EXTERNAL ANALYSIS = OPPORTUNITIES

THREATS
Session takeaways
 Explain the importance of building understanding of resources, capabilities, and
activities in organisational strategy.
 Explain how an organisation can compete through the deployment of distinctive
resources, using concepts and ideas of the resource-based view.
 Evaluate the potential of an organisation to manage its resource base over time
through dynamic capability.
 Appraise the configuration of an organisation as a set of supporting and value-adding
activities.
 Critically assess the value of internally focused analytical tools in strategy work.
Readings:
Baker, M.J. (2014) Marketing, Strategy and Management, Palgrave Macmillan. Ch.10, 11 (ebook)
Further Key Reading:
Prahalad, C.K. and Hamel, G. (1990) ‘The Core Competence of the Corporation’ Harvard Business Review, 68(3): 79-91 Available at:
https://eds-a-ebscohost-com.uea.idm.oclc.org/eds/pdfviewer/pdfviewer?vid=2&sid=08e951c6-2e15-43f1-8f49-2c52f6917c5b%40sessio
nmgr4008
Teece, D. J., Pisano, G., & Shuen, A. (1997) ‘Dynamic capabilities and strategic management’ Strategic Management Journal, 18(7): 509-
533 Available at:
https://onlinelibrary-wiley-com.uea.idm.oclc.org/doi/10.1002/%28SICI%291097-0266%28199708%2918%3A7%3C509%3A%3AAID-SMJ8
82%3E3.0.CO%3B2-Z
Teece, D., Peteraf, M. and Leih, S., (2016) Dynamic capabilities and organizational agility: Risk, uncertainty, and strategy in the innovation
economy. California Management Review, 58(4): 13-35. Available at:
https://journals-sagepub-com.uea.idm.oclc.org/doi/pdf/10.1525/cmr.2016.58.4.13

Video:
Dynamic capabilities in an uncertain world. https://www.youtube.com/watch?v=stG6-nPZapU

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