Chapter #3

Evaluating a Firm’s Internal Capabilities

Learning Objectives

Describe the Critical assumptions of the resource-based view

Describe four types of resources and capabilities

Apply the value chain analysis to identify a firm’s critical resources and capabilities

Apply the VRIO frame work to identify the competitive Implications of a firm’s resources and capabilities including…

The conditions under which resources are likely to be valuableThe conditions under which resources are likely to be rareFour reasons why a firm’s resources may be costly to imitateHow a firm uses its structure, control processes and compensation policy to exploit its resources

Opening Case

EASEGANintendoSonyOnline gamesWizards of the CoastWarhammer

war

Resource-based View of the Firm

Resources Are defined as the tangible and intangible assets that a firm controls

Factories, Products (tangible)

Reputation, Teamwork (intangible)

CapabilitiesSubset of a firms resources that allows the firm to identify and implement strategies

Types of resources

Financial Resources$ Retained Earnings

Physical ResourcesPlant, Access to raw materials, Geographic location

Human ResourcesLeadership

Organizational ResourcesCollections of individuals

Assumptions of the resource-based view

Resource HeterogeneityFirms, even in the same industry can develop different resources and capabilities

Resource ImmobilityMay be long lasting

David Ricardo

Fertile Land Example

Gratuitous Economics

cartoon

The VRIO Framework

ValueDoes a resource enable a firm to exploit an environmental opportunity and or neutralize an environmental threat?

RarityIs a resource currently controlled by only a small number of competing firms?

ImitabilityDo firms without a resource face a cost disadvantage in obtaining or developing it?

OrganizationAre a firm’s other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resource

Value for Yahoo

YahooFirst mover

Superior Technology (237 million)

Sell Advertising

Charge Customers

Sell Data Base

Value Chain Oil Industry

Exploring for crude oilDrilling for crude oilPumping crude oilShipping crude oilBuying crude oilRefining crude oilSelling refined products to distributorsShipping refined productsSelling refined products to final customers

Ethics and the nature of externalities

Pollution

Education

Value Chain McKinsey and Company

Value Chain Porter

Rarity

ESPN X-games

Imitability

Sustained competitive Advantage

Forms of imitationDirect duplication

Substitution

Why might it be costly

Unique historical conditionsSpace and time dependent resources

ESPN X-Games

Path DependenceLater advantages may be dependent on resources that were developed earlier

Casual AmbiguityTake for granted

Multiple hypothesis

Not just a few

More on costly to imitate

Casual AmbiguityTake for granted

Multiple hypothesis

Not just a fewWhenever sources of competitive advantage are widely diffused across people, locations and processes, those sources of competitive advantage will be difficult to imitate

Costly continued

Social ComplexitySocially complex phenomena, beyond the ability of firms to systematically manage and influence

PatentsNot as difficult to imitate (depending on industry) (Sony and reverse engineering)

Research Box

MIT70 plants6 had both low costs and high qualityModern technology necessary but not sufficientHuman resource practices

Participative decision-making, quality circles, team productionLoyalty, belief that managers would treat employees fairly

Organization

Formal structureManagement control systemsCompensation policies

Complementary resources & Capabilities

Xerox PARC (Palo Alto Research Center) Through the 1960s and early 70s

The personal Computer

The “mouse”

Widows-type software

Laser printer

Paperless office

Ethernet

The VRIO FrameworkValuable Rare Costly to

imitateExploited Completive

ImplicationsEconomic Performance

No No Competitive

Disadvantage

Below Normal

Yes No Competitive

Parity

Normal

Yes Yes No Temporary competitive advantage

Above

Normal

Yes Yes Yes Yes Sustained Competitive

Advantage

Above

Normal

The VRIO Framework and Strengths and Weaknesses

Valuable Rare Costly to imitate

Exploited Strength or Weakness

No No Weakness

Yes No Strength

Yes Yes No Strength

Distinctive competency

Yes Yes Yes Yes Strength, Sustainable

Distinctive Competency

The responsiblity

Janitor

Competitive Parity and Competitive Advantage

Bench marking not sufficient

Must develop proprietary valuable, rare and costly-to imitate resources and capabilities

Difficult-to-Implement

Is the strategy easier for us to implement than it is for our competitors to implement?

Two errorsOverestimate the uniqueness of resources

Underestimate the uniqueness of resources

Socially Complex Resources

Employee empowerment

Organizational culture

Teamwork

The role of organization

Structure

Control Systems

Compensation Policies