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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


The Resource-Based ViewResources 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
» marketing skill, cooperativerelationships


The Resource-Based View
Resources and Capabilities
Firm Assets: Machinery Collective Product Design Skill Recruiting Skill Engineering Skill of Individuals Mineral Deposits Are these resources or capabilities? ? ? ? ? ?


Function Corporate HQ Capability Expertise in management of multibusiness corporation Example General Electric, ABB Speed of new productCanon, development Sony Continual improvements Toyota, in production or Komatsu, assembly process Dell Brand management P&G, Coke

R&D Manufacturing


Source: Grant 5


RBV Assumptions
 Two

critical assumptions of RBV:
differences in resources among similar firms costly for firms to acquire

Resource Heterogeneity Resource Immobility

 What

dothese 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



The VRIO Framework
If a firm has resources that are:
• valuable, • rare, and • costly to imitate, and… • thefirm is organized to exploit these resources,

then the firm can expect to enjoy a sustained competitive advantage.


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 somecombination of the two? (Levi’s reputation allows it to charge a premium for its Docker’s pants)


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 beother 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

Applying the VRIO Framework
Valuable and Rare
If a firm’s resources are: Not Valuable Valuable, but Not Rare Valuable and Rare The firm can expect: Competitive Disadvantage Competitive Parity CompetitiveAdvantage (at least temporarily)


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 singleresources (Harley-Davidson’s styles may be easily 11 imitated, but its reputation cannot)

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...
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