3

Leveraging
chapter

Resources and
Capabilities

Global Strategy
Mike W. Peng

© 2009 Peng Global Strategy 2E

 Outline

• Understanding resources and capabilities

• Resources, capabilities, and the value chain
• The VRIO framework
• Debates and extensions
• The savvy strategist

© 2009 Peng Global Strategy 2E 3–2

 Competing on Resources
• Focus of the industry-based view:
 How “average” firms within an industry
compete.

• Focus of the resource-based view:

 How individual firms differ from each other
within an industry and can outperform the
industry average consistently and significantly.

© 2009 Peng Global Strategy 2E 3–3

 Resources and Capabilities
• The Resource-based View
 A firm consists of a bundle of productive
resources and capabilities.
 Resources
– The tangible and intangible assets a firm uses to choose and
implement its strategies.
 Capabilities
– The skills a firm can use to bring its resources to bear.

 This book follows leading resource-based theorists

such as J. Barney, D. Collis, and C. Montgomery,
by using the two terms, “resources” and
“capabilities,” interchangeably and often in parallel
© 2009 Peng Global Strategy 2E 3–4
 Resources and Capabilities
• Tangible • Intangible
 Resources and  Resources and
capabilities that are capabilities not easily
observable and observed or difficult
easily quantified (or impossible) to
quantify
 Broadly organized in
 Examples include:
four categories:
 Human
 Financial
 Innovation
 Physical
 Reputational
 Technological
 Organizational

© 2009 Peng Global Strategy 2E 3–5

 Examples of Resources and Capabilities

Sources: Adapted from (1) J. Barney, 1991, Firm resources and sustained competitive advantage (p. 101), Journal of
Management, 17: 101; (2) R. Grant, 1991, Contemporary Strategy Analysis (pp. 100–104), Cambridge, UK: Blackwell; (3) R.
Hall, 1992, The strategic analysis of intangible resources (pp. 136–139), Strategic Management Journal, 13: 135–144. Table 3.1
© 2009 Peng Global Strategy 2E 3–6
 Resources, Capabilities,
and the Value Chain
• Value Chain
 The functional activities within the firm that
create value in the goods and services produced
• Components of the Value Chain
 Primary activities
 Are directly associated with the development,
production, and distribution of goods and services.
 Support activities
 Assist in the accomplishment of primary activities.

© 2009 Peng Global Strategy 2E 3–7

 The Value Chain

Panel A. An example of value chain with firm boundaries

Figure 3.1
© 2009 Peng Global Strategy 2E 3–8
 The Value Chain (cont’d)

Panel B. An example of value chain with some outsourcing

Figure 3.1 cont’d
© 2009 Peng Global Strategy 2E 3–9
 Value Chain Analysis
• Shows how a bundle of resources and capabilities
come together to add value.
 Forces strategists to think about firm resources
and capabilities at a micro-activity-based level.
 The key is to examine whether the firm has the
resources and capabilities to perform a particular
activity in a manner superior to competitors.
 Requires that strategists ascertain a firm’s strengths
and weaknesses on an activity-by-activity basis, relative
to rivals, in a SWOT analysis.
 SIA 3.1. Outsourcing luxury car production

© 2009 Peng Global Strategy 2E 3–10

11
Location, Location, Location

12
 The VRIO Framework
• VRIO
 An analysis of the “sticky” nature of resources
and capabilities of a firm and the difficulty of
their replication elsewhere.
• Two Key Assumptions:
 Resource heterogeneity
 Each firm has a unique combination of resources
and capabilities such that no two firms are “twins.”
 Resource immobility
 Resources and capabilities unique to one firm
cannot easily migrate to competing firms.
© 2009 Peng Global Strategy 2E 3–13
Table 3.2. VRIO framework

14
 The VRIO Framework: Value
• The Question of Value
 Only value-adding resources can lead to competitive
advantage, whereas non-value-adding capabilities
may lead to competitive disadvantage.
 If firms do not shed non-value-adding resources and
capabilities, they are likely to suffer below-average
performance or become extinct (e.g., IBM).

• Overall, the search for valuable resources and

capabilities is an ever present challenge for virtually all
firms.

© 2009 Peng Global Strategy 2E 3–15

 The VRIO Framework: Rarity
• The Question of Rarity
 Valuable common resources and capabilities can lead to
competitive parity but no advantage (e.g., airline aircraft).
 Valuable rare resources and capabilities can provide, at best,
temporary competitive advantage
 SIA 3.2. ANA: Refreshing the parts other airlines can’t reach
 Resources and abilities that add value in new areas needed to
keep up with the competition (benchmarking).
 Once competitors develop equal abilities, then no unique and
distinctive capability remains on which to build a competitive
advantage.

© 2009 Peng Global Strategy 2E 3–16

 The VRIO Framework: Imitability
• The Question of Imitability
 Valuable and rare resources and capabilities
are a source of competitive advantage only if
competitors have a difficult time imitating
them.
 Imitation of tangible resources (such as plants,
software, or trucking fleet) is easy.
 Imitation of intangible resources (knowledge,
managerial talents, and organizational culture) is
much more difficult.
 Some resources are impossible to imitate

© 2009 Peng Global Strategy 2E 3–17

 The VRIO Framework: Imitability
(cont’d)
• Why is imitation so difficult?
 Time compression diseconomies: Inability to
acquire in a short period of time rivals’ resources
and capabilities over a long history
 SIA (in 1E): Mercedes’ failure in learning and
practicing the Japanese capabilities of “design to cost”
 Path dependencies: History matters
 Causal ambiguity: What really causes the success
of certain firms? Nobody really knows!

© 2009 Peng Global Strategy 2E 3–18

 The VRIO Framework:
• The Question ofOrganization
Organization
 How is a firm organized to develop and leverage
the full potential of its resources and capabilities?
• A More Fundamental Question
 Why do firms exist? In other words, why do people
organize firms?
 Firms exist to develop and leverage resources and
capabilities better than individuals could.
• Complementary Assets: e.g., star power + other talents
• Social Complexity: e.g., movie production

© 2009 Peng Global Strategy 2E 3–19

20
 The Savvy Strategist
• Managers need to build firm strengths based on
the VRIO framework
• Relentless imitation or benchmarking is not likely
to be a successful strategy
• Managers need to build up resources and
capabilities for future competition

© 2009 Peng Global Strategy 2E 3–21

 Implications for Strategists:
Fundamental Questions to Consider
• Why do firms differ?
 The assumption of resource heterogeneity –
that is, every firm is unique in its bundle of
resources and capabilities – directly addresses
this question.
• How do firms behave?
 The answer boils down to how they take
advantage of their strengths embodied in
resources and capabilities and overcome their
weaknesses.

© 2009 Peng Global Strategy 2E 3–22

 Implications for Strategists:
Fundamental Questions to Consider
(cont’d)
• What determines the scope of the firm?
 Value chain analysis suggests that the scope of the
firm is determined by how a firm performs different
value-adding activities relative to rivals.
 Managers often fail to assess them relative to
competitors, resulting in an unnecessarily broad scope
with some mediocre units.
• What determines the international success and
failure of firms?
 The resource-based view identifies firm-specific
resources and capabilities as the crucial
determinants.

© 2009 Peng Global Strategy 2E 3–23

 Key Terms

agency problem
agents
business process outsourcing (BPO)
capabilities
causal ambiguity
complementary assets
core competencies
corporate governance
direct duplication
dynamic capabilities
financial resources and capabilities
human resources and capabilities
innovation resources and capabilities

© 2009 Peng Global Strategy 2E 3–24