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 » marketing skill, cooperative relationships 3 3

The Resource-Based View

Resources and Capabilities

Firm Assets: Machinery Collective Product Design Skill Are these resources or capabilities?

?

?

Recruiting Skill Engineering Skill of Individuals Mineral Deposits ?

?

?

4 4

Capabilities

Function Corporate HQ R&D Manufacturing Marketing Capability Expertise in management of multi business corporation Example General Electric, ABB Speed of new product development Continual improvements in production or assembly process Toyota, Komatsu, Dell Brand management Canon, Sony 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: • v aluable, • r are, and • costly to i mitate, and… • the firm is o rganized to exploit these resources, then the firm can expect to enjoy a sustained competitive advantage.

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Applying the

VRIO

Framework

The Question of V alue • 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 R arity • 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

V aluable and R are If a firm’s resources are: Not V aluable The firm can expect: Competitive Disadvantage V aluable, but Not R are V aluable and R are Competitive Parity Competitive Advantage (at least temporarily) 10 10

Applying the

VRIO

Framework

The Question of I mitability • 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 O rganization • 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

V aluable?

R are?

No Costly to I mitate?

Exploited by O rganization?

No Competitive Implications Disadvantage Economic Implications Below Normal Yes No Parity Normal Yes Yes Yes Yes No Yes Yes Temporary Advantage Sustained Advantage Above Normal Above Normal

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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 (strategy decisions lead to competitive advantage) No Response Change Tactics 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) • specific

actions

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

The Resource-Based View

Resources & Capabilities • V aluable • R are • Costly to I mitate • O rganized to Exploit Competitive Advantage CA will be sustained if: • other firms’ costs of imitation are greater than benefit of imitation • 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!!

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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