Leveraging Resources and Capabilities 3 Leveraging Resources and Capabilities chapter Part I: Foundations of Global Strategy Global Strategy Mike W. Peng Copyright © 2009 Cengage. PowerPoint Presentation by John Bowen, Columbus State Community College All rights reserved.

Outline Understanding resources and capabilities Resources, capabilities, and the value chain The VRIO framework Debates and extensions The savvy strategist Copyright © 2009 Cengage. All rights reserved.

Understanding Resources and Capabilities Tangible Resources and capabilities that are observable and easily quantified Broadly organized in four categories: Financial Physical Technological Organizational Intangible Resources and capabilities not easily observed or difficult (or impossible) to quantify Examples include: Human Innovation Reputational Copyright © 2009 Cengage. All rights reserved.

Examples of Resources and Capabilities TANGIBLE RESOURCES AND CAPABILITIES EXAMPLES Financial Ability to generate internal funds Ability to raise external capital Physical Location of plants, offices, and equipment Access to raw materials and distribution channels Technological Possession of patents, trademarks, and copyrights Organizational Formal planning, command, and control systems Integrated management information systems INTANGIBLE RESOURCES AND CAPABILITIES EXAMPLES Human Knowledge Trust Managerial talents Organizational culture Innovation A supportive atmosphere for new ideas Research and development capabilities Capacities for organizational innovation and change Reputational Perceptions of product quality, durability, and reliability among customers Reputation as a good employer Reputation as a socially responsible corporate citizen 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. Copyright © 2009 Cengage. All rights reserved. Table 3.1

Resources, Capabilities, and the 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 Copyright © 2009 Cengage. All rights reserved.

The Value Chain Panel A. An example of value chain with firm boundaries Copyright © 2009 Cengage. All rights reserved. Figure 3.1

The Value Chain (cont’d) Panel B. An example of value chain with some outsourcing Copyright © 2009 Cengage. All rights reserved. Figure 3.1 cont’d

A Two-Stage Decision Model in Value Chain Analysis Copyright © 2009 Cengage. All rights reserved. Figure 3.2

The VRIO Framework: Features of a Resource or Capability COSTLY TO IMITATE? EXPLOITED BY ORGANIZATION VALUABLE? RARE? COMPETITIVE IMPLICATIONS FIRM PERFORMANCE No No Competitive disadvantage Below average Yes No Yes Competitive parity Average Yes Yes No Yes Temporary competitive advantage Above average Yes Yes Yes Yes Sustained competitive advantage Consistently above average Sources: Adapted from (1) J. Barney, 2002, Gaining and Sustaining Competitive Advantage, 2nd ed. (p. 173), Upper Saddle River, NJ: Prentice Hall; (2) R. Hoskisson, M. Hitt, & R. D. Ireland, 2004, Competing for Advantage (p. 118), Cincinnati: Thomson South-Western. Copyright © 2009 Cengage. All rights reserved. Table 3.2

The VRIO Framework: Value and Rarity Four fundamental questions of VRIO Value: do the resources and capabilities add value? Necessary for a competitive advantage Rarity: how rare are the valuable resources and capabilities? Valuable, but common parity, not advantage Valuable and rare can lead to temporary advantage If everyone has it, you can’t make money from it Copyright © 2009 Cengage. All rights reserved. 4

The VRIO Framework: Imitability Easier to imitate tangible resources/capabilities than tangible ones Two ways to imitate - direct duplication and substitution Direct duplication - most difficult Substitution - less challenging, but not easy Why is imitation so difficult? Hard to acquire in a short time what competitors have developed over a long time Events earlier in time affect future events Difficult to identify causal determinants of performance Copyright © 2009 Cengage. All rights reserved. 4

The VRIO Framework: Imitability (cont’d) Valuable, rare, but imitable resources/capabilities = temporary advantage Only valuable, rare and hard-to-imitate resources/capabilities = sustained competitive advantage Copyright © 2009 Cengage. All rights reserved.

The VRIO Framework: Organization The Question of Organization How is a firm organized to develop and leverage the full potential of its resources and capabilities? Using complementary assets effectively Managing social complexity effectively Invisible relationships can add value - make imitation more difficult Copyright © 2009 Cengage. All rights reserved. 4

Debates and Extensions Firm- versus Industry-Specific Determinants of Performance: Both views are complementary to each other Static Resources versus Dynamic Capabilities The resource-based view: incorporating dynamic capabilities Tacit knowledge “Learning before doing” versus “learning by doing” Simple rules to guide behavior and decisions Develop new resources/capabilities Less bundled resources/capabilities Copyright © 2009 Cengage. All rights reserved. 4

Dynamic Capabilities in Slow- and Fast-Moving Industries SLOW-MOVING INDUSTRIES FAST-MOVING (HIGH-VELOCITY) INDUSTRIES Market environment Stable industry structure, defined boundaries, clear business models, identifiable players, linear and predictable change Ambiguous industry structure, blurred boundaries, fluid business models, ambiguous and shifting players, nonlinear and unpredictable change Attributes of dynamic capabilities Complex, detailed, analytic routines that rely extensively on existing knowledge (“learning before doing”) Simple, experiential routines that rely on newly created knowledge specific to the situation (“learning by doing”) Focus Leverage existing resources and capabilities Develop new resources and capabilities Execution Linear Iterative Organization A tightly bundled collection of resources with relative stability A loosely bundled collection of resources that are frequently added, recombined, and dropped Outcome Predictable Unpredictable Strategic goal Sustainable competitive advantage (hopefully for the long term) A series of short-term (temporal) competitive advantages Sources: Adapted from (1) K. Eisenhardt & J. Martin, 2000, Dynamic capabilities: What are they? Strategic Management Journal, 21: 1105–1121; (2) G. Pisano, 1994, Knowledge, integration, and the locus of learning, Strategic Management Journal, 15: 85–100. Copyright © 2009 Cengage. All rights reserved. Table 3.3

The Savvy Strategist Developing resources/capabilities that are valuable, rare, hard-to-imitate, and embedded in organizational structures and systems can help firms achieve successful performance Lessons from the VRIO framework Task for strategists - build firm strengths by identifying, developing, and leveraging resources/capabilities Imitation is not likely to be a successful strategy Sustained competitive advantage will not last forever Firms should try to develop “strategic foresight” Copyright © 2009 Cengage. All rights reserved. 4

The Savvy Strategist (cont’d) Four fundamental questions: Resource Based Views Why do firms differ? Resource heterogeneity How do firms behave? Take advantage of strengths and overcome weaknesses What determines the scope of the firm? How a firm performs relative to rivals What determines the international success and failure of firms? Firm-specific resources/capabilities and a bit of luck Copyright © 2009 Cengage. All rights reserved.