Evaluating a Firm’s Internal Capabilities 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 valuable The conditions under which resources are likely to be rare Four reasons why a firm’s resources may be costly to imitate How a firm uses its structure, control processes and compensation policy to exploit its resources

Opening Case EA SEGA Nintendo Sony Online games Wizards of the Coast Warhammer 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) Capabilities Subset of a firms resources that allows the firm to identify and implement strategies

Types of resources Financial Resources Physical Resources $ Retained Earnings Physical Resources Plant, Access to raw materials, Geographic location Human Resources Leadership Organizational Resources Collections of individuals

Assumptions of the resource-based view Resource Heterogeneity Firms, even in the same industry can develop different resources and capabilities Resource Immobility May be long lasting

David Ricardo Fertile Land Example Gratuitous Economics cartoon

The VRIO Framework Value Rarity Imitability Organization Does a resource enable a firm to exploit an environmental opportunity and or neutralize an environmental threat? Rarity Is a resource currently controlled by only a small number of competing firms? Imitability Do firms without a resource face a cost disadvantage in obtaining or developing it? Organization Are a firm’s other policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resource

Value for Yahoo Yahoo Sell Advertising Charge Customers Sell Data Base First mover Superior Technology (237 million) Sell Advertising Charge Customers Sell Data Base

Value Chain Oil Industry Exploring for crude oil Drilling for crude oil Pumping crude oil Shipping crude oil Buying crude oil Refining crude oil Selling refined products to distributors Shipping refined products Selling 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 imitation Direct duplication Substitution

Why might it be costly Unique historical conditions Casual Ambiguity Space and time dependent resources ESPN X-Games Path Dependence Later advantages may be dependent on resources that were developed earlier Casual Ambiguity Take for granted Multiple hypothesis Not just a few

More on costly to imitate Casual Ambiguity Take for granted Multiple hypothesis Not just a few Whenever 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 Complexity Patents Socially complex phenomena, beyond the ability of firms to systematically manage and influence Patents Not as difficult to imitate (depending on industry) (Sony and reverse engineering)

Research Box MIT 70 plants 6 had both low costs and high quality Modern technology necessary but not sufficient Human resource practices Participative decision-making, quality circles, team production Loyalty, belief that managers would treat employees fairly

Organization Formal structure Management control systems Compensation 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 Framework Valuable Rare Costly to imitate Exploited Completive Implications Economic Performance No Competitive Disadvantage Below Normal Yes Parity Normal Temporary competitive advantage Above Sustained Competitive Advantage

The VRIO Framework and Strengths and Weaknesses Valuable Rare Costly to imitate Exploited Strength or Weakness No Weakness Yes Strength Distinctive competency 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 errors Overestimate 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