1. Evaluating a Firm’s Internal Capabilities
Chapter #3
Evaluating a Firm’s Internal Capabilities

2. 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…

3. 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

4. Opening Case EA SEGA Nintendo Sony Online games Wizards of the Coast
Warhammer
war

5. 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

6. 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

7. 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

8. David Ricardo
Fertile Land Example
Gratuitous Economics
cartoon

9. 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

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

11. 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

12. Ethics and the nature of externalities
Pollution
Education

13. Value Chain McKinsey and Company

14. Value Chain Porter

15. Rarity
ESPN X-games

16. Imitability Sustained competitive Advantage Forms of imitation
Direct duplication
Substitution

17. 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

18. 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

19. 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)

20. 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

21. Organization Formal structure Management control systems
Compensation policies
Complementary resources & Capabilities

22. 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

23. 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

24. 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

27. The responsiblity
Janitor

28. Competitive Parity and Competitive Advantage
Bench marking not sufficient
Must develop proprietary valuable, rare and costly-to imitate resources and capabilities

29. 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

30. Socially Complex Resources
Employee empowerment
Organizational culture
Teamwork

31. The role of organization
Structure
Control Systems
Compensation Policies