Global StrategyGlobal StrategyMike W. PengMike W. Peng

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© 2009 Peng Global Strategy 2E© 2009 Peng Global Strategy 2E

Leveraging Leveraging Resources and Resources and

CapabilitiesCapabilities

© 2009 Peng Global Strategy 2E 3–2

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 3–3

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 3–4

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 3–5

Resources and Capabilities

• TangibleResources and

capabilities that are observable and easily quantified

Broadly organized in four categories:FinancialPhysical TechnologicalOrganizational

• IntangibleResources and

capabilities not easily observed or difficult (or impossible) to quantify

Examples include:Human Innovation Reputational

© 2009 Peng Global Strategy 2E 3–6

Examples of Resources and Capabilities

Table 3.1

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.

© 2009 Peng Global Strategy 2E 3–7

Resources, Capabilities, and the Value Chain

• Value ChainThe functional activities within the firm that

create value in the goods and services produced

• Components of the Value ChainPrimary activities

Are directly associated with the development, production, and distribution of goods and services.

Support activitiesAssist in the accomplishment of primary activities.

© 2009 Peng Global Strategy 2E 3–8

The Value Chain

Figure 3.1

Panel A. An example of value chain with firm boundaries

© 2009 Peng Global Strategy 2E 3–9

The Value Chain (cont’d)

Figure 3.1 cont’dPanel B. An example of value chain with some outsourcing

© 2009 Peng Global Strategy 2E 3–10

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

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Location, Location, Location

© 2009 Peng Global Strategy 2E 3–13

The VRIO Framework

• VRIOAn 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 immobilityResources and capabilities unique to one firm

cannot easily migrate to competing firms.

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Table 3.2. VRIO framework

© 2009 Peng Global Strategy 2E 3–15

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 3–16

The VRIO Framework: Rarity

• The Question of RarityValuable 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 advantageSIA 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 3–17

The VRIO Framework: Imitability

• The Question of ImitabilityValuable 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 3–18

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 3–19

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?

• A More Fundamental QuestionWhy 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

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© 2009 Peng Global Strategy 2E 3–21

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 3–22

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 3–23

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 3–24

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