Week 4:Firm Resources and Capabilities

Learning Objectives

By the end of today’s session, you should be able to:

Delineate the role of resources and capabilities in shaping firm strategy.

Discuss the role of resources and capabilities in achieving and maintaining a competitive advantage.

Identify ways in which firms can develop resources and capabilities.

Define core competencies.

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Some Definitions

Resources are factors of production such as labor, capital, processes and knowledge.

Capabilities refer to the action (production) limits of the firm.

Activities refer to specific well-defined and effective business processes (i.e., invoicing, delivery).

A core competency is a unique firm level strength.

A competitive advantage is an inherent and underlying advantage that gives the firm the potential for a profitability edge over its competitors.

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Why It Makes Sense to “See” the Firm through the Lens of Its Resources and CapabilitiesThe Resource-Based-View of the Firm Framework

Resources and capabilities are the fundamental determinants of what a firm can achieve.

Ability to minimize resource intensity usage while maximizing capabilities determines a firm’s profit potential.

Environments are complex and dynamic. As they change, focusing on firm’s resources and capabilities offers a less “risky” option to developing firm strategy.

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Assumptions of the Resource-Based-View of the Firm Framework

Resource heterogeneity – bundles/combinations of resources, capabilities and competencies vary (and sometimes are unique) across firms.

Resource immobility – resources, capabilities and competencies (and their bundles) are “sticky”, and they don’t easily transition from firm to firm.

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Resource Types

Types:

Tangible.

Intangible.

Human resources (both tangible and intangible).

How do you identify resources:

Can it be used to create value that directly or indirectly can be monetized?

Does it have any economic application?

Can it enhance the value of an existent resource?

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ResourcesGrant et al. (2012)

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RESOURCE CHARACTERISTICS INDICATORS
Tangible Resources Financial Borrowing capacityInternal funds generation Debt/Equity ratioCredit ratingNet cash flow
Physical Plant and equipment:Size, location, technology flexibility.Land and buildingsRaw materials Market value of fixed assets.Scale of plantsAlternative uses for fixed assets
Intangible Resources Technology Patent, copyrights, know-how, R&D facilitiesTechnical and scientific employees Number of patents ownedRoyalty income R&D expenditureR&D staff
Reputation Brands, customer loyalty, company reputation (with suppliers, customers, government) Brand equityCustomer retentionSupplier loyalty
Human Resources Training, experience,adaptability, commitment and loyalty of employees Employee qualifications,Pay rates, turnover

Example: Reputation

2021 Most Admired Firms:

Apple

Amazon.com

Microsoft

Walt Disney

Starbucks

Berkshire Hathaway

Alphabet

JPMorgan Chase

Netflix

Costco Wholesale

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What Makes Reputation?

Ability to attract and retain talented people.

Management excellence.

Socially responsible.

Creativity/innovativeness

High quality service/product.

Efficiency.

Financial soundness.

Long-term investment value.

Effectiveness in doing business globally

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CapabilitiesGrant et al. (2012)

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FUNCTION CAPABILITY EXEMPLARS
CORPORATE FUNCTIONS Financial control Management developmentStrategic innovationMultidivisional coordinationAcquisition managementInternational management ExxonMobil, PepsiCo General Electric, Shell Google, FacebookUnilever, ShellCisco Systems, General ElectricShell, Ford
MANAGEMENT INFORMATION Comprehensive, integrated MIS network linked to managerial decision making Wal-Mart, Capital One, Dell
R&D ResearchInnovative new product developmentFast-cycle new product development IBM, Merck3M, AppleCanon,
OPERATIONS Efficiency in volume manufacturing Continuous improvements in operationsFlexibility and speed of response Briggs & Stratton, YKKToyota, Harley-DavidsonFour Season Hotels
PRODUCT DESIGN Design capability Apple, Samsung
MARKETING Brand managementBuilding reputation for qualityResponsiveness to market trends Procter & Gamble, UnileverJohnson & JohnsonMTV, L’Oreal
SALES AND DISTRIBUTION Effective sales promotion and executionEfficiency and speed of order processingSpeed of distributionCustomer service PepsiCo, PfizerTicketmaster, Netflix Amazon.comSingapore Airlines, Caterpillar

Effective Combinations of Resources and Capabilities Can Lead to:

Core competencies.

Competitive advantages.

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The Relationship between Resources, Capabilities and Firm Strategy Grant et al. (2012)

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The Relationship between Resources, Capabilities and Competitive AdvantageGrant et al. (2012)

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The Link Between Resources, Capabilities, Core Competencies and Competitive AdvantageRothaermel (2021)

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Under What Conditions Can a Resource or Capability (or Combination) Yield a SUSTAINABLE Competitive Advantage?

A resource and a capability (or combination of the two) must be (VRIO):

Valuable.

Rare

Inimitable

Organizable

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VRIO FrameworkGrant et al. (2012)

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A Dynamic “State of Mind”The Dynamic Capabilities FrameworkOr How to Maintain Competitive Advantage

Dynamic capability – the ability of a firm to continuously create, adapt, redesign, improve and/or leverage resource and capabilities.

The framework:

Embeds change as a consistent characteristic of the system.

Focus on continuous accumulation of resources and capabilities (and innovative bundling).

Places a premium on adaptive capacity.

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