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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