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In this chapter, we turn our attention to inside the firm. One of the key messages of this chapter is that a firm’s ability to gain
and sustain competitive advantage is partly driven by core competencies—unique strengths that are embedded deep within a
firm. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value
for the customer or offering products and services of comparable value at lower cost. We will analyze why differences in firm
performance exist within the same industry and ground this discussion with theory-based analytical frameworks.
To gain a better understanding of why and how firm differences explain competitive advantage, we begin this chapter by
Learning Objectives
LO 4-1 Differentiate among a firm’s core competencies, resources, capabilities, and activities.
LO 4-2 Compare and contrast tangible and intangible resources.
LO 4-3 Evaluate the two critical assumptions behind the resource-based view.
LO 4-4 Apply the VRIO framework to assess the competitive implications of a firm’s resources.
LO 4-5 Evaluate different conditions that allow a firm to sustain a competitive advantage.
LO 4-6 Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.
LO 4-7 Apply a value chain analysis to understand which of the firm’s activities in the process of
transforming inputs into outputs generate differentiation and which drive costs.
LO 4-8 Conduct a SWOT analysis to generate insights from external and internal analysis and derive
strategic implications.
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ChapterCase
STRATEGY SMART VIDEO EXAMPLE
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This commercial for Beats Electronics might be an upbeat way to start class.
CONSIDER THIS DISCUSSION QUESTIONS
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The ChapterCase argues that Beats Electronics’ core competency lies in its marketing savvy and in Dr. Dre’s coolness
factor. Do you agree with this assessment? Why or why not?
Students who argue in favor of Beats’ marketing savvy should be challenged to provide specific evidence from the textbook
to support their opinions, such as “Prior to Beats, no musician endorsed audio headphones in the same way as a basketball
player such as Michael Jordan endorsed his line of Nike shoes, Air Jordan. Dr. Dre was the first legendary music producer to
endorse premium headphones. In addition, he created custom Beats for stars such as Justin Bieber, Lady Gaga, and Nicki
Minaj. Other music celebrities including Skrillex, Lil Wayne, and will.i.am endorsed Beats by wearing them in their music
videos and at live events and mentioning them on social media. But Beats did not stop at musicians. Famous athletes—
music’s savviest marketing minds.”
Students who argue against this assessment should be challenged to provide evidence from their experience or other sources
that other firms in Beats’ industry outperform them on marketing savvy or that this capability is neither rare nor valuable.
If you believe that Apple bought Beats Electronics to bring Jimmy Iovine and Dr. Dre into Apple, what are the
potential downsides of this multibillion–dollar “acqui–hire” (an acquisition to hire key personnel)?
Some issues that might be raised in this section of the discussion are the possibility that Iovine and Dre might be less
If Beats Electronics’ core competencies are indeed intangibles, such as coolness and marketing savvy, do you think
these competencies will remain as valuable under Apple’s ownership? Why or why not?
This argument could easily be argued on both sides. The negative side would consider the issues raised above on organization
size and culture, as well as the ability to transfer coolness or personal contacts. On the positive side these music and other
The ChapterCase provides at least three theories why Apple purchased Beats Electronics. Which of those do you
believe are most accurate, and why?
Improving its position in the music industry, enhancing the coolness of its own brand, or acquiring talent were probably all
4
4.1 Core Competencies LO 4–1
POWERPOINT SLIDES 6–11
EXAMPLES
POWERPOINT SLIDE 8
NEWER FACULTY: You might want to begin your lecture by returning to the illustration of peeling back layers of an onion to
show students the strategic analysis process of beginning in the broad macroenvironment, closing in to the industry
environment, and then finally reaching the firm environment. Refer to Exhibit 4.1 to help students put external and internal
analysis in context. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating
higher value for the customer or offering products and services of comparable value at lower cost. The important point here is
that competitive advantage can be driven by core competencies.
POWERPOINT SLIDE 11
Sony’s strategy in the consumer electronics industry was to first build the resources and capabilities to successfully
commercialize a pocket radio. This success laid the foundation for Sony’s core competency in the miniaturization of
electronic technology and was subsequently applied to the Sony Walkman, followed by its MP3 Player. In the same industry
STRATEGY SMART VIDEO EXAMPLES
POWERPOINT SLIDE 61
Honda’s development of its core competencies through learning from its mistakes is discussed in this video.
POWERPOINT SLIDE 62
Steve Jobs and Bill Gates describe core competency development in this video.
POWERPOINT SLIDE 63
Steve Jobs describes capabilities and competitive advantage in this video.
EXERCISE
EXPERIENCED FACULTY: Encourage students to work in small groups to develop a list of resources for a simple case, then a
list of capabilities. When they have spent a few moments on this, call on various groups to allow you to create a list of
resources and capabilities on the board. Then explain how resources work in concert with capabilities. As an example using
the Starbucks MiniCase, you might discuss how Starbucks’ resource of exclusive supply contracts with superior coffee
growers, combined with Starbucks’ capabilities to roast coffee and to train highly skilled baristas, enables them to create a
core competence of superior tasting coffee. In a capstone course, you might use this exercise to illustrate the interaction of
business-level strategy and marketing functional strategy. AACSB 2015 Standard 9 Integrating knowledge across fields
END OF CHAPTER SMALL GROUP EXERCISE 1
POWERPOINT SLIDE 55
Brand valuations were mentioned in the chapter as a potential key intangible resource for firms. Some product brands are so
well established that the entire category of products (including those made by competitors) may be called by the brand name
rather than the product type. In your small group, develop two or three examples of this happening in the marketplace. In any
of the cases noted, does such brand valuation give the leading brand a competitive advantage? Or does it produce confusion
in the market for all products or services in that category? Provide advice to the leading brand as to how the firm can
strengthen the brand name.
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Students will have a variety of answers for this activity. Many classic retail products such as Band-Aid, Kleenex, ChapStick,
and Coke will come up in the small groups. In addition, Google is commonly mentioned for all things search-related on the
knowledge across fields
DISCUSSION TOPICS
When firms diversify into a new industry, they are faced with acquiring new competencies to compete with firms already
established in that industry. Verizon and AT&T are faced with the fact that smartphone market penetration may be reaching
its limits in the U.S. In search for other growth areas, they have decided to tackle video media. They are taking advantage of
the disruption to that industry as viewers move away from cable television. Each firm has chosen a different point of entry to
the industry (satellite for AT&T and mobile video streaming for Verizon) and a different entry method (acquisition for
AT&T and organic development for Verizon). Discuss the competencies that each firm will need for this diversification and
the pros and cons of acquisition versus organic development as a means to gain those competencies. (See “Verizon, AT&T
chart different paths” T Gryta 10/19/15 The Wall Street Journal.)
Disney offers a great subject for a discussion of leveraging core competencies across multiple product lines and industries.
Their new strategy of focusing their business around “franchises” is designed to maximize the benefits of this effort. (See
“How Disney milks its hits for profits ever after” B Fritz 6/9/15 The Wall Street Journal.) Using the Frozen franchise as an
example, ask students to discuss the risks of having a large portion of their revenue tied to each single key resource,
especially one that is tied to the consumer preferences of children. How might Disney mitigate that risk (beyond broader
diversification)? (See “With ‘Cinderella’ Disney recycles fairy tales without cartoons” B Fritz 3/11/15 The Wall Street
Journal for one such idea.)
Tying the concepts in this section back to what students learned in Chapter 2, the traits and competencies of a firm’s leaders
are critical competencies for a firm’s success. You can assign this article, “Do you have the right leaders for your growth
strategy?” July 2011 McKinsey Quarterly, as a springboard for a discussion of human skills as resources and capabilities.
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END OF CHAPTER DISCUSSION QUESTION 1
POWERPOINT SLIDE 7
Why is it important to study the internal resources, capabilities, and activities of firms? What insights can be gained?
Because it gives managers the ability to formulate a tailored strategy for their company according to the resources,
INTEGRATION
Case Analysis and Interactive Labeling: Internal Analysis: Looking Inside the
Firm
This case analysis and interactive click and drag activity uses a brief case on the resource-based view of the firm. It
complements the book’s discussion about core competencies. The student must read the textbook and also the case
provided here. Then, the student will drag the elements to the correct locations. Finally, students will complete a related
quiz with three questions. Note that the interactive can be worth more points than each multiple choice question, thus
representing the effort needed to complete. Difficulty: Medium Blooms: Apply AACSB: Analytic

Follow-Up Activity: The instructor can expand on the concepts from this interactive by comparing the concepts of
competencies and resources. In particular, students will often benefit from a discussion of the differences between
intangible resources and competencies. Student groups can be assigned one of the intangible resources in Exhibit 4.4 and
develop some core competencies that could develop using this resource.
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Extended Discussion
NEWER FACULTY:
Nike’s core competency is to create heroes. What does this mean? How did Nike build its core competency? Does
it obey the VRIO attributes?
Nike chose as celebrity endorsers athletes that succeeded against the odds, overcame hardships, or came from
disadvantaged backgrounds. They identified future superstars and placed huge bets on a single athlete in a sport. They
began with basketball and gradually moved to add athletes in other sports. Celebrity endorsements are valuable because
they attract brand loyalty. Moreover, Nike celebrities appeal to a broad range of athletes and non-athletes as a result of
the emotional draw of the back stories. Few of Nike’s competitors have taken this approach, so it is still a rare
capability. The existing contracts provide some protection against imitation with specific heroes, but there are a lot of
athletes out there with interesting life stories, so rivals could imitate this competence. Others may argue that the
expertise Nike has built over the years creates path dependent barriers to imitation. Students might also point out that
among potential celebrity endorsers, there is probably more of a cachet associated with signing with Nike than other
brands because everyone wants to be a hero. Clearly Nike has organized its firm resources and processes around this
competence and embedded it deep within the firm. Others might argue that the high level of risk in this strategy, as seen
from the multiple failures outlined in the case, illustrate how challenging it can be for the firm to control the value of
this competence. The balance of benefit gained between the athlete and the firm can easily tip against Nike if the athlete
gets into trouble.
What would it take for Nike’s approach to turn from a strength into a weakness? Did this tipping point already
occur? Why or why not?
Students are likely to point out that Nike’s competence in creating heroes by focusing on athletes from disadvantaged
backgrounds can lead and has led to public relations nightmares. It is risky. The key to this discussion is to draw in the
An obvious way of diversifying risk is to spread endorsement funds across multiple athletes, this reduces the positive
impact of each association on the brand, but it also reduces the negative impacts of a “failed hero.” Students may come
up with many new ideas on how to build heroes. One such concept that would lower the firms risk is to reduce the
emphasis on heroes that have risen from disadvantaged circumstances to heroes who serve the community through
charitable activities. Since these heroes would be multidimensional with both athletic and philanthropic successes, they
may fall from grace less spectacularly.
tactics. Ideas might include: keeping disgraced endorsers in the limelight, developing endorsement deals with other
athletes, creating campaigns based on the idea that everyone is a hero to someone, or creating endorsement deals with
child athletes. AACSB 2015 Standard 9 Thinking creatively
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4.2 The Resource–Based View LO 4–2
PowerPoint Slides 12–15
EXAMPLES
Sequential Brands is a firm that is based entirely on intangible assets, recognized brands (see “Martha Stewart’s new boss:
textbook with mixed tangible and intangible assets for challenging students to identify the firm’s core competencies.
POWERPOINT SLIDE 15
In 2015, Google sought permission to build new 3.4 million square feet campus across four pieces of land near the edge of
7, 2015.
EXERCISES
POWERPOINT SLIDE 14
Assign each of the examples in Exhibit 4.2 to a different team and ask them to develop a list of the tangible resources,
intangible resources, and capabilities that are needed to deliver the core competency of the firm.
DISCUSSION TOPICS
To augment the textbook’s description of the reasons that intangible resources are more likely to lead to competitive
advantage than external resources, it may be interesting to discuss the challenges of managing key resources that are largely
intangible. Two things to emphasize are ownership and control. Contrast manufacturing equipment, such as a superior
performing heat exchanger, with brand value or knowledge stocks, such as a deep understanding of the relationship of a range
of chemical drugs to the disease conditions that they are designed to treat. When you go home in the evening and then come
back to the plant, your heat exchanger is still there, bolted to the ground. Your knowledge stocks, although you may own
them (through employee contracts) and they may be documented in patents and other firm codified knowledge, the bulk of
their value is in the minds of employees, who could retire or change employers at any time. Your equipment is going to
operate the same way today as it did yesterday and basically do what it is told to do. Your employees may have new ideas
that they are not motivated to share at work. Although your brand value is recognized as good will on your balance sheet, it
lies fundamentally in the minds and perceptions of your customers. This perception is entirely out of your control. You may
be able to influence how customers perceive your brand, but you cannot control it or otherwise exercise your “ownership” to
improve it.
IKEA has disclosed that its brand value is $11 billion. What are the ramifications of this fact for strategic management?
Would you conclude from the resource-based view that there are only advantages to maximizing your brand value or are
there some disadvantages of having large intangible corporate assets? (See “IKEA discloses $11 B secret” 8/13/12 The Wall
Street Journal.) AACSB 2015 Standard 9 Integrating knowledge across fields
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4.2 The Resource–Based View LO 4–3
POWERPOINT SLIDE 16
STRATEGY SMART VIDEO LECTURE
POWERPOINT SLIDE 60
This video offers an introduction to the resource-based view by one of its founding researchers, Jay Barney. It can be used as
a substitute for the introductory portion of your lecture on this theory or assigned as preparation before class in a hybrid
course.
EXAMPLES
Invite students to identify examples of resource heterogeneity within an industry: For example, compare the search algorithm
Invite students to identify examples of resource immobility within an industry: For example, long patent lives for proprietary
drugs, long-term licenses for access to petroleum reserves (usually 20 years or more), trademark protection for valuable
4.2 The Resource–Based View LO 4–4
POWERPOINT SLIDES 17–21
EXAMPLES
NEWER FACULTY: We recommend describing each of the four characteristics of the VRIO analysis separately in your
lecture. Of particular note is that the fourth characteristic is actually about the organization or firm itself rather than its
resources. This point is often difficult for students to grasp, as they are often not used to ordering their thoughts into levels of
analysis, so it is worth emphasizing.
In some instances, firms are able to create a competitive advantage but fail to capture it because of actions of their
stakeholders. This sounds like a contradiction, doesn’t it? It is not. Consider this: Once a firm has created a competitive
advantage, a battle can ensue over how the spoils of that competitive advantage are split among the firm’s different
stakeholders. In the U.S. car industry, the United Auto Workers (UAW) union had such a stronghold on GM, Chrysler, and
Ford that some argue they were a major factor in creating a competitive disadvantage (although management signed the labor
contracts with the unions). In the investment banking industry, employees are powerful stakeholders. Skilled human capital is
one of the most important resources in investment banking (as in other professional services such as management consulting
and law firms). As a consequence of their strong position, the combined annual bonuses of investment banks’ employees
frequently exceed the bank’s net income. In 2007, the year before the financial meltdown, the net income of the big-five U.S.
investment banks combined (Bear Sterns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley) was a little
over $10 billion, and the total of the bonuses paid to the employees was close to $40 billion. During 2008, the worst year in
terms of stock performance since the Great Depression, the big-five investment banks lost $25 billion, but still paid bonuses
that exceeded $25 billion. These data show that although investment banks clearly have valuable resources (namely,
employees) that can create competitive advantage, those same resources are powerful stakeholders that can capture the value
they create. By capturing that value, the employee stakeholders left less value for other stakeholders, such as stockholders or
customers. AACSB 2015 Standard 9 Economic, political, regulatory, legal, technological, and social contexts of
organizations in a global society
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tomography (CAT) scanner. This technology, for which EMI received several patents, can take three-dimensional pictures of
the human body and is considered to be the most important breakthrough in radiology since the discovery of X-rays. The
resource, it was not able to protect itself from GE’s substitution attempt.
When resources are rare, firms can buy them, build them, or develop an alliance to share them. An example to illustrate this
is artificial intelligence capability (see “Artificial intelligence experts are in high demand” M Mizroch 5/4/15 The Wall Street
Journal). This article compares the alternatives of engaging in a bidding war for talent versus partnering with a university to
develop new talent.
Costly to Imitate: Google’s core competency in creating proprietary algorithms to develop software products and services
for the Internet and mobile computing is valuable, rare, and costly to imitate. Although Microsoft clearly has a strength in
developing operating system and application software for the PC, it lacks Google’s ability to create a superior web search
engine despite its efforts with Bing. Google’s core competency in developing proprietary algorithms that underlie its web–
based products and services is thus costly and difficult for Microsoft (and others) to imitate. The combination of the three
resource attributes (V + R + I) has allowed Google to enjoy a competitive advantage.
POWERPOINT SLIDE 17
Use the leading video game consoles, Sony’s PlayStation 3, Microsoft’s Xbox One, and Nintendo’s Wii, to illustrate Exhibit
4.5. Sony and Microsoft tend to compete on stronger technological prowess, a larger library of games, and deeper pockets of
cash. On the other hand, Nintendo has over the years created and nurtured a valuable, rare, and hard–to-imitate resource: a deep
understanding of the casual gamer that has enabled Nintendo to develop products that respond to the casual gamer’s
preferences. With the introduction of its Wii game console, Nintendo’s knowledge of the “casual gamer” became a valuable
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EXERCISE
An excellent exercise to illustrate a VRIO analysis is the Egg Drop exercise described in: Warner, A. G. 2005. “An Egg–
Centric Approach to Teaching Strategic Types: Adapting a Classic Exercise.” J of Mgt Educ. (29) 583. It is also fun for
students. AACSB 2013 Standard 9 Thinking creatively
END OF CHAPTER DISCUSSION QUESTION 3
The resource-based view of the firm identifies four criteria that managers can use to evaluate whether particular
resources and capabilities are core competencies and can, therefore, provide a basis for sustainable competitive
advantage. Are these measures independent or interdependent? Explain. If (some of) the measures are
interdependent, what implications does that fact have for managers wanting to create and sustain a competitive
advantage?
INTEGRATION
Case Analysis and Interactive Labeling: Internal Analysis: Looking Inside the
Firm
This activity builds student comprehension of the VRIO elements by examining a case about the development of casual
gaming by Nintendo. The student must read the case provided, as well as the relevant textbook section, to answer the
questions in this exercise. Difficulty: Medium Blooms: Apply AACSB: Analytic

The instructor can expand on the concepts from this case analysis by having students discuss another example of this
VRIO process—for example, Groupon in Strategy Highlight 4.1. Class or small group discussions can also be created
around the similarities and differences in these firms. Both Nintendo and Groupon have faltered more recently, what
VRIO steps could they have taken to extend their competitive advantage?