CHAPTER 4
LEVERAGING RESOURCES AND CAPABILITIES
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. define resources and capabilities.
2. explain how value is created from a firm’s resources and capabilities.
3. articulate the difference between keeping an activity in-house and outsourcing it.
4. explain what a VRIO framework is.
5. understand how to use a VRIO framework.
6. participate in two leading debates concerning leveraging resources and capabilities.
7. draw implications for action.
GENERAL TEACHING SUGGESTIONS
Some students may feel that organizations, especially large MNE’s, are abstract and cannot relate
to them; thus, it may help to personalize concepts. Once the student can see how the concept
applies to him or her, the student may then apply it to large groups of people – i.e. organizations.
Have students discuss their own resources and capabilities and how those might be leveraged.
Perhaps have the students prepare their own SWOT analysis, and then show the application of
the concepts to organizations.
OPENING CASE DISCUSSION GUIDE
LEGO’s Secrets
LEGO bricks can be found everywhere. How has the company maintained its popularity?
Innovation and experimentation are credited for its long-running success. In 1932, LEGO began
making wooden building blocks. In 1947, LEGO experimented successfully with the use of
plastic to make the blocks. Continued research improved the way that the bricks snapped
together. Quality standards are high—higher than any competitor’s standards. The bricks are
nearly indestructible. Backwards compatibility and an array of products focused on the bricks,
continue to keep LEGO a successful company.
CHAPTER OUTLINE: KEY CONCEPTS AND TERMS
Sections I through V of Chapter 4
I. UNDERSTANDING RESOURCES AND CAPABILITIES
1. Key Concept
Resources and capabilities are the tangible and intangible assets a firm uses to choose
and implement its strategies.
2. Key Terms
Capabilities are the tangible and intangible assets a firm uses to choose and
implement its strategies. Also known as resources.
Intangible resources and capabilities are assets that are hard to observe and
difficult (if not impossible) to quantify.
Resources are the tangible and intangible assets a firm uses to choose and implement
its strategies. Also known as capabilities.
SWOT analysis is a tool for determining a firm’s strengths (S), weaknesses (W),
opportunities (O), and threats (T).
Tangible resources and capabilities are assets that are observable and easily
quantified.
II/III. RESOURCES, CAPABILITIES, AND THE VALUE CHAIN
1. Key Concepts
A value chain consists of a stream of activities from upstream to downstream that add
value. A SWOT analysis engages managers to ascertain a firm’s strengths and
weaknesses on an activity-by-activity basis relative to rivals.
Outsourcing is turning over all or part of an organization’s activity to an outside supplier.
An activity with a high degree of industry commonality and a high degree of
commoditization can be outsourced, and an industry-specific and firm specific
(proprietary) activity is better performed in-house.
On any given activity, the four choices for managers in terms of modes and locations are
(1) offshoring, (2) onshoring, (3) captive sourcing/FDI, and (4) domestic in-house
activity.
2. Key Terms
Benchmarking is examining whether a firm has resources and capabilities to
perform a particular activity in a manner superior to competitors.
Captive sourcing is setting up subsidiaries abroad so that the work done is in-house
but the location is foreign. Also known as foreign direct investment (FDI).
Commoditization is a process of market competition through which unique products
that command high prices and high margins gradually lose their ability to do so, thus
becoming commodities.
Offshoring is outsourcing to an international or foreign firm.
Onshoring is outsourcing to a domestic firm.
Outsourcing is turning over an activity to an outside supplier that will perform it on
behalf of the focal firm.
Value chain is a stream of activities from upstream to downstream that add value.
IV. FROM SWOT TO VRIO
1. Key Concept
SWOT (Strengths, Weaknesses, Opportunities, and Threats) is a traditional analytical
tool. A VRIO framework suggests that only resources and capabilities that are valuable,
rare, inimitable, and organizationally embedded will generate sustainable competitive
advantage.
2. Key Terms
Causal ambiguity is the difficulty of identifying the actual cause of a firm’s
successful performance.
Complementary asset is the combination of numerous resources and assets that
enable a firm to gain a competitive advantage.
Social complexity is the socially intricate and interdependent ways firms are
typically organized.
VRIO framework is the resource-based framework that focuses on the value (V),
rarity (R), imitability (I), and organizational (O) aspects of resources and capabilities.
V. DEBATES AND EXTENSIONS
1. Key Concept
Two debates are discussed: Are domestic capabilities the same as international
(cross-border) capabilities? For Western firms and economies, is offshoring beneficial or
detrimental in the long run?
2. Key Terms
Business process outsourcing (BPO) is outsourcing business processes to third-party
providers.
Original brand manufacturer (OBM) is a firm that designs, manufactures, and
markets branded products.
Original design manufacturer (ODM) is a firm that both designs and manufactures
products.
Original equipment manufacturer (OEM) is a firm that executes design blueprints
provided by Western firms and manufactures such products.
Reshoring is moving formerly offshored activities back to the home country of the
focal firm.
VI. MANAGEMENT SAVVY
1. Key Concept
Managers need to build firm strengths based on the VRIO framework. Relentless
imitation or benchmarking, while important, is not likely to be a successful strategy.
Managers need to build up resources and capabilities for future competition. Students are
advised to make themselves “untouchables” whose jobs cannot be outsourced.
2. Key Terms
None