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Chapter 4: Leveraging Resources and Capabilities
Chapter Outline
LO1: Define resources and capabilities.
1. Key Concepts
A basic proposition of the resource-based view is that a firm consists of a bundle of
productive resources and capabilities. Resources are defined as “the tangible and intangible
assets a firm uses to choose and implement its strategies.” There is some debate regarding
the definition of capabilities. Therefore, in this book, the authors use the terms “resources”
and “capabilities” interchangeably and often in parallel. In other words, capabilities are
defined here the same as resources. One useful way to meaningfully classify the diversity in
the variety of resources and capabilities is to separate the resources and capabilities into two
categories: tangible and intangible. Tangible resources and capabilities are assets that are
observable and quantifiable. By definition, intangible resources and capabilities are harder to
observe and more difficult (or even impossible) to quantify. Yet, it is widely acknowledged
that they must be there, because no firm is likely to generate competitive advantage by
relying on tangible resources and capabilities alone.
2. Key Terms
LO2: Explain how value is created from a firm’s resources and capabilities.
1. Key Concepts
Most goods and services are produced through a chain of vertical activities (from upstream
to downstream) that add value—in short, a value chain. The value chain typically consists of
two areas: primary activities and support activities. Value chain analysis forces managers to
think about a firm’s resources and capabilities at a very micro, activity-based level. Given
that no firm is likely to be good at all primary and support activities, the key is to examine
whether the firm has resources and capabilities to perform a particular activity in a manner
superior to competitors—a process known as benchmarking in SWOT analysis. If managers
find that their firm’s particular activity is unsatisfactory, a decision model (shown in Exhibit
4.3) can remedy the situation.
2. Key Terms
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Chapter 4: Leveraging Resources and Capabilities
LO3: Articulate the difference between keeping an activity in-house and outsourcing it.
1. Key Concepts
In the first stage of the decision model, managers ask, “Do we really need to perform this
activity in-house?” Exhibit 4.4 introduces a framework to take a hard look at this question,
the answer to which boils down to (1) whether an activity is industry-specific or common
across industries, and (2) whether this activity is proprietary (firm-specific) or not.
3. Key Terms
LO4: Explain how to use a VRIO framework to understand a firm’s resources and
capabilities.
1. Key Concepts
Recent progress in the resource-based view has gone beyond the traditional SWOT analysis.
The new work focuses on the value (V), rarity (R), imitability (I), and organizational (O)
aspects of resources and capabilities, leading to a VRIO framework. Overall, only valuable,
rare, and hard-to-imitate capabilities that are organizationally embedded and exploited can
lead to sustained competitive advantage and persistently above-average performance.
Because capabilities cannot be evaluated in isolation, the VRIO framework presents four
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interconnected and increasingly difficult hurdles (Exhibit 4.7). In other words, these four V,
R, I, and O aspects come together as one package.
2. Key Terms
3. Discussion Exercise
Valuable and rare resources and capabilities can be a source of competitive advantage only if
competitors have a difficult time imitating them. What steps would you, as the manager of a
firm, take to preserve the inimitability of your resources? Conversely, how would you
neutralize the inimitable advantage that your competitors have? If you knew that your
competitive advantage was based on imitable resources, how would you ensure the
sustainability of that advantage?
LO5: Identify four things you need to do as part of a successful career and business
strategy.
1. Key Concepts
Shown in Exhibit 4.8, the resource-based view suggests four implications for action. First,
the proposition that firms “compete on resources and capabilities” is not novel. The subtlety
comes when managers attempt, via the VRIO framework, to distinguish resources and
capabilities that are valuable, rare, hard-to-imitate, and organizationally embedded from
those that do not share these attributes. Second, relentless imitation or benchmarking, while
important, is not likely to be a successful in the long run. Third, even a sustainable
competitive advantage will not last forever, particularly in today’s global competition.
Therefore, the lesson for all firms, including current market leaders, is to develop strategic
foresight—over-the-horizon radar is a good metaphor. Such strategic foresight enables firms
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to anticipate future needs and move early to identify, develop, and leverage resources and
capabilities for future competition. Finally, here is a very personal and relevant implication
for action. There are two lessons students can draw. First, the whole debate on offshoring, a
part of the larger debate on globalization, is very relevant and directly affects their future as
a manager, a consumer, and a citizen. Second, be very serious about the VRIO framework of
the resource-based view. In other words, you can use the VRIO framework to develop
yourself into an “untouchable”—a person whose job cannot be outsourced, as defined by
Thomas Friedman in The World Is Flat (2005).
Debate: Emerging Markets/Ethical Dilemma
For and Against Offshoring
1. Key Concepts
Offshoring—or, more specifically, international outsourcing—has emerged as a leading
corporate movement in the 21st century. However, it is debatable whether such offshoring
proves to be a long-term benefit or hindrance to Western firms and economies. Proponents
argue that offshoring creates enormous value for firms and economies. Western firms are
able to tap into low-cost yet high-quality labor, translating into significant cost savings.
Firms can also focus on their core capabilities, which may add more value than dealing with
non-core (and often uncompetitive) activities. While acknowledging that some U.S.
employees may lose their jobs, proponents suggest that on balance, offshoring is a win-win
solution for both U.S. and Indian firms and economies.
Critics make three points on strategic, economic, and political grounds. Strategically, if
“even core functions like engineering, R&D, manufacturing, and marketing can be moved
outside,” what is left of the firm? U.S. firms have gone down this path before—in
manufacturing—with disastrous results. Economically, critics question whether developed
economies, on the whole, actually gain more. Finally, critics make the political argument
that many large firms in developed economies are unethical and are interested only in the
cheapest and most exploitable labor. For firms in developed economies where this debate
primarily takes place, the choice is not really offshoring versus nonoffshoring, but where to
draw the line on offshoring.
2. Key Term
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Closing Case Discussion Guide
The Rise of Alibaba
Founded in 1999 by former English teacher Jack Ma, Alibaba has risen to become the largest e-
commerce firm not only in China, but also in the world. The value of goods sold on Alibaba
platforms eclipses that of Amazon and eBay combined. The rise of Alibaba has been
breathtaking. China is the world’s largest e-commerce market (bigger even than the United
States), and Alibaba controls four-fifths of all e-commerce in China. From a resource-based
perspective, the rise of Alibaba is a story of focus and innovation. “eBay may be a shark in the
ocean,” Ma once said, “but I am a crocodile in the Yangtze River. If we fight in the ocean, I lose;
but if we fight in the river, I win.” The Crocodile of Yangtze, as Ma became known, has largely
focused on China to avoid head-on competition with the eBays of the world elsewhere.
Led by Jack Ma, Alibaba has emerged as a high-profile global leader in e-commerce. Formidable
as Alibaba is, it is not without its challenges. Its business model grows on PC-based e-commerce.
As China moves toward becoming the world’s largest market for smartphones, it is fast moving
to mobile commerce—at a speed faster than any other major economy. According to Alibaba’s
own prospectus, “we face a number of challenges to successfully monetizing our mobile user
traffic.” While he is eager to fight it out for China’s mobile commerce traffic, the Crocodile of
the Yangtze has also been eyeing the wider global ocean. Some 12 percent of Alibaba’s sales are
already overseas. Its most attractive overseas markets are likely to be low-trust, underbanked
emerging economies in Asia, Africa, and Latin America. But sharks such as eBay and Amazon
will not go down without a fight. Looking to the future, whether Alibaba deserves to be one of
the world’s most valuable companies will depend on how it can defend its e-commerce
dominance at home in the mobile era and how it can grow its business abroad.
Video Case
Watch “Leveraging the Hidden Assets in Your Business” by Andrew Sherman of Grow Fast
Grow Right.
1. Although Sherman does not specifically refer to “SWOT,” how does he illustrate one
element of SWOT analysis?
2. Sherman referred to a professor who claims that the balance sheets of S&P 500 companies
reflect only 15 percent of their value. What point was he trying to make?
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3. Sherman urged small business people to find “Rembrandts in the attic.” What did he mean
by that? How does one do that?
4. Do you agree with Mr. Sherman’s comments about intellectual capital? For a small business
firm seeking to expand globally, how does leveraging intellectual capital compare with
leveraging financial capital?
5. Imagine that you own a small firm that has a limited amount of expertise in technology but
you are concerned about your lack of expertise in many other areas of business. How could
leveraging your expertise provide a means of obtaining the capabilities that you lack?
Additional Discussion Material
(From Prep Cards)
Critical Discussion Questions
1. Pick any pair of rivals (such as Samsung and Sony, Nokia and Motorola, and Boeing and
Airbus) and explain why one outperforms the other.
2. Conduct a VRIO analysis of your business school relative to the top three rival schools in
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terms of (1) perceived reputation (such as rankings), (2) faculty strength, (3) student quality,
(4) administrative efficiency, (5) IT, and (6) building maintenance. If you were the dean and
had a limited budget, where would you invest precious financial resources to make your
school number one among rivals? Why?
3. On Ethics: Ethical dilemmas associated with offshoring are plenty. Pick one of these
dilemmas and make a case either defending your firm’s offshoring activities or arguing
against such activities. (Assume that you are employed at a firm headquartered in a
developed economy).
Review Questions
1. Describe two types of tangible resources and capabilities, and describe two types of
intangible resources and capabilities.
The students’ answers will vary. Tangible resources and capabilities (assets that are
observable and easily quantified) can be broadly categorized in four categories:
Financial resources and capabilities (cash and equity)
Physical resources and capabilities (offices and equipment)
Technological resources and capabilities (organization’s computers and Web servers)
Organizational resources and capabilities (organization’s policies and procedures)
2. What is commoditization?
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3. What are the components of VRIO?
4. Why is imitation difficult?
5. How do complementary assets and social complexity influence a firm’s organization?
6. Outline the two positions in the debate on offshoring versus nonoffshoring.
Two main arguments exist in favor of offshoring. Proponents argue that offshoring creates
enormous value for firms and economies. Western firms are able to tap into low-cost yet
high-quality labor, translating into significant cost savings. Firms can also focus on their
core capabilities, which may add more value than dealing with non-core (and often
uncompetitive) activities. While acknowledging that some U.S. employees may lose their
jobs, proponents suggest that, on balance, offshoring is a win-win solution for U.S. and
Indian firms and their respective economies. Offshoring offers firms access to low-cost,
high-quality labor. At the same time, it allows them to focus on their core capabilities.
7. Explain the difference between primary activities and support activities in a value chain.
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8. Redraw Exhibit 4.5, adding definitions to each of the four terms.
9. When analyzing a value chain with a VRIO framework, what is the most important question
to begin with, and why?
10. How does the rarity of a firm’s resources and capabilities affect its competitive advantage?
11. Which is more difficult: imitating a firm’s tangible resources or its intangible resources?
12. If a firm is successful domestically, is it likely to be successful internationally? Why, or why
not?
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13. What is one common mistake that managers often make when evaluating their firm’s
capabilities?
14. What is the likely result of relentless imitation or benchmarking?
15. How would you characterize strategic foresight?