CHAPTER 3
LEVERAGING RESOURCES AND CAPABILITIES
CHAPTER OUTLINE
I. OPENING CASE: Enhancing Value, Rarity, and Inimitability at Burberry
A. Founded in 1856, Burbury is an iconic British brand
1. Most famous for its World War I trenchcoats
2. Earned a royal warrant as official supplier to Royal family
C. Angela Ahrendts became Burberry CEO in 2006 and focused on Burberry’s value, rarity,
and inimitability: the company’s Britishness
D. Burberry adopted a new strategy based on its iconic trench coat
1. Sells more than 300 products related to trench coats and expanded the style and colors
of trench coats available
2. Most Burberry trench coats are priced above US$1000
II. UNDERSTANDING RESOURCES AND CAPABILITIES
A. The resource-based view posits that a firm consists of a bundle of productive resources
and capabilities
E. Resources and capabilities can be divided into two categories
1. Tangible resources and capabilities: assets that are observable and can be easily
quantified. They can be classified as:
a. Financial : Examples include firm’s ability to generate funds and raise external
capital
b. Physical: Examples include infrastructure and geographic locations
c. Technological: Examples include the number of inventions or patents a firm has
to its credit
Chapter 3 Leveraging Resources and Capabilities
c. Reputation: Examples include a firm’s ability to establish its reliability
III. RESOURCES, CAPABILITIES, AND THE VALUE CHAIN
A. A value chain analysis allows us to see the connection between resources, capabilities,
and value
B. Value chain—most goods and services are produced through a chain of vertical activities
that add value
E. Outsourcing is an option that a firm can exercise if it does not need to perform an activity
in-house
F. Another factor that needs to be taken into account is the geographic dimension, to take
advantage of spatial locations, domestic versus foreign locations. This has led to the
usage of the following terms:
1. Offshoring—international/foreign outsourcing
2. Onshoring—domestic outsourcing
G. A value chain analysis allows managers to ascertain a firm’s strengths and weaknesses on
an activity-by-activity basis, relative to rivals, in an SWOT analysis
IV. FROM SWOT TO VRIO
A. The resource-based view has shifted from the traditional SWOT analysis to a VRIO
framework
B. The focus in on the value (V), rarity (R ), imitability (I), and organizational (O) aspects of
capabilities, leading to a VRIO framework
C. Four fundamental questions are answered by the VRIO framework:
3. The question of imitability—how challenging is it for competitors to imitate valuable
and rare resources/capabilities?
a. Easier to imitate tangible resources/capabilities than intangible ones
b. Why is imitation difficult? Causal ambiguity—difficulty of identifying the causal
determinants of successful firm performance
Chapter 3 Leveraging Resources and Capabilities
c. Valuable, rare, but imitable resources/capabilities may provide temporary
competitive advantage
d. Only valuable, rare and hard-to-imitate resources/capabilities can lead to
sustained competitive advantage
V. DEBATES AND EXTENSIONS
A. The resource-based view has its share of controversies and debates
B. The four leading debates are:
1. Firm-specific versus industry-specific determinants of performance
2. Static resources versus dynamic capabilities
3. Offshoring versus non-offshoring
4. Domestic resources versus international capabilities
D. Static resources versus dynamic capabilities
1. Logic of the resource-based view is relatively static
2. Critics suggest that the resource-based view should incorporate dynamic capabilities
a. Tacit knowledge represents the ultimate dynamic capability a firm can possess
b. “Learning before doing” versus “learning by doing”
E. Offshoring versus non-offshoring
1. Offshoring or international outsourcing has emerged as a leading corporate movement
2. Outsourcing low-end manufacturing is common
3. But the increased outsourcing of high-end services, particularly IT services and all
sorts of business process outsourcing (BPO), is controversial
4. It is debatable whether such offshoring is beneficial or a hindrance to Western firms
Chapter 3 Leveraging Resources and Capabilities
7. Critics use a political argument against outsourcing—Western firms are unethical and
are interested only in the cheapest and most exploitable labor
VI. THE SAVVY STRATEGIST
A. The savvy strategist can draw three important implications for action
1. There is nothing new about the proposition that firms compete on resources and
capabilities
outsource
2. Relentless imitation or benchmarking is not likely to be a successful strategy. It might
be better for a firm to develop its own unique and innovative capabilities
3. A competitive advantage that is sustained does not imply that it will last forever.
Competitive advantage has become shorter in duration
B. Firms should try to develop “strategic foresight”—to be able to anticipate future needs
and build appropriate resources/capabilities
C. The resource-based view provides answers to the four fundamental questions:
1. Why do firms differ?
a. Resource heterogeneity—firms have different bundles of resources/capabilities
2. How do firms behave?
3. What determines the scope of the firm?
a. How a firm performs different value-adding activities relative to rivals
4. What determines the international success and failure of firms?
Chapter 3 Leveraging Resources and Capabilities
CHAPTER THREE – LECTURE NOTES AND TEACHING TIPS
SUMMARY OF THE OPENING CASE: Enhancing Value, Rarity, and Inimitability at
Burberry
The opening case looks at Burberry and how it found that a Burberry trench coat designed and
manufactured in the UK is valuable, rare, and impossible to imitate by rivals.
Teaching Tip: Ask students to respond to the following case discussion questions (Possible
answers are included in italics):
Why did Burberry find itself trailing other luxury brands?
Why would Britishness be an asset to Burberry?
The trench coat, considered a British invention, was at the company’s roots. Thus a trench coat
UNDERSTANDING RESOURCES AND CAPABILITIES
Teaching Tip: Ask students to analyze the factors behind a particular company’s success. What
are the resources and capabilities available to the company? What motivates them to do better
than their competitors?
As detailed in the chapter, resources are defined as “the tangible and intangible assets a firm uses
to choose and implement its strategies.” The definition of capabilities is more controversial.
Chapter 3 Leveraging Resources and Capabilities
RESOURCES, CAPABILITIES, AND THE VALUE CHAIN
Teaching Tip: Form students into groups and assign each group a particular industry. Ask each
group to show how they would attempt to start a business in that industry and seek to gain an
advantage through resources, capabilities, and the value chain.
In an effort to understand how a firm’s resources and capabilities come together to add value, the
perform a particular activity better than competitors.
Teaching Tip: Assign students to small groups. Ask them to discuss the issue of outsourcing and
each group can present their views to the rest of the class. Is outsourcing ethical? In what
situations would you consider outsourcing unethical?
Value-adding activities do not necessarily reside within the company. Recently, the trend of
outsourcing is becoming more common. Outsourcing is defined as turning over all or part of an
FROM SWOT TO VRIO
Teaching Tip: Ask students to look at a company selling a popular product—a soft drink or a
computer, for instance. Ask them to analyze the resources and capabilities of the company using
the VRIO framework.
This section introduces the VIRO framework, which originates from the value (V), rarity (R),
imitability (I), and organization (O) aspects of resources and capabilities. There are two
assumptions being made under this framework. First, it is the assumption of resource
Chapter 3 Leveraging Resources and Capabilities
(2) The question of imitability—how challenging is it for competitors to imitate valuable and
rare resources/capabilities?
Valuable and rare resources and capabilities can be a source of competitive advantage only if
competitors have a difficult time imitating them. Tangible resources are relatively easy to
imitate, while intangible resources are not. Imitation is difficult because of causal ambiguity,
which refers to the difficulty of identifying the causal determinants of successful firm
performance.
Overall, valuable, rare, but imitable resources and capabilities may give firms some
temporary competitive advantage that leads to above-average performance during some time.
However, such advantage is not likely to be sustainable. Only valuable, rare, and hard-to–
imitate resources and capabilities potentially lead to a sustained competitive advantage.
Teaching Tip: Students can get understandably frustrated with the resource-based, VIRO model
if the instructor merely emphasizes the historical and path-dependent nature of resources. Their
predictable concern, after memorizing the model, is that it doesn’t have practical application.
“Suppose my firm does not have those historical resources? Suppose we do not have reputational
and historical skills (like Hewlett Packard or Disney) that can be used to create competitive
advantage, then what?” Discuss this problem, that is, how can a firm acquire resources and
capabilities, and build new ones? How can a firm spur the creation of a whole new industry, such
as Southwest did with the low-cost, no-frills airline model, or the firm that created the fresh cut
salads in a bag, by developing new and fairly unique competencies and resources (e.g., first
mover-brand names, technological standards, franchising models) in that field?
DEBATES AND EXTENSIONS
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Teaching Tip: Ask students to consider, perhaps in small groups initially, how a firm such as
Abbott Labs or Pfizer creates and maintains a competitive advantage. Pfizer is more dependent
on a pipeline of patent-protected medicines, while Abbott, in addition to pharmaceuticals, has a
Chapter 3 Leveraging Resources and Capabilities
This section discusses the four common debates under the resource-based view: (1) firm- versus
industry-specific determinants of performance, (2) static resources versus dynamic capabilities,
(3) rent generation versus appropriation, and (4) domestic resources versus international
capabilities.
The second debate stems from the relatively static nature of the resource-based view, which may
be adequate for slower-moving industries but is less satisfactory for dynamically faster-moving
industries. Hence, the resource-based view is urged to be strengthened by a heavier emphasis on
dynamic capabilities. Recently, the shift to “knowledge economy” has made scholars and
strategy consultants urge a “knowledge–based” view of the firm. Tacit knowledge, probably the
most valuable, unique, hard-to-imitate, and organizationally complex of all the resources, may
represent the ultimate resource (or ability to create new knowledge, a dynamic capability) that a
firm has in its arsenal to build competitive advantage. Overall, recent research on dynamic
capabilities suggests that the existing resource-based view may have overemphasized the role of
leveraging existing resources and capabilities and underemphasized the role of developing new
ones.
The third debate looks at offshoring that has emerged as a leading corporate movement.
Outsourcing low-end manufacturing is widely practiced. But increased outsourcing of more
high-end services, particularly IT services and all sorts of business process outsourcing (BPO),
has proved to be controversial. Digitization and commoditization of service work have been
enabled by the rise of the Internet and the reduction of international communication costs, but
their long-term impact is yet to be understood. Thus, it is debatable whether offshoring will
Chapter 3 Leveraging Resources and Capabilities
THE SAVVY STRATEGIST
Teaching Tip: Buy or build. Ask students how they think top management can actually impact
strategy and performance in terms of firm resources. After some discussion, suggest novel ways
in which firms such as Cisco and Microsoft have bought resources by acquiring a number of
small firms. Microsoft’s acquisition of Hotmail is one of many such acquisitions of technology
that Microsoft was slow to develop or did not understand (Microsoft top management was late in
integrating Internet-related applications to its products, though they finally moved very
aggressively in that direction, with Internet Explorer and Hotmail). Ask students what might
hinder a firm from developing new resources and capabilities such that they have to acquire
them.
This part summarizes the three key implications for strategists in this chapter. First, strategists
must have some sense of what really matters and how they can affect and utilize firm resources
and capabilities. Through the VRIO framework, only those resources and capabilities that are
valuable, rare, hard-to-imitate, and organizationally embedded, can possibly lead to sustained
competitive advantage and persistently above-average performance. (Example: managerial
talents.) This section points out three significant lessons from the VRIO framework. First of all,
some firms outperform others, even within the same industry, because the winners have some
Chapter 3 Leveraging Resources and Capabilities
POSSIBLE ANSWERS TO CRITICAL DISCUSSION QUESTIONS
1. Pick any pair of rivals in the same industry (such as Boeing/Airbus and Apple/Samsung), and
explain why one outperforms another.
Answers can vary depending on the example chosen by the student. You could ask students to
2. ON ETHICS: Ethical dilemmas associated with offshoring are plenty. Pick one of these
dilemmas and make a case to either defend your firm’s offshoring activities or argue against
such activities (assuming you are employed at a firm headquartered in a developed
economy).
The students should read up on the pros and cons of globalization, both from this text, and in
outside reading (the instructor should suggest this). An excellent source, apart from the many
3. ON ETHICS: Since managers read information posted on competitors’ websites, is it ethical
to provide false information on resources and capabilities on corporate websites? Do the
benefits outweigh the costs?
In the information technology industry, IT bosses and buyers used to have a term for this false
advertising of capabilities and products: they called it “vaporware.” Firms used to get
themselves in trouble by promising things they could not deliver, or by saying that new
Chapter 3 Leveraging Resources and Capabilities
TOPICS FOR EXPANDED PROJECTS
1. Conduct a VRIO analysis by ranking your school in terms of the following six dimensions
relative to the top three rival schools. If you were the dean with a limited budget, where
would you invest precious financial resources to make your school number one among its
rivals?
The students should be given some hints on what constitutes faculty strength. If this is given
for homework, ask them to look up nearby (in terms of rating) schools on the Business Week
2. The Opening Case introduces Burberry, which is 160 years old in 2016. Find another firm in
any industry and any country that has also survived 100 years. Find the “secrets” behind the
longevity of this firm.
Answers may vary. There are a number of companies that are more than 100 years old. The
focus of this exercise should be to figure out what is unique about these companies. Some of
3. ON ETHICS: Highly successful firms ranging from Standard Oil in the 1910s to Microsoft
in the 1990s have been accused by the government and many critics for engaging in “unfair”
competition to “crush competitors.” As CEO of one of the successful firms that is being sued
by the government for engaging in such behavior, how do you defend your firm from a
resource-based view?
Answers will vary. Answers should emphasize the competitive advantage in utilizing its
resource and performance capabilities.