Exploring Strategy

11th edition
Text and Cases

Chapter 4
Resources and
capabilities

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 Learning outcomes
• Identify organisational resources and capabilities and
how these relate to the strategies of organisations.
• Analyse how resources and capabilities might provide
sustainable competitive advantage on the basis of their
Value, Rarity, Inimitability and Organisational support
(VRIO).
• Diagnose resources and capabilities by means of
benchmarking, VRIO analysis, value chain analysis,
activity systems mapping and SWOT analysis.
• Consider how resources and capabilities can be
developed based on dynamic capabilities.

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Resources and capabilities:
the key issues

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 Resource-based strategy
The resource-based view (RBV) of strategy
asserts that the competitive advantage and
superior performance of an organisation are
explained by the distinctiveness of its capabilities.

It is sometimes also called the ‘capabilities view’.

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Foundations of resources and capabilities

The resources and capabilities of an organisation

contribute to its long-term survival and
potentially to competitive advantage.
• Resources are the assets that organisations have or
can call upon (e.g. from partners or suppliers), that is
‘what we have’.
• Capabilities (sometimes referred to as competences)
are the ways those assets are used or deployed, that is
‘what we do well’ .

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Table 4.1 Resources and capabilities

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 Redundant capabilities
• Capabilities, however effective in the past, can
become less relevant as industries evolve and
change.
• Such ‘capabilities’ can become ‘rigidities’ that
inhibit change and become a weakness.

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 Threshold and distinctive
capabilities (1 of 2)
• Threshold capabilities are those needed for an
organisation to meet the necessary requirements
to compete in a given market and achieve parity
with competitors in that market – ‘qualifiers’.
• Distinctive capabilities are those that are
required to achieve competitive advantage.
Distinctive or unique capabilities that are of value
to customers and which competitors find difficult
to imitate – ‘winners’.

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Threshold and distinctive
capabilities (2 of 2)

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 Core competences
Core competences1 are the linked set of skills,
activities and resources that, together:
•deliver customer value
•differentiate a business from its competitors
•potentially, can be extended and developed as
markets change or new opportunities arise.

1G. Hamel and C.K. Prahalad, ‘The core competence of the corporation’, Harvard Business
Review, vol. 68, no. 3 (1990), pp. 79–91.

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 Strategic capabilities and
competitive advantage
The four key criteria by which capabilities can be
assessed in terms of providing a basis for
achieving sustainable competitive advantage are:
•value
•rarity
•inimitability and VRIO1
•organisational support

Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal of

1

Management, vol. 17, no. 1 (1991), pp. 99–120.

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VRIO (1 of 5)

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 VRIO (2 of 5)

V – Value of resources and capabilities

Strategic capabilities are of value when they:
• take advantage of opportunities and
neutralise threats;
• provide value to customers;
• are provided at a cost that still allows an
organisation to make an acceptable return.

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 VRIO (3 of 5)

R – Rarity
• Rare capabilities are those possessed uniquely by
one organisation or only by a few others.
(e.g. a company may have patented products, have
supremely talented people or a powerful brand.)
• Rarity could be temporary.
(e.g. Patents expire, key individuals can leave or
brands can be de-valued by adverse publicity.)

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 VRIO (4 of 5)

I – Inimitability
Inimitable capabilities are those that competitors find
difficult and costly to imitate, to obtain or to substitute.
•Competitive advantage can be built on unique resources
(a key individual or IT system) but these may not always
be sustainable (key people leave or others acquire the
same systems).
• Sustainable advantage is more often found in
competences (the way resources are managed,
developed and deployed) and the way competences
are linked together and integrated.
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Criteria for the inimitability of resources
and capabilities

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 VRIO (5 of 5)
O – Organisational support
The organisation must be suitably organised to
support the valuable, rare and inimitable
capabilities that it has. This includes appropriate
processes and systems.

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 Organisational knowledge
Organisational knowledge is organisation-specific,
collective intelligence, accumulated through both
formal systems and people’s shared experience.
‘Explicit’ knowledge or ‘objective’ knowledge is
transmitted in formal systematic ways, e.g. systems
manuals or market research.
‘Tacit’ knowledge is more personal, context-
specific, hard to formalise and communicate and is
difficult to imitate, e.g. the knowledge and
relationships in a top R&D team.

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 VRIO analysis
A VRIO analysis helps to evaluate if, how and to
what extent an organisation or company has
resources and capabilities that are :
(i) valuable;
(ii) rare;
(iii) inimitable;
(iv) supported by the organisation.

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 The value chain (1 of 2)
• The value chain describes the categories of
activities within an organisation, which, together,
create a product or service.
• The value chain consists of five primary activities
(which are directly concerned with the creation or
delivery of a product or service) and four support
activities (which help to improve the effectiveness
or efficiency of primary activities).
• Competitive advantage can be analysed in any of
these activities.

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 The value chain (2 of 2)

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by
Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved.

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 The value system (1 of 2)
• The value system comprises the set of inter-
organisational links and relationships that are
necessary to create a product or service.
• Competitive advantage can be derived from
linkages within the value system.

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 The value system (2 of 2)

Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by
Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved.

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 Uses of the value chain
• A generic description of activities –
understanding how the discrete activities (or
clusters of linked activities) contribute to
consumer benefit .
• Identifying activities where the organisation has
particular strengths or weaknesses.
• Analysing the competitive position of the
organisation using the VRIO criteria – thus
identifying sources of sustainable advantage.
• Looking for ways to enhance value or decrease
cost in value activities (e.g. outsourcing).

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 Uses of the value system
• Understanding cost/price structures across the
value system – analysing the best area of focus
and the best business model.
• Identifying ‘profit pools’ (i.e. The levels of profit
in different parts of the system) – seeking ways
to use existing capabilities in order to exploit
these.
• The ‘make or buy’ decision – which activities to
do ‘in-house’ and which to outsource.
• Partnering – deciding who to work with and the
nature of these relationships.

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 Mapping activity systems (1 of 2)
• Identify ‘higher order strategic themes’, that is,
how the organisation meets the critical success
factors in the market.
• Identify the clusters of activities that underpin
these themes and how they fit together.
• Map this in terms of how activity systems are
interrelated.

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Mapping activity systems (2 of 2)

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 Using activity system maps
• Relationship to the value chain. Understanding
and identifying strategic capabilities in terms of
activities and linkages.
• The importance of linkages and fit. How the
internal and external activities create value for
customers by supporting each other.
• Relationship to VRIO. How these activities and the
way they link/fit together can be the source of
sustainable competitive advantage.
• Superfluous activities.
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 Benchmarking
Benchmarking is a means of understanding how
an organisation compares with others – typically
competitors.
Two approaches to benchmarking:
•Industry/sector benchmarking – comparing
performance against other organisations in the same
industry/sector against a set of performance indicators.
•Best-in-class benchmarking – comparing an
organisation’s performance or capabilities against
‘best-in-class’ performance – wherever that is found
even in a very different industry. (e.g. BA benchmarked
its refuelling operations against Formula 1).

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 SWOT analysis
SWOT provides a general summary of the Strengths
and Weaknesses explored in an analysis of strategic
capabilities (Chapter 4), and the Opportunities and
Threats explored in an analysis of the environment
(Chapters 2 and 3).

INTERNAL ANALYSIS = STRENGTHS

WEAKNESSES

EXTERNAL ANALYSIS = OPPORTUNITIES

THREATS

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 Uses of SWOT analysis (1 of 2)
• Major strengths and weaknesses are identified
using the analytic tools explained in Chapter 4.
• Scoring (e.g. + 5 to −5) can be used to assess the
interrelationship between environmental impacts
and the strengths and weaknesses.
• SWOT can be used to examine strengths,
weaknesses, in relation to competitors.
• Focus on strengths and weaknesses that differ in
relative terms compared to competitors and
leave out areas where the organisation is at par
with competitors.
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 Uses of SWOT analysis (2 of 2)
• Key opportunities and threats are identified using
the analytical tools explained in Chapters 2 and 3.
• Focus on opportunities and threats that are directly
relevant for the specific organisation and industry
and leave out general and broad factors.
• Summarise the results and draw concrete
conclusions.
• SWOT can be used to generate strategic options –
using a TOWS matrix.

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The TOWS matrix

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 Dangers in a SWOT analysis
• Long lists with no attempt at prioritisation.
• Over generalisation – sweeping statements
often based on biased and unsupported
opinions.
• SWOT is used as a substitute for analysis – it
should result from detailed analysis using the
frameworks in Chapters 2 and 3.
• SWOT is not used to guide strategy – it is seen
as an end in itself.

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 Dynamic capabilities
Dynamic capabilities are the means by which an
organisation has the ability to renew and recreate
its strategic capabilities to meet the needs of
changing environments.

Such capabilities are distinct from ordinary

capabilities that may be necessary to operate
efficiently now but that may not be sufficient to
sustain superior performance in the future.

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 Generic dynamic capabilities
• Sensing capabilities – constantly scanning and
exploring new opportunities across markets and
technologies (e.g. R&D and market research)
• Seizing capabilities – addressing opportunities
through new products, processes and activities
• Re-configuring capabilities – new products and
processes may require renewal and re-configuration
of capabilities and investment in new technologies.

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 Developing strategic capabilities
(1 of 2)
Internal capability development
• Building and recombining capabilities – this
requires creative entrepreneurial skills (e.g. a
culture that promotes capability innovation)
• Leveraging capabilities – identifying capabilities in
one part of the organisation and transferring them
to other parts (sharing best practice)
• Stretching capabilities – building new products or
services out of existing capabilities.

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 Developing strategic capabilities
(2 of 2)
• External capability development – adding
capabilities through mergers, acquisitions or
alliances
• Ceasing activities – non-core activities can be
stopped, outsourced or reduced in cost
• Monitor outputs and benefits – to better
understand sources of consumer benefit and
enhance anything that contributes to this
• Awareness development – recognising what
enhances strategy. Training, development and
organisation learning are important.
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 Summary (1 of 3)
• To be able to compete at all in a market an
organisation needs threshold resources and
capabilities, but to achieve sustained competitive
advantage they also need to be unique and distinctive.

• To be distinctive and provide for sustainable

competitive advantage, resources and capabilities need
to fulfil the VRIO criteria of being Valuable, Rare,
Inimitable and supported by the Organisation.

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 Summary (2 of 3)
Ways of diagnosing organisational resources
and capabilities include:
•VRIO analysis of resources and capabilities to evaluate
if they contribute to competitive advantage.
•Analysing an organisation’s value chain and value
system to understand how value to a customer is
created and can be developed.
•Activity systems mapping to identify more detailed
activities which underpin resources and capabilities.

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 Summary (3 of 3)
• SWOT analysis drawing together an understanding of
the strengths, weaknesses, opportunities and threats
an organisation faces.
• Benchmarking to understand the relative
performance of organisations.
• Managers need to adapt and change resources and
capabilities if the environmental changes and this can
be done based on dynamic capabilities.

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