Slide 3.

4: Resources and
capabilities analysis

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.2

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

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.3

4.1 Introduction

Two key notions underlie the analysis of resources and capabilities.

•The first is that organizations are not identical but have diff­erent
resources and capabilities; they are ‘heterogeneous’ in this respect.
•The second is that it can be diffi„cult for one organisation to obtain or
imitate the resources and capabilities of another.

•The resource-based view (RBV) of strategy asserts that the

competitive advantage and superior performance of an organisation is
explained by the distinctiveness of its capabilities.

•The chapter has four further sections and the key issues posed by the
chapter are summarised in Figure 4.1.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.4

Resources and capabilities: the key issues

Figure 4.1 Resources and capabilities: the key issues

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.5

4.2 Foundations of resources and

capabilities

The resources and capabilities of an organisation

contribute to its long-term survival and potentially
to competitive advantage.

However, to understand and to manage

resources and capabilities it is necessary to
explain their components.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.6

4.2.1 Resources and capabilities

• Resources are the assets that organisations

have or can call upon (e.g. from partners or
suppliers),that is, ‘what we have’ .
• Capabilities or competences are the ways
those assets are used or deployed effectively,
that is, what we do well’.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.7

4.2.2 Threshold and distinctive

resources and capabilities
Threshold resources and capabilities are those needed for an organization to meet the
necessary requirements to compete at all in a given market and achieve parity with
competitors in that market. – ‘qualifiers’.
Distinctive resources and capabilities are required to achieve competitive advantage– ‘winners’.

Table 4.1 Resources and capabilities

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.8

4.3 Distinctive resources and capabilities as a

basis of competitive advantage

Four key criteria by which resources and

capabilities can be assessed in terms of
them providing a basis for achieving such
competitive advantage:
•Value,
•Rarity,
•Inimitability and
•Organizational support – or VRIO.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.9

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

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.10

Organisational knowledge

Organisational knowledge is the collective

intelligence, specific to an organisation,
accumulated through both formal systems and
the shared experience of people in that
organisation.

Some of this knowledge is ‘Tacit’ knowledge

that is, more personal, context-specific and
hard to formalise and communicate – so it is
difficult to imitate, for example, the knowledge
and relationships in a top R&D team.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.11

4.3.1 V – value of resources and

capabilities
Strategic capabilities are of value when they:
• take advantage of opportunities and neutralise threats,
• provide value to customers
• taking advantage of opportunuties and neutralising threats
• at a cost that allows an organisation to realise acceptable levels of
return

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.12

4.3.2 R – rarity

• Rare capabilities are those possessed uniquely

by one organisation or by a few others only.
(E.g. a company may have patented products,
have supremely talented people or a powerful
brand.)
• Rarity could be temporary.
(Eg: Patents expire, key individuals can leave
or brands can be de-valued by adverse
publicity.)

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.13

4.3.3 I – inimitability

Inimitable capabilities are those that competitors

find difficult to imitate or obtain.
• Competitive advantage can be built on unique
resources (a key individual or IT system) but
these may not 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.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.14

Criteria for the inimitability of

resources and capabilities

Figure 4.3 Criteria for the inimitability of resources and capabilities

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.15

4.3.4 O – organisational support

To fully take advantage of the resources and capabilities an

organisation’s structure and formal and informal management control
systems need to support and facilitate their exploitation.

The question of organisational support works as an adjustment factor.

Some of the potential competitive advantage can be lost if the

organization is not organized in a way that it can fully take advantage
of valuable, rare and inimitable resources and capabilities.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.16

4.4 Analysing resources and

capabilities

If managers are to manage the resources

and capabilities of their organization, the
sort of analysis explained here,
•the VRIO analysis tool,
•the value chain and system,
•activity systems,
•benchmarking, and
•SWOT, are centrally important.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.17

4.4.1 VRIO analysis

• A VRIO analysis thus 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 and (iv) supported by the
organisation.

Resources and capabilities provide sustainable bases of competitive

advantage the more they meet all four criteria.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.18

4.4.2 The value chain and value

system
• The value chain describes the categories of
activities within an organisation which,
together, create a product or service.
• The value chain invites the strategist to think of
an organisation in terms of sets of activities –
sources of competitive advantage can be
analysed in any or all of these activities.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.19

The value chain

Figure 4.4 The value chain within an organisation

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

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.20

Uses of the value chain

• A generic description of activities –

understanding the discrete activities and how
they both contribute to consumer benefit and
how they add to cost.
• 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) Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.21

The value system

• 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.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.22

The value system

Any one organisation is part of a wider value system of di­fferent interacting
organisations.

Figure 3.5 The value system

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

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.23

Uses of the value system

• Understanding cost/price structures across

the value network – analysing the best area
of focus and the best business model .
• Identifying ‘profit pools’ within the value
network and seek to exploit these.
• The ‘make or buy’ decision: deciding which
activities to do ‘in-house’ and which to
outsource.
• Partnering and relationships – deciding who
to work with and the nature of these
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.24

4.4.3 Activity systems

• 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.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.25

Mapping activity systems

• A means of identifying
strategic capabilities in
terms of linkages of
activities
• Internal and external links
are identified (e.g. in terms
of the needs of customers).
• Therefore helps identify
bases of competitive
advantage.
• And sustainable advantage
for example, in terms of
bases of inimitability.

Illustration 4.6 Activity systems at Geelmuyden.Kiese

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.26

4.4.4 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). Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.27

4.4.5 SWOT
SWOT summarises the strengths, weaknesses,
opportunities and threats likely to impact on
strategy development.

INTERNAL STRENGTHS WEAKNESSES

ANAYSIS

EXTERNAL OPPORTUNITIES THREATS

ANALYSIS

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.28

Uses of SWOT analysis

• Key environmental impacts are identified using the

analytical tools explained in Chapter 2.
• Major strengths and weaknesses are identified
using the analytic tools explained in Chapter 3.
• 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, opportunities and threats in relation
to competitors.
• SWOT can be used to generate strategic options–
using a TOWS matrix.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.29

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.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.30

The TOWS matrix

Figure 4.7 The TOWS matrix

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.31

4.5 Dynamic capabilities

• an organisation’s ability to renew and

recreate its resources and capabilities to
meet the needs of changing environments.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.32

Developing strategic capabilities (1)

Internal capability development:

• 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.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.33

Developing strategic capabilities (2)

• Internal capability development – building and

recombining capabilities, leveraging capabilities,
stretching capabilities.
• External capability development – adding
capabilities through mergers, acquisitions or
alliances.
• Ceasing activities – non-core activities can be
stopped, outsourced or reduced in cost.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.34

Chapter summary (1)

• Strategic capabilities comprise both resources and

competences.
• The concept of dynamic capabilities highlights that
strategic capabilities need to change as the market
and environmental context of an organisation
changes.
• Sustainability of competitive advantage is likely to
depend on an organisation’s capabilities being of at
least threshold value in a market but also being
valuable, relatively rare, intimable and non-
substitutable.

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011
Slide 3.35

Chapter summary (2)

Ways of diagnosing organisational capabilities

include:
• Benchmarking as a means of understanding the
relative performance of organisations.
• Analysing an organisation’s value chain and value
network as a basis for understanding how value to
a customer is created and can be developed.
• Activity mapping as a means of identifying more
detailed activities which underpin strategic
capabilities.
• SWOT analysis as a way of drawing together an
understanding of strengths, weaknesses,
opportunities and threats an organisation faces.
Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011