Resources and Capabilities The RBV and the VRIO Framework Core Competences The Value Chain Dynamic Capabilities fisher.osu.edu Objectives Internal Analysis OSU Fisher College of Business Hawk • Strategic Management Industry Effects vs Firm Effects What matters more: industry differences or firm differences? Internal Analysis We are moving more internal…. SWOT and Internal Attributes Barney motivates the article with SWOT analysis. What is SWOT, and how does it fit with the course?SWOT = Strengths, Weaknesses, Opportunities, ThreatsBarney says there are a lot of tools to analyze the external environment (Industry Analysis), but there has been less development of tools to analyze the firm’s strengths and weaknessesBarney provides an approach to analyzing the competitive implications of a firm’s INTERNAL strengths and weaknesses Barney Resources and Capabilities What does Barney call these internal attributes?RESOURCES AND CAPABILITIES!What are these resources and capabilities?All of the financial, physical, human, and organizational assets used by a firm to develop, manufacture, and deliver products or services to its customersFinancial resources = debt, equity, retained earnings, etcPhysical resources = machines, manufacturing facilities, and buildingsHuman resources = all of the experience, knowledge, judgment, risk taking propensity, and wisdom of individualsOrganizational resources = the history, relationships, trust, and organizational culture, along with a firm’s formal reporting structure, explicit management control systems, and compensation policies Barney Tangible and Intangible Resources Rothaermel Chapter 4 Tangible and Intangible Resources Rothaermel Chapter 4SummaryTangible resources = resources that are visible, have physical attributes (buildings, factories, equipment, etc.)Intangible resources = resources that are invisible, have no physical attributes (knowledge, technology, patents)Which is more likely to lead to a competitive advantage? intangible!Google example:Tangible resources valued at $5 billionIntangible resources valued at over $100 billion Barney’s Approach (VRIO) Barney says he provides an easy-to-apply approach to analyzing the competitive implications of a firm’s internal strengths and weaknesses. What is this approach?It is essentially a battery of tests to assess the strategic value of each resource of a firmIt lets us really assess whether a resource will provide SUSTAINABLE competitive advantageManagers should address 4 questions about their resources and capabilities:1. The Question of Value2. The Question of Rareness3. The Question of Imitability4. The Question of OrganizationLet’s go through each one…. Barney The Question of Value What is this?Do a firm’s resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats?What’s the basic idea here?Identify what the firm is good at (ie, boosting ∏)Honda’s engines are reliableNorthstar’s veg ...

1. Resources and Capabilities
The RBV and the VRIO Framework
Core Competences
The Value Chain
Dynamic Capabilities
fisher.osu.edu
Objectives
Internal Analysis
OSU Fisher College of Business
Hawk • Strategic Management
Industry Effects vs Firm Effects
What matters more: industry differences or firm differences?
Internal Analysis
We are moving more internal….
SWOT and Internal Attributes
Barney motivates the article with SWOT analysis. What is
SWOT, and how does it fit with the course?SWOT = Strengths,

2. Weaknesses, Opportunities, ThreatsBarney says there are a lot
of tools to analyze the external environment (Industry
Analysis), but there has been less development of tools to
analyze the firm’s strengths and weaknessesBarney provides an
approach to analyzing the competitive implications of a firm’s
INTERNAL strengths and weaknesses
Barney
Resources and Capabilities
What does Barney call these internal attributes?RESOURCES
AND CAPABILITIES!What are these resources and
capabilities?All of the financial, physical, human, and
organizational assets used by a firm to develop, manufacture,
and deliver products or services to its customersFinancial
resources = debt, equity, retained earnings, etcPhysical
resources = machines, manufacturing facilities, and
buildingsHuman resources = all of the experience, knowledge,
judgment, risk taking propensity, and wisdom of
individualsOrganizational resources = the history, relationships,
trust, and organizational culture, along with a firm’s formal
reporting structure, explicit management control systems, and
compensation policies
Barney
Tangible and Intangible Resources
Rothaermel Chapter 4
Tangible and Intangible Resources

3. Rothaermel Chapter 4SummaryTangible resources = resources
that are visible, have physical attributes (buildings, factories,
equipment, etc.)Intangible resources = resources that are
invisible, have no physical attributes (knowledge, technology,
patents)Which is more likely to lead to a competitive
le:Tangible resources
valued at $5 billionIntangible resources valued at over $100
billion
Barney’s Approach (VRIO)
Barney says he provides an easy-to-apply approach to analyzing
the competitive implications of a firm’s internal strengths and
weaknesses. What is this approach?It is essentially a battery of
tests to assess the strategic value of each resource of a firmIt
lets us really assess whether a resource will provide
SUSTAINABLE competitive advantageManagers should address
4 questions about their resources and capabilities:1. The
Question of Value2. The Question of Rareness3. The Question
of Imitability4. The Question of OrganizationLet’s go through
each one….
Barney
The Question of Value
What is this?Do a firm’s resources and capabilities add value by
enabling it to exploit opportunities and/or neutralize
threats?What’s the basic idea here?Identify what the firm is
good at (ie, boosting ∏)Honda’s engines are reliableNorthstar’s
veggie burger is valuableThink about your own resources and
capabilities. Do they pass the question of value?Maybe you are
good at:GrillingNetworkingPicking stocksDo they have the
potential to boost your profits?
Barney

4. The Question of Rareness
What is this?How many competing firms already possess these
valuable resources and capabilities?What’s the basic idea
here?Valuable but common resources are a source of
competitive parityTo have better performance than competitors,
you need to be unique!To gain competitive advantage, a firm
needs to exploit resources and capabilities that are different
from competitorsKnowledge often diffuses over time, eroding
the “rareness” of resourcesWhat are examples?Toyota good at
lean manufacturing. Is it rare anymore?You start a sports bar.
But there are tons of them.Northstar veggie burger is no where
else = rare
The Question of Imitability
What is this?Do firms without a resource or capability face a
cost disadvantage in obtaining it compared to firms that already
possess it?Why is this important?This is about
SUSTAINABILITY! If yes, firms with these abilities can have
abnormally high profits for a long timeIf no, other firms will
easily do what you are doing and compete away your profitsBig
question: Can firms imitate your skills?Important: evaluate the
relevant barriers to imitation!Critical question: What determines
Imitation?Imitation can occur in two ways:1. Duplication = an
imitating firm builds the same kind of resources as the firm it is
imitating2. Substitution = us esome resource for other resources
Barney
Barriers to Imitation

5. What stops or slows Imitation?1. Better Expectations of Future
Resource ValueThe firm may have anticipated how the market
would evolve better than everyone else and acquired a key
resource on the cheapYou buy real estate in a run down
neighborhood 20 years ago, art galleries and restaurants start
moving in, your real estate is now worth lots of $$$Maybe due
to talent, maybe due to luck
2. Importance of History (Path Dependence)Historically unique
circumstances may have played a part in creating the resources.
You can’t replicate it!Many resources take time to develop!
Costly to rush it. (Time Compression Diseconomies)Caterpillar
and WWII. Gov’t support.Honda took years and years to
develop their engines and engineering ability. You can’t do this
overnight.
Barriers to Imitation
What stops or slows Imitation?3. Importance of Numerous
Small Decisions (Causal Ambiguity)Whether numerous “small
decisions” play a large role in developing and exploiting a
firm’s resources and capabilitiesSome firms are talented
because of lots of little things. They are essentially invisible.
Causal ambiguity = it’s unclear why the resources are good. 4.
Importance of Socially Complex Resources (Social
Complexity)Socially complex = organizational phenomena like
reputation, trust, friendship, teamwork, and cultureA team of 3
replicate!
to answer the Question of Imitability

6. The Question of Organization
What is this?Is a firm organized to exploit the full competitive
potential of its resources and capabilities?What’s the basic idea
here?You also need supporting complementary resources to gain
a competitive advantageComplementary resources = resources
that have limited ability to generate a competitive advantage in
isolation, but in combination with other resources and
capabilities, they enable a firm to realize its full competitive
advantageExamples of complementary resources?Formal
reporting structureExplicit management control
systemsCompensation policiesSales networks
Barney
Applying the Barney framework
Resource A
Resource B
Resource C
Resource D
Valuable?
Rare?
Costly to Imitate?
Exploited by Organization?
Assessment?
No
Yes
Yes
Yes
No
No
Yes
Yes

7. No
No
No
Yes
No
No
Yes
Competitive Disadvantage / Weakness
Competitive Parity / Strength
Temporary Competitive Advantage / Strength and Distinct
Competence
Sustained Competitive Advantage / Strength and Sustainable
Distinctive Competence
No
See Barney and Hesterly 2012
Cane’s Chicken
?
?
?
?
Valuable?
Rare?
Costly to Imitate?
Exploited by Organization?
Assessment?
?
?
?
?
?
?
?

8. ?
?
?
?
?
?
?
?
?
Assumptions of RBV
Note that there are a few key assumptions underlying the
Resource Based View(1) resource heterogeneity = bundles of
resources and capabilities tend to differ across firms(2) resource
immobility = resources tend to be sticky and don’t move easily
from firm to firmThese assumptions suggest resource bundles
differ across firms, and these differences can persist for long
periods of time
Barney
Barney Summary
RBV (Resource Based View) provides a method to study how a
firm’s internal resources and capabilities are a source of
competitive advantageIndustry Analysis, studying the
environment, and picking good industries is not enoughYou
need to have unique resources and capabilities that are valuable,
rare, and costly to imitate. You then need to exploit these
resources through your organizationBarney’s analysis lets us
explicitly test each resource for their potential for providing
sustainable competitive advantageCarefully assess each
question. Try to link to financials. Provide evidence. Explain
the logic.

9. Barney
Barney Summary
Graphical Depiction of VRIO (Barney):
Core Competences
A related concept to the RBV is the notion of “Core
Competences”. What are these?= unique strengths, embedded
deep within the firm, that allow a firm to differentiate its
products and services from those of its rivals, creating higher
value for the customer or offering products and services of
comparable value at lower costIt’s basically the internal
characteristics of the firm that makes the firm have a
competitive advantage“They are built through the interplay of
resources and capabilities”“Resources reinforce core
competencies, while capabilities allow managers to orchestrate
their core competencies.” Core Competences came about at
around the same time as the RBV. (See Prahalad and Hamel
1990.) Very related concepts. The RBV VRIO framework is a
little more precise, easier to apply.
Examples of Core Competences
Link between RBV and Core Competences

10. The Value Chain
Another useful tool for internal analysis is the value chain.
What is it?It is an activity template that describes the internal
activities a firm engages in when transforming inputs into
outputsPrimary Activities = firm activities that add value
directly by transforming inputs into outputs as the firm moves a
product or service horizontally along the internal value
chainInbound logistics, operations, outbound logistics,
marketing and sales, after-sales serviceSupport Activities =
activities that add value indirectly, but are necessary to sustain
primary activitiesR&D, information systems, operations
management, HR, finance, accounting, general management
The Value Chain
Note: You can also just set it up as a table.
The Value Chain
How is the value chain useful?Use it to break down the firm and
understand internal firm characteristics at the activity levelUse
the RBV to test the firm’s resources and capabilities for each
activityUse it to understand the firm as a system of
interconnected activitiesStrategic activity system = the
conceptualization of the firm as a network of interconnected
activitiesA firm’s decisions for each activity are interconnected.
They affect each otherTo gain competitive advantage, all of the
firm’s decisions at the activity level should work in concert.
They should reinforce each other to execute a firm’s

11. strategy.Thus, there are tradeoffs. The firm must decide what to
do for each activity and WHAT NOT TO DO. (Remember Porter
said this?)The Value Chain will be useful for many topics in the
course (especially generic strategies)
Dynamic Capabilities
What are dynamic capabilities? What is the idea?Industries
constantly evolve. This suggests firm’s resources and
capabilities can get outdated. What can firms do to maintain a
competitive advantage?They can evolve! They can adjust their
activity system and update their resources and capabilities to
keep up with the dynamically changing environmentDynamic
Capabilities = a firm’s ability to create, deploy, modify,
reconfigure, upgrade, or leverage its resources in its quest for
competitive advantage. It describes the firm’s ability to
reconfigure its resource base and to create external market
change for others. The dynamic capabilities perspective = a
model that emphasizes a firm’s ability to modify and leverage
its resource base in a way that enables it to gain and sustain
competitive advantage in a constantly changing
environmentDynamic capabilities are an intangible resource
built through continuous investments and experience over
time.Consider IBM as well as the bathtub metaphor….
IBM and Dynamic Capabilities
In 1993, IBM was all about hardware.
Fierce competition in the PC hardware
market ensued. Massive layoffs at IBM…
Today, IBM has reconfigured itself
Into a global IT services company.

12. Dynamic Capabilities and the Bathtub
SWOT
Recap: What is SWOT again? How does everything we’ve
discussed so far relate to SWOT?A framework that allows
managers to synthesize insights obtained from an internal
analysis of the company’s strengths and weaknesses (S and W)
with those from an analysis of external opportunities and threats
(O and T).You probably are thinking of the 2 by 2 matrices you
sometimes see.We basically have done a big SWOT analysis in
the class so far.We’ve gone in depth into analyzing the external
environment (this is the O and T)We’ve gone in depth into
analyzing the internal characteristics of the firm (this is the S
and W)Use SWOT to try to link internal factors to external
factors to develop recommendations. Use it to synthesize your
entire analysis.
SWOT
For next session…
Business Level StrategiesRead Rothaermel Chapter 6Review
Rothaermel Chapter 4