This chapter discusses leveraging resources and capabilities. It defines resources and capabilities as tangible and intangible assets a firm can use strategically. Resources can be organized into four categories: financial, physical, technological, and organizational. Intangible resources like human capital, innovation, and reputation are also discussed. The value chain is introduced as the set of value-creating activities from product design to support. Primary and support activities of the value chain are outlined. Configuration and coordination of the value chain are explained in relation to factors like costs, clusters, logistics, and culture. The VRIO framework is presented as a tool to assess the competitive potential of resources based on their value, rarity, imitability, and ability to

1. CHAPTER 3
Leveraging Resources and Capabilities
LEARNING OBJECTIVES
1. Understanding resources and capabilities
2. Define value chain
3. Discuss how to manage value chain
4. Explain change and the value chain
5. Discuss value, rarity, imitability, and
organizational aspects of resources and
capabilities or VRIO framework
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2. Understanding Resources & Capabilities
1. Most firms have a bundle of productive resources and capabilities.
2. Resources can be defined as tangible and intangible assets that a firm
can utilize to strategize its business. Since they are considered as
assets, they can easily be measured.
3. The best way to measure them is through organizing them into four
categories.
 First, financial resources and capabilities refer to the company financial
reliability for example generating internal funds or raising external capital.
 Second, physical resources and capabilities refer to location of plants,
offices, and equipment and access to raw materials and distribution
channels.
 Third, technological resources and capabilities refer to the ability to invent
and create patterns, trademarks, and copyrights.
 Finally, organizational resources and capabilities refer to planning,
command, control and structure systems in an organization.
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3. Understanding Resources & Capabilities (2)
1. While tangible resources are easier to quantify, it’s the opposite for
intangible resources and capabilities.
2. Intangible can be something that exists in a company such as the ability
to be competitive.
 The first example of intangible resources and capabilities is human.
Human typically are able to generate knowledge, trust, be able to
observe talent and understand organizational culture.
 Second, innovation refers to skills and assets for a company to
generate new ideas through research and development and
inventing new ways of doing things.
 Finally, reputational resources and capabilities refer to a company
ability to develop and leverage its reputation and image as the best
place to work or the best socially responsible company. Reputation
is an important indicator that signal a company work culture and
competitiveness process.
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4. What is the Value Chain?
1. The value chain is the set of linked value-creating activities
the company performs to design, produce, market,
distribute, and support a product. value-chain analysis helps
managers understand the behavior of costs and existing
and potential sources of differentiation.
2. A value chain separates a firm into:
• primary activities that create and deliver the product
• support activities that aid the individuals and groups
engaged in primary activities.
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5.  Configuration is the way in which managers
arrange the activities of the value chain i.e.
company concentrated performing all value
activities in one location or dispersed various
value activities in different countries.
 Coordination is the way that managers
connect the activities of the value chain
whether performed in one or many countries.
5Configuration vs Coordination Explained

6. Primary Activity Description
Product Design The basis of the firm’s advantage that sets the function, characteristics,
and aesthetics of the product or process.
Operations Activities that transform inputs into finished product; issues of concern
include raw material procurement, sourcing components, supply chains,
plant location, manufacturing process, parts production, and assembly.
Marketing Informing buyers and consumers about products and services.
Encouraging consumption by applying the marketing mix, developing
sales force, devising packaging scheme, defining the brand, and
advertising.
Outbound Logistics The task of moving the finished product from operations to wholesalers,
retailers, or the final consumers. Issues of concern include demand
chains, channels, inventory, warehousing, and transportation.
Service Customer support in term of installation, after- sales service, complaints
handling, and training. Key activities include warranty, captive or
independent services networks, market coverage, and speed of
response.
Primary Activities of the Value Chain
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7. Support Activity Description
Materials and Equipment Management of the procurement, transportation, storage, and
distribution of materials and equipment necessary to conduct
primary activities.
Human Resources
Management
Recruiting, developing, motivating, and rewarding the
workforce of the company. Supervising labor-relations
activities
System and Solutions Managing information processing and the development of
specialized knowledge of primary activities. Issues involve
management information system and process automation,
along with the integration of relevant technologies such as
telecom, wireless, and cloud systems.
Infrastructure General management functions that enable day-to-day
operation in the company. Activities include accounting and
finance, legal and regulatory affairs, safety and security,
quality control, and other overhead functions.
Support Activities of the Value Chain 7

8. Configuration:
Using The Value Chain
 the dynamism of prevailing economic, legal, political, and
cultural conditions spurs managers to consider the cost
implication of broader features of the environment.
 effectively, managers organize their configuration of value
activities in term of (1) macro cost factors as well as the
moderating influence of (2) cluster effects, (3) logistics, (4)
digitization, (5) economies of scale, and (6) business
environments.
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9. Configuration:
Using The Value Chain (1)
1) MACRO COST FACTORS
Manufacturing costs vary from country to country because
of wage rates, worker productivity, resource availability, and
fiscal and monetary policies. wage differences, both
present and projected, drive value-chain configuration for
many MNEs e.g. the quest for productive, low-cost labour
has led tens of thousands of MNEs to open operations in
China.
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10. Configuration:
Using The Value Chain (2)
2) CLUSTER EFFECTS
An industry cluster is a system of businesses and institutions engaged
with one another at various levels. a peculiarity of value creation is the
so-called cluster effect, in which a particular industry gradually clusters
more and more related value creation activities in a specific location.
Effectively, industry cluster are geographic concentrations of
competing, complementary, or interdependent firm and industries that
do business with each other and share overlapping needs for talent,
technology, and infrastructure. for example, London is center for global
finance, Baden –Württemberg for cars and electrical engineering,
Silicon Valley for technology, and Hollywood for entertainment.
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11. Configuration:
Using The Value Chain (3)
3) LOGISTICS
Logistics entails how companies obtain, produce, and exchange
material and services in the proper place and in proper quantities for
the proper value activity. for example, consider the production of
lithium ion batteries. First, companies must mine lithium and move it
from Bolivia to a manufacturing plant in Guangzhou, which ships
lithium ion batteries to a distributor in France, who then supplies
market channels in the European Union. Each transaction, whether
physical or informational, involves an exchange between different
activities of the value chain.
These exchange transactions fall under the broad construct of
logistics. the importance of logistics to configuration of a value chain
follows from the fact that conducting business across the world opens
the potential for high transaction costs. Minimizing exchange expense
by efficiently configuring the location of the value activities is a source
of competitive advantage.
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12. Configuration:
Using The Value Chain (4)
The process of digitization involves converting an analog product into a
string of zeros and ones. increasingly, products like software, music, and
books, as well as services like call centers, application processing, and
financial consolidation, can be digitized and, hence, located virtually
anywhere. Equipped with networked computers, workers can move
goods and services anywhere in the world at negligible cost and
complication. Consequently, the potential for digitization of goods or
services influences how a company configures its value chain.
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4) DIGITIZATION

13. Configuration:
Using The Value Chain (5)
5) ECONOMIES OF SCALE
The concept of economies of scale refers to a situation
wherein a firm doubles its cumulative output yet total cost
less than doubles due to efficiency gains. Effectively,
reductions in the unit cost of a product result from the
increasing efficiency that comes with larger operations.
value chains identify the format and interactions between
different activities of the company.
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14. Configuration:
Using The Value Chain (6)
6) BUSINESS ENVIRONMENT
Companies normally try to configure value chains whether to access or
avoid a particular country based on its business environment. Some of
these countries commonly promise business-friendly markets that offer
tax holidays, reduced long-term tax rates, low cost capital agreement,
flexible operating requirements, and responsive public policies.
companies would weigh various opportunities to streamline value
activities and improve cost competitiveness. In 2009, Denmark,
followed, by the United States, Canada, Singapore, and New Zealand,
were widely regarded as the best countries for business.
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15. Coordination
SEVERAL FACTORS INFLUENCE VALUE CHAIN
COORDINATION:
• National cultures
• Learning effects
• Operational obstacles
• Subsidiary networks
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16. Coordination:
National Culture
1. The globalization of a company’s value chain, such as design done in
Finland, inputs sourced from Brazil, production done in China,
distribution organized in the United States, and service done in Mexico,
presses managers to understand how foreign cultures influence
coordination.
2. National cultures also impose hurdles in coordinating a transaction from
one stage of the value chain to another units anchored in individual
versus collectivist cultures may disagree over information sharing or
collaboration responsibilities; conflicts complicate coordination. Hence,
features of national culture require managers to understand their
implications to the collaborative relationship that shape the coordination
of value activities.
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17. Coordination:
Learning Curve
1. Essentially, as managers use and improve coordination practices, their
increasing proficiency improves the performance of the value chain.
managers, for example learn by recurring experiences how to transfer
best practice from country to country, thereby gaining insights of the
value chain as a whole instead of a collection of parts.
2. for example, an MNE may have factories in different countries, such as
Japan and Mexico, which manufacture the same product apply different
production philosophies. the Mexican factory may use a traditional
assembly-line operation given the local conditions of inexpensive labor,
patchy transportation infrastructure, and marginal cost of high
technology.
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18. Coordination:
Learning Curve
3. The Japanese factory, in contrast, may use a lean production system
given local labor competency, manufacturing expertise, and efficient
logistics. the different manufacturing approaches complicate how
managers coordinate activities between factories. planning to learn how
to coordinate these links in the value-chain positions the MNE to gain
production efficiencies that lead to lower costs, higher quality, satisfied
customers, and new sales.
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19. Coordination:
Operational Obstacles
1. operating internationally inevitably runs into communication challenges
because of time zones, differing languages, and ambiguous meanings.
increasingly, companies rely on browser-based communications
methods to coordinate the handoffs from link to link.
2. the thinking goes that electronically linked producers and retailers can
lower coordination costs throughout the value chain. in addition,
standardizing the format for data input helps standardize the format for
interpretation.
3. electronic transactions boost efficiency by reducing intermediary
transactions and the associated unneeded coordination (streamlining
the distributor link in the value chain by eliminating an intermediary).
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20. Coordination:
Subsidiary Networks
1. the growing prevalence of social networks provides perspectives for
managers to better understand the dynamics of their subsidiary
networks. managers coordinate the value chain so that it enables
efficient transactions and ideally fortifies core competencies throughout
the global network.
2. the advent of social networks, such as those exemplified by LinkedIn,
Orkut, Facebook, or Myspace, signal significant change in how
managers achieve these goals. study of the successful practices of
social networks directs managers to shape how subsidiaries interact
with each other, paying heed to the informal connections that link
executives together as well as associations and connections between
individual employees across countries.
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21. Coordination:
Subsidiary Networks
3. Rather than exchange predicted upon traditional business
directives, social network analysis indicates that
information flows more efficiently in a collaborative and
peer-to-peer manner.
4. Hence, network dynamics show that workers are more
inclined to communicate and collaborate while
simultaneously contributing and participating in
coordinating the value chain.
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22. The VRIO (Value, Rarity, Imitability,
Organization) Framework
Barney and Hesterly (2006), describe the VRIO framework as a good tool to examine
the internal environment of a firm. they state that VRIO “stands for four questions
one must ask about a resource or capability to determine its competitive potential:
1. the question of value: does a resource enable a firm to exploit an
environmental opportunity, and/or neutralize an environmental threat?
2. the question of rarity: is a resource currently controlled by only a small number
of competing firms? [are the resources used to make the products/services or the
products/services themselves rare?]
3. the question of imitability: do firms without a resource face a cost
disadvantage in obtaining or developing it? [is what a firm is doing difficult to
imitate?]
4. the question of organization: are a firm’s other policies and procedures
organized to support the exploitation of its valuable, rare, and costly-to-imitate
resources?”
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