Chapter 3: Evaluating a firm’s internal capabilities

Ghatika Sannidhya Ramadhani ( 9004920190)

3.1. Describe the resource-based view and how it differs from SCP model

The resource-based view of the firm

 To analyze a firm’s external threats and opportunities, the Structure–Conduct –Performance

RBV focuses on the resources and capabilities controlled by a firm as a sources of competitive advantage.

 Resources are defined as the tangible and intangible assets that a firm controls that it can be use
to conceive and implement its strategies
 Capabilities are a subset of firm’s resources and are defined as the tangible and intangible assets
that enable a firm to take full advantage of the other resources it controls. So that capabilities
alone do not enable a firm to conceive and implement its strategy.
Ex: marketing skills and tam word and cooperation among its managers.
 4 board categories of resources and capabilities:
1. Financial resources: all the money used to conceive and implement strategies
2. Physical resources: all the physical technology used in a firm. Includes plant and equipment.
Geographic location, access to raw materials.
3. Human resources: include training, experience, judgement, intelligence of individual
managers and workers in a firm.
4. Organizational resources: attribute of groups of individuals. Include formal reporting
structure, controlling, coordinating system, culture and reputation, informal relations.
 Critical assumptions of the RBV
1. Different firms may possess different bundles of resources and capabilities, even if they are
competing in the same market assumption of firm resources heterogeneity
2. Some of these resource and capabilities to develop or acquire them  assumption of
resource immobility.

These assumptions make it possible to explain why some firms outperform other firms. If a firm
possess a valuable resources and capabilities that a few other firm possess and if these other firms
find it too costly to imitate these resources and capabilities, the firm that possesses these tangible
and intangible assets can gain a sustained competitive advantage.

3.2. Describe the VRIO framework and how it relates to the RBV

“VRIO” is a mechanism that integrates two existing theoretical frameworks: the positioning perspective
and the resource-based view. It is the primary tool for accomplishing internal analysis. It 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?
3. The Question of Imitability: Do firms without a resource face a cost disadvantage in obtaining or
developing it?

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?

3.3 Be able to apply VRIO framework to identify competitive implications

- Not valuable  it will not enable a firm to choose/ implement strategies that exploit environmental
opportunities or neutralize environmental threats

- Valuable, not rare exploitation of this resource will generate competitive parity. Can be thought of as
organizational strengths

-Valuable, rare, not costly to imitate  exploiting this resource will generate a temporary competitive
advantage. This type of resource of capability can be thought of as an organizational strength and as a
distinctive competence.

-Valuable , rare ,costly to imitate  exploiting it will generate a sustained competitive advantage, but if
organization fails to organize itself to take full advantage of this resource, some of its potential
competitive advantage could be lost.

3.4 Important implication of RBV

Imitation and competitive dynamics in an industry

If particular firm in industry has a competitive advantage, other firms in industry can respond to the
advantages of a competitor in one of 3 ways:

1. They can choose to limit their response (not responding to other firms competitive advantage)
3 reasons:
-Firms has own competitive advantage,
-it doesn’t have the resources (financial, physical, human, organizational) and capabilities to
imitate; duplicate/ substitute,
-it is trying to reduce the level of rivalry in an industry
Actions a firm takes that have the effect of reducing the level of rivalry in an industry and that also
do not require firms in industry to directly communicate or negotiate with each other is called
Tacit cooperation (facilitate by; small number of competing firms, homogeneous products and
costs, market-share leader, high barriers for entry)

When tacit cooperation has the effect of reducing supply and increasing prices, it is known as
Tacit collusion.
2. Modify tactics : changing tactics in response to another firm’s competitive advantage)
Tactics are the specific actions a firm takes to implement its strategies. When competing firms are
pursuing approx. the same strategies, the competitive advantages that any one firm might enjoy
at a given point in time are most likely due to the tactics that firm is pursuing. Tactics may change
by imitating the tactics of firms with an advantage/ leapfrogging them.
 3. Fundamentally alter strategies : changing strategies in response to another firm’s competitive
advantage
Does not occur very often, only occurs when other firm’s strategies usurp a firm’s competitive
advantage. When firms change their strategies, the must proceed through the entire strategic
management process. Changing a strategy often requires a firm to change its identity and its
purposes. In general, it is much better for a firm to change its strategy before that strategy is no
longer viable.

Implication of the RBV

- RBV suggest that competitive advantage can be found in several of the different resources and
capabilities controlled by the firm. These resources and capabilities are not limited to those that
are controlled directly by a firm’s senior managers, but falls on every employee in a firm. (the
responsibility for competitive advantage reside)
- RBV suggest in order to gain competitive advantage, firms must implement strategies that rely on
valuable, rarity and costly to imitate resources and capabilities. (competitive parity and
competitive advantage)
- RBV suggest the critical question ‘’ is this strategy easier for us to implement than it is for our
competitors to implement?’’. Firms can make 2 errors: overstate the uniqueness / underestimates
their uniqueness  underestimate the extent to which strategies they pursue can be sources of
sustained competitive advantages. (difficult to implement strategies)