Evaluating a Firm

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Chapter 3

• Evaluating a Firms Internal Capabilities

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Learning Objectives

• Describe the Critical assumptions of the
  resource-based view
• Describe four types of resources and capabilities
• Apply the value chain analysis to identify a
  firms critical resources and capabilities
• Apply the VRIO frame work to identify the
  competitive Implications of a firms resources
  and capabilities including

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• The conditions under which resources are likely
  to be valuable
• The conditions under which resources are likely
  to be rare
• Four reasons why a firms resources may be costly
  to imitate
• How a firm uses its structure, control processes
  and compensation policy to exploit its resources

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Opening Case

• EA
• SEGA
• Nintendo
• Sony
• Online games
• Wizards of the Coast
• Warhammer
• war

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Resource-based View of the Firm

• Resources
• Are defined as the tangible and intangible assets
  that a firm controls
• Factories, Products (tangible)
• Reputation, Teamwork (intangible)
• Capabilities
• Subset of a firms resources that allows the firm
  to identify and implement strategies

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Types of resources

• Financial Resources
• Retained Earnings
• Physical Resources
• Plant, Access to raw materials, Geographic
  location
• Human Resources
• Leadership
• Organizational Resources
• Collections of individuals

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Assumptions of the resource-based view

• Resource Heterogeneity
• Firms, even in the same industry can develop
  different resources and capabilities
• Resource Immobility
• May be long lasting

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David Ricardo

• Fertile Land Example
• Gratuitous Economics
• cartoon

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The VRIO Framework

• Value
• Does a resource enable a firm to exploit an
  environmental opportunity and or neutralize an
  environmental threat?
• Rarity
• Is a resource currently controlled by only a
  small number of competing firms?
• Imitability
• Do firms without a resource face a cost
  disadvantage in obtaining or developing it?
• Organization
• Are a firms other policies and procedures
  organized to support the exploitation of its
  valuable, rare, and costly-to-imitate resource

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Value for Yahoo

• Yahoo
• First mover
• Superior Technology (237 million)
• Sell Advertising
• Charge Customers
• Sell Data Base

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Value Chain Oil Industry

• Exploring for crude oil
• Drilling for crude oil
• Pumping crude oil
• Shipping crude oil
• Buying crude oil
• Refining crude oil
• Selling refined products to distributors
• Shipping refined products
• Selling refined products to final customers

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Ethics and the nature of externalities

• Pollution
• Education

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Value Chain McKinsey and Company
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Value Chain Porter
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Rarity

• ESPN X-games

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Imitability

• Sustained competitive Advantage
• Forms of imitation
• Direct duplication
• Substitution

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Why might it be costly

• Unique historical conditions
• Space and time dependent resources
• ESPN X-Games
• Path Dependence
• Later advantages may be dependent on resources
  that were developed earlier
• Casual Ambiguity
• Take for granted
• Multiple hypothesis
• Not just a few

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More on costly to imitate

• Casual Ambiguity
• Take for granted
• Multiple hypothesis
• Not just a few
• Whenever sources of competitive advantage are
  widely diffused across people, locations and
  processes, those sources of competitive advantage
  will be difficult to imitate

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Costly continued

• Social Complexity
• Socially complex phenomena, beyond the ability of
  firms to systematically manage and influence
• Patents
• Not as difficult to imitate (depending on
  industry) (Sony and reverse engineering)

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Research Box

• MIT
• 70 plants
• 6 had both low costs and high quality
• Modern technology necessary but not sufficient
• Human resource practices
• Participative decision-making, quality circles,
  team production
• Loyalty, belief that managers would treat
  employees fairly

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Organization

• Formal structure
• Management control systems
• Compensation policies
• Complementary resources Capabilities

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Xerox PARC (Palo Alto Research Center) Through
the 1960s and early 70s

• The personal Computer
• The mouse
• Widows-type software
• Laser printer
• Paperless office
• Ethernet

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The VRIO Framework
Valuable Rare Costly to imitate Exploited Completive Implications Economic Performance
No No Competitive Disadvantage Below Normal
Yes No Competitive Parity Normal
Yes Yes No Temporary competitive advantage Above Normal
Yes Yes Yes Yes Sustained Competitive Advantage Above Normal
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The VRIO Framework and Strengths and Weaknesses
Valuable Rare Costly to imitate Exploited Strength or Weakness
No No Weakness
Yes No Strength
Yes Yes No Strength Distinctive competency
Yes Yes Yes Yes Strength, Sustainable Distinctive Competency
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The responsiblity

• Janitor

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Competitive Parity and Competitive Advantage

• Bench marking not sufficient
• Must develop proprietary valuable, rare and
  costly-to imitate resources and capabilities

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Difficult-to-Implement

• Is the strategy easier for us to implement than
  it is for our competitors to implement?
• Two errors
• Overestimate the uniqueness of resources
• Underestimate the uniqueness of resources

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Socially Complex Resources

• Employee empowerment
• Organizational culture
• Teamwork

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The role of organization

• Structure
• Control Systems
• Compensation Policies