Chapter 3

Strategy, Resources and

Capabilities
Learning objectives

• Understand the origins and assumptions of the resource-

based view (RBV) of the firm
• Appreciate the nature and determinants of value creation and
capture
• Have a critical understanding of the central concepts
associated with the RBV
• Appreciate the role of dynamic capabilities (DCs) in building
sustainable competitive advantage
• Explain the link between the RBV, DCs and knowledge-based
views of organization
• Relate DCs to entrepreneurship
Problems with market-based analysis

• Framing an organization’s strategy according to the structure

of its market assumes that the market is relatively static or
fixed in its dimensions
• Commentators on globalization frequently remind us that
markets are changing at a rapid pace
• What is the logic of defining an organization’s strategy in
relation to a market that might change very quickly?
• Are firms even able to change their strategy this quickly?
Beyond market-based analysis

When a market-based strategy is successful, it is likely to be

copied by competitors, thus reducing any competitive advantage:

‘Environmental analysis, by itself, cannot create the unique

insights, while in the same circumstances, the analysis of a
firm’s unique skills and capabilities can’
(Barney, 1986: 1232)
Resource-based view of the firm

• Porter dominated strategic management:

– characterized by an outside-in view of strategy
– organizations should look to the external environment to
make strategy
• In contrast to Porter, RBV looks inside the firm
• In the 1990s, RBV emerged as an alternative approach to
understanding competitive advantage
Resource-based view of the firm

• The resource-based view of the firm argues that it is those

resources that are unique and inimitable (difficult to imitate or
copy) that provide competitive advantage
• While rival firms can copy products, processes and
technologies, they cannot duplicate their unique ‘bundling’
Resource-based view of the firm

‘Firms should seek to develop inimitable resources over

time. It is possession of these and these alone that will help
produce a meaningful and long-term competitive advantage’
(Clegg et al., 2011: 84)
Resources

• Resources are stocks of tangible and intangible assets that

can generate value
• There are four major types:
– capital
– labour/human capital
– land
– knowledge/organization
• Intangible resources are of unique value because they are
hard to understand, copy or buy
Resources

• Resources are best understood as inputs into the production

of a good or a service
• The most basic types of resources are
– financial
– physical
– human
Resources and capabilities

• For the RBV, resources and capabilities provide the building

blocks for constructing a firm’s strategy
• The difference between a resource and a capability is not
always drawn clearly
• Broadly speaking, ‘resources’ are tradeable (i.e. can be
bought and sold), whereas capabilities are not easy to trade
because they cannot be attributed to any particular asset (e.g.
person, management technique, technology)
Resources and capabilities

Internal resources and capabilities provide the basic

direction for a firm’s strategy, according to RBV theorists:

‘Managers often fail to recognize that a bundle of assets,

rather than the particular product market combination
chosen for its deployment, lies at the heart of their firm’s
competitive position’
(Dierickx and Cool, 1989: 1504)
Capabilities

• Capabilities are not tradable and are not necessarily

embodied in any particular individual or asset
• Capabilities might include:
– specialized research and development teams
– sophisticated customer service systems
– aspects of the firm’s culture and traditions that create
unique and inimitable value
Core competencies and capabilities

• Hamel and Prahalad (1990) introduced and popularized the

term core competencies:
– an assemblage of multiple resources, skills and
capabilities located at the organization level that work
together effectively to achieve the collective learning
necessary to maintain a competitive edge
• An organizational capability is an organizationally embedded
and firm-specific resource that is hard to transfer and/or
imitate
Four generic determinants of value
creation

• Human resources
• Reductions in unit costs
• Organizational infrastructure
• Innovation
Four generic determinants of value
creation
The value chain

A value chain is a set of activities that an organization carries

out to create value for its customers by delivering a product or a
service that the buyer values and is prepared to buy at a price
that affords the organization a profit margin
The value chain
Value capture and creation

The ‘size of the pie’ captured by a firm depends on factors such

as:
• Barriers to entry
• Firm-level ‘generic strategies’:
– cost leadership
– differentiation
– focus strategies (Porter, 1985)
• Integration co-operation and diversification strategies
• Firm-wide differentiation strategies
Assembling core competences

• Assembling core competences depends not only on the

internal capabilities of an organization
• Core competences also depend on how the firm relates to
customers and other organizations such as contractors,
suppliers and distributors
Intellectual origins of RBV

• Penrose is an exception to Coase’s (1991) argument that

economists in general have ignored the ‘main activity of a firm
– running a business’
• Edith Penrose was an economist who travelled widely, holding
positions in London, Baghdad, Canberra, Paris (INSEAD),
Switzerland and the UN
• Penrose’s ideas were reinvigorated by the emergence of RBV
Edith Penrose

Edith Penrose identified the firm as having important productive

capacities that create resources – radical ideas for economists
of the time:
‘Penrose argued that one cannot even start to analyze the
external environment of the firm (to include the market) without
a prior understanding of the nature of the firm, which is its
human and nonhuman resources, and their interaction’
(Pitelis, 2007: 479)
Value and sustainable competitive
advantage

Pitelis (2009) defined value in the following way:

Value is perceived worthiness of a subject matter to a socio-
economic agent that is exposed to and/or can make use of the
subject matter in question
Property-based resources

• Property-based resources are legally defined property rights

held by the firm:
– land and buildings
– right over the use of labour
– finance
– raw material inputs
– intellectual property
• Other firms are unable to appropriate these rights unless they
obtain the owner’s permission
• Contracts, patents or deeds of ownership protect property-
based resources
Knowledge-based resources

Knowledge-based resources such as technical expertise or a

history of good relationships with trade unions, suppliers and
other stakeholders may be difficult for other firms to understand,
buy or copy
Jay Barney

• Barney (1991) makes a strong critique of product market

approaches, such as those of Porter and the IO approach
• For Barney, a market strategy is unlikely to generate
economic rent because other firms in the market can buy the
same resources and eliminate any rent-making possibilities
• Barney’s particular focus is on how organizations actually
acquire or develop the resources they need for their strategies
Barney’s VRIN framework

Barney (1991) argues that for a resource to

be a secure basis for competitive advantage,
it must be:
– Valuable
– Rare
– Imperfectly imitable
– Non-substitutable
Barney’s VRIN framework

• Valuable: enables a firm to produce a good or a service in an

efficient and/or effective manner to exploit opportunities and
counter threats
• Rare: few organizations possess them
• Imperfectly imitable: it is difficult for competitors to copy the
resource
• Non-substitutable: no strategically equivalent resources are
available (i.e. resources that are not identical but fulfil the
same function) that can be exploited by a competitor firm
Barney’s VRIN framework

• If each of the VRIN conditions is satisfied, then there is the

possibility of a resource providing a sustainable competitive
advantage (SCA)
• Resources such as organizational culture, strategic HRM,
information technology and trust, can provide competitive
advantage
• Rather than scanning the market for opportunities, strategists
should be looking inside the firm to discover sources of
competitive advantage that organizations have that cannot
easily be bought or copied
Four factors determining the
sustainability of competitive advantage

• Durability
• Opacity – or the ‘transparency problem’
• Isolating mechanisms restricting transferability
• Non-replicability
Durability

• The extent to which a competitive advantage is long-lasting

depends, in part, on the durability of a firm’s capabilities
• Some capabilities endure over several decades:
– consider the reputational capabilities of Mercedes, L’Oreal
and Coca Cola
• Capabilities often outlast the resources on which they are
based
Opacity/Transparency

• If a set of resources and capabilities can be imitated in

another context, the source of competitive advantage can
be rapidly diminished
• A strategist seeking to imitate a rival needs to work out how
the competitive advantage is actually achieved – it must be
‘clear’ or ‘transparent’, not ‘opaque’
• This can be difficult and is often referred to as the
‘transparency problem’
Transferability

• The extent to which resources and capabilities can be easily

transferred will have an impact on the longevity of a firm’s
competitive advantage
• Once requisite resources and capabilities have been
identified, competitive advantage is likely to be short-lived
• It is often very difficult to transplant or copy capabilities (e.g.
star footballers might not perform as well in a different team)
Replicability

• Where the market transferability of resources and capabilities

is difficult, firms may attempt to create their own
• In some cases, the resources and capabilities that sustain
competitive advantage in other contexts can be easily copied
• In other cases, where capabilities are particularly complex, it
can be much more difficult to replicate the required resources
and capabilities
Isolating mechanisms

Isolating mechanisms (also known as ‘barriers to imitation’) exist

when certain firms (or ‘strategic groups’ of firms) possess unique
resources, or ways of combining resources, that are hard to
decipher and that others cannot imitate
Generic isolating mechanisms

Kor and Mahoney (2004) single out five generic isolating

mechanisms that can render a firm’s resources particularly
valuable:
1. Path dependencies in resource development
2. Firm-specific knowledge possessed by managers
3. Shared team-specific experience of managers
4. Entrepreneurial vision of managers
5. The firm’s idiosyncratic capacity to learn and diversify
Dynamic capabilities

Dynamic capabilities are the firm’s

capacities to integrate, build and reconfigure internal and
external resources/competences to address and shape
rapidly changing business environments (Teece et al., 1997)
Dynamic capabilities

• Dynamic capabilities are the processes of a firm that are able

to re-configure resources to respond to changes in the
marketplace
• The dynamic capabilities approach is best seen as a
development from the RBV
• It shares similar assumptions but links the RBV with an
understanding that market conditions are fast-changing and
constantly require new and different competences:
– If a firm is unable to adapt to changing circumstances,
then over the long term it will become unprofitable
What are dynamic capabilities?

• Sensing
• Seizing
• Reconfiguring
• Transforming
Dynamic capabilities
Routines and dynamic capabilities

• The firm is more than:

– the sum of its resources
– the sum of the capabilities of its individual members
– the sum of its routines
• Routines minimize the need for oversight by providing order
and stability
• DCs suggest that, at a higher level of decision-making, human
action is critical in transforming existing routines and even
disrupting order and stability
Problems with dynamic capabilities

• You cannot know what a DC is until you have seen it in action:

– you only know that you have a dynamic capability when
you have used it and it was successful – then you know
you have it!
• If you think you have one and it fails to produce SCA, only
then do you realize you don’t have it
• Is this a tautological view of strategy?
The knowledge-based view (KBV)

• Transferability
• Capacity for aggregation
• Appropriability
• Specialization in knowledge acquisition
• Knowledge requirements of production
KBV

• It is the management of knowledge, not transactions, that is

important for strategy
• The firm is a ‘knowledge-integrating institution’
• SCA comes from three processes of managing knowledge:
– coordination
– communication
– control
Knowledge management

• A simple definition of knowledge management (KM) is that it is

a managerial practice that seeks to identify, leverage, control
and create knowledge in an organization
• A knowledge-based organization attends to two related
processes that underlie its everyday processes:
– the effective application of existing knowledge
– the creation of new knowledge
Knowledge management

Nonaka and Takeuchi (1995) identify four major mechanisms

through which knowledge may be managed:
• socialization (tacit–tacit)
• externalization (tacit–explicit)
• internalization (explicit–tacit)
• combination (explicit–explicit)
Socialization

• This form of knowledge creation involves the interplay of tacit

knowledge creating tacit knowledge
• A good example of this is an apprenticeship whereby the
apprentice learns through doing, observing and being in the
same space as the master craftsperson
Externalization

• According to Nonaka and Takeuchi (1995), this represents

the quintessential form of knowledge creation whereby tacit
knowledge is transformed into explicit knowledge
• This form of knowledge creation has been the driving force
behind most contemporary knowledge management
programmes
Internalization

• This form of knowledge production is where someone uses

explicit knowledge sufficiently often that it becomes ‘second
nature’
• This often happens in professional work where an accountant,
doctor or lawyer comes to embody the explicit knowledge
Combination

• This form of knowledge is where two forms of explicit

knowledge combine to create a new hybridized form of
knowledge
• For instance, if a project team contains an accountant and a
strategist working together, they will be a combining of two
forms of explicit knowledge
Critique of Nonaka and Takeuchi

• Epistemological – can you convert different forms of

knowledge, as they suggest?
• Contextual – they underplay the importance of power
relations, i.e. why should workers ‘give up’ their knowledge?
Conclusion

You should now know about:

• Resource-based view
• Dynamic capabilities
• Value chain
• Knowledge-based view of the firm
• Knowledge management
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