Urgent 5 questions- answers needed

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Chapter 4, Leveraging Resources and Capabilities

Leveraging Resources and Capabilities

Learning Outcomes

Define resources and capabilities

Explain how value is created from a firm’s resources and capabilities

Articulate the difference between keeping an activity in-house and outsourcing it

Explain how to use a VRIO framework to understand a firm’s resources and capabilities

Identify three things you need to do (and one thing you should avoid) as part of a successful career and business strategy

LEARNING OUTCOMES

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SWOT Analysis

Analytical tool for determining a firm’s:

Strengths (S)

Weaknesses (W)

Opportunities (O)

Threats (T)

LO 1

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Resources (Capabilities)

Tangible and intangible assets used by a firm to choose and implement its strategies

Tangible resources and capabilities: Assets that are observable and easily quantified

Intangible resources and capabilities: Assets that are hard to observe and difficult to quantify

LO 1

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4.1 - Examples of Resources and Capabilities

LO 1

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Exhibit

Value Chain

Series of activities used in the production of goods and services, which makes them more valuable

Consists of primary activities and support activities

Each activity requires a number of resources and capabilities

LO 2

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Value Chain (continued)

Benchmarking

Examining whether a firm has the resources and capabilities to perform activities in a manner superior to competitors

Decision model is used as a remedy when an activity is unsatisfactory

LO 2

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4.2 - The Value Chain

LO 2

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Exhibit

A value chain is a series of activities used in the production of goods and services that make a product or service more valuable. Each activity in the chain requires a number of resources and capabilities. Value chain analysis forces managers to think about resources and capabilities at a very micro, activity-based level.

4.2 - The Value Chain (continued)

LO 2

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Exhibit

4.3 - Two-Stage Decision Model in Value Chain Analysis

LO 2

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Exhibit

Benchmarking: Given that no firm is likely to have enough resources and capabilities to be good at all primary and support activities, the key is to examine whether the firm has resources and capabilities to perform a particular activity in a manner superior to competitors. If managers find that a particular activity performed by their firm is unsatisfactory, a two-stage decision model can remedy the situation.

4.4 - In-House versus Outsource

LO 3

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Exhibit

Outsourcing: Turning over of an organizational activity to an outside supplier that will perform the activity on behalf of the focal firm.

The answer to the question “Do we really need to perform this activity in-house?” boils down to two factors: whether an activity is industry-specific and whether it is proprietary. For example, there is little need to keep an activity proprietary if it has commonality across industries. Commoditization is a process of market competition through which unique products that command high prices and high margins gradually lose their ability to do so, thus becoming commodities.

Outsourcing

Turning over an activity to an outside supplier who performs it on behalf of the focal firm

Reasons for outsourcing

Certain activities possess generic attributes

Can be shared across industries

Lack of skills to develop capabilities in-house

Access through alliances

LO 3

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Outsourcing (continued 1)

Offshoring: Outsourcing to an international or foreign firm

Onshoring: Outsourcing to a domestic firm

Captive sourcing: Setting up subsidiaries abroad so that work is done in-house

Location is foreign

Known as foreign direct investment

Domestic in-house activity

LO 3

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Outsourcing (continued 2)

Business process outsourcing (BPO): Outsourcing of business processes

Examples - Loan origination, credit card processing, and call center operations

Reshoring: Moving formerly offshored activities back to the home country of the focal firm

LO 3

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4.5 - Location, Location, Location

LO 3

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Exhibit

There is some amount of confusion around “outsourcing” and “offshoring.” The table expands the terms outsourcing and offshoring into four terms based on location:

Offshoring - International/foreign outsourcing

Onshoring - Domestic outsourcing

Captive sourcing - Setting up subsidiaries abroad

Domestic in-house activity

Offshoring and onshoring are international and domestic variants of outsourcing, while captive sourcing is conceptually identical to foreign direct investment (FDI).

A key take-away from this table is that value-adding activities may be geographically dispersed around the world, even for a single firm, to take advantage of the best locations and modes to perform certain activities.

VRIO Framework

Resource-based framework

Focuses on value (V), rarity (R), imitability (I), and organizational (O) aspects of resources and capabilities

LO 4

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VRIO Framework - Value and Rarity

Value

Value-adding resources lead to competitive advantage

Non-value-adding resources make firms suffer from below-average performance

Rarity

Valuable and rare resources and capabilities provide temporary competitive advantage

Valuable but common resources and capabilities lead to competitive parity

LO 4

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VRIO Framework - Imitability

Imitation is difficult

Causal ambiguity: Difficulty of identifying the actual cause of a firm’s successful performance

Intangible capabilities are harder to imitate in comparison to a firm’s tangible resources

Hard-to-imitate resources and capabilities lead to sustained competitive advantage

LO 4

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Imitation is difficult because of causal ambiguity, which refers to the difficulty of identifying the actual cause of a firm’s success. Outsiders usually have a hard time understanding what a firm does inside its boundaries. Additionally, even managers of a firm often do not know exactly what contributes to their success.

VRIO Framework - Organization

Valuable, rare, and hard-to-imitate capabilities must be organized to attain:

Sustained competitive advantage

Above-average performance

Complementary assets: Combination of numerous resources and assets that enable a firm to gain a competitive edge

LO 4

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Complementary assets refer to the combination of resources that go into producing a competitive advantage for a firm. It may be that not just a few resources and capabilities enable a firm to gain a competitive advantage but that literally thousands of these organizational attributes, bundled together, generate such advantage.

VRIO Framework - Organization (continued)

Ambidexterity: Capabilities to simultaneously deal with paradoxes

Social complexity: Socially intricate and interdependent ways that firms are organized

LO 4

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Social complexity refers to the intricate and interdependent ways that firms are typically organized. The manner in which multinationals, which have thousands of employees scattered around the world, overcome cultural differences and achieve organizational goals is complex. It is often the invisible relationships among employees around the world that add value.

4.7 - The VRIO Framework and Firm Performance

LO 4

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Exhibit

Overall, only valuable, rare, and hard-to-imitate resources and capabilities that are organizationally embedded and exploited can possibly lead to persistently above-average performance. Because resources and capabilities cannot be evaluated in isolation, the VRIO framework presents four interconnected and increasingly difficult hurdles for them to become a source of sustainable competitive advantage.

4.8 - Implications for Action

LO 5

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Exhibit

Key Terms

SWOT analysis

Resource (capability)

Tangible resource and capability

Intangible resource and capability

Value chain

Commoditization

Benchmarking

Outsourcing

Offshoring

Onshoring

Captive sourcing

Business process outsourcing (BPO)

Reshoring

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KEY TERMS

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Key Terms (continued)

VRIO framework

Causal ambiguity

Complementary asset

Ambidexterity

Social complexity

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KEY TERMS (continued)

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Summary

Resources or capabilities are tangible and intangible assets a firm uses to choose and implement strategies

Value chain analysis helps determine whether resources and capabilities add value to the firm

Outsourcing can help organizations focus better on their core activities

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SUMMARY

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Summary (Continued 2)

Valuable, rare, and hard-to-imitate capabilities, which are organizationally embedded, lead to sustained competitive advantage

Managers need to build a firm’s strengths based on the VRIO framework

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SUMMARY

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