Fundamentals of Strategy

Fifth Edition

Part I
The strategic position

Chapter 4
Resources and capabilities
analysis

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 Learning outcomes

• Identify organisational resources and capabilities and

how these relate to the strategies of organisations.
• Analyse how resources and capabilities might provide
sustainable competitive advantage on the basis of their
Value, Rarity, Inimitability and Organisational
support (VRIO).
• Diagnose resources and capabilities by means of VRIO
analysis, value chain analysis and SWOT analysis.
• Consider how resources and capabilities can be
developed based on dynamic capabilities.

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 Resource-based strategy

The resource-based view (RBV) of strategy

asserts that the competitive advantage and
superior performance of an organisation are
explained by the distinctiveness of its resources
and capabilities.
It is sometimes also called the ‘capabilities
view’.

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 Foundations of resources and
capabilities
The resources and capabilities of an organisation contribute
to its long-term survival and potentially to competitive
advantage.

• Resources are the assets that organisations have or can

call upon (e.g. from partners or suppliers), that is ‘what we
have’ (nouns).

• Capabilities (sometimes referred to as

competences) are the ways those assets are
used or deployed, that is ‘what we do’ (verbs).

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Resources and capabilities

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 Threshold and distinctive
capabilities
• Threshold capabilities are those needed for an
organisation to meet the necessary requirements
to compete in a given market and achieve parity
with competitors in that market – ‘qualifiers’.
• Distinctive capabilities are those that are
required to achieve competitive advantage.
Distinctive or unique capabilities that are of
value to customers and which competitors
find difficult to imitate – ‘winners’.

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Distinctive resources and capabilities:
Competitive advantage basis
The four key criteria by which capabilities can be
assessed in terms of providing a basis for
achieving sustainable competitive advantage are:
•value
•rarity
•inimitability and VRIO1
•organisational support

1
Jay Barney: ‘Firm resources and sustained competitive advantage’,
Journal of Management, vol. 17, no. 1 (1991), pp. 99–120.

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 VRIO (1 of 5)

Source: The VRIO criteria were introduced by Jay Barney in J.B. Barney, Gaining and sustaining competitive advantage, Addison-Wesley, 1997.

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 VRIO (2 of 5)
V – Value of resources and capabilities
Strategic capabilities are of value when they:
•take advantage of opportunities and neutralise
threats;
• provide value to customers;
•are provided at a cost that still allows an
organisation to make an acceptable return.

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 VRIO (3 of 5)
R – Rarity
• Rare capabilities are those possessed uniquely
by one organisation or only by a few others.
(For example, a company may have patented
products, have supremely talented people or a
powerful brand.)
• Rarity could be temporary.
(For example, Patents expire, key individuals
can leave or brands can be de-valued by
adverse publicity.)

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 VRIO (4 of 5)
I – Inimitability
Inimitable capabilities are those that competitors find
difficult and costly to imitate, to obtain or to substitute.
•Competitive advantage can be built on unique resources (a
key individual or IT system) but these may not always be
sustainable (key people leave or others acquire the same
systems).
•Sustainable advantage is more often found in
competences (the way resources are managed, developed
and deployed) and the way
competences are linked together and integrated.

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Criteria for the inimitability of
resources and capabilities

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 VRIO (5 of 5)
O – Organisational support
The organisation must be suitably organised to
support the valuable, rare and inimitable
capabilities that it has. This includes appropriate
processes and systems.

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 The VRIO framework: Analysis

A VRIO analysis helps to evaluate if, how and to

what extent an organisation or company has
resources and capabilities that are:
(i) valuable;
(ii) rare;
(iii) inimitable;
(iv) supported by the organisation.

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 The VRIO analysis

Source: Adapted with the permission of J.B. Barney and W.S. Hesterly, Strategic Management and Competitive Advantage, Pearson, 2012.

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 The value chain (1 of 2)

• The value chain describes the categories of activities

within an organisation, which, together, create a product
or service.
• The value chain consists of five primary activities (which
are directly concerned with the creation or delivery of a
product or service) and four support activities (which
help to improve the effectiveness or efficiency of primary
activities).
• Competitive advantage can be analysed in any of
these activities.

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 The value chain (2 of 2)

Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. The Free Press, a Division of Simon & Schuster, Inc.

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 Uses of the value chain

• A generic description of activities – understanding

how the discrete activities (or clusters of linked
activities) contribute to consumer benefit.
• Identifying activities where the organisation has
particular strengths or weaknesses.
• Analysing the competitive position of the
organisation using the VRIO criteria – thus identifying
sources of sustainable competitive advantage.
• Looking for ways to enhance value or decrease
cost in value activities (e.g. outsourcing).

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 SWOT analysis

SWOT provides a general summary of the Strengths and

Weaknesses explored in an analysis of strategic
capabilities (Chapter 4), and the Opportunities and
Threats explored in an analysis of the environment
(Chapters 2 and 3).

INTERNAL ANALYSIS = STRENGTHS

WEAKNESSES

EXTERNAL ANALYSIS = OPPORTUNITIES

THREATS

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 Uses of SWOT analysis (1 of 2)

• Major strengths and weaknesses are identified using

the analytic tools explained in Chapter 4.

• Scoring (e.g. + 5 to −5) can be used to assess the

interrelationship between environmental impacts and the
strengths and weaknesses.

• SWOT can be used to examine strengths, weaknesses,

in relation to competitors.

• Focus on strengths and weaknesses that differ in

relative terms compared to competitors and leave
out areas where the organisation is at par with
competitors.

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 Uses of SWOT analysis (2 of 2)

• Key opportunities and threats are identified using the

analytical tools explained in Chapters 2 and 3.

• Focus on opportunities and threats that are directly

relevant for the specific organisation and industry and
leave out general and broad factors.

• Summarise the results and draw concrete

conclusions.

• SWOT can be used to generate strategic

options – using a TOWS matrix.

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The TOWS matrix

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 Dangers in a SWOT analysis

• Long lists with no attempt at prioritisation.

• Over generalisation – sweeping statements
often based on biased and unsupported
opinions.
• SWOT is used as a substitute for analysis –
it should result from detailed analysis using the
frameworks in Chapters 2 and 3.
• SWOT is not used to guide strategy –
it is seen as an end in itself.

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 Dynamic capabilities

Dynamic capabilities are the means by which an

organisation has the ability to renew and recreate its
strategic capabilities to meet the needs of changing
environments.
Such capabilities are distinct from ordinary
capabilities that may be necessary to operate
efficiently now but that may not be sufficient to
sustain superior performance in the future.

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 Generic dynamic capabilities

• Sensing capabilities – constantly scanning and

exploring new opportunities across markets and
technologies (e.g. R&D and market research).
• Seizing capabilities – addressing opportunities
through new products, processes and activities.
• Re-configuring capabilities – new products and
processes may require renewal and
re-configuration of capabilities and
investment in new technologies.

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 Summary (1 of 3)

• To be able to compete at all in a market an

organisation needs threshold resources and
capabilities, but to achieve sustained competitive
advantage they also need to be unique and
distinctive.
• To be distinctive and provide for sustainable
competitive advantage, resources and capabilities
need to fulfil the VRIO criteria of being
Valuable, Rare, Inimitable and supported
by the Organisation.

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 Summary (2 of 3)

Ways of diagnosing organisational resources

and capabilities include:
•VRIO analysis of resources and capabilities to evaluate
if they contribute to competitive advantage.
•Analysing an organisation’s value chain as a basis for
understanding how value to a customer is created and
can be developed.
•SWOT analysis drawing together an
understanding of the strengths, weaknesses,
opportunities and threats an organisation faces.

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 Summary (3 of 3)

• Managers need to adapt and change resources

and capabilities if the environmental changes
and/ or competitors catch up and this can be
done based on dynamic capabilities: sensing,
seizing and reconfiguring resources and
capabilities.

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