Internal Organizati. on and the Resource-Based View (RBV)
Internal Organization and the Resource-Based View (RBV)
Context: Chapter 3 focuses on the internal environment and the RVV/RBV side of strategic management. Complements last week’s external environment focus. The goal is understanding how resources, capabilities, and their combination create lasting competitive advantage beyond industry factors.
Big idea: Competitive advantage comes from assets and capabilities you possess and how you use them, not just being in the right industry. Competitive parity is possible when external forces are similar; lasting advantage requires unique resources or unique use of them.
Exam and quizzes:
Last week’s quiz average was ~96; this week’s quiz format: 10 questions, multiple choice/true-false.
Next week: a slightly different assessment - a written quiz available all week to preview exam-style questions and receive exam-like feedback. This prepares you for the actual exam.
A key topic study guide for Exam 1 will be posted; start there and practice with example responses under time constraints (e.g., 1h30m).
Core idea for the RBV framework:
Resources and capabilities are building blocks for core competencies that drive performance differences between firms.
Competitive advantage tends to be temporary because rivals can imitate or replicate advantages; durable advantages require more than just owning assets.
Recap of the external vs internal emphasis:
External environment: macro forces and general environment (last week).
Internal environment: resources, capabilities, and how they are organized and orchestrated for advantage.
What you’ll learn in this chapter:
What resources are, what capabilities are, and how they feed core competencies.
How to define a core competency and evaluate its sustainability using the VREN criteria (Value, Rare, inimitable, Non-substitutable).
How to locate core competencies via value chain analysis.
The distinction between tangible and intangible resources and why intangible often underpins durable advantage.
How resource orchestration extends RBV by emphasizing bundling and leveraging resources, not just acquiring them.
The role of strategic human capital and management in aligning resources with external opportunities.
When to outsource: you should outsource only activities that do not contribute to your competitive advantage.
The practical implications and pitfalls of over-outsourcing (loss of coherence/innovation, jobs impact).
The Resource-Based View (RBV) and Resource Orchestration
RBV core idea: Firms win by possessing and using resources (and capabilities) that enable superior performance in their environment.
Resource orchestration theory: Extends RBV by emphasizing that acquiring resources is not enough; you must bundle and leverage them effectively.
Acquisition: obtain the base tools/resources.
Bundling: combine resources into coherent configurations that fit the firm's context.
Leveraging: put bundled resources into the market effectively to realize value.
Example: Alphabet (Google) and self-driving tech
Alphabet buys multiple autonomous-vehicle components and bundles them through Waymo, but the real leverage (market deployment and integration) is still catching up to incumbents like Tesla.
Takeaway: Acquiring resources alone does not guarantee success; leverage and integration are crucial for realized benefits.
Practical takeaway: Acquiring, bundling, and leveraging resources must occur simultaneously to yield positive outcomes.
Real-world intuition: The R+BV lens explains why merely owning assets (e.g., patents or tech) isn’t enough; how you bundle and deploy them matters for competitive advantage.
Tangible vs Intangible Resources
Core distinction: Resources exist as tangible (observable, quantifiable) vs intangible (rooted in history, culture, networks).
Tangible resources:
Examples: financial capital, physical assets (factories, equipment), technology, organizational structures, distribution facilities.
Pros/cons: Easy to observe and copy; can deliver short-term advantages but are often replicable and not a durable source of differentiation.
Intangible resources:
Examples: human capital (talent, knowledge), organizational culture, brand reputation, customer relationships, ecosystem effects (e.g., Apple’s ecosystem).
Pros/cons: Difficult to imitate and transfer; highly durable and harder to replicate, often driving sustainable advantages.
Patents vs. the broader innovator system:
Patents are tangible (they can be bought/licensed); the underlying innovative capacity (R&D teams, culture) is intangible and harder to imitate.
Relative strength:
Intangible resources tend to be more durable and harder to imitate, making them better bases for competitive advantage.
Tangible resources can be valuable but are easier for rivals to copy; they’re often necessary foundations but not sufficient alone for sustained advantage.
Synergies among intangibles:
Human capital, innovation, and reputation reinforce each other (e.g., Coca-Cola’s brand heritage; Apple’s ecosystem intertwines hardware/software/services).
Practical implication:
Balance is key: maximize intangible assets while maintaining tangible assets that enable leveraging; overemphasis on intangibles at the expense of necessary tangible resources can undermine execution.
Capabilities and Strategic Human Capital
Capabilities vs resources:
Resources: what you own or have access to (the base instruments).
Capabilities: what you can do with those resources (processes, routines, know-how).
Both are essential: you need capital to invest and the know-how to leverage it effectively.
Strategic human capital: management’s ability to align resources and capabilities with external opportunities to create value beyond simply hoarding assets.
Functional areas as domains of capability:
Examples: Walmart’s logistics; Amazon’s delivery capabilities; HR, marketing, manufacturing, R&D as domains where capabilities can be developed and deployed.
Key message: Without both resources and capabilities, value creation is limited. A firm must invest in both the assets and the human/organizational processes that turn those assets into performance.
Core Competencies and How to Find Them: The Value Chain Analysis
Definition of core competencies:
Three to five capabilities that distinctly differentiate the firm and provide unmatched value to customers.
If too few (e.g., 1–2), they may be easily copied; if too many (e.g., 7–10), the firm loses focus and coherence.
Practical guideline: Most firms operate best with about three to five core competencies.
How core competencies are identified:
Through value chain analysis: map internal activities to locate where capabilities enable value creation.
Determine whether capabilities exist in production, logistics, service, marketing, etc., and identify outsourcing needs.
Examples of core competencies (illustrative):
Tesla: scale and efficiency in EV manufacturing and operations.
Apple: integrated ecosystem of hardware and software creating strong brand loyalty.
Coca-Cola: enduring brand and global recognition.
Core competencies arise from resources and capabilities and define a firm’s unique value proposition.
The Value Chain: Porter’s Internal Supply Chain (Internal Value Chain)
Porter’s internal value chain concept: translate the idea of a supply chain from the external environment to internal operations.
Primary activities (the internal transformation chain):
Inbound logistics: receiving, warehousing, and internal handling of inputs.
Operations: transformation of inputs into final product/service; manufacturing and processing.
Outbound logistics: distribution of finished products to customers; getting products to market efficiently.
Marketing and sales: global advertising, promotions, and sales activities.
Service: after-sales support and service to maintain value.
Support activities (enabling functions):
Procurement: sourcing and acquiring inputs and resources.
Technology development: software, systems, and innovations that improve processes.
Human resource management: hiring, training, development, leadership planning.
Firm infrastructure: organizational design, governance, planning, and coordination for lean operations.
Example applications:
Inbound logistics: Walmart’s inventory management and supplier coordination.
Operations: Samsung’s manufacturing capabilities for hardware products.
Outbound logistics: BMW’s inland port strategy near Spartanburg to streamline exports and reduce port bottlenecks.
Marketing and sales: Coca-Cola’s advertising, sponsorships, and global campaigns.
Service: American Express’s concierge and solid after-sales service.
Value chain usefulness:
Helps identify where the firm has strengths and where weaknesses cause inefficiencies.
Guides outsourcing decisions: outsource activities that are not core or that erode profitability if kept in-house.
Highlights the importance of coordination and coherence across activities; outsourcing too much can erode identity and innovation.
Outsourcing considerations:
Outsource what you cannot create value from internally or what you perform poorly.
Do not outsource competitive advantage: if the activity is a core competency, outsourcing it destroys the advantage.
Outsourcing provides flexibility and can reduce fixed costs, but it can also reduce the firm’s ability to innovate and maintain identity.
Potential downsides of outsourcing: loss of jobs, reduced coherence, potential stagnation in innovation.
Strategic takeaways:
Focus on strengthening value-chain activities that align with core competencies and outsource the rest to improve efficiency and capital flexibility.
The goal is to achieve strategic fit: resources and capabilities should align with the business model and competitive strategy.
The VREN Framework: Criteria for Core Competencies
The VREN framework defines four criteria a resource/capability must meet to be a core competency and source of sustained competitive advantage:
Valuable (V): Capabilities that help neutralize threats or exploit opportunities; provide tangible value to customers.
Rare (R): Not possessed by many competitors; capabilities that are scarce relative to demand.
Inimitable (I): Costly to imitate; difficult for rivals to reproduce due to historical development, ambiguity of cause, or social complexity.
Non-substitutable (N): No strategic substitute that can provide the same value.
How these criteria translate into performance implications:
If a capability is only valuable (V) but not rare or inimitable (or substitutable), it yields only competitive parity or temporary advantage.
If it’s valuable and rare (V and R) but not inimitable (I) or non-substitutable (N), the advantage is temporary as others may copy.
When a capability is valuable, rare, inimitable, and non-substitutable (V ∧ R ∧ I ∧ N), it can yield a sustainable competitive advantage (SCA) with above-average returns.
Key concepts for I:
Historically developed capabilities (e.g., Coca-Cola’s brand longevity).
Ambiguous cause: the exact sources of the capability are not easily identified; difficult to replicate because the mechanism is not fully understood.
Social complexity: relationships with customers, brands, and ecosystems that are hard to replicate (e.g., Apple’s ecosystem, strong customer loyalty).
Nonsubstitutability: little or no substitutes that deliver the same combination of benefits (though substitutes can exist in some form; true substitutes are rare).
Visual summary (conceptual):
Valuable → Rare → Inimitable → Non-substitutable → Sustainable Competitive Advantage (SCA)
A capability needs to satisfy all four to be truly durable and valuable over time.
Examples re-examined through VREN:
Apple ecosystem: intangible, difficult to imitate, and creates high switching costs; a leading example of a durable, hard-to-copy advantage.
Tesla manufacturing and production scale: difficult to replicate at scale; a costly-to-imitate process contributing to durable advantages.
Coca-Cola: brand strength and legacy; socially constructed value and hard-to-copy reputation.
Netflix library: rare asset in terms of content breadth and selection; value is significant but must be maintained to stay rare.
Zappos customer service example: strong customer service is valuable and rare, but not entirely inimitable; yields temporary advantage unless scaled and reinforced.
Important caveat:
Non-substitutability is valuable but not absolute; there can be substitutes that address similar needs, so non-substitutability is often a high bar rather than a certainty.
Practical Implications: Balancing Resources, Capabilities, and Outsourcing
Not all firms can do everything well. The takeaway is to focus on core competencies and outsource the rest to improve efficiency and strategic focus.
Integration and fit matter: it's not about having many resources, but the right fit among resources, capabilities, and organizational structure.
Final guidance on outsourcing:
Outsource activities that drag down performance and do not contribute to core competencies.
Do not outsource core competencies or competitive advantages.
Outsourcing too broadly can erode the firm’s identity, reduce innovation, and harm long-term value.
Strategic management takeaway:
Build and fund your core competencies with the goal of sustaining competitive advantage.
Use value-chain analysis to identify where to invest and where to outsource.
Strive for a balanced portfolio of tangible and intangible resources to support durable capabilities.
Summary of Key Takeaways
RBV and Resource Orchestration emphasize that winning requires not just resources, but how you bundle and leverage them.
Distinguish tangible vs intangible resources; intangible assets often provide more durable competitive advantages because they are harder to imitate.
Capabilities (the know-how to deploy resources) must complement resources for real value creation.
Core competencies are typically 3–5 in number; too few risks imitation, too many dilutes focus.
Value chain analysis (Porter) is a practical tool for locating core competencies and guiding outsourcing decisions.
The VREN framework provides a practical criterion set for judging whether a capability can yield sustained competitive advantage: Valuable, Rare, Inimitable, Non-substitutable.
Sustainable competitive advantage arises when a capability satisfies VREN, and gains are reinforced through interdependencies (history, social ties, ecosystem effects).
Practical caveat: Outsource to fix weaknesses, but preserve and invest in core competencies; avoid outsourcing which would erode competitive advantage or strategic coherence.
Exam readiness tip: Start with the Exam One key topic study guide, then practice with sample questions and feedback to understand expectations and refine timing.
Quick reference formulas and notations
Sustainable Competitive Advantage (SCA) condition (informal):
SCA occurs when a capability satisfies all four criteria, i.e.
SCA ext{ occurs if } V \land R \land I \land N.
Core competencies: typically in the range
3 \le \text{number of core competencies} \le 5.Internal value chain structure (Porter): Primary activities (Inbound Logistics, Operations, Outbound Logistics, Marketing & Sales, Service); Support activities (Procurement, Technology Development, Human Resource Management, Firm Infrastructure).