Session 9 & 10: Learning Objectives
- 1 Distinguish between Resources, Capabilities, and Core Competencies.
- 2 Apply the VRIO Framework to assess sustainable advantage.
- 3 Evaluate Isolating Mechanisms: Path Dependence, Causal Ambiguity, Social Complexity.
- 4 Analyze the Value Chain: Primary vs. Support Activities.
Key Concepts
Strategic Context
Exhibit 9.0: Linking External & Internal Analysis
Resources,
& Capabilities
The Roots of Advantage
Resources, Capabilities, and Core Competencies
Resources
Any assets that a firm can draw on when formulating and implementing a strategy. (Tangible & Intangible)
Capabilities
Organizational and managerial skills necessary to orchestrate a diverse set of resources effectively.
Core Competencies
Unique strengths, embedded deep within a firm, that allow for differentiation or cost leadership.
Core Competencies in Action
Exhibit 9.1: Industry Examples
Comparative Analysis
| Company | Core Competencies | Strategic Applications (Examples) |
|---|---|---|
| Amazon | Superior IT & AI; Customer service; Diversification. | Online retailing dominance; Prime ecosystem; AWS cloud infrastructure. |
| Apple | Industrial design; Marketing & retailing; Digital ecosystem integration. | Category-defining devices (iPhone, iPad, Watch); 2B+ user ecosystem (App Store, iCloud). |
| Coca-Cola | Superior marketing & distribution. | Global brand recognition ("Secret Formula"); Extensive beverage lineup available worldwide. |
| ExxonMobil | Discovering & extracting fossil fuels globally. | Oil and gas exploration/production focus (excluding renewables). |
| Superior IT & AI for scale; Ad targeting algorithms. | 3.5B+ users worldwide; News Feed/Stories; Highly targeted online advertising platform. | |
| Five Guys | Providing fresh, customized burgers & hand-cut fries; High-quality ingredients. | Premium hamburgers and fries (No freezers, peanut oil). |
| Superior AI & proprietary algorithms; Mobile OS dominance. | Search engine; Online ads; Android OS (70% global share); Cloud services (Docs, Drive). | |
| IKEA | Designing modern functional furnishings at low cost; Retail experience. | Flat-pack DIY furniture; Fully furnished room setups in-store. |
| McKinsey | Developing practice-relevant strategic knowledge & insights. | High-level management consulting for business and government clients. |
| Microsoft | Best-in-class productivity software & business apps. | Office 365; Teams; Azure cloud computing and storage. |
| Netflix | Superior AI for content prediction & recommendation algorithms. | Data-driven original content creation; Personalized streaming recommendations. |
| Tesla | EV engineering expertise; Battery technology; Vertical integration. | Category-defining EVs (Model S/3/X/Y); Solar roof; Powerwall energy storage. |
| Uber | Mobile app-based transportation & logistics expertise. | Global ride-hailing (UberX) and food delivery (UberEats) scale. |
The Engine of Advantage
Exhibit 9.2: Linking Resources, Capabilities, and Activities
Resources
Capabilities
Core
Competencies
Activities
Transform inputs into value
Competitive
Advantage
Superior Performance
Each distinct activity enables firms to add incremental value by transforming inputs into goods and services. In the interplay between resources and capabilities, resources reinforce core competencies, while capabilities allow managers to orchestrate them. Strategic choices find their expression in a specific set of the firm’s activities, which leverage core competencies for competitive advantage.
The arrows leading back from competitive advantage to resources and capabilities indicate that superior performance in the marketplace generates profits that to some extent need to be reinvested into the firm (retained earnings) to further hone and upgrade the firm’s resources and capabilities in its pursuit of achieving and maintaining a strategic fit within a dynamic environment.
Case in Point: The Retail Wars
The Past: Best Buy outperformed Circuit City (bankrupt 2009) via superior employee development and customer-centric store configurations.
The Shift: More recently, Best Buy struggled because it failed to hone its competencies against Amazon.
The Lesson: Amazon leveraged a lower cost structure (no physical overhead) to undercut prices. When a firm does not continually upgrade, competitors develop equivalent or superior skills.
Companies need to look beyond visible manifestations (products) to the invisible roots of advantage. In the next section, we clarify these opaque aspects by distinguishing between tangible and intangible resources.
The Resource-Based View
Heterogeneity & Immobility
1. Resource Heterogeneity
The assumption that bundles of resources, capabilities, and competencies differ across firms. Firms in the same industry are not the same.
2. Resource Immobility
The assumption that resources are "sticky" and do not move easily from firm to firm. This allows performance differences to persist over time.
Asset Composition Shifts
Dynamics of Competitive Advantage
Imitation, Substitution, and Organization
EXHIBIT 9.3: The VRIO Framework
Costly?
to Capture?
Direct Imitation
FIVE GUYSWhile competitors can see the "better burger" model, Five Guys has a 20-year lead (Path Dependence). Franchisees locked down prime locations early.
Result: First-mover advantage + Perfected competency blocks direct copying.
Substitution
AMAZONBezos didn't build better bookstores; he replaced them. Online retail offered strategic equivalence (same product) with a superior delivery method.
Result: Lower cost structure negates physical retail advantage.
Combination
SAMSUNGSamsung attacked Apple via two fronts: Imitating the iPhone's look/feel and Substituting the iOS ecosystem with Android.
Result: Mitigated Apple's competitive advantage.
Organization (O)
XEROX PARCXerox invented the Mouse & GUI (Valuable/Rare). But management was focused on copiers. They lacked the structure to capture value.
Result: Apple & Microsoft captured the value instead.
Case Study: Five Guys
Applying RBV and VRIO to a Real-World Anomaly
Fundamental Question: Can Internal Resources Substitute for External Marketing?
The Context: Fast food is a marketing-heavy industry. McDonald's spends $1.6B/year on ads.
The Anomaly: Five Guys spends virtually zero.
The Session 9 & 10 Lesson: They leverage Intangible Resources (Reputation, Culture) to replace Tangible Ad Spend.
The "No Marketing" Strategy
Five Guys allocates capital differently. Instead of buying commercials, they invest in:
- Tangible Resources: Fresh meat (no freezers), peanut oil, potatoes from >42nd parallel.
- Intangible Capabilities: Fanatical service culture driven by "Mystery Shopper" bonuses.
The Strategic Footprint
Ad Spend Anomaly
The Scaling Trajectory (1986–2025)
Growth in Number of Stores. Note the inflection point at 2003 (Franchising).
Strategic Activity System Map
The Value Chain
Transforming Inputs into Superior Performance
Logistics
Logistics
& Sales
*Primary Activities (Bottom) touch the product directly. Support Activities (Top) enable the chain.
Isolating Mechanisms
Why Success is Sticky: Path Dependence, Causal Ambiguity, & Social Complexity
1. Path Dependence
"History Matters." Current options are limited by past decisions.
Designed in 1870s to stop jams. We still use it not because it's best, but because billions are trained on it. Switching costs > Efficiency gains.
2. Causal Ambiguity
The link between resources and success is "opaque" or invisible.
Rivals copied the planes and routes but failed. They couldn't copy the "spirit" because the cause of success was a thousand tiny, interlocking choices.
3. Social Complexity
Advantage rooted in complex human relationships and culture.
You can buy the computers, but you can't buy the "Braintrust"—the decades of trust and brutal honesty between the creative team.
Mechanism Comparison
| Concept | The Barrier | Example |
|---|---|---|
| Path Dependence | Time and History | Coca-Cola's 130-year brand equity. |
| Causal Ambiguity | Lack of Clarity | Toyota's Lean Manufacturing spirit. |
| Social Complexity | Human Relationships | Goldman Sachs' elite network. |
The Archives of Path Dependence
Locked in by muscle memory.
4' 8.5" from Roman chariots.
Early lead created lock-in.
Trillions in sunk infrastructure.
Software ecosystem lock-in.
Network effect of talent.
Built around central hubs.
Light-water design lock-in.
Legacy banking code.
WWII wage freeze accident.
The Mysteries of Causal Ambiguity
Hawaiian shirts & service magic.
Daily micro-adjustments.
Forced perspective & culture.
Invisible worker mindset.
Silent design-store comms.
Data, code, or brains?
Selling atmosphere, not coffee.
Behavioral weighting secrets.
Subconscious brand history.
Community over fabric.
The Web of Social Complexity
Global alumni network.
Warrior Spirit culture.
Trust to fail fast.
Shared activist passion.
Secrecy & silos.
Team-first social contract.
No titles, just followers.
Trust via shared hardship.
Reputation for radical trust.
Global volunteer norms.
The Dark Side: Core Rigidities
When isolating mechanisms become too strong, they turn into traps. A company's greatest strength becomes its greatest weakness because it refuses to change.
- Path Dependence Trap: Kodak invented digital cameras but was "locked-in" to film profits.
- Ambiguity Trap: Managers become "superstitious"—doing things because "that's how we've always done it."
- Social Trap: BlackBerry's culture ignored the iPhone because their social system reinforced their own superiority.
Breaking the Path
Group Activity: The Resource Audit
Applying Concepts to Real-World Examples
Strategic Context: Differences & Examples
| Feature | Resources (Assets) | Capabilities (Skills) | Core Competencies (Strengths) |
|---|---|---|---|
| Definition | A firm's assets/inputs (Tangible/Intangible) | Ability to bundle & manage resources | Unique strengths driving sustainable advantage |
| Nature | Often visible (or invisible), acquirable | Intangible processes, routines, culture | Highest order; complex interactions; hard to copy |
| Role | The foundation / inputs | Effective usage of resources | Strategic differentiation advantage |
Tesla
- Resource: Gigafactories, Patents
- Capability: Rapid Iteration, Vertical Integration
- Core Comp: Advanced EV Innovation
SpaceX
- Resource: Starbase, Engineers
- Capability: Reusability Logic, Rapid Testing
- Core Comp: Low-Cost Space Transport
Nvidia
- Resource: GPU IP, AI Talent
- Capability: CUDA Platform Optimization
- Core Comp: Accelerated AI Computing
Activity: The Strategic Flow Map
Instructions: Working in groups of 3-4, select a company NOT listed above (e.g., Netflix, Starbucks, Nike). Use the template below to map their path from Resources to Advantage.
List Resources
Tangible & Intangible inputs
Define Capabilities
How are they managed?
Core Competency
The unique advantage
Simulation: The Franchise Strategist
The Strategic Dilemma
Resist the pressure to "normalize". Align every internal resource to build a unique bundle of Core Competencies.
Title
Description...
Rank
Result
Details...
Group Challenge: The Strategic Turnaround
Diagnose, Engineer, and Pitch a Sustainable Advantage
Objective
Work in groups of 5–6 to diagnose a failing firm using the VRIO Framework and engineer a "Sustainable Competitive Advantage" that rivals cannot easily copy.
Assemble Your Board (5 Mins)
The Diagnosis (15 Mins)
Pick ONE scenario. Draw a VRIO table. Mark the "X" where the chain breaks.
Scenario A: The Generic App
Viral photo app with millions of users (Valuable/Rare), but competitors are cloning filters in days.
Scenario B: The Luxury Ghost
200-year-old watch brand (Path Dependent). High quality, but untrained retail staff and broken website.
Scenario C: The Leaky Lab
Revolutionary AI healthcare tech. Lead scientists are being headhunted by Google/Meta (Imitation Risk).
The "Unfair" Fix (20 Mins)
Propose a Strategic Pivot to turn "No" into "Yes".
- Complexity: Link asset to firm-specific processes so one person leaving doesn't destroy value.
- Path Dependence: Lean into history to create "lock-in".
- Org Alignment: Change incentives/software to ensure value isn't wasted (avoid Xerox PARC fate).
The Pitch (3 Mins)
Present to the class. You must answer:
VRIO Strategic Audit Scorecard
Grade Peers| Pillar | The Test | Score (1-5) |
|---|---|---|
| Valuable? | Does the "Fix" neutralize threats/exploit opps? | |
| Rare? | Is the solution unique? | |
| Inimitable? | Used Path Dependence / Causal Ambiguity? | |
| Organized? | Systems/Culture aligned to capture value? |
Devil’s Advocate Pro-Tips
Ask these "Shark Tank" questions during Q&A:
"If I hire your top 3 managers tomorrow, do I take your strategy with me?"
"Can AI provide this same result for half the price?"
"Do your current middle managers actually have the skills to run this?"
Sample Gold Standard Deliverable
Use this template for Scenario A (The Generic App) to guide your own board presentation.
1. Initial Audit (The Flaw)
| Valuable? | YES |
| Rare? | YES |
| Inimitable? | NO |
| Organized? | YES |
Diagnosis: Rivals can reverse-engineer code in weeks. Result: Temporary Advantage.
2. The Strategic Pivot
3. Post-Fix Result
4. Devil's Advocate Defense
"Can't Instagram just buy your creators?"
"Legacy Clause contracts: Creators lose 'Veteran' royalty status if they switch. 20% revenue drop."