Chapter 3: Evaluating a Firm’s Internal Capabilities287
CHAPTER 3: EVALUATING A FIRM’S INTERNAL CAPABILITIES
TRUE/FALSE QUESTIONS
Capabilities are a subset of a firm’s resources and are defined as tangible and
intangible assets that enable a firm to take full advantage of other resources it
controls.
True
False
Answer: True Page: 76
Difficulty: Easy
Chapter Objective: 1
1.
2.
Resources in the Resource Based View are defined as the tangible and intangible
assets that a firm controls, which it can use to conceive of and implement its
strategies.
True
False
Answer: True Page: 76
Difficulty: Easy
Chapter Objective: 2
3.
Financial resources include only the profits a firm has made earlier in its history
and that it has reinvested in itself.
True
False
Answer: False Page: 76
Difficulty: Moderate
Chapter Objective: 2
4.
Organizational resources include the training, experience, judgment, intelligence,
relationships and insight of individual managers and workers in a firm, while
human resources are an attribute of collections of individuals.
True
False
Answer: False Page: 77
Difficulty: Moderate
Chapter Objective: 2
5.
One of the key assumptions of the RBV is resource homogeneity.
True
False
Answer: False Page: 77
Difficulty: Moderate
Chapter Objective: 1
6.
The assumption of resource immobility holds that it may be very costly for firms
without certain resources and capabilities to develop or acquire them.
True
False
Answer: True Page: 77
Difficulty: Moderate
Chapter Objective: 1
288 Part
7.
Inputs whose quantity of supply is fixed and whose demand does not respond to
price increases are said to be elastic in supply.
True
False
Answer: False Page: 78
Difficulty: Moderate
Chapter Objective: 1
A firm’s plant and equipment, its geographic location and its access to raw
materials are all examples of physical resources.
True
False
Answer: True Page: 76
Difficulty: Easy
Chapter Objective: 2
8.
In the VRIO framework, the “R” represents resources.
True
False
Answer: False Page: 79
Difficulty: Moderate
Chapter Objective: 3
9.
10. Within the VRIO framework, valuable resources and capabilities are also known as
strengths.
True
False
Answer: True
Page: 80
Difficulty: Easy
Chapter Objective: 3
11. Within the VRIO framework, resources and capabilities that are not valuable are
also known as weaknesses.
True
False
Answer: True
Page: 80
Difficulty: Easy
Chapter Objective: 3
12. In general, firms that use their resources and capabilities to exploit opportunities to
neutralize threats will see no increase in their net revenues, nor a decrease in their
net costs compared to the situation where they are not using these resources and
capabilities to exploit opportunities or neutralize threats.
True
False
Answer: False
Page: 80
Difficulty: Moderate
Chapter Objective: 3
13. The value of a firm’s resources and capabilities will generally manifest itself in
either higher revenues or lower costs or both once a firm starts using these
resources and capabilities to exploit opportunities or neutralize threats.
True
False
Answer: True
Page: 80
Difficulty: Moderate
Chapter Objective: 3
Chapter 3: Evaluating a Firm’s Internal Capabilities289
14. A firm’s value chain is the set of business activities in which it engages to develop
and produce, but not to market, its products and services.
True
False
Answer: False
Page: 83
Difficulty: Moderate
Chapter Objective: 4
15. If a firm creates environmental pollution in the process of manufacturing its goods,
the pollution is known as an externality.
True
False
Answer: True
Page: 84
Difficulty: Moderate
Chapter Objective: 4
16. The value chain model developed by McKinsey and Company divides valuecreating activities into two large categories: primary activities and support
activities.
True
False
Answer: False
Page: 85
Difficulty: Moderate
Chapter Objective: 4
17. Primary value chain activities include activities such as inbound logistics, outbound
logistics, sales and marketing and services.
True
False
Answer: True
Page: 85
Difficulty: Moderate
Chapter Objective: 4
18. A resource can be a source of competitive advantage even if the resource is
controlled by numerous firms.
True
False
Answer: False
Page: 86
Difficulty: Hard
Chapter Objective: 5
19. Most firms have a resource-base that is composed primarily of valuable but
common resources and capabilities, some of which are essential if a firm is to gain
competitive parity.
True
False
Answer: True
Page: 86
Difficulty: Moderate
Chapter Objective: 5
20. In general, as long as the number of firms that possess a particular valuable
resource or capability is less than the number of firms needed to generate perfect
competition dynamics in an industry, that resource can be considered rare and a
potential source of competitive advantage.
True
False
Answer: True
Page: 87
Difficulty: Moderate
Chapter Objective: 5
290 Part
21. When firms without a resource or capability face a cost disadvantage in obtaining
or developing it compared to firms that already possess it, this resource or
capability is described as perfectly imitable.
True
False
Answer: False
Page: 87
Difficulty: Hard
Chapter Objective: 5
22. A sustained competitive advantage can be competed away by strategic imitation.
True
False
Answer: False
Page: 87
Difficulty: Moderate
Chapter Objective: 5
23. In general imitation can occur in one of two ways: direct duplication or
substitution.
True
False
Answer: True
Page: 88
Difficulty: Easy
Chapter Objective: 5
24. The ability of firms to acquire, develop, and use resources often depends upon their
place in time and space and firms that do not have space-and-time-dependent
resources face a significant cost disadvantage in obtaining and developing them.
True
False
Answer: True
Page: 88
Difficulty: Moderate
Chapter Objective: 5
25. A process is said to be path dependent when imitating firms are not able to
understand the relationship between the resources and capabilities controlled by a
firm and that firm’s competitive advantage.
True
False
Answer: False
Page: 89
Difficulty: Hard
Chapter Objective: 5
26. The interpersonal relations among managers in a firm, a firm’s culture, and a firm’s
reputation among suppliers and customers can all act to make a firm’s resources
and capabilities socially complex.
True
False
Answer: True
Page: 91
Difficulty: Moderate
Chapter Objective: 5
27. A firm’s patents may decrease, rather than increase, the costs of imitation.
True
False
Answer: True
Page: 93
Difficulty: Moderate
Chapter Objective: 5
Chapter 3: Evaluating a Firm’s Internal Capabilities291
28. Most technological developments in an industry are diffused throughout firms in a
relatively brief period of time, but only if the technology in question has not been
patented.
True
False
Answer: False
Page: 93
Difficulty: Hard
Chapter Objective: 5
29. A firm’s formal reporting structure is a description of who in an organization
reports to whom and is often embedded in a firm’s organizational chart.
True
False
Answer: True
Page: 93
Difficulty: Easy
Chapter Objective: 6
30. Formal management controls include a firm’s culture and the willingness of
employees to monitor each other’s behavior.
True
False
Answer: False
Page: 93
Difficulty: Moderate
Chapter Objective: 6
31. Compensation policies are the ways that firms pay employees, and such policies
create incentives for employees to behave in certain ways.
True
False
Answer: True
Page: 93
Difficulty: Easy
Chapter Objective: 6
32. If a resource or capability is valuable and rare but not costly to imitate, exploiting
this resource will generate a sustainable competitive advantage for a firm.
True
False
Answer: False
Page: 95
Difficulty: Moderate
Chapter Objective: 6
33. Decisions made by other firms given the strategic choices of a particular firm
define the nature of the competitive dynamics that exist in an industry.
True
False
Answer: True
Page: 98
Difficulty: Moderate
Chapter Objective: 7
34. One reason a firm may not respond to another firm's competitive advantage is
because it does not have the resources or capabilities to do so.
True
False
Answer: True
Page: 98
Difficulty: Easy
Chapter Objective: 7
292 Part
35. Any actions that a firm takes that have the effect of reducing the level of rivalry in
an industry that also do not require firms in an industry to negotiate with each other
can be thought of as explicit cooperation.
True
False
Answer: False
Page: 99
Difficulty: Moderate
Chapter Objective: 7
36. When tacit cooperation has the effect of reducing supply and increasing prices, it is
known as tacit collusion.
True
False
Answer: True
Page: 99
Difficulty: Easy
Chapter Objective: 7
37. Tacit cooperation is only a viable strategy when an industry is perfectly
competitive.
True
False
Answer: False
Page: 99
Difficulty: Hard
Chapter Objective: 7
38. In the end, competitive advantage is so important to a firm's success, it must remain
the sole property of senior management.
True
False
Answer: False
Page: 103
Difficulty: Moderate
Chapter Objective: 7
39. To the extent that a resource or capability is a source of sustained competitive
advantage in one country, it virtually guarantees that it will also be valuable, rare,
and costly to imitate in another country.
True
False
Answer: False
Page: 106
Difficulty: Moderate
Chapter Objective: 8
40. Research suggests that, before firms can learn from their international operations,
they must be prepared to unlearn and modify or abandon traditional ways of
engaging in business.
True
False
Answer: True
Page: 107
Difficulty: Moderate
Chapter Objective: 8
Chapter 3: Evaluating a Firm’s Internal Capabilities293
MULTIPLE CHOICE QUESTIONS
41. _______________ in the RBV are defined as the tangible and intangible assets that
a firm controls that it can use to conceive of and implement its strategies.
A. Management controls
B. Capabilities
C. Resources
D. Compensation policies
Answer: C
Page: 76
Difficulty: Easy
Chapter Objective: 1
42. __________ are a subset of a firm's resources and are defined as tangible and
intangible assets that enable a firm to take full advantage of other resources it
controls.
A. Retained earnings
B. Capabilities
C. Human resources
D. Financial resources
Answer: B
Page: 76
Difficulty: Moderate Chapter Objective: 1
43. A firm's marketing skills and teamwork as well as its cooperation among managers
are examples of
A. financial resources.
B. human resources.
C. physical resources.
D. capabilities.
Answer: D
Page: 76
Difficulty: Moderate Chapter Objective: 1
44. The training, experience, judgment, intelligence, relationships and insight of
individual managers and workers in a firm are examples of
A. physical resources.
B. human resources.
C. organizational resources.
D. financial resources.
Answer: B
Page: 77
Difficulty: Moderate Chapter Objective: 2
45. Computer hardware and software technology, robots used in manufacturing and
automated warehouses are examples of which type of resources?
A. Financial resources
B. Physical resources
C. Human resources
D. Organizational resources
Answer: B
Page: 76
Difficulty: Moderate Chapter Objective: 2
294 Part
46. A firm’s formal reporting structure, its formal and informal planning and its
controlling and coordinating systems are examples of which type of resources?
A. Financial resources
B. Physical resources
C. Human resources
D. Organizational resources
Answer: D
Page: 77
Difficulty: Moderate Chapter Objective: 2
47. The VRIO assumption that some of the resource and capability differences among
firms may be long lasting is known as
A. resource mobility.
B. resource homogeneity.
C. resource immobility.
D. resource heterogeneity.
Answer: C
Page: 77
Difficulty: Moderate Chapter Objective: 1
48. ______________ implies that for a given business activity, some firms may be
more skilled in accomplishing this activity than other firms.
A. Resource mobility
B. Resource homogeneity
C. Resource immobility
D. Resource heterogeneity
Answer: D
Page: 77
Difficulty: Moderate Chapter Objective: 1
49. The theoretical roots of the Resource-Based View can be traced to research done by
A. David Ricardo.
B. Adam Smith.
C. Oliver Williamson.
D. Joseph Schumpeter.
Answer: A
Page: 78
Difficulty: Hard
Chapter Objective: 1
50. Inputs whose quantity is fixed and whose demand does not respond to price
increases are said to be
A. elastic in supply.
B. inelastic in supply.
C. elastic in demand.
D. perfectly competitive.
Answer: B
Page: 78
Difficulty: Moderate Chapter Objective: 1
Chapter 3: Evaluating a Firm’s Internal Capabilities295
51. To the extent that a firm's resources and capabilities enhance a firm's competitive
position by enabling a firm to exploit its opportunities or neutralize its threats, these
resources and capabilities are valuable and are known as
A. temporary competitive advantages.
B. sustainable competitive advantages.
C. core competencies.
D. strengths.
Answer: D
Page: 80
Difficulty: Moderate Chapter Objective: 3
52. The set of business activities in which it engages to develop, produce, and market
its products or services is known as its
A. value chain.
B. physical resources.
C. organizational resources.
D. human resources.
Answer: A
Page: 83
Difficulty: Moderate Chapter Objective: 4
53. If in the process of maximizing its performance, a firm engages in activities that
pollute the environment, the impact of that pollution is a(n)
A. capability.
B. externality.
C. competitive advantage.
D. weakness.
Answer: B
Page: 84
Difficulty: Moderate Chapter Objective: 4
54. In Porter’s value chain model, which of the following activities would be
considered a primary activity?
A. Technology development
B. Human resource management
C. Inbound logistics
D. Product development
Answer: C
Page: 85
Difficulty: Moderate Chapter Objective: 4
55. ESPN’s development of an extensive offering of X-Games coverage that is
unmatched by any other sports outlet is an example of which element of the VRIO
framework?
A. Organization
B. Imitability
C. Value
D. Rarity
Answer: D
Page: 86
Difficulty: Hard
Chapter Objective: 5
296 Part
56. Most firms have a resource-base that is composed primarily of resources and
capabilities that are
A. valuable but not rare.
B. neither valuable nor rare.
C. valuable and rare.
D. rare but not valuable.
Answer: A
Page: 86
Difficulty: Moderate Chapter Objective: 5
57. Which of the following is not one of the six distinct activities in McKinsey and
Company's value chain model?
A. Technology development
B. Product design
C. Manufacturing
D. Inbound logistics
Answer: D
Page: 85
Difficulty: Moderate Chapter Objective: 4
58. In general, as long as the number of firms that possess a particular valuable
resource or capability is less than the number of firms needed to generate perfect
competition dynamics in an industry, that resource or capability can be considered
__________ and a potential source of competitive advantage.
A. valuable
B. rare
C. inimitable
D. un-substitutable
Answer: B
Page: 86
Difficulty: Moderate Chapter Objective: 5
59. If firms that do not possess resource or capabilities face a cost disadvantage in
obtaining these resources or capabilities compared to the firms that already possess
them, these resources and capabilities are termed
A. rare.
B. valuable.
C. imperfectly imitable.
D. perfectly imitable.
Answer: C
Page: 87
Difficulty: Moderate Chapter Objective: 5
60. Firms that possess and exploit costly-to-imitate, rare and valuable resources in
choosing and implementing their strategies may enjoy a period of
A. temporary competitive advantage.
B. competitive disadvantage.
C. competitive parity.
D. sustained competitive advantage.
Answer: D
Page: 87
Difficulty: Moderate Chapter Objective: 5
Chapter 3: Evaluating a Firm’s Internal Capabilities297
61. If a firm’s resources and capabilities are costly to imitate because imitating firms
may not understand the relationship between the resources and capabilities
controlled by a firm and that firm’s competitive advantage, this competitive
advantage is said to be protected from imitation by
A. path dependence.
B. casual ambiguity.
C. unique historical conditions.
D. social complexity.
Answer: B
Page: 90
Difficulty: Hard
Chapter Objective: 5
62. Resources and capabilities, such as relations among managers and a firm's culture,
that may be costly to imitate because they are beyond the ability of firms to
systematically manage and influence are referred to as
A. socially complex.
B. casually ambiguous.
C. path dependent.
D. the result of unique historical conditions.
Answer: A
Page: 91
Difficulty: Moderate Chapter Objective: 5
63. According to the research in strategic human resources management
A. firms that are able to use human resource practices to develop socially complex
human and organizational resources are able to gain competitive advantage over
firms that do not engage in these practices.
B. firms that are able to use human resource practices to develop socially simplistic
human and organizational resources are able to gain competitive advantage over
firms that do not engage in these practices.
C. firms that are able to use human resource practices to develop socially complex
human and organizational resources gain little advantage over firms that do not
engage in these practices.
D. firms that are able to use human resource practices to develop socially complex
human and organizational resources are at a competitive disadvantage when
compared to firms that do not engage in these practices.
Answer: A
Page: 92
Difficulty: Moderate Chapter Objective: 6
64. Which of the following statements regarding patents is accurate?
A. Patents always increase the costs of imitation.
B. Patents may decrease, rather than increase the costs of imitation.
C. Patents always decrease the costs of imitation.
D. Patents have no impact on the costs of imitation.
Answer: B
Page: 93
Difficulty: Moderate Chapter Objective: 5
298 Part
65. The range of formal and informal mechanisms to ensure that managers are
behaving in ways consistent with a firm’s strategies are referred to as
A. formal reporting structures.
B. organizational charts.
C. compensation policies.
D. management control systems.
Answer: D
Page: 93
Difficulty: Easy
Chapter Objective: 6
Which of the following are examples of formal management controls?
A. A firm's culture
B. The willingness of employees to monitor each other
C. Budgeting and reporting activities
D. Managerial motivation
Answer: C
Page: 93
Difficulty: Moderate Chapter Objective: 6
67. Southwest Airlines’ strong internal culture that helps ensure that employees act in
ways consistent with the company’s strategy is an example of a(n)
A. informal management control.
B. formal management control.
C. compensation policy.
D. formal reporting structure.
Answer: A
Page: 93
Difficulty: Hard
Chapter Objective: 6
68. Resources that are valuable-but-not-rare can be categorized as
A. organizational weaknesses.
B. distinctive competencies.
C. organizational strengths.
D. complimentary resources and capabilities.
Answer: C
Page: 95
Difficulty: Moderate Chapter Objective: 6
69. Resources that generate a temporary competitive advantage are
A. valuable, rare and costly to imitate.
B. valuable but neither rare nor costly to imitate.
C. valuable and either rare or costly to imitate.
D. valuable and rare but not costly to imitate.
Answer: D
Page: 95
Difficulty: Hard
Chapter Objective: 6
70. If a resource or capability is valuable and rare but not costly to imitate, exploiting
this resource will generate a(n)
A. sustained competitive advantage.
B. perfectly competitive environment.
C. temporary competitive advantage.
D. environment characterized by competitive parity.
Answer: C
Page: 95
Difficulty: Moderate Chapter Objective: 6
Chapter 3: Evaluating a Firm’s Internal Capabilities299
71. Resources and capabilities that are valuable, rare, and costly to imitate are best
described as
A. distinctive competencies.
B. entry barriers.
C. complimentary resources and capabilities.
D. sustainable distinctive competencies.
Answer: D
Page: 95
Difficulty: Moderate Chapter Objective: 6
72. If Delta Airlines were to significantly change its fare structure and flight schedule
to enhance its competitive position in response to aggressive price cutting by
Southwest Airlines, this would be an example of
A. explicit collusion.
B. tacit collusion.
C. competitive dynamics.
D. a harvest strategy.
Answer: C
Page: 98
Difficulty: Hard
Chapter Objective: 7
73. Any actions a firm takes that have the effect of reducing the level of rivalry in an
industry that also do not require firms in an industry to directly communicate or
negotiate with each other can be thought of as
A. tacit cooperation.
B. tacit collusion.
C. explicit collusion.
D. competitive parity.
Answer: A
Page: 99
Difficulty: Moderate Chapter Objective: 7
74. When tacit cooperation has the effect of reducing supply and increasing prices, it is
known as
A. monopolistic competition.
B. explicit collusion.
C. competitive parity.
D. tacit collusion.
Answer: D
Page: 99
Difficulty: Moderate Chapter Objective: 7
75. Tacit cooperation is only a viable strategy when
A. an industry is perfectly competitive.
B. an industry is heterogeneous with respect to the products they sell and their cost
structure.
C. there is a strong market share leader in the industry.
D. there are low entry barriers in the industry.
Answer: C
Page: 99
Difficulty: Hard
Chapter Objective: 7
300 Part
76. The specific actions a firm takes to implement its strategies are known as
A. competitive advantages.
B. objectives.
C. goals.
D. tactics.
Answer: D
Page: 100
Difficulty: Moderate
Chapter Objective: 7
77. Which of the following statements regarding the resource based view is accurate?
A. Competitively valuable resources and capabilities are controlled only by a firm's
general managers.
B. Only lower level employees need to accept the responsibility of creating, nurturing
and exploiting resources and capabilities that can generate competitive advantages
for a firm.
C. Employees should define their jobs in functional terms instead of in competitive
and economic terms.
D. Competitive advantage is too important to remain the sole property of senior
management.
Answer: D
Page: 103
Difficulty: Moderate
Chapter Objective: 7
78. Which of the following statements regarding competitive parity and competitive
advantage is accurate?
A. Some firms develop valuable, rare, and costly-to-imitate resource and capabilities
in being efficient second movers-that is, imitating and improving on the product
and technological innovations of other firms.
B. Firms that benchmark their performance against the performance of successful
competitors can expect to develop at least a temporary competitive advantage.
C. Firms must be first movers to gain competitive advantages.
D. Even if all a firm does is create value in the same way as its competitors, the firm
can expect to earn at least a temporary competitive advantage.
Answer: A
Page: 104
Difficulty: Hard
Chapter Objective: 7
79. A firm that has a sustained competitive advantage in its domestic market
A. can expect to have a sustained competitive advantage in all of the countries in
which it competes.
B. can expect to have at least a temporary competitive advantage in all of the countries
in which it competes.
C. can expect that resources that are valuable, rare and costly to imitate in one country
will be valuable, rare and costly to imitate in other countries.
D. can expect that resources that are valuable, rare and costly to imitate in one country
may not be valuable, rare and costly to imitate in other countries.
Answer: D
Page: 106
Difficulty: Hard
Chapter Objective: 8
Chapter 3: Evaluating a Firm’s Internal Capabilities301
80. Each of these is one of the three critical determinants of the firm's ability to
develop new resources and capabilities through its international operations except
A. the intent to learn.
B. having a sustained competitive advantage in its home market.
C. the transparency of learning partners.
D. the receptivity to learning.
Answer: B
Page: 107
Difficulty: Moderate
Chapter Objective: 8
LaserTech is a manufacturer of industrial lasers and has developed a new, patented, technology
that allows their customers to manufacturer their products more precisely with a higher level of
consistency and at a lower cost than they could previously. LaserTech’s executives believe that
no other rivals have a similar technology, and that it would be very difficult for rivals to copy
this technology since the benefits of the new technology can only be realized within LaserTech’s
system which includes processes that are protected by trade secrets making it difficult for rivals
to understand the relationship between the company’s new technology and its competitive
advantage.
81. LaserTech’s new technology appears to be
A. valuable and rare but not costly to imitate.
B. valuable and either rare or costly to imitate.
C. valuable but neither rare nor costly to imitate.
D. valuable, rare and costly to imitate.
Answer: D
Page: 95
Difficulty: Moderate
Chapter Objective: 5
82. If one of LaserTech’s rivals were to decide to divest its industrial laser
manufacturing business in response to LaserTech’s new technology this would be
an example of
A. competitive dynamics.
B. tacit collusion.
C. a sustainable distinctive competence.
D. competitive parity.
Answer: A
Page: 98
Difficulty: Moderate Chapter Objective: 7
83. If LaserTech’s new technological development was due to proprietary investments
the company made when it was first founded twenty years ago this would be an
example of
A. social complexity.
B. tacit collusion.
C. path dependence.
D. causal ambiguity.
Answer: C
Page: 89
Difficulty: Moderate Chapter Objective: 7
302 Part
84. LaserTech’s new technology is an example of
A. financial resources.
B. physical resources.
C. human resources.
D. organizational resources.
Answer: B
Page: 76
Difficulty: Easy
Chapter Objective: 2
85. The inability of rivals to develop or acquire technology similar to that of LaserTech
is an illustration of
A. resource immobility.
B. resource heterogeneity.
C. causal ambiguity.
D. path dependence.
Answer: A
Page: 77
Difficulty: Hard
Chapter Objective: 1
The Bates Company has been producing tools for over fifty years. In that time the company has
been acknowledged as a producer of high quality tools at a reasonable price. Bates’ competitive
prices can be attributed to three factors. First, the company recognized early in its development
that tools made from specific blends of various types of metal was less costly to produce and had
superior performance compared to traditional metals. Accordingly, Bates made investments in
developing tools made for specialty metals long before other competitors and has made a series
of investments over its operating history that have put it far ahead of its competitors in terms of
product development. Industry analysts believe that based on these investments it would be
difficult and extremely costly, if it were even possible, for rivals to catch Bates. Second, in
recognizing the importance of certain metals, Bates was able to sign long-term contracts with
suppliers of the metals that have provided Bates with a lasting cost advantage. Finally, Bates
maintains its cost advantages by using a thorough budgeting and reporting system that allows
them to closely control costs and these systems are supported by a frugal company culture and
financial incentives that reward employees for finding ways to save money throughout the
company.
86. Bates’ culture is an example of a(n)
A. informal management control.
B. formal management control.
C. compensation policy.
D. formal reporting structure.
Answer: A
Page: 93
Difficulty: Moderate
Chapter Objective: 6
87. The budgeting and reporting activities that Bates uses are examples of
A. informal management controls.
B. formal reporting structures.
C. formal management controls.
D. primary value chain activities.
Answer: C
Page: 93
Difficulty: Moderate Chapter Objective: 6
Chapter 3: Evaluating a Firm’s Internal Capabilities303
88. The reward system Bates uses to encourage employees to find ways to reduce costs
is an example of a(n)
A. sustained distinctive competence.
B. informal management control.
C. formal reporting structure.
D. compensation policy.
Answer: D
Page: 93
Difficulty: Moderate Chapter Objective: 6
89. The fact that it would be would be difficult and costly for firms to match Bates’
capabilities in the tool industry indicates that these capabilities are
A. imperfectly imitable.
B. casually ambiguous.
C. substitutable.
D. perfectly imitable.
Answer: A
Page: 87
Difficulty: Hard
Chapter Objective: 5
90. It would be costly for competitors to duplicate Bates due to
A. path dependence and causal ambiguity.
B. causal ambiguity and unique historical conditions.
C. path dependence and unique historical conditions.
D. causal ambiguity and patents.
Answer: C
Page: 89
Difficulty: Hard
Chapter Objective: 5
ESSAY QUESTIONS
91. Describe the difference between resources and capabilities.
Resources in the RBV are defined as the tangible and intangible assets that a firm controls
that it can use to conceive of and implement its strategies. Examples of resources might
include a firm’s factories (a tangible asset), its products (a tangible asset), its reputation
among customers (an intangible asset), and teamwork among its managers (an intangible
asset).
Capabilities are a subset of a firm’s resources and are defined as tangible and intangible
assets that enable a firm to take full advantage of other resources it controls. That is,
capabilities do not enable a firm to conceive of and implement its strategies by themselves,
but enable a firm to use other resources to conceive of and implement such strategies.
Examples of capabilities might include a firm’s marketing skills and teamwork and
cooperation among its managers.
Page: 76
Difficulty: Easy
Chapter Objective: 1
304 Part
92. Identify the four broad categories that a firm's resources and capabilities can be
classified into.
A firm’s resources and capabilities can be classified into four broad categories: financial
resources, physical resources, individual resources, and organizational resources.
Financial resources include all the money, from whatever source, that firms use to conceive
of and implement strategies.
Physical resources include all the physical technology used in a firm. This includes a firm's
plant and equipment, its geographic location, and its access to raw materials.
Human resources include the training, experience, judgment, intelligence, relationships, and
insight of individual managers and workers in a firm.
Organizational resources are an attribute of collections of individuals.
Pages: 76-77
Difficulty: Easy
Chapter Objective: 2
93.
Identify and describe the two fundamental assumptions about the resources and
capabilities that firms may control that the RBV rests on.
The two fundamental assumptions that the RBV rests on are resource heterogeneity and
resource immobility.
Resource heterogeneity implies that for a given business activity, some firms may be more
skilled in accomplishing this activity than other firms.
Resource immobility implies that it may be very costly for firms without certain resources
and capabilities to develop or acquire them.
Page: 77 Difficulty: Easy
Chapter Objective: 1
94.
Identify the four questions represented in the VRIO framework that one must ask
about a resource or capability to determine its competitive potential.
The four questions are:
The Question of Value – Does a resource enable a firm to exploit an external opportunity or
neutralize an external threat?
The Question of Rarity - How many competing firms already possess particular valuable
resources and capabilities?
The Question of Imitability - Do firms without a resource or capability face a cost
disadvantage in obtaining or developing it compared to firms that already possess it?
The Question of Organization - Is a firm organized to exploit the full competitive potential of
its resources and capabilities?
Pages: 79-94
Difficulty: Moderate
Chapter Objective: 3
95.
Define the concept of a value chain and distinguish between two commonly used
value chain models.
A firm’s value chain is the set of business activities in which it engages to develop, produce,
and market its products or services. One model is the McKinsey and Company value chain
model which suggests that the creation of value almost always involves six distinct
activities: technology development, product design, manufacturing, marketing, distribution,
and service. Firms can develop distinctive capabilities in any one or any combination of
Chapter 3: Evaluating a Firm’s Internal Capabilities305
these activities. The second model is Porter's value chain model which divides valuecreating activities into two large categories: primary activities and support activities.
Primary activities include inbound logistics (purchasing, inventory, and so forth), production,
outbound logistics (warehousing and distribution), sales and marketing, and service (dealer
support and customer service). Support activities include infrastructure (planning, finance,
information services, legal), technology development (research and development, product
design), and human resource management and development.
Pages: 83-85
Difficulty: Moderate
Chapter Objective: 4
96.
Discuss whether a firm must be must be the only one to possess a valuable resource
or capability in order for the firm to benefit from the resource or capability's rarity or
if other firms may own it as well.
A firm does not have to be the sole possessor of a valuable resource or capability for the firm
to benefit from the rarity of a resource or capability. It may be possible for a small number
of firms in an industry to possess a particular valuable resource or capability and still obtain a
competitive advantage. In general, as long as the number of firms that possess a particular
valuable resource or capability is less than the number of firms needed to generate perfect
competition dynamics in an industry, that resource or capability can be considered rare and a
potential source of competitive advantage.
Pages: 86-87
97.
Difficulty: Hard
Chapter Objective: 4
Identify two forms of imitation and describe four sources of costly imitation.
In general, imitation occurs in one of two ways: direct duplication or substitution.
Imitating firms can attempt to directly duplicate the resources possessed by the firm with a
competitive advantage. Imitating firms can also attempt to substitute other resources for a
costly-to-imitate resource possessed by a firm with a competitive advantage. The four
sources of costly imitation include:
 Unique Historical Conditions. It may be the case that a firm was able to acquire or
develop its resources and capabilities in a low-cost manner because of its unique
historical conditions. The ability of firms to acquire, develop, and use resources
often depends upon their place in time and space.
 Causal Ambiguity. A second reason why a firm's resources and capabilities may be
costly to imitate is that imitating firms may not understand the relationship between
the resources and capabilities controlled by a firm and that firm's competitive
advantage.
 Social Complexity. A third reason that a firm's resources and capabilities may be
costly to imitate is that they may be socially complex phenomena, beyond the ability
of firms to systematically manage and influence.
 The existence of patents.
Pages: 88-93
Difficulty: Moderate
Chapter Objective: 5
306 Part
98.
Identify four components of a firm's organization that are relevant to the question
of organization and discuss what role they play in building a competitive advantage.
Numerous components of a firm's organization are relevant to the question of organization,
including its formal reporting structure, its formal and informal management control systems,
and its compensation policies. A firm’s formal reporting structure is a description of who in
an organization reports to whom and is often embodied in a firm’s organizational chart.
Management control systems include a range of formal and informal mechanisms to ensure
that managers are behaving in ways consistent with a firm’s strategies. Formal management
controls include a firm’s budgeting and reporting activities that keep people higher up in a
firm’s organizational chart informed about the actions taken by people lower down in a firm’s
organizational chart. Informal management controls might include a firm’s culture and the
willingness of employees to monitor each other’s behavior. Compensation policies are the
ways that firms pay employees. Such policies create incentives for employees to behave in
certain ways.
These components of a firm’s organization are often called complementary resources and
capabilities because they have limited ability to generate competitive advantage in isolation.
However, in combination with other resources and capabilities, they can enable a firm to
realize its full potential for competitive advantage potential.
Pages:93-94
Difficulty: Moderate
Chapter Objective: 6
99.
Discuss the questions underlying the VRIO framework and use these questions to
differentiate between a simple distinctive competence and a sustained distinctive
competence.
The four questions underlying the VRIO framework are value, rarity, inimitability and
organization. If a resource or capability is valuable and rare but not costly to imitate,
exploiting this resource will generate a temporary competitive advantage for a firm.
Consequently, this type of resource or capability can be thought of as an organizational
strength and as a distinctive competence.
If a resource or capability is valuable, rare, and costly to imitate, exploiting this resource will
generate a sustained competitive advantage. In this case, competing firms face a significant
cost disadvantage in imitating a successful firm's resources and capabilities and thus cannot
imitate this firm's strategies. As suggested earlier, this cost advantage may reflect the unique
history of the successful firm, causal ambiguity about which resources to imitate, the socially
complex nature of these resources and capabilities, or any patent advantages a firm might
posses. In any case, attempts to compete away the advantages of firms that exploit these
resources will not generate competitive advantage or even competitive parity for imitating
firms. Even if these firms are able to acquire or develop the resources or capabilities in
question, the very high costs of doing so would put them at a competitive disadvantage
compared to the firm that already possessed the valuable, rare, and costly-to-imitate resources.
These kinds of resources and capabilities are organizational strengths and sustainable
distinctive competencies.
Pages: 94-96
Difficulty: Moderate
Chapter Objective: 6
Chapter 3: Evaluating a Firm’s Internal Capabilities307
100. Define the nature of competitive dynamics and identify three reasons why a firm
might not respond to another firm's competitive advantage.
Decisions made by other firms given the strategic choices of a particular firm define the
nature of the competitive dynamics that exist in an industry.
There are at least three reasons why a firm might not respond to another firm’s competitive
advantage.
 First, this firm might have its own competitive advantage. Responding to another
firm’s competitive advantage might destroy, or at least compromise, this firm’s
sources of competitive advantage.
 Second, a firm may not respond to another firm’s competitive advantage because it
does not have the resources and capabilities to do so.
 Finally, a firm may not respond to the advantages of a competitor because it is trying
to reduce the level of rivalry in an industry.
Pages: 98-100
Difficulty: Moderate
Chapter Objective: 7