CHAPTER 3

Internal Analysis: Resources and Capabilities

DISNEY’S STRATEGY(OPENING MINICASE)

1. What Markets Served

2. What Unique Value (why we win with customers)

3. What Resources and Capabilities (how we deliver unique value)

4. What Barriers to Imitation

PURPOSE OF INTERNAL ANALYSIS

• An organization’s future success depends on its own internal conditions as well as external conditions

• Managers need to be able to identify– Strengths that the company can relay on in

order to compete– Weaknesses that need to be corrected or

minimized as competitive factors

MANAGERS MUST UNDERSTAND

–The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profit

–The importance of superior efficiency, innovation, quality, and responsiveness to customers

–The sources of their company’s competitive advantage (strengths and weaknesses)

Competitive Advantage

• The collection of factors that sets a company apart from its competitors and gives it a unique position in the industry/market

• Means to add value for stakeholders• Focus especially on adding value for

customers

Core Competence(ies)

A unique set of lasting capabilities that a company relies on to achieve competitive advantage and add value

• Innovation• Efficiency• Customer Responsiveness• Quality• Special Expertise

VALUE-CHAIN ANALYSIS

• Sequential process of value-creating activities• The amount that buyers are willing to pay for

what a firm provides them• Value is measured by total revenue• Firm is profitable to the extent the value it

receives exceeds the total costs involved in creating its product or service

THE VALUE CHAIN

Adapted from Exhibit 3.1 The Value Chain: Primary and Support ActivitiesSource: Adapted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter.

Value Chain Interpretation

• Represents a company or any organization• Simplified illustration of all activities that an

organization must perform• Framework for analyzing a company’s

strengths and weaknesses• Margin represents profit- expand margin by

- Being able to charge a higher price- Operating at a lower cost within the Value

Chain

SUPPORT ACTIVITY: GENERAL ADMINISTRATION

FIRM INFRASTRUCTURE• Typically supports the entire value chain and not individual

activities- Effective planning systems- Ability of top management to anticipate and act on key

environmental trends and events- Ability to obtain low-cost funds for capital expenditures

and working capital- Excellent relationships with diverse stakeholder groups- Ability to coordinate and integrate activities across the

value chain- Highly visible to inculcate organizational culture,

reputation, and values

SUPPORT ACTIVITY: HUMAN RESOURCE MANAGEMENT

• Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel

- Effective recruiting, development, and retention mechanisms for employees

- Quality relations with trade unions- Quality work environment to maximize overall

employee performance and minimize absenteeism- Reward and incentive programs to motivate all

employees

SUPPORT ACTIVITY: TECHNOLOGY DEVELOPMENT• Related to a wide range of activities and those

embodied in processes and equipment and the product itself

- Effective R&D activities for process and product initiatives

- Positive collaborative relationships between R&D and other departments

- State-of-the art facilities and equipment- Culture to enhance creativity and innovation- Excellent professional qualifications of personnel- Ability to meet critical deadlines

SUPPORT ACTIVITY: PROCUREMENT

• Function of purchasing inputs used in the firm’s value chain

- Procurement of raw material inputs- Development of collaborative “win-win” relationships

with suppliers- Effective procedures to purchase advertising and

media services- Analysis and selection of alternate sources of inputs to

minimize dependence on one supplier- Ability to make proper lease versus buy decisions

Applying Value Chain Analysis

• Framework for identifying company’s strengths and weaknesses

• Means to focus on where the company’s core competencies exist and can be used to achieve competitive advantage and add value

• Comparison with competitors reveals opportunities for improving company’s competitive position

Resource-Based View (RBV)

1. RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles

2. The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources

3. Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages

RESOURCE-BASED VIEW OF THE FIRM

• Three key types of resources- Tangible and Intangible Resources- Organizational capabilities- Priorities

TYPES OF RESOURCES: TANGIBLE RESOURCES

• Relatively easy to identify, and include physical and financial assets used to create value for customers

• Financial resources- Firm’s cash accounts- Firm’s capacity to raise equity- Firm’s borrowing capacity

• Physical resources- Modern plant and facilities- Favorable manufacturing locations- State-of-the-art machinery and equipment

TYPES OF RESOURCES: TANGIBLE RESOURCES

• Technological resources- Trade secrets- Innovative production processes- Patents, copyrights, trademarks

• Organizational resources- Effective strategic planning processes- Excellent evaluation and control systems

TYPES OF RESOURCES: INTANGIBLE RESOURCES

• Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

- Human• Experience and capabilities of employees• Trust• Managerial skills• Firm-specific practices and procedures

TYPES OF RESOURCES: INTANGIBLE RESOURCES

• Innovation and creativity- Technical and scientific skills- Innovation capacities

• Reputation- Brand name- Reputation with customers- Reputation with suppliers

TYPES OF RESOURCES:ORGANIZATIONAL CAPABILITIES

• Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end

- Outstanding customer service- Excellent product development capabilities- Innovativeness of products and services- Ability to hire, motivate, and retain human capital

• Driven by Organization’s Values• Reflects Organization’s Culture• Priorities Guide Resource Allocation• Priorities Maintain Allocations Over Timr

TYPES OF RESOURCES:PRIORITIES

SUSTAINABLE COMPETITIVE ADVANTAGE: VRIO MODEL

Is the resource or capability…

Valuable

Rare

Inimitable

Organized to Exploit

Implications• Neutralize threats and

exploit opportunities• Not many firms possess• Physically unique• Path dependency• Tacit knowledge• Causal ambiguity• Social complexity• No equivalent strategic

resources or capabilities

Adapted from Exhibit 3.7 Four Criteria for Assessing Sustainability of Resources and Capabilities

INIMITABLE RESOURCES

• Unique History—Coke• Path Dependence—Boeing• Complex Systems—Merck• Tacit Knowledge—Apple• Property Rights—Chevron

Source: adapted from Jay Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, no. 1 (March 1, 1991): 99–120. and Jay Barney and Bill Hesterly, Strategic Management and Competitive Advantage, 4e, Pearson.

Is the resource Valuable?

Is the resource

Rare?

Is the resource

Inimitable?

Is the company

Organized to exploit?

No No No No Competitive Failure

Yes No No No Competitive Parity

Yes Yes No No Competitive Advantage

Yes Yes Yes No Durable Competitive Advantage

Yes Yes Yes Yes Sustained Competitive Advantage

RESOURCES AND COMPETITIVE ADVANTAGE

FINANCIAL RATIO ANALYSIS• Six types of financial ratios

- Short-term solvency or liquidity- Long-term solvency measures- Asset management (or turnover)- Profitability- Market value- Growth

• Meaningful ratio analysis must include- Analysis of how ratios change over time- How ratios are interrelated

COMBINING INTERNAL AND EXTERNAL ANALYSES

• Internal and External Analyses commonly referred to as SWOT:– Strengths– Weaknesses– Opportunities– Threats

• Strengths and Weaknesses identified from Internal Analysis

• Opportunities and Threats identified from External Analyses

Internal Analysis

• Strengths and Weaknesses identified through the use of tools including:- Stakeholder Analysis- Core Competencies- Value Chain- Resource-Based View- VRIO - Sustainable Competitive Advantage- Financial Analysis- Strategic Issues

External Analysis

• Opportunities and Threats identified through the use of tools such as:- Five Force Analysis- General Environment Assessment- Key Success Factors in Industry- Competitive Changes during Industry

Evolution

RESULTS OF INTERNAL AND EXTERNAL ANALYSIS

• Requires creative interpretation • Understanding of company’s competitive position

in its industry• Identification of strategic issues the company

faces• Strategic issues

– Represent dangers to the company’s long-term survival

– Suggest areas where the company should concentrate its efforts in order to grow

Internal Analysis• Strengths

• Weaknesses

External Analysis• Opportunities

• Threats

Strategic Issues

Strategic Alternatives

Strategy

Tools Tools