Internal Capabilities

3

Evaluating a Firm’s Internal Capabilities

THE IMPORTANCE OF INTERNAL ANALYSISExternal analysis tells us what a firm should do. On the other hand, internal analysis will suggest what a firm can do. External and internal analysis, considered together, are fundamental building blocks in the strategic management process.

The Resource-Based View (RBV) draws upon compelling economic logic to offer a framework for thinking about which, if any, of the firm’s resources and capabilities are likely to lead to competitive advantage. It is important to understand this logic. We should be able to recognize why the attributes of resources will or won’t lead to competitive advantage. RBV logic can be applied in two important ways. First, this logic can be used to analyze a firm’s status quo—to form a reasoned opinion as to whether a firm’s existing resources are likely to result in a competitive advantage. Second, and perhaps more importantly, this logic can be used as a planning tool—to help managers see how a firm’s resources should be deployed to gain competitive advantage. Thus, the logic laid out in this chapter is central to the very idea of strategic choice aimed at creating competitive advantage.

WHAT DOES INTERNAL ANALYSIS TELL US AND WHY DOES IT MATTER?What Does Internal Analysis Tell Us?Internal analysis is a way of looking inside a firm to determine what the firm’s strengths and weaknesses might be. We want to take this look in a comparative sense so that we are clear about strengths and weaknesses as compared to relevant competitors.

Chapter 3: Evaluating a Firm’s Internal Capabilities

Important Point: External analysis tells us what the threats and opportunities are in the external environment. Thus, it provides direction about what the firm should do. Internal analysis tells us what the firm can do. Internal analysis builds on external analysis by providing a framework for managers to think about how a firm’s resources can be deployed to best exploit opportunities and neutralize threats in the external environment.

Why Does Internal Analysis Matter?

The “Big Idea” behind internal analysis is that we are attempting to discover potential sources of competitive advantage. It’s not just that we want to know if the focal firm has better resources than another firm; rather, it’s that we want to know if the focal firm possesses resources that could be deployed in such a way that competitive advantage could be achieved. Internal analysis allows a firm to develop strategy with a reasonable expectation of competitive advantage. Without an internal analysis, firms would just be guessing as to whether a strategy would result in competitive advantage. The following example illustrates the importance of internal analysis.

► Example: Softsoap Enters the Market

Softsoap was the brainchild of Minnetonka’s CEO, Robert Taylor. The idea of putting liquid hand soap in a pump container for home use was novel at the time. Taylor knew that the most likely competitors would be large companies like Procter & Gamble who were good at developing and marketing new products for the home and personal care markets. Had Taylor forged ahead without any form of internal analysis he would have rightly developed a great product. He knew the liquid soap would be easy to manufacture and that he could buy the pumps from one or both of the two existing pump manufacturers. Procter & Gamble, and probably others, would have quickly imitated his product and most likely driven him out of business. These other manufacturers were many times larger than Minnetonka. However, Taylor engaged in a form of internal analysis by recognizing that even though these larger companies had a resource advantage when it came to manufacturing and marketing the liquid soap, they had no advantage when it came to the pump bottles. He recognized that if he bought all the pump bottle production of the two manufacturers he would have an advantage over firms


much larger than Minnetonka. Taylor bought all the pumps the two manufacturers could produce in a year. He paid more for these orders of pumps than Minnetonka was worth at the time. The strategy worked. He had a 12-18 month lead over his much larger competitors in which he was able to establish the Softsoap brand and capture market share. (Brandenburger & Nalebuff, 1995, The Right Game: Use Game Theory to Shape Strategy, Harvard Business Review.)

THE RESOURCE-BASED VIEWThe RBV is the theoretical lens through which internal analysis is conducted. A bit of history is in order here. The most popular strategic management theory and thinking before the mid-1980s was based on the Structure-Conduct-Performance Model from industrial organization economics. In the mid-1980s scholars began to argue that the primary drivers of firm performance may be found at the firm level instead of the industry level. Differences in the resource endowments of firms were viewed as being the root causes of differences in firm performance. This very Ricardian view quickly became known as the Resource-Based View of the firm. This shift in level of analysis from the industry level to the firm level has important implications for management. Where the S-C-P message seemed to be “choose the right industry,” the RBV message seems to be “choose the right resources.”

Scholars began to think about firm-level characteristics to try to answer the question: Why do some firms do better than other firms? The resources a firm possesses or controls provided a natural place to begin looking for answers to this question. Defining a firm’s resources and capabilities is an important step about using the RBV to conduct internal analysis.

Resources & Capabilities

Describe Four Types of Resources and Capabilities

• resources are the tangible and intangible assets that a firm controls, which it can use to conceive of and implement its strategies• capabilities are a subset of resources that enable a firm to take full advantage of other resources the firm controls


Important Point: Any asset or ability of a firm is a resource. Capabilities are simply those resources that firms use to combine and deploy other resources.

Machinery is a resource. Collective Product Design skill is a capability. This refers to the ability of the firm, working together, to produce new product designs. Recruiting skill is a firm capability. Engineering skills of individuals are firm resources. Mineral deposits are firm resources.

Four Types of Resources• financial—the money available to the firm from whatever source (debt, equity,

retained earnings, etc.)• physical—machinery, factories, offices, raw materials, geographic location,

technology• human—training, experience, individual intelligence, judgment, work ethic• organizational—reporting structures, reward systems, coordinating systems,

relationships, etc.

The purposes of categorizing resources are: 1) simply to demonstrate that anything and everything may be viewed as a resource, and 2) to show later on that different types of resources may be combined to form the capabilities of the firm.

► Example: Coca-Cola’s Resources and Capabilities

Coca-Cola has a distinctive red can with a trademarked white wave image that goes around the can. These are physical resources. Coca-Cola has access to substantial working capital (cash). This is a financial resource. Coca-Cola has talented marketing professionals. These are individual human resources. Coca-Cola also has well established set of reporting structures, reward systems, communications systems, and IT systems. These are organizational resources. Coca-Cola has the ability to put these various resources together in an effective marketing campaign. This is a capability. Thus we would correctly refer to Coca-Cola’s marketing capability as one of its resources right along with its other physical, capital, human, and organizational resources.


Two Assumptions of the Resource-Based View

Describe the Critical Assumptions of the Resource-Based View

The RBV makes two critical assumptions that set it apart from the industrial organization economics that preceded it. In the IO economics view of the world any firm differences that may arise would be quickly dissipated through competition. If one firm had a good idea, others would quickly copy it. There would be no enduring differences between firms. The RBV makes two assumptions that directly oppose this idea.

Resource Heterogeneity: different firms may possess different resources and capabilities even if they are competing in the same industry. This is an explicit recognition that all firms are not the same.Resource Immobility: some resources may not be moved from firm to firm without substantial cost. It may be more costly for a firm to acquire a desirable resource than that resource is worth to that firm.

These two assumptions make the notion of enduring firm differences plausible. The idea of enduring firm differences may not be all that novel to students—it seems like common sense. But, if we are to explain why one firm does better economically than another we need to have a logical explanation as to why there are causal differences between the firms.

THE VRIO FRAMEWORKApply the VRIO Framework to Identify the Competitive Implications of a Firm’s Resources and Capabilities

The VRIO framework is the analysis ‘tool’ of the RBV. This framework is a way of examining resources to determine if a resource is likely to be a source of competitive advantage. Four criteria must be met if a resource is to lead to competitive advantage. These four criteria are represented by questions in the framework. The framework allows us to draw conclusions about competitive advantage based on answers to the four questions.

• Value – Does the resource enable the firm to exploit an opportunity or neutralize a threat? The evidence of a positive response to this question is usually that the resource somehow increases revenue or decreases cost.


• Rarity – Is the resource rare? Is the resource rare enough that there is still scarcity in the marketplace for this resource?• Imitability – Is the resource costly to imitate? Specifically, is the resource so costly to imitate that no one would try to imitate it?• Organization – Is the firm organized in such a way that the resource can be exploited?

If the answer to these four questions is affirmative, then the firm can reasonably expect to achieve a competitive advantage. Of course, there will be many resources that meet some but not all of the criteria. The competitive implication of these resources will be explained as we move along.

APPLYING THE VRIO FRAMEWORKThe VRIO Framework is applied by subjecting one or more resources, bundles of resources or a capability to each of the four questions.

Important Point: You must understand that the framework is applied on a resource-by-resource basis and not to the firm as a whole. For example, if a firm sought help in analyzing its proposed introduction of a new personal digital music device the VRIO Framework might be applied to the firm’s: design capability, marketing capability, distribution capability, proposed product per se, etc. This helps to highlight which of these resources, if any, might be sources of competitive advantage.

The Question of ValueThis is a straightforward question intended to ascertain whether or not the resource is strategically relevant. There is a cost to the firm of carrying any resource and if the firm does not receive some benefit that outweighs the cost, then the firm is at a competitive disadvantage. If the firm receives a benefit that outweighs the carrying cost of the resource, then we would conclude that the resource is valuable, and could, therefore, be a potential source of competitive advantage.

Most resources are valuable. However, the important question here is whether the resource is valuable in this specific context. Make sure that students understand that the resource must be valuable in the firm’s intended use for that resource.


The Question of RarityHaving established that a resource is valuable, we next turn our attention to the question of rarity. We are interested in whether a resource is rare enough that it creates a difference between the focal firm and its competitors such that the focal firm realizes some advantage from the difference. This question is tied to the assumption of resource heterogeneity. If there is to be any advantage in having a resource, it must create differences between firms.

Important Points:• Some firm resources that are valuable but not rare are still very important to the firm (e.g., telephone systems).• A resource can still be rare even if more than one firm possesses it—the real question is this: Is the resource rare enough that the firm derives some advantage from having the resource?• A resource is considered rare if so few firms possess the resource that nearly perfect competition is not observed.

Implications of Value and Rarity

Not valuable. A resource that is not valuable will put the firm at a competitive disadvantage if for no other reason than the carrying costs associated with such a resource. It may also be the case that a resource that is not valuable may actually drive customers and/or employees away.

Valuable, but not rare. A resource that is valuable but not rare will lead to competitive parity. This makes sense because it means that the firm is like other firms—no advantage, no disadvantage.

Valuable and rare. If a resource is valuable and rare, the firm can reasonably expect a competitive advantage. However, at this point we don’t know if the differences between firms will be enduring so the competitive advantage may only be temporary.

The Question of Imitability

Describe the Kinds of Resources and Capabilities that Are Likely to Be Costly to Imitate

Maintaining the rareness of a resource is the key to having a sustained competitive advantage. If competing firms can acquire a valuable and rare resource, then the advantage of possessing that resource will quickly dissipate. The big issue here is the cost of


imitation. A firm can expect to sustain its competitive advantage if other firms face a cost disadvantage in acquiring the valuable and rare resource.

Important Point: A cost disadvantage means that a competing firm would face a cost so high that acquiring the resource would not be worth that cost. Assume a firm faces a cost of $100 to acquire a particular resource and that the firm can expect to sell the output of that resource for only $85. It would be irrational for the firm to attempt to acquire the resource

A sustained competitive advantage does not mean that the firm will have the advantage indefinitely. It means the firm will have the advantage only until the resource is imitated by enough other firms that nearly perfectly competitive competition ensues, at which point the advantage will be gone.

Costs of Imitation. There are several categories of cost that firms may face as they attempt to imitate valuable and rare resources. These sources of cost are examined with the aim of helping students understand and exploit these costs. If a firm is protected by the high costs of imitation that competitors face, then the firm can expect the competitive advantage to be sustained.

Unique Historical ConditionsFirms attempting to imitate resources that came about because of unique historical conditions may face substantial cost disadvantages. Two types of cost disadvantages faced by would be imitators are:

• First mover advantages – brand loyalty and market share are difficult to overcome. • Path dependency – refers to the fact that the development of a resource may depend heavily on other resources being in place before the desired resource.

CAUSAL AMBIGUITYA firm may face a cost disadvantage in acquiring valuable and rare resources because it is unclear exactly which resources need to be imitated in order to get the desired effect. Southwest Airlines provides an example of causal ambiguity. Southwest does several things that other airlines would love to imitate, but so far, no has been able to imitate them. Competitors know that Southwest has an advantage due to its human resource practices. Even though competitors know the human resources practices of Southwest are creating an advantage, competitors are so far, unable to imitate Southwest because they don’t exactly what aspect to imitate.


Furthermore, there are probably many resources bundled together that make up Southwest’s human resource practices.

Social ComplexitySocial complexity may create a cost disadvantage for a firm attempting to imitate a valuable and rare resource because the desired resource may be the result of a set of complex social relationships. Duplicating these relationships may be extremely costly or even impossible.

Important Point: Some resources and capabilities are generated, in part, from the interaction of two or more individuals. These resources and capabilities are also influenced by organizational surroundings within the firm. Attempting to recreate such a set of social interactions is costly at best, if not strictly impossible.

PatentsPatents help to create cost disadvantages for imitators, but they are not an ironclad protection for patent holders. One problem for those seeking a patent is that potentially sensitive information has to be disclosed to get the patent in the first place. This information could prove useful to others attempting to develop a similar product or solution. Another problem for patent holders is that the patent must be enforced if others choose to infringe on the patent. For these reasons, some firms opt for a trade secret instead of a patent. Trade secrets offer a different level of protection, but there is little, if any, a priori disclosure requirement.

The Question of Organization

Describe How a Firm Uses Its Structure, Formal and Informal Control Processes, and Compensation Policy to Exploit Its Resources

The logic behind the question of organization is simply that a firm must be appropriately organized to be able to exploit the potential competitive advantage stemming from valuable, rare, and costly-to-imitate resources and capabilities. Conceivably a firm could have a valuable, rare, and costly-to-imitate resource and never realize a competitive advantage because of inadequate organization.

3M is an extremely innovative firm, having developed hundreds of new products based on adhesive and other chemical technologies. The company seems to have a culture focused on innovation. 3M’s organization structure and reward systems help reinforce this innovative culture. R&D engineers are encouraged to spend time tinkering with new ideas—sometimes completely unrelated to current


products. People are rewarded for taking risks in creating and marketing new products. Not every new product is a success, but people are not punished for the occasional failure. As a result of these organizational characteristics, 3M seems to enjoy a sustained competitive advantage.

Important Points

• The ‘organization’ we’re talking about here refers to the firm reporting structures, formal and informal management control systems, hiring and retention policies, compensation policies, etc. of the firm.• These ‘organization’ characteristics of a firm heavily influence the incentives and motivations of employees.• These ‘organization’ characteristics of a firm may not be sources of competitive advantage per se, but they complement other resources and capabilities of the firm. • Point out to students that a reporting structure that allows information to flow from salespeople back to product design engineers may be critical to competitive advantage. For example, a firm could have a set of resources that allowed the firm to offer a product that was comparable to competitors’ products. If that firm had a more efficient reporting structure than competitors, it may be able to alter the resource bundle to offer a superior product. Thus, the reporting structure would complement the other resources of the firm and allow the firm to realize a competitive advantage from its superior product.

A resource or capability subjected to VRIO analysis would fall on one of the four lines.

• First line: a resource is found not to be valuable. Competitive Implication: competitive

disadvantage. • Second line: a resource is valuable, but not rare.

Competitive Implication: competitive parity. • Third line: a resource that is valuable and rare, but not costly to imitate.

Competitive Implication: temporary competitive advantage.

• Fourth line: a resource is valuable, rare, and costly to imitate.

Competitive Implication: sustained competitive advantage.


The question of organization is an adjustment factor. If a firm possessed a resource that was valuable, rare, and costly to imitate, but the firm had only mediocre organization, then we would conclude that the competitive implication would move upward on the chart toward only temporary competitive advantage or parity.

COMPETITIVE DYNAMICS OF RESOURCE IMITATIONDiscuss How the Decision to Imitate or Not Imitate a Firm with a Competitive Advantage Affects the Competitive Dynamics in an Industry

Competitive dynamics of imitation are important considerations for both the firms trying to imitate and the firms whose resources are being imitated by other firms. For the firm attempting to imitate, the fundamental question is: Will the benefits of imitating the resource be worth the costs? For the firm who has a resource advantage, the question is: Do other firms face a cost disadvantage in imitating our resources?

A No Change Response. In the face of another firm’s resource advantage, a firm may decide that ‘no response’ is the best response. There may be several compelling reasons for a ‘no response.’

• A firm may decide that it wants to serve a different market or type of customer. For example, a used automobile dealer who exclusively offers four-wheel-drive pickup trucks would probably not respond to resource advantages of the dealer who specializes in Honda Civics.

• A firm may recognize that a response could damage its own resource advantage. For example, the used auto dealer that exclusively offers late model Audi’s may decide that it doesn’t make sense to try to match the offerings of a nearby dealer who offers lower priced autos. A few Toyota Corollas and Honda Civics on the lot may send the wrong message.

• A firm may simply decide that it doesn’t have the resources necessary to respond to a competitor’s resource advantage. A small, relatively new used auto dealer may decide that offering the same credit terms as the


competition down the street exceeds the financial resources currently available to the new dealer.

• A firm may choose the ‘no response’ route in an effort to establish tacit collusion in a market. Suppose the four-wheel-drive pickup truck dealer and the late model Audi dealer are on the same street near one another. The truck dealer chooses not to offer late model Audi’s even though he knows he could take some business from the other dealer. In return, the used Audi decides not to offer trucks even though she could gain a few sales by doing so. The used Audi dealer could signal her intent by offering any truck she took as a trade-in to the truck dealer. Both dealers would benefit by maintaining specialization and appealing to specific car buyers.

Changes in Tactics and Strategies. Firms may decide that changes in either tactics or strategies make sense in response to a resource advantage held by a competitor. There are important differences between changing tactics and changing strategies.

Tactics Changes:• refer to changes in the way an overall strategy is carried out.

• Example: changes in product characteristics like size, shaper, color, etc. The product is still hand soap, for example, and it’s still sold in the same places to the same people.

• are typically easy to imitate. When one firm adopts a change in tactics, others can and will quickly follow.• may create temporary advantages until competitors are able to imitate them.• may create an advantage if the firm ‘leap frogs’ the competition like Procter & Gamble did with Tide (pp. 89-90).• may be a source of advantage for firms that can do them in rapid succession and thereby stay ahead of the competition.

Strategy Changes:


• refer to fundamental change in the way a firm approaches its business.

• Example: Monsanto changed from being a chemical company to being a life sciences company focused on genetic engineering.

• mean a firm has altered its theory about how to compete.• usually occur when a firm figures out that its current strategy won’t even produce competitive parity.• can be expected to produce competitive parity if they simply mimic what other firms are doing.• can generate competitive advantage if the VRIO criteria are met.

SUMMARY OF RBV LOGIC• The RBV was developed in an effort to answer the question: Why do some firms do better economically than other firms?• The RBV assumes that firm-level phenomena are the primary determinants of economic performance.• The RBV makes two assumptions that distinguished it from previous economic theory:

• resource heterogeneity: firms may have different resource endowments• resource immobility: some resources may not be easily transferred or acquired

• These assumptions allow for the possibility of enduring firm differences.• Without firm differences, there would be no advantage for any one firm over any other firm.

Important Points

• The VRIO Framework is to be applied to a specific resource (or bundle of resources) or capability—not to the resources and capabilities of the firm as a whole.• The framework can be used to assess what a firm is currently doing, or, it can be used to help a firm craft a strategy using the resources and capabilities of the firm. It can be used to answer the question: Is this resource likely to be a source of competitive advantage?


• Each of the four questions (VRIO) should be asked in the context of the market in which the firm operates.• The most desirable position for a firm is to have a sustained competitive advantage.

• A competitive advantage depends on a cost disadvantage for others who would imitate a valuable and rare resource. • A competitive advantage also depends on the focal firm’s organization. It must be able to exploit its resource advantages in order to achieve competitive advantage.

CONCLUSIONFinally, it has proven useful to conclude the class session with a return to the big picture and a final explanation about why internal analysis matters. In a nutshell, the RBV and the VRIO Framework offer us a way to think about the probable results of our strategic decisions.

Important Points:• External analysis only tells half the story. A firm would be hard pressed to formulate an effective strategy using only external analysis.• Internal analysis and external analysis, taken together, allow us to think about positioning firm resources in a way that is likely to lead to competitive advantage and above normal returns.• Internal analysis helps to sharply focus attention on the role of managers. If we accept that managers are responsible for the economic performance of a firm, then the role of managers must be to ‘bundle’ the resources of the firm.• The VRIO Framework is a very effective tool for managers to use as they attempt to position or ‘bundle’ the resources of the firm in the pursuit of competitive advantage.

As a final note, we suggest that you point out to students that the principles covered in this session may have very real and relevant application in their personal and professional lives. Encourage students to think about the contributions they can make within their families, communities, and professional circles given their personal ‘resources’ such as talents, abilities, personalities, and interests. In a utilitarian sense, a little VRIO analysis of one’s personal and professional ‘resources’ may go a long way toward helping the


individual achieve a measure of competitive advantage on a personal level.


CHALLENGE QUESTIONS

1. Which approach to strategy formulation is more likely to generate economic profits: (a) evaluating external opportunities and threats and then developing resources and capabilities to exploit these opportunities and neutralize these threats or (b) evaluating internal resources and capabilities and then searching for industries where they can be exploited? Why?

Answer (b) is more likely to generate economic profits because the firm in answer (a) would have to acquire resources. These resources would have to be acquired in a market where other firms would very likely know the value of the resources. Prices would be bid up to the point where economic profits would probably not be possible. The firm in answer (b) already has the resources and capabilities and they would not capitalize the value of the resources and capabilities in the process of acquiring them.

2. Which firm will have a higher level of economic performance: (a) a firm with valuable, rare, and costly-to-imitate resources and capabilities operating in a very attractive industry or (b) a firm with valuable, rare, and costly-to-imitate resources and capabilities operating in a very unattractive industry? Assume both these firms are appropriately organized. Explain your answer.

The firm in answer (a) will have higher performance because overall profits will be higher in the attractive industry. There will be less pressure from each of the five forces explained in Porter’s Five Forces Model. However, this is not to say that a firm in an unattractive industry cannot earn high economic performance. In fact, some firms do earn very attractive returns in industries that would be considered unattractive because they have resources and capabilities that set them apart from competitors. Wal-Mart is a good example.

3. Will a firm currently experiencing competitive parity be able to gain sustained competitive advantages by studying another firm that is currently experiencing sustained competitive advantages? Why or why not?

The correct answer depends on what the firm does with its analysis. If the firm studies the firm with a sustained


competitive advantage and then tries to imitate the source of advantage, the answer is no. Such a firm will likely stay at competitive parity because that firm’s offering will most likely not be rare. If, on the other hand, the firm studies the firm with a sustained competitive advantage and then formulates a strategy that results in resources and capabilities that are valuable, rare, and costly to imitate, then the answer would likely be yes. Such a firm’s offering would generate competitive advantage as predicted by the VRIO Framework.

Problem Set

1. Apply the VRIO Framework in the following settings. Will the actions described be a source of competitive disadvantage, parity, temporary advantage, or sustained competitive advantage?

a. Proctor and Gamble introduces new smaller packaging for its laundry detergent, Tide.

b. American Airlines announces a 5% across-the-board reduction in airfares.

c. The Korean automobile firm Hyundai announces a 10-year, 100,000 mile warranty on its cars.

d. Microsoft makes it easier to transfer data and information from Microsoft Word to Microsoft Excel.

e. Merck is able to coordinate the work of its chemists and biologists in the development of new drugs.

f. Ford patents a new kind of brake pad for its cars.g. Ashland chemical, a specialty chemical company, patents a

new specialty chemical.h. The New York Yankees sign all star pitcher Roger Clemens to

a long term contract.i. Michael Dell uses the money he has made from Dell

Computers to purchase the Dallas Cowboys football team.j. Ted Turner uses the money he has made from his

broadcasting empire to purchase the Atlanta Braves baseball team.

2. Identify three firms you might want to work for. Using the VRIO framework, evaluate the extent to which the resources and capabilities of these firms gives them the potential to realize competitive disadvantages, parity, temporary advantages, or


sustained advantages. What implications, if any, does this analysis have for who you might want to work for?

3. You have been assigned to estimate the present value of a potential construction project for your company. How would you use the VRIO framework to construct the cash flow analysis that is a part of any present value calculation?

Answer 1

a. Proctor & Gamble – temporary advantage. This will be imitated by other firms.

b. American Airlines – temporary advantage. This will be imitated by other airline carriers.

c. Hyundai – sustained competitive advantage. 100,000 mile warranty is valuable, rare, and costly to imitate.

d. Microsoft – sustained competitive advantage. Costly to imitate.

e. Merck – could be either temporary or sustained competitive advantage. Merck is using “organization” to exploit its resources and capabilities.

f. Ford – temporary advantage. Depends on the cost to imitate and perceived value.

g. Ashland Chemical – Temporary or sustained competitive advantage. Depending upon the rarity of the chemical, cost to imitate, and its value.

h. New York Yankees – Parity. This could be considered parity or temporary advantage as this resource is not permanent.

i. Michael Dell – Competitive disadvantage. The resources could be better utilized for research and new product development. The football team does not directly benefit the firm.

j. Ted Turner – Students may argue several different options here. Arguments could be made for competitive disadvantage, parity and perhaps, temporary advantage.


Answer 2

Students are asked to identify three firms of their choosing. Students need to apply the VRIO framework by focusing on the four questions: (1) Question of value; (2) question of rarity; (3) question of imitability; and (4) the question of organization. Students firms will vary widely. You may wish to have students present their selections and defend their choices.

Answer 3

Using the VRIO framework would allow for the specifying of a value chain associated with the potential construction project for the company. This listing of the various business activities must be completed for the construction project to be completed. It allows for an analysis of the process in a disaggregated way which can be useful in constructing the cash flow analysis. In essence, using this approach allows one to think about how each of the activities associated with the construction project affect the financial, physical, individual and organizational resources of the firm. Further, VRIO framework allows one to track the impact of the construction project on the firm’s revenues and costs.

Internal Capabilities

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