Internal Analysis: Resources,
Capabilities, and Activities
Joe Mahoney
Internal Analysis: Inside the Firm
• Comparing two firms in same industry:
Internal focus
 Core Competencies
 Unique
 Can
strengths deep inside that differentiate a firm
drive competitive advantage
 Strategic Fit
 Internal
strengths fit with the
environment
external
Creating Strategic Fit to Leverage Internal Strengths
4–3
The Role of Strategy in Business is to Generate and
Sustain Value via the Linkages Between Positioning,
Organization, and Resources & Capabilities
Positioning
Organization
Resources &
Capabilities
4–4
Positioning
• Scope of the Firm:
 Geographic scope
 Product-market scope: Choice of businesses
(corporate portfolio analysis)
 Product market positioning
within a business
 Vertical integration (value chain)
decisions
Organization
• Structure
 Formal definition of authority
 Conflict resolution
• Systems
 Rules, routines, evaluation and rewards
• Processes
 Informal communication, networks, and recruitment
4-6
Resources and Capabilities
• Tangible resources
 e.g., physical capital
• Organizational capabilities
 e.g., routines and standard operating procedures
• Intangible resources
 e.g., trademarks, “know-how”
4–8
Linking Resources and Capabilities to Firm Performance
Company Examples of Core Competencies and Applications
4–11
Tangible and Intangible Resources
4–12
The Resource-based View
• Google Example
 Tangible resources valued at $5 billion
 Intangible brand valued at over $100 billion
 Googleplex has both tangible and intangible aspects
• Competitive Advantage More Likely…..
 From intangible resources
4–14
Two Critical Resource Dimensions in RBV
• Resource heterogeneity
 Bundles of resources and capabilities differ across firms
 Southwest Airlines and Alaska Airlines have different
resources
 SWA
– Higher employee productivity
– Informal organization, pilots help load luggage
• Resource immobility
 Resources tend to be “sticky” and do not move easily
 Southwest Airlines sustained advantage
 Several decades superior performance
 Competitors have unsuccessfully imitated SWA model
4–15
Applying RBV: Decision Tree Competitive Implications
The Value Chain
• Primary Activities
 Add value directly in transforming inputs into outputs

Raw materials through production to customers
• Support Activities
 Indirectly add value
Provide support to the primary activities
 Information systems, human resources, accounting, etc.

• Managers can see how competitive advantage flows
from a system of activities (using activity-based
accounting).
4–18
Value Chain: Primary and Support Activities
Hostess’s Cost Components
80
Profit
70
Marketing: Promotions
Cents per unit
60
Marketing: Advertising
50
Outbound logistics
40
Operations: Manufacturing
30
Operations: Packaging
20
Operations: Ingredients
10
0
© 1999 Pankaj Ghemawat
Relative Cost Analysis
90
80
Profit
70
Marketing: Promotions
Cents per unit
60
Marketing: Advertising
50
Outbound logistics
40
Operations: Manufacturing
30
20
Operations: Packaging
10
Operations: Ingredients
0
Hostess
© 1999 Pankaj Ghemawat
Little Debbie Ontario Baking Savory Pastries
Value Chain Analysis
• Outsourcing activities can have
the unintended consequence
of damaging the firm’s potential
to evaluate continuously its
key assumptions, learn, and
create new capabilities and
core competencies. Thus,
managers should verify that
the firm does not outsource
activities that stimulate the
development of new
capabilities and competencies.
4–22
Strategic Coherence
The Logic of How The Business Fits Together:
• Southwest Airlines
 Low Price
 Short Routes
• No Frills
• Point-to-Point
• One Aircraft -Boeing 737
• High number of
Aircraft per Route
• No Meals
• Flexible/ Lower Staffing
• American Airlines
 Premium Price
 Short, Long, & Int’l
 Variety
• Hub & Spoke System
• Multiple Aircraft
• Low number of
Aircraft per Route
• Meals & Service
• Higher Staffing
Southwest Airline’s Activity System
No baggage
transfers
No meals
No seat
assignments
Frequent,
reliable
departures
High
compensation
of employees
Flexible
union
contracts
15-minute
gate
turnarounds
Lean, highly
productive
ground and
gate crews
High level
of employee
stock
ownership
Limited
passenger
amenities
Limited use
of travel
agents
No
connections
with other
airlines
Standardized
fleet of 737
aircraft
Short-haul,
point-to-point
routes between
midsize cities
and secondary
airports
Automatic
ticketing
machines
Very low
ticket prices
High
aircraft
utilization
“Southwest,
the low-fare
airline”
24
Strategic Coherence: Fit and Balance
• A fit among corporate, business, and functional strategy;
• A fit between strategy formulation and implementation;
• A balance of commitment and flexibility;
• A balance among stakeholders;
• A balance of competition and cooperation;
• A balance of hiding and diffusing information;
• A balance of centralization and decentralization; and
• A balance between stability and change.
4–25
Strategic Coherence
• Combining activities that complement and reinforce one
another. These activities dovetail together to help achieve
the overall objectives of the firm.
• Such strategies, which may regarded as systems of
activities are often more successful because they are more
difficult to imitation. Thus, they can lead to a sustainable
competitive advantage.
• Strategic coherence may not be a sufficient condition for
attaining a competitive advantage, but it is often a necessary
one.
4–26
Strategic Coherence
• A sustainable competitive advantage often requires tradeoffs. These tradeoffs arise for at least three reasons:
 Inconsistencies in image or reputation.
 Tradeoffs arising from the activities themselves.
 Limits on internal coordination and control
• General management at its core is strategy:
 Defining and communicating the company’s unique position;
 Making tradeoffs;
 Forging a dynamic fit among activities (i.e., strategic coherence).
4–27
Dynamic Strategic Activity Systems
• A network of interconnected activities in the firm
• Evolve over time – external environment changes
 Add new activities & upgrade or remove obsolete ones
• Vanguard Example
 A global investment firm - $1.4 trillion managed assets
 Emphasis on low customer cost and quality service
– Among the lowest expense ratios in the industry (0.20%)
 Updated the activity system from 1997 to 2011
 New customer segmentation core
 Two new support activities
 Permits customized offerings: long-term and more active traders
4–28
Vanguard Group’s Activity System 1997
Legend
Core
Support
4–29
Vanguard Group’s Activity System 2011
Legend
Core
Support
4–30
Dynamic Capabilities Perspective
• A firm can modify its resource base to gain &
sustain a competitive advantage
 Advantage is gained from reconfiguring a firm’s
resource base
 Honda core competency in gas-powered engine
design
 Could
 If
decrease in value
consumers move toward electric-powered cars
 BYD
competency in batteries would gain advantage
• Dynamic capabilities are an intangible resource
• Resource stocks and flows are a useful view
4–31
Role of Inflows and Outflows in Building Stocks
4–32
IBM Product Scope 1993 and 2010
In 1993, hardware accounted
for 50% of IBM revenues
In 2010, software & (IT) services
accounted for 80% of IBM revenues,
hardware was down to 18%
4–33
How to Protect a
Competitive Advantage
1. Better Expectations of Future Values
 Buy Resources at a low cost

Real Estate Development - highway expansion
2. Path Dependence
 Current alternatives are limited by past decisions

Honda’s core competency in gas engines took decades to build
4–34
How to Protect a
Competitive Advantage
3. Causal Ambiguity
 Cause of success or failure are not apparent

Why has Apple had such a string of successful products?
– Role of Steve Jobs’ vision?
– Unique talents of the Apple design team?
– Timing of product introductions?
4. Social Complexity
 Two or more systems interact creating many possibilities
 A group of 3 people has 3 relationships

A group of 5 people has 12 relationships
4–36