CHAPTER
4
Internal Analysis:
Resources, Capabilities,
and Activities
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
LO 4-1 Distinguish among a firm’s resources, capabilities, core
competencies, and firm activities.
LO 4-2 Differentiate between tangible and intangible resources.
LO 4-3 Describe the critical assumptions behind the resource-based view.
LO 4-4 Apply the VRIO framework to assess the competitive implications
of a firm’s resources.
LO 4-5 Identify competitive advantage as residing in a network of firm
activities.
LO 4-6 Outline how dynamic capabilities can help a firm sustain
competitive advantage.
LO 4-7 Identify different conditions that allow firms to sustain their
competitive advantage.
LO 4-8 Conduct a SWOT analysis.
4-2
Chapter Case 4
From Good to Great to Gone:
• Circuit City
 A GREAT performer from 1982 – 2000

World-class logistics & customer responsiveness

4S: service, selection, savings, & satisfaction

6 times better investment than GE under Jack Welch!
• Bankruptcy in fall of 2008!
 Outflanked by firms like Best Buy and Amazon
4-3
Chapter Case 4
Circuit City
• What are the key issues in Circuit City’s
demise?
 Management distracted by other businesses

Insufficient investments in core competencies

Laid-off 3,000 very experienced sales staff
 Response to online retailers inadequate

Best Buy also having problems with this recently
4-4
INTERNAL ANALYSIS: Inside the Firm
• Comparing two firms in same industry:
Internal focus
 Core Competencies

Unique strengths deep inside that differentiate a firm

Can drive competitive advantage
 Strategic Fit

Internal strengths change with external environment
4-5
EXHIBIT 4.1
Creating Strategic Fit to Leverage Internal Strengths
4-6
Internal Analysis: Link to Superior Performance
• Combination of Resources & Capabilities
 Builds core competencies
 Competencies drive activities

To transform inputs into goods & services
 Activities can produce competitive advantage &
performance
 Reinvest profits from superior performance

Hone and upgrade core competencies
4-7
EXHIBIT 4.2 Linking Resources & Capabilities to Firm Performance
4-8
THE RESOURCE-BASED VIEW
• Tangible Resources
 Visible, physical attributes
• Intangible Resources
 No physical attributes
• 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
4-9
EXHIBIT 4.4 Tangible & Intangible Resources
4-10
Two Critical Assumptions in RBV
• Resource heterogeneity
 Bundles of resources and capabilities differ across firms
 Southwest Airlines & Alaska Airlines have different
resources

SWA
– Higher employee productivity
– Informal organization, pilots help load luggage
• Resource immobility
 Resources tend to be “sticky” & don’t move easily
 Southwest Airlines sustained advantage
Several decades superior performance
 Competitors have unsuccessfully imitated SWA model

4-11
RBV – Also linked to Human Resources
• Firm Resources that can be part of the
competitive advantage.
 Physical Capital Resources (plant, equipment,
finances)
 Organizational Capital Resources(structure, planning,
controlling, coordinating, and HR systems)
 Human Capital (skills, judgment, and intelligence of
employees)
(Barney & Wright, 1998)
1–12
What is the ultimate quest for the function
of the Human Resources Department in a
firm?
• Developing employees who are skilled and
motivated, who can deliver high quality products
and services.
• Developing and maintaining the culture of the
organization.
• The encouragement of teamwork and trust.
(Barney & Wright, 1998)
The VRIO Framework
• Valuable
 Attractive features
 Lower costs (& price)
Higher profits

 Honda – design & build
engines
• Rare
 Only a few firms
possess
 Toyota – lean
manufacturing

Temporary competitive
advantage
• Costly to Imitate
 Unable to develop or
buy at a reasonable
price
 Apple – Yes
 Crocs – No
• Organized to Capture
 Exploit competitive
potential
Structure
 Coordinating systems

 Xerox PARC – No
 Nintendo Wii – Yes
4-14
Summary of VRIO, Competitive Implications, and Economic Implications
Valuable?
Rare?
Costly to
Imitate?
No
Yes
No
Yes
Yes
No
Yes
Yes
Yes
Organized
Properly?
Competitive
Implications
Economic
Implications
No
Disadvantage
Below Normal
Parity
Normal
Temporary
Advantage
Above Normal
(at least for some
amount of time)
Sustained
Advantage
Above Normal
Yes
(Barney & Hesterly, 2006)
(Bertsch & Wiseman, 2008)
1–15
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
4-16
EXHIBIT 4.6 Value Chain: Primary & Support Activities
4-17
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

4-18
EXHIBIT 4.8 Vanguard Group’s Activity System 2011
Legend
Core
Support
4-19
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 decrease in value

If 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
4-20
EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks
4-21
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
U.S. is the ONLY industrial nation not on the metric system
 Honda’s core competency in gas engines took decades to
build

4-22
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
4-23
Cloud Computing for small businesses
• Can cloud computing boost competitive
advantage?
 Outsource hosting server
Less cost in training staff
 Scalable resources
 Purchased with operational funds
 Competition amongst providers

(Truong, D., 2010)
1–24
THE SWOT ANALYSIS
• Conduct a SWOT after external and internal
analysis completed
• SWOT combines external and internal analysis
 Internal Strengths and Weaknesses

From VRIO framework
 External Opportunities and Threats

From PESTEL or competitive forces analysis (Ch. 3)
 Leverage internal strengths to exploit external
opportunities

Achieving such a dynamic fit yields sustained competitive
advantage
4-25
EXHIBIT 4.11
Strategic Questions in the SWOT Analysis
4-26
Healthy Business Annual Check-Up
• Annual company-wide SWOT analysis
 Should use 360 degree review

Involving employees will strengthen your relationship
 Focus on key areas and assign ratings
 Prioritize opportunities and threats
• Use limited SWOT analysis for specific items
 New products
 Acquistion
 Single business unit
(Simoneaux, S. L., & Stroud, C. L., 2011)
1–27
STARBUCKS: Re-creating Its Uniqueness
Create a Unique Experience
• Soft music, comfortable
chairs and sofas.
• Wireless hotspot for
working or surfing the net.
• Handmade specialty drink.
• Fresh ground coffee after
every pot (8 minutes).
• STRONG CORE COMPETENCY
© 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
1–28
STARBUCKS VRIO FRAMEWORK
• VALUABLE
Unique coffee house experience. Work or relax in
coffeehouse ambience. Value chain.
the
• RARITY
Who else offers our product? Who else offers our
experience. How unique is our offering?
• COST TO IMITATE
Can our service be duplicated? Who can compete?
McDonalds, Tim Hortons, Panera Bread.
• ORGANIZED
Can we launch the necessary stores properly? 17,00
stores in 20 years.
1–29
Why and How did Starbucks lose its
uniqueness?
STRATEGIC MOVES
• Opened up 16,000 new
stores across 50
countries.
• Expanded Menu:
Desserts, Sandwiches,
Books, Music.
• Tried to keep up with their
massive growth. Grinding
of beans.
© 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
OUTCOMES
• Strayed from its core
business.
• Forgot what made it
unique.
• WHAT SERVICE DO YOU FEEL VERY
GOOD/COMFORTABLE ABOUT?
• It changed what its
customers loved about it;
The Experience.
1–30
Re-creating what made Starbucks Special
STRATEGIC MOVES
• 2009: Introduced VIA,
instant coffee.
• 2010: Baristas would no
longer multitask. Focus
would be more on the
customers experience.
© 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
CEO Howard Schultz
1–31
Starbucks up’s and down’s.
Strategy Activity Systems
• Network of interconnected
activities within a firm.
• Every decision has an
outcome:
Dynamic Capabilities Perspective
• Intangible resource
• Can be modified to gain
an advantage.
 Grinding beans:
 Menu:
 Retail:
• Internal environment
changes when external
does.
• Starbucks forgot that its
intangible resources were
its core competencies.
1–32
STARBUCKS COFFEE
• Stick to YOUR
business.
• Different flavors,
blends, styles.
• Larger stores.
• Upgrade technology
1–33
Chapter Four Conclusion
• A firms Resources and Capabilities and how
they impact Core Competencies and Activities.
• Resource Based View.
• Tangible vs. Intangible Resources.
• Value Rarity Imitate Opportunity Framework.
• Value Chain.
• Dynamic Strategic Activities vs. Dynamic
Capabilities .
• Protect a Competitive Advantage.
• SWOT Analysis.
© 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
1–34
References
Barney and Hesterly (2006). The VRIO Framework: An Overview. Retrieved from
http://faculty.tlu.edu/fgarza/Applying%20the%20VRIO%20Framework.doc
Barney, J., & Wright, P. (1998). On becoming a strategic partner: The role of human
resources in gaining competitive advantage. Human Resource Management, 37(1),
31-46. Retrieved from http://search.proquest.com/docview/224323931?accountid=28644
Bertsch, T. & Wiseman, D. (2008). Growth for Tiffany & Co. Journal of the International
Academy for Case Studies 10(1), 83-89. Retrieved from
http://search.proquest.com/docview/216297353?accountid=28644
Simoneaux, S. L., & Stroud, C. L. (2011). BUSINESS BEST PRACTICES: SWOT
analysis: The annual check-up for a business. Journal of Pension Benefits, 18(3),
75-78. Retrieved from http://search.proquest.com/docview/860007592?accountid=28644
Truong, D. (2010). How cloud computing enhances competitive advantages: A research model for
small businesses. The Business Review, Cambridge, 15(1), 59-65. Retrieved from
http://search.proquest.com/docview/347569664?accountid=28644
1–35