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 Activities
Source: 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
TYPES OF RESOURCES:
PRIORITIES
•
•
•
•
Driven by Organization’s Values
Reflects Organization’s Culture
Priorities Guide Resource Allocation
Priorities Maintain Allocations Over Timr
SUSTAINABLE COMPETITIVE
ADVANTAGE: VRIO MODEL
Is the resource or
capability…
Valuable
Implications
• Neutralize threats and
exploit opportunities
• Not many firms possess
• Physically unique
Rare
• Path dependency
Inimitable
• Causal ambiguity
Organized to Exploit
• Social complexity
• No equivalent strategic
resources or capabilities
• Tacit knowledge
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
RESOURCES AND COMPETITIVE
ADVANTAGE
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
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.
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 longterm survival
– Suggest areas where the company should
concentrate its efforts in order to grow
Internal Analysis
External Analysis
•Strengths
•Opportunities
•Weaknesses
Tools
•Threats
Strategic
Issues
Strategic
Alternatives
Strategy
Tools