ANALYZING A FIRM’S CAPABILITIES
AND RESOURCES
Chapter 5
Organizational Analysis
 Strategic management is about creating and
sustaining competitive advantage.
 Competitive advantage can be understood in the
relationship of three constructs:
 Use value-subjective valuation of a product; “worth”
 Exchange value-objective price at the time of
exchange
 Consumer surplus-net value a customer derives from a
purchase
 Think of “buyer’s remorse” as negative consumer surplus
Competitive Advantage
Use Value
Consumer Surplus
This area represents the value
created in each profitable sale and
consists of both profit for the firm
and surplus for the customer.
Exchange
Value
Profit
Total Cost
To the Firm
This area represents the firm’s
total costs in presenting the
product or service for sale. To
create new value, the firm must
cover its total costs.
Organizational Analysis
 When a customer chooses to purchase from Firm A rather than Firm B,
the following are true:
 There was some difference in the consumer surplus offered by Firm A and
Firm B
 That difference gives Firm A a competitive advantage over Firm B
 That competitive advantage can be attributed to Firm A’s capabilities and
resources
Superior
capabilities
and resources
Greater
consumer
surplus
Competitive
advantage
 This is a simplified statement of the resource based view used in
conducting the organizational side of strategic analysis.
Organizational Analysis
 The Resource-Based View (RBV)
 Firms are constantly seeking to gain advantage and to
translate that advantage into earnings.
 Firms must appear more attractive than other options in the
eyes of customers at the moment that customers decide to
purchase.
 To do this, firms make deliberate decisions about the
procurement, development, and deployment of assets and
resources used to produce advantage.
Organizational Analysis
 The RBV holds that competitive advantage
emerges from resources and capabilities that meet
four criteria:
 Value
 Rarity
 Inimitability
 Non-substitutability
Organizational Analysis
 Two types of resources
 Tangible resources—physical resources that can be readily
seen, touched, and/or quantified
 Plant, property, and equipment, cash, etc.
 Intangible resources—non-physical resources that can be
difficult to quantify or be seen
 Patents, trademarks, “secret family recipes”, etc.
 Capabilities—what organizations can do based on
what resources they possess
 New product development, customer service, etc.
 Dynamic capabilities—a unique ability to create new
capabilities; ability to “update” capabilities
Organizational Analysis
 Value
 Valuable resources are resources that consumers
desire or resources that give a firm an ability to
produce products and services that consumers want.
 A good location for a retail outlet
 A good credit rating
 A key technology
 Valuable resources can be both tangible and
intangible.
Organizational Analysis
 Rarity
 Consider three coffee shops in a two-block area of the same
downtown. Each offers a slightly different location, a
slightly different atmosphere; each has different personnel,
different history, different reputation, and a historically
different clientele.
 For different segments of the market, each offers a
uniquely different combination of products and services, a
rare bundle of resources.
 What specifically are these rare resources?
 The answer lies in the eyes of any customer who would
value any one of these stores over the others.
Organizational Analysis
 Inimitability
 Advantage from valuable and rare resources will
diminish if imitated by competitors.
 Diffusion of key capabilities can undermine
competitive advantage.
 Outsourcing can yield benefits. However, while the
savings from outsourcing are appealing, it is
important to consider the long term implications for
imitability and rarity.
Organizational Analysis
 Inimitability
 Is Sam’s Cola an effective imitation of Coca-Cola?
 It depends upon who you ask; for consumers who see little
difference in the use value of different sodas, Sam’s Cola is
an effective imitation.
 Understanding what is or is not an effective imitation
means understanding the nature of the value that the
product or service provides.
Organizational Analysis
 Non-Substitutability
 Imitating a valuable and rare resource can be difficult.
Thus, it can makes sense to substitute it with some
equivalent resource.
 The ability to substitute the value generating function
of a resource reduces its value and its ability to sustain
competitive advantage.
Resources, Capabilities, and Competitive Advantage
Sustainable competitive advantage emerges from resources that are:
Valuable
Valuable resources are used by firms to create products and
services that customers find desirable. They allow firms to
exploit opportunities and to respond to threats
Rare
Resources that are rare are held by just a very few. As such,
when valuable resources are also rare, they are likely to be in
great demand
Inimitable
Inimitability simply means difficult, costly, or impossible to
imitate or develop. Resources that are inimitable are not
likely to lose their value through diffusion
NonSubstitutable
Resources that have no obvious or direct equivalents are
difficult or costly to substitute
Learning from Harley-Davidson
 What was the cause of Harley-Davidson’s decline
and how did the company recover?
 How would you quantify the power of the Harley-
Davidson brand?
 What do you think are Harley-Davidson’s
distinctive competencies?
Organizational Analysis
 The Value Chain
 A tool for decomposing the value generating activities
of an organization.
 Term reflects that at each step, the product or service
becomes more valuable
 The value chain is based on a simple but powerful
idea, that the value customers see and the value that
leads to profits result from a series of distinct but
interconnected activities.
The Value Chain
Firm Infrastructure
Human Resource Management
Information Technology
Physical Plant & Maintenance
Inbound
Logistics
Operations
Outbound
Marketing
Logistics
& Sales
The Value Chain
 Primary Activities: actions that are directly
involved in creating and distributing goods and
services (creating value!)
 Inbound Logistics—the arrival of raw materials
 Operations—the actual production process
 Outbound Logistics—the movement of finished
products to customers
 Marketing & Sales—work to attract customers and
convince them to make purchases
 Service—the extent to which a firm provides
assistance to their customers
The Value Chain
 Support Activities: structures that provide
underlying support primary activities
 Firm Infrastructure—how the firm is organized
(structure)
 Human Resource Management—involves the
recruitment, training, and compensation of
employees
 Technology—use of computerization and
telecommunications to support activities
 Procurement—process of negotiating for and
purchasing raw materials
The Marketing Mix
 The marketing mix (a.k.a.—4 P’s) provides important
insights into how to leverage resources and capabilities
into goods and services people will buy
 Product—the good(s)/service(s) a firm sells
 Price—the price at which goods/services are offered
 Place—the location of offerings or distribution channels
 Promotion—the communication s used to market a
product (e.g., advertising, public relations, other forms of
direct or indirect sales)
 The marketing mix is critical to a firm’s survival and
competitive advantage
Competitive Profile Analysis
 Competitive Profile Analysis
 Combines value chain analysis ,with the VRIN criteria
and the outputs from the environmental analysis.
 Based upon the environmental analysis and the mission and
goals of the firm, an ideal value chain is developed.
 That ideal profile provides the benchmark against which the
current value chain is evaluated.
 The gap between the ideal and the current guides the
development of new strategy.
Competitive Profile Analysis
CPA for textbook industry
Function/
Resources
Value
Rareness
Inimitability
Substitutability
Rating
High
Very High
Very High
Modest
9
Operations
Modest
Low
Low
Modest
5
Outbound
Logistics
Modest
Low
Low
Modest
4
Sales &
Marketing
Modest
High
Modest
Low
8
Service
Modest
Modest
Modest
Low
6
Firm
Infrastructure
High
Modest
Modest
Low
5
HR
Management
High
Modest
Modest
Low
8
Very High
Low
Low
Modest
5
Low
Low
Low
High
3
Inbound
Logistics
Technology
Physical/Plant
Constraints Analysis
 A constraints analysis helps identify root causes of
problems that restrict an ideal outcome
 Simple process
1. Identify problems that you believe restrict the outcome
2. Draw causal arrows from one problem to another if you
believe that they are causal
3. The problems that have no arrows pointing at them are
root causes and should be dealt with first
Constraints Analysis
Cause A
Cause D
Cause B
Problem
Cause C
Cause E
Cause F
Cause G
Final Thoughts & Caveats
 The Fallacy of the Better Mousetrap
 Better mousetrap fallacy –
 “if a man can write a better book, preach a better sermon, or
make a better mousetrap than his neighbor, though he builds his
house in the woods, the world will make a beaten path to his
door.”
 While an appealing idea, research in the field of
entrepreneurship underscores the reality that a better
mousetrap, a better invention, a better technology, a better
product, or a better service will not necessarily make a
better or more profitable business.
Final Thoughts & Caveats
 The Fallacy of the Better Mousetrap
 Successes reflect timely interactions between the products and
services that customers find attractive and a host of contextual
circumstances that make those products and services valuable and
difficult for other firms to imitate.
Success
= Good timing + Desirable product + Strong customer interaction
+ Favorable contextual factors + Error (Luck)
 Even a truly better mousetrap might be ignored if it is never noticed
by the market or if it is improperly marketed to consumers who do
not have mouse problems!
Final Thoughts & Caveats
 The Challenge of a Sustainable Advantage
 Things change and resources that are valuable and rare
today may be less so tomorrow, while resources that have
no value today could be very valuable in the future.
 Sustained competitive advantage is built upon resources
that are valuable, rare, inimitable and non-substitutable.
However, over time, few resources retain their value and
few will remain highly rare if they are highly valued.
Final Thoughts & Caveats
 The Challenge of Sustainable Advantage
 So, is any competitive advantage truly sustainable?
 The answer is that it is all a matter of perspective.
 Sustaining an advantage, even for a short time, is still an important
achievement as it allows a firm to reap greater profits and to realize
greater returns.
 At the same time, no competitive advantage is sustainable
indefinitely.
 Temporary advantage research suggests firms are better off
concatenating short-term advantages into a sustainable path
Final Thoughts & Caveats
 Ambiguity and Social Complexity
 The relationship between competitive advantage and the
resources that enable it is complex and difficult to
discern, embedded in human interactions, historical
endowments, and networks of tacit knowledge.
 The process of gathering resources and creating from
them competitive advantage is an imperfect one and
cannot be reduced to a simple and generalizable
formula.
Final Thoughts & Caveats
 Ambiguity and Social Complexity
 Social complexity simply means beyond the ability of most
to understand or influence.
 Competitive advantage is socially complex:
 It is typically embedded in bundles of resources that
connect to one another and to the people and operations
of a firm in complex ways. As a result, competitive
advantage is rarely attributable to any single, solitary
resource or ability.
Final Thoughts & Caveats
 Ambiguity and Social Complexity
 Causal ambiguity exists when the connections
between a firm’s resources and its competitive
advantage are not well understood.
 So, it is difficult to know which resources produce
which outcomes. As a result, the process of
resource acquisition and development becomes
much more imprecise, uncertain, and expensive.
Three Final Caveats
 Ambiguity and Social Complexity
 Thus…
 Competitive advantage is not a commodity that can be
bought and sold.
 Rather, it must be crafted, cultivated, and maintained.
 “Firms cannot purchase sustained competitive
advantage on open markets” – Barney (1986)