Strategic Management
Lecture 03:
Strategic Analysis II:
Strategic Capability
Niels-Erik Wergin
What is Strategic Capability?
Strategic capability
refers to the resources and competences
of an organisation needed for success.
Internal Factors
Internal Analysis
(last week: external factors – external analysis)
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Why Internal Analysis?
Internal analysis provides a comparative look at
a firm’s resources and competences
• what are the firm’s strengths?
• what are the firm’s weaknesses?
• how do these strengths & weaknesses compare
to competitors?
• how can these strengths & weaknesses be utilised
to gain competitive advantage?
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Resources and Competences
Resources:
• tangible and intangible assets of a firm
• used to conceive of and implement strategies
Competences:
• skills and knowledge that enable a firm to
take full advantage of its resources
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Two Types of Resources
Tangible resources are physical assets of
an organisation such as buildings, workers,
patents, and finance.
Intangible resources are non-physical
assets such as information, reputation,
knowledge, and skills
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Resource Categories
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Physical
resources
Financial
resources
Human
resources
Intellectual
capital
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What are Competences?
Core competences
are the skills and abilities by which resources
are used by an organization
to achieve competitive advantage
in ways that others cannot imitate or obtain.
e.g.: marketing skills
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The Experience Curve
 Competences in activities develop over time
based on experience, resulting in cost
efficiencies
• Growth may not be optional
• Unit costs should decline year on year
• First mover advantage is important
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The Experience Curve
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Internal Analysis
The VRIO Framework
Four Important Questions:
• Value
• Rarity
• Imitability
• Organization
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The VRIO Framework
If a firm has resources that are:
• Valuable,
• Rare,
• costly to Imitate, and
• the firm is Organized to exploit these resources,
then the firm can expect to enjoy a sustained
competitive advantage.
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The VRIO Framework (1) - Value
The Question of Value
• in theory: Does the resource enable the firm
to exploit an external opportunity or neutralize
an external threat?
• the practical: Does the resource result in an
increase in revenues, a decrease in costs, or
some combination of the two? (BMW’s reputation
allows it to charge a premium for its cars)
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The VRIO Framework (2) - Rarity
The Question of Rarity
• if a resource is not rare, then perfect competition
dynamics are likely to be observed (i.e., no
competitive advantage, no above normal profits)
• a resource must be rare enough that perfect
competition has not set in
• thus, there may be other firms that possess the
resource, but still few enough that there is scarcity
(several pharmaceuticals sell cholesterol-lowering
drugs, but the drugs are still scarce—look at prices)
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Applying the VRIO Framework
Valuable and Rare
If a firm’s resources are:
The firm can expect:
Not Valuable
Competitive Disadvantage
Valuable, but Not Rare
Competitive Parity
Valuable and Rare
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Competitive Advantage
(at least temporarily)
The VRIO Framework (3) - Imitability
The Question of Imitability
• the temporary competitive advantage of valuable
and rare resources can be sustained only if
competitors face a cost disadvantage in imitating
the resource
» intangible resources are usually more
costly to imitate than tangible resources
(Harley-Davidson’s styles may be easily
imitated, but its reputation cannot)
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The VRIO Framework (3) - Imitability
The Question of Imitability
• If there are high costs of imitation, then the
firm may enjoy a period of sustained
competitive advantage
• A sustained competitive advantage will last
only until a duplicate or substitute emerges
• If a firm has a competitive advantage, others
will attempt to imitate it
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16/03/2016
Applying the VRIO Framework
Value, Rarity, & Imitability
If a firm’s resources are:
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The firm can expect:
Valuable, Rare, but
not Costly to Imitate
Temporary
Competitive Advantage
Valuable, Rare, and
Costly to Imitate
Sustained
Competitive Advantage
(if Organized appropriately)
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The VRIO Framework (4) - Organization
The Question of Organization
• a firm’s structure and control mechanisms
must be aligned so as to give people ability
and incentive to exploit the firm’s resources
• examples: formal and informal reporting structures,
management controls, compensation policies,
relationships, etc.
• these structure and control mechanisms complement
other firm resources—taken together, they can help a
firm achieve sustained competitive advantage
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Applying the VRIO Framework
Valuable?
Rare?
Costly to
Imitate?
Exploited by
Organization?
No
Disadvantage
No
Parity
Yes
Yes
No
Temporary
Advantage
Yes
Yes
Yes
Yes
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No
Competitive
Implications
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Yes
Sustained
Advantage
The Resource-Based View
Competitive
Advantage
Resources &
Capabilities
• Valuable
Competitive Advantage
will be sustained if:
• Rare
• Costly to Imitate
• Organized to Exploit
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• other firms’ costs of
imitation are greater
than benefit of imitation
• the firm is organized
to exploit advantages
Benefits of Internal Analysis
Tells us:
• what the firm should do, given the relative
strengths and weaknesses of resources and
competences
Managers’ Job:
• use strategic capability (resources and
competences) to achieve competitive advantage
VRIO Framework Helps Managers Recognize
Sources of Competitive Advantage
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Case Example: eBay
 Analyse eBay’s strategic capability
 Which capabilities provided eBay’s
competitive advantage?
 How would you manage this capability
given new entrants and the changing
nature of eBay?
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