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Session 9
Internal Analysis
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© 2000 The McGraw-Hill Companies, Inc.
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Session Topics
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Resource-Based View of the Firm
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Three Basic Resources
What Makes a Resource Valuable?
Using the Resource-Based View in Internal Analysis
SWOT Analysis
 The Functional Approach
 Value Chain Analysis
 Internal Analysis: Making Meaningful Comparisons
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Comparison with Past Performance
Stages of Industry Evolution
Benchmarking
Comparison with Success Factors in the Industry
Irwin/McGraw-Hill
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Ingredients Critical to a Successful Strategy
Be consistent with
conditions in the
competitive environment
Strategy
must . . .
Place realistic
requirements on
the firm’s resources
Be carefully
implemented/executed
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What is the Resource-Based View of the Firm?
Firms differ in fundamental ways
because each firm possesses a
unique “bundle” of resources tangible and intangible assets and
organizational capabilities to make
use of those assets.
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The RBV of The Firm
More internally oriented
 Key analytic tool is value chain analysis
 Resources are not mobile/transferable across
company and industry boundaries
 Focuses on sharpening your skills at executing
value chain activities that create superior
efficiency, innovation, quality, and/or company
responsiveness.

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The Industrial/Organizational Economics
Perspective
More externally oriented
 Key Analytic tool is Porter’s Five Forces Model
 Assumes that resources are transferable/mobile
across across company boundaries
 More of a free-agent mentality
 Choose your industry wisely and then set about
to develop resource proficiency
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The Three Basic Resources
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Tangible assets
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Intangible assets
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Easiest to identify and often found on a firm’s balance sheet
Include physical and financial assets
Examples: Production facilities, raw materials, financial
resources, real estate, computers
Cannot be seen or touched
Often very critical in creating competitive advantage
Examples: Brand names, company reputation, company
morale, patents and trademarks, accumulated experience
Organizational capabilities

Involve skills - ability to combine assets, people, and
processes - used to transform inputs into outputs
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Examples of Different Resources
Tangible Assets
Intangible Assets
• Hampton Inn’s
• Nike’s brand name
reservation system
• McDonald’s
locations
• Georgia Pacific’s
land holdings
• Virgin Airlines’ plane
fleet
• Coca-Cola’s Coke
formula
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• Coke’s brand
recognition
• Wendy’s advertising
with Dave Thomas
• Disney’s image
• IBM’s management
team
• Southwest Airlines
culture
Organizational
Capabilities
• Southwest’s
turnaround time
• Wal-Mart’s
purchasing and
inbound logistics
• Sony’s productdevelopment
processes
• Nordstrom’s
customer service
• 3M’s innovation
process
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What Makes a Resource Valuable?
1. Competitive superiority: Does the resource help fulfill a
customer’s need better than those of firm’s competitors?
2. Resource scarcity: Is the resource in short supply?
3. Inimitability: Is the resource easily copied or acquired?
4. Appropriability: Who actually gets the profit created by a
resource?
5. Durability: How rapidly will the resource depreciate?
6. Substitutability: Are other alternatives available?
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Characteristics Making Resources Difficult to Imitate
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Physically unique resources
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Resources virtually impossible to imitate
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Examples: One-of-a-kind real estate location,
mineral rights, patents
Path-dependent resources
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Resources that must be created over time in a manner
that is often expensive and difficult to accelerate
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Examples: Dell Computer’s system of direct sales of
customized PCs via the Internet, Coca-Cola’s brand
name, Gerber Baby Food’s reputation for quality
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Characteristics Making Resources Difficult to Imitate
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Causal ambiguity (How do they do that?)
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Situations where it is difficult for competitors to
understand how a firm has created its advantage
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Example: Southwest Airlines’ approach
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Same plane, routes, gate procedures, number of attendants
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Culture of fun, family, and frugal yet focused services
Economic deterrence
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Involves large capital investments in capacity to
provide products or services in a given market that
are scale sensitive
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Resource Inimitability
Cannot be imitated
• Patents
• Unique locations
• Unique assets
Difficult to imitate
• Brand loyalty
• Employee satisfaction
• Reputation for fairness
Can be imitated
• Capacity preemption
• Economies of scale
Easy to imitate
• Cash
• Commodities
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Guidelines: Using the RBV in Internal Analysis
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Disaggregate resources - break them into more
specific competencies rather than use broad categories
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Use a functional perspective in disaggregating
tangible and intangible assets and organizational
capabilities
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Look at organizational processes and combinations
of resources, not only at isolated assets or capabilities
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Use the value chain approach to uncover potentially
valuable capabilities, activities, and processes
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Key Resources Across Functional Areas
Marketing
Financial and Accounting
• Firm’s products/services
• Concentration of sales in a few
products or to a few customers
• Ability to gather needed information
about markets
• Market share
• Product-service mix and expansion
potential
• Channels of distribution
• Effective sales organization
• Product-service image, reputation,
and quality’
• Imaginativeness, efficiency,
effectiveness of sales promotion
• Pricing strategy and flexibility
• After-sale service and follow-up
• Goodwill - brand loyalty
• Ability to raise short-term and longterm capital; debt-equity
• Corporate-level resources
• Cost of capital relative to competitors
• Tax considerations
• Relations with owners, investors, and
stockholders
• Leverage position
• Cost of entry and barriers to entry
• Price-earnings ration
• Working capital
• Effective cost control
• Financial size
• Efficiency and effectiveness of
accounting system
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Key Resources Across Functional Areas (continued)
Production, Operations, Technical
• Raw materials cost and availability,
supplier relationships
• Inventory control systems
• Location, layout, and use of facilities
• Economies of scale
• Technical efficiency of facilities
• Effectiveness of subcontracting use
• Degree of vertical integration
• Efficiency and cost-benefit of
equipment
• Effectiveness of operation control
procedures
• Costs and technological competencies
relative to competitors
• Research and development
• Patents and trademarks
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Human Resources
• Management personnel
• Employees’ skills and morale
• Labor relations costs compared to
competitors
• Efficiency and effectiveness of
personnel policies
• Effectiveness of incentives used to
motivate performance
• Ability to level peaks and valleys of
employment
• Employee turnover and absenteeism
• Specialized skills
• Experience
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Key Resources Across Functional Areas (continued)
Quality Management
Information Systems
• Relationship with suppliers,
customers
• Timeliness and accuracy of
information about sales,
operations, cash, and suppliers
• Internal practices to enhance
quality of products and services • Relevance of information for
tactical decisions
• Procedures for monitoring
quality
• Information to manage quality
issues: customer service
• Ability of people to use
information provided
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Fig. 6-5: Key Resources Across Functional Areas (concluded)
Organization and General Management
• Organizational structure
• Firm’s image and prestige
• Firm’s record in achieving objectives
• Organization of communication system
• Overall organizational control system
• Organizational climate and culture
• Use of systematic procedures in decision making
• Top-management skills, capabilities, and interest
• Strategic planning system
• Intra-organizational synergy
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SWOT Analysis
Based on assumption an effective strategy derives from a sound
“fit” between a firm’s internal resources and its external situation
Opportunities
A major favorable
situation in a firm’s
environment
Threats
A major unfavorable
situation in a firm’s
environment
Strengths
A resource advantage
relative to competitors
and the needs of markets
firm serves
Weaknesses
A limitation or deficiency
in one or more resources
or competencies relative to
competitors
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SWOT Analysis Diagram
Numerous environmental
opportunities
Critical
internal
weaknesses
Cell 3: Supports
a turnaroundoriented strategy
Cell 1: Supports
an aggressive
strategy
Cell 4: Supports
a defensive
strategy
Cell 2: Supports
a diversification
strategy
Substantial
internal
strengths
Major environmental
threats
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What is Value Chain Analysis?
Focuses on how a business creates customer value
by examining contributions of different internal
activities to that value
 Divides a business into sets of activities within the
business
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Starts with inputs a firm receives
Finishes with firm’s products or services and aftersales service to customers
Allows better identification of a firm’s strengths
and weaknesses since the business is viewed as a
process
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The Value Chain
Support
Activities
General administration
Human resource management
Research, technology, and
systems development
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Primary Activities
Service
Marketing
and sales
Outbound
logistics
Operations
Inbound
Logistics
Procurement
© 2000 The McGraw-Hill Companies, Inc.
22
Internal Analysis: Making Meaningful Comparisons
1. Comparison with past
performance
Perspectives
to use in
evaluating
how a firm
stacks up
based on its
internal
capabilities
2. Stages of industry evolution
3. Benchmarking - Comparison
with competitors
4. Comparison with success
factors in the industry
Irwin/McGraw-Hill
© 2000 The McGraw-Hill Companies, Inc.