CHAPTER

Internal Analysis: Resources, Capabilities, and Activities

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Part 1 Strategy Analysis

LO 4-1 Distinguish among a firms 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 firms 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.

Chapter Case 4 Circuit City

From Good to Great to Gone:

A great performer from 1982 2000:

World-class logistics and customer responsiveness 4S: service, selection, savings, and satisfaction 6 times better investment than GE under Jack Welch

Bankruptcy in fall of 2008

Outflanked by firms like Best Buy and Amazon

Chapter Case 4

Circuit City

What are the key issues in Circuit Citys demise?

Management distracted by other businesses
Insufficient Laid-off

investments in core competencies

3,000 very experienced sales staff

Response to online retailers inadequate

Best

Buy also having problems with this recently

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 the external environment

EXHIBIT 4.1

Creating Strategic Fit to Leverage Internal Strengths

The Role of Strategy in Business is to Generate and Sustain Value via the Linkages Between Position, Organization, and Resources

Positioning

Organization

Resources & Capabilities

Positioning Scope of the Firm:

Geographic scope
Product-market scope: Choice of businesses

(corporate portfolio analysis)

Product market positioning

within a business
Vertical integration

decisions

Organization Structure
Formal definition of authority Conflict resolution

Systems
Rules, routines, evaluation and rewards

Processes
Informal communication, networks, and recruitment

Resources and Capabilities Tangible resources

e.g., physical capital

Organizational capabilities
e.g., routines and standard operating procedures

Intangible resources
e.g., trademarks, know-how

11

EXHIBIT 4.2 Linking Resources and Capabilities to Firm Performance

EXHIBIT 4.3 Company Examples of Core Competencies & Applications

LO 4-1 Distinguish among a firms 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 firms 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.

EXHIBIT 4.4

Tangible and Intangible Resources

The Resource-based View 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

Two Critical Assumptions in RBV

Resource heterogeneity
Bundles of resources and capabilities differ across firms Southwest Airlines and Alaska Airlines have different

resources
SWA

Higher employee productivity Informal organization, pilots help load luggage

Resource immobility
Resources tend to be sticky and do not move easily Southwest Airlines sustained advantage Several decades superior performance Competitors have unsuccessfully imitated SWA model

LO 4-1 Distinguish among a firms 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 firms 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.

EXHIBIT 4.5

Applying RBV: Decision Tree Competitive Implications

STRATEGY HIGHLIGHT 4.1

How Nintendo Focused on the Casual Gamer

Video Gaming Business

$22 billion in 2009, growing to $60 billion in 2013 Nintendo understands the casual gamer
Game

Boy handheld devices in 1990

Nintendo
Wii

DS in 2004

consoles in 2007 49% of game console market in 2010

Microsoft Kinect introduced in November of 2010

Competition

continues
124

LO 4-1 Distinguish among a firms 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 firms 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.

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

EXHIBIT 4.6

Value Chain: Primary & Support Activities

Hostesss Cost Components

80

Profit
70

Marketing: Promotions
60

Cents per unit

Marketing: Advertising
50

Outbound logistics
40

Operations: Manufacturing
30

Operations: Packaging Operations: Ingredients

20

10

1999 Pankaj Ghemawat

Relative Cost Analysis

90 80 70 60

Profit Marketing: Promotions Marketing: Advertising Outbound logistics Operations: Manufacturing Operations: Packaging Operations: Ingredients
Hostess Little Debbie Ontario Baking Savory Pastries

Cents per unit

1999 Pankaj Ghemawat

50 40 30 20 10 0

Boeing Suppliers (777)

Firm
Alenia AeroSpace Technologies CASA Fuji

Country
Italy Australia Spain Japan

Parts
Wing flaps Rudder Ailerons Landing gear doors, wing section Flight computers Flap supports Landing gears Landing gear doors Landing gear doors

GEC Avionics United Kingdom Korean Air Korea MenascoAerospace Canada Short Brothers Singapore Aerospace Ireland Singapore
3-7

Value Chain Analysis Outsourcing activities can have the unintended consequence of damaging the firms potential to evaluate continuously its key assumptions, learn, and create new capabilities and core competencies. Therefore, managers should verify that the firm does not outsource activities that stimulate the development of new capabilities and competencies.

Strategic Coherence The Logic of How The Business Fits Together:

Southwest Airlines
Low Price Short Routes

American Airlines
Premium Price Short, Long, & Intl Variety

No Frills Point-to-Point One Aircraft -Boeing 737 High number of Aircraft per Route No Meals Flexible/ Lower Staffing

Hub & Spoke System Multiple Aircraft Low number of Aircraft per Route Meals & Service Higher Staffing
32

Southwest Airlines Activity System

No meals No baggage transfers No seat assignments

Limited passenger amenities

No connections with other airlines

Frequent, reliable departures

15-minute gate turnarounds

Limited use of travel agents

Standardized fleet of 737 aircraft

Short-haul, point-to-point routes between midsize cities and secondary airports

High compensation of employees

Lean, highly productive ground and gate crews

Automatic ticketing machines

Very low ticket prices

Flexible union contracts

High level of employee stock ownership

High aircraft utilization

Southwest, the low-fare airline

33

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

EXHIBIT 4.7

Vanguard Groups Activity System 1997

Legend
Core Support

EXHIBIT 4.8

Vanguard Groups Activity System 2011

Legend
Core Support

Dynamic Capabilities Perspective A firm can modify its resource base to gain & sustain a competitive advantage
Advantage is gained from reconfiguring a firms

resource base
Honda core competency in gas-powered engine

design
Could If

decrease in value

consumers move toward electric-powered cars competency in batteries would gain advantage

BYD

Dynamic capabilities are an intangible resource Resource stocks and flows are a useful view

EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks

STRATEGY HIGHLIGHT 4.2

IBMs Dynamic Strategic Fit

From mainframes to services transformation

In 1992, less than 8,000 people in global services In 2010, nearly 150,000 employees there

IBM started the PC revolutionthen became a misfit in the industry Lou Gerstner joined as CEO of a nearly bankrupt IBM Moved IBM downstream toward services and thus higher value added Transformation of core competency: Today, IBM is a nimble IT-services firm

139

EXHIBIT 4.9

IBM Product Scope 1993 and 2010

In 1993, hardware accounted for 50% of IBM revenues

In 2010, software & services accounted for 80% of IBM revenues, hardware was down to 18%

LO 4-1 Distinguish among a firms 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 firms 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.

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 Hondas core competency in gas engines took decades to build

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

EXHIBIT 4.11

Strategic Questions in the SWOT Analysis

SWOT Matrix: Four Categories of Alternatives

1. Strength-Opportunity: Offensive alternatives,
utilize a strength to address an opportunity

2. Weaknesses-Threat: Defensive alternatives,

eliminate or minimize a weakness in order to minimize the effect of a threat

3. Strength-Threat: Utilize a strength to minimize the

effect of a threat

4. Weakness-Opportunity: Shore up a weakness to

enable the organization to take advantage of an opportunity

The The Basic Basic Framework Framework Strategy: Strategy: the the Link Link between between the the Firm Firm and and its its Environment Environment
THE FIRM
Goals & Values Resources & Capabilities Structure & Systems STRATEGY STRATEGY

THE INDUSTRY ENVIRONMENT

Competitors Customers Suppliers

47

Take-Away Concepts
LO 4-1 Distinguish among a firms resources, capabilities, core competencies, and firm activities.
Core competencies are unique, deeply embedded, firm-specific strengths that allow firms to differentiate their products and services to create more value for consumers than their rivals or to offer products and services of acceptable value at lower cost. Resources are assets that a company can draw on when crafting and executing strategy. Capabilities are the organizational competencies necessary to orchestrate a diverse set of resources to deploy them strategically. Activities enable firms to add value by transforming inputs into goods and services.

LO 4-2 Differentiate between tangible and intangible resources.

Tangible resources have physical attributes and are visible. Intangible resources have no physical attributes and are invisible. Competitive advantage is more likely to be based on intangible resources.

LO 4-3 Describe the critical assumptions behind the resource-based view.

The resource-based view makes two critical assumptions: resource heterogeneity (resources differ across firms) and resource immobility (resources are sticky).

Take-Away Concepts
LO 4-4 Apply the VRIO framework to assess the competitive implications of a firms resources.
For a firms resource to be the basis of a competitive advantage, it must have VRIO attributes: valuable (V), rare (R), and costly to imitate (I). The firm must also be able to organize (O) in order to capture the value of the resource.

LO 4-5 Identify competitive advantage as residing in a network of firm activities.

Each primary activity the firm performs should add incremental value directly by transforming inputs into outputs. Support activities sustain primary activities. A network of primary and supporting firm activities can create a strategic fit that can lead to competitive advantage. A strategic activity system conceives of a firm as a network of interconnected activities. Firms need to upgrade their value activities over time, in response to changes in the external environment and to moves of competitors..

Take-Away Concepts
LO 4-6 Outline how dynamic capabilities can help a firm sustain competitive advantage.
To sustain a competitive advantage, any fit between a firms internal strengths and the external environment must be dynamic. This fit is accomplished through the ability to create, deploy, modify, reconfigure, or upgrade the resource base.

LO 4-7 Identify different conditions that allow firms to sustain their

competitive advantage.
Several conditions make it costly for competitors to imitate another firms resource or capability that underlie its competitive advantage: (1) better expectations of future resource value (or simply luck), (2) path dependence, (3) causal ambiguity, and (4) social complexity

LO 4-8 Conduct a SWOT analysis.

Formulating a strategy that increases the chances of gaining & sustaining a competitive advantage is based on synthesizing insights obtained from an internal analysis of the companys strengths (S) and weaknesses (W) with those from an analysis of external opportunities (O) and threats (T). A SWOT analysis by itself is insufficient to guide strategy formulation.