4CHAPTER

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

Internal Analysis: Resources, Capabilities, and Activities

Part 1 Strategy Analysis

LO 4-1 Distinguish among a firm’s 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 firm’s 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 Chapter Case 4 Chapter Case 4 Chapter Case 4 From Good to Great to GoneFrom Good to Great to Gone: From Good to Great to GoneFrom Good to Great to Gone:

• Circuit City

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

Circuit City

• What are the key issues in Circuit City’s demise?

Management distracted by other businesses

Insufficient investments in core competencies

Laid-off 3,000 very experienced sales staff

Response to online retailers inadequate

Best Buy also having problems with this recently

Chapter Case 4 Chapter Case 4

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

9

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

11

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”

IndividualIndividual OrganizationOrganization

ExplicitExplicit

TacitTacit

InformationFacts

Scientific kn.

DatabasesSystems & procedures

Intellectual property

Skills Organizationalcapabilities

CRAFTENTERPRISES

‘INDUSTRIAL’ ENTERPRISESTypes

ofKnowledge

Typesof

Knowledge

Levels of knowledgeLevels of knowledge

Knowledge Types and Knowledge ConversionKnowledge Types and Knowledge Conversion

EXHIBIT 4.2 Linking Resources and Capabilities to Firm Performance

EXHIBIT 4.3 Company Examples of Core Competencies & Applications

Precision Mechanics

FineOptics

Micro-Electronics

35mm SLR cameraCompact fashion cameraEOS autofocus camera

Digital cameraVideo still camera

Plain-paper copierColor copier

Color laser copier Laser copierBasic fax

Laser faxMask aligners

Excimer laser alignersStepper aligners

Inkjet printerLaser printer

Color video printerCalculator

Notebook computer

Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities

LO 4-1 Distinguish among a firm’s 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 firm’s 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

Appraising ResourcesAppraising Resources

RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds/ generation Credit rating

Tangible Net cash flow

Resources Physical Plant and equipment: Market value of

size, location, technology fixed assets.

flexibility. Scale of plants

Land and buildings. Alternatives for fixed

Raw materials. assets

Technology Patents, copyrights, know how No. of patents owned.

R&D facilities. Royalty income

Intangible Technical and scientific R&D expenditure.

Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity. Product

reputation (with suppliers, customers, price premium.

government) Recognition.

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyability of customers pay rates, turnover.

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 firm’s 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 firm’s 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

Scarcity

Relevance

Durability

Mobility

Replicability

Property rights

Relative bargainingpower

Embeddedness ofresources

THE EXTENT OF THE COMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE

APPROPRIABILITY

THE PROFITEARNING POTENTIALOF A RESOURCE OR

CAPABILITY

The Rent-Earning Potential of Resources and Capabilities

The Rent-Earning Potential of Resources and Capabilities

1–24

STRATEGY HIGHLIGHT 4.1STRATEGY HIGHLIGHT 4.1 How Nintendo Focused onthe 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 DS in 2004

Wii consoles in 2007

• 49% of game console market in 2010

Microsoft Kinect introduced in November of 2010

Competition continues…

LO 4-1 Distinguish among a firm’s 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 firm’s 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

3-4Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

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.

General administration

Human resource management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing and sales

Service

EXHIBIT 4.6 Value Chain: Primary & Support Activities

© 1999 Pankaj Ghemawat

Hostess’s Cost Components

0

10

20

30

40

50

60

70

80

Cen

ts p

er u

nit

Profit

Marketing: Promotions

Marketing: Advertising

Outbound logistics

Operations: Manufacturing

Operations: Packaging

Operations: Ingredients

© 1999 Pankaj Ghemawat

Relative Cost Analysis

0

10

20

30

40

50

60

70

80

90

Hostess Little Debbie Ontario Baking Savory Pastries

Cen

ts p

er u

nit

Profit

Marketing: Promotions

Operations: Manufacturing

Operations: Packaging

Operations: Ingredients

Marketing: Advertising

Outbound logistics

3-7

Boeing Suppliers (777)Boeing Suppliers (777)

Firm Country PartsAlenia Italy Wing flaps

AeroSpaceTechnologies

Australia Rudder

CASA Spain Ailerons

doors, wing sectionFuji Japan Landing gear

GEC Avionics United Kingdom Flight computers

Korean Air Korea Flap supports

MenascoAerospace Canada Landing gears

Short Brothers Ireland Landing gear doors

SingaporeAerospace

Singapore Landing gear doors

Value Chain Analysis

• Outsourcing activities can have the unintended consequence of damaging the firm’s 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.

32

Strategic Coherence

The Logic of How The Business Fits Together:

•Southwest Airlines Low Price Short Routes

•No Frills•Point-to-Point•One Aircraft --

Boeing 737•High number of

Aircraft per Route•No Meals•Flexible/ Lower

Staffing

•American Airlines Premium Price Short, Long, & Int’l Variety

•Hub & Spoke System•Multiple Aircraft•Low number of

Aircraft per Route•Meals & Service•Higher Staffing

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Southwest Airline’s Activity System

Limitedpassengeramenities

Short-haul,point-to-pointroutes betweenmidsize cities

and secondaryairports

Highaircraft

utilization

Frequent,reliable

departures

Lean, highlyproductiveground andgate crews

Very lowticket prices

No meals

No seatassignments

No baggagetransfers

No connectionswith other

airlines

15-minutegate

turnarounds

Limited useof travelagents

Automaticticketingmachines

Standardizedfleet of 737

aircraft

Flexibleunion

contracts

High levelof employee

stockownership

“Southwest,the low-fare

airline”

Highcompensationof employees

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 Group’s Activity System 1997

Legend

Core

Support

EXHIBIT 4.8 Vanguard Group’s 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 firm’s

resource base

Honda core competency in gas-powered engine design Could decrease in value

If consumers move toward electric-powered cars

BYD competency in batteries would gain advantage

• Dynamic capabilities are an intangible resource

• Resource stocks and flows are a useful view

EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks

1–39

STRATEGY HIGHLIGHT 4.2STRATEGY HIGHLIGHT 4.2 IBM’s 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 revolution…then 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

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 firm’s 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 firm’s 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 Honda’s core competency in gas engines took decades to build

1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

Founding ofHonda motor

company

50cc 2-cycle engine

4 cycle engines

405ccmotorcycle

Related products:ground tillers, marineengines, generators,pumps, chainsaws

First product: clip-on engine

for bicycles

The 50ccsuper-cub

N360 minicar

1000ccGoldwingtouring

motor cycle

Acura Cardivision

The Evolution of Honda Motor CompanyThe Evolution of Honda Motor Company

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

47

The Basic FrameworkStrategy: the Link between the

Firm and its Environment

The Basic FrameworkStrategy: the Link between the

Firm and its Environment

THE FIRM

Goals & Values

Resources &Capabilities

Structure & Systems

THE INDUSTRYENVIRONMENT

CompetitorsCustomersSuppliers

STRATEGYSTRATEGY

The Basic FrameworkStrategy: the Link between the

Firm and its Environment

The Basic FrameworkStrategy: the Link between the

Firm and its Environment

THE FIRM

Goals & Values

Resources &Capabilities

Structure & Systems

THE INDUSTRYENVIRONMENT

CompetitorsCustomersSuppliers

STRATEGYSTRATEGY

LO 4-1 Distinguish among a firm’s 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 firm’s resources.

For a firm’s 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 firm’s 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 firm’s 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 company’s 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.

Take-Away Concepts