Internal Analysis

Resource and Capability Analysis

M. Peteraf Copyright 2015

Course Road Map

Part I: External Analysis
The competitive environment

Part II: Internal Analysis

Company resources and capabilities
Value chains and activities
Positioning and generic strategies
Part III: Corporate Strategy
International strategies
Diversification strategies
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Todays Session
Profitability differences across and within

industries
Profitability

differences and competitive advantage

Competitive advantage defined

Resource and Capability Analysis

Identifying resources and capabilities
The

VRIN tests

Testing

for sustainable competitive advantage

2

Differences in Profitability Across Selected Industries

Pharmaceuticals
Prepackaged software
Semiconductors
Women's clothing stores
Dental equipment
Eating places
Drug stores
Petroleum / natural gas
Race track operations
Trucking except local
Engineering services
Computer system design
Cable television service
Motor vehicles
Scheduled air transport
-5

10

15

20

Operating income / assets, 1988-95 (%)

Source: Pankaj Ghemawat and Jan W. Rivkin, Creating Competitive Advantage

2003 Giovanni Gavetti

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Differences in Profitability Within Selected Industries

Airline Industry

Semiconductor Industry
Southwest

Intel

American

Texas Instruments

United

Motorola
Delta

AMD
US Airways

Analog Devices
Continental

National Semiconductor
-5

TWA

10

15

20

25

Operating income / assets, 1988-95 (%)

-5

10

Operating income / assets, 1988-95 (%)

Source: Pankaj Ghemawat and Jan W. Rivkin, Creating Competitive Advantage

2003 Giovanni Gavetti

Profitability Differences and

Competitive Advantage
Why are some businesses in an industry more

profitable than others?

Some may be better positioned in the industry

Some have a COMPETITIVE ADVANTAGE over

others

Less subject to the competitive pressures of the five-forces

Studies show a strong correlation between competitive

advantage and profitability over the medium/long term

We will look at a connection between positioning

and competitive advantage in chapter 5
5

Competitive Advantage
A measure of business performance relative to

competitors
But not performance in terms of profitability
May result in higher profitability, but this depends

on some other things as well

Comes from meeting customer needs more

effectively (i.e., with products or services that

customers value more highly), or doing so more
efficiently (i.e., at lower cost).
6

Competitive Advantage Defined

Definition in Text (p. 7 side box)
A company achieves a competitive advantage when it

provides buyers with superior value compared to rival sellers

or offers the same value at a lower cost to the firm

Another way to say this:

A business has a COMPETITIVE ADVANTAGE if it

creates more economic value than its competitors

But now we need to know what we mean by the term

economic value

Creating Economic Value

Products / Services

The
Transformation
Process

Inputs

Customer Value per unit

(Willingness-to-Pay)

Total Economic Value

Created (per unit)

Per Unit Cost

So the text is saying.

Competitive advantage means either deliver more value to the
customer or produce at lower cost

Rival firm

More value to
customer

Lower costs
9

Value, Intrinsic Worth, and Price

Customer Value per unit reflect Intrinsic Worth

(perceived value)
Its the maximum the customer would be willing to
pay per unit
But they prefer to pay less!

Its generally NOT the same thing as Price

The price could be be the same
But more often its lower

If the price is higher, the customer wont buy the good

since they are not willing to pay that price!

11

Resource and Capability

Analysis
A tool for assessing the likelihood of gaining a

Sustainable Competitive Advantage

Resources and Capabilities

The Resource-Based View of the firm (RBV) is

an analytical lens that views the firm as a

collection of resources & capabilities
Think of resources and capabilities as a firms

competitive assets what it uses to compete

Resources and capabilities can vary in three ways:
Form
Quality
Competitive importance

What are Resources?

Resources represent strategic assets (competitive assets)

that are owned or controlled by the firm

Think of them as what the firm has to work with as it makes

and sells its products and services but not just inputs

All the things that make them a more effective competitor

Resources can be tangible or intangible

Categorizing them along these lines helps managers to

identify their resources

Examples of each type?

Types of Company Resources

Tangible Resources
Physical resources
Financial resources
Technological assets
Organizational resources
Intangible Resources
Human assets, skills, and intellectual capital
Brands, company image, and reputational assets
Relationships: alliances, joint ventures, or partnerships
Company culture and incentive system

14

What are Capabilities?

Capabilities are short for Organizational Capabilities
Capabilities are an organizations capacity to perform some

activity proficiently
They are built from resources (and other capabilities) and draw on

resources as the capabilities are employed

Capabilities

Tend to emerge over time through complex interactions among tangible

and intangible resources
Are embedded in firm routines, processes, and systems
Are built up through learning and the accumulation of knowledge about
how to get things done
Are always intangible

How do we Identify Capabilities?

Two ways
Begin with clusters of resources in the firm

Think about what kinds of capabilities would be

associated with these
Examples?

Look

at the various types of activities being

performed within specific functional areas

E.g. The marketing function; manufacturing

Examples?
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Resource or Capability?
Are the following resources or capabilities?
Machinery
Collective product design skills
Engineering skills of individuals
An oil field
Brand reputation
Ability to build brand reputations
A capacity to create innovative new products
Good relations with suppliers
A can-do organizational culture
Which are tangible and which are intangible?
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Resource and Capability Bundles

Resource and capability bundles are sets of tightly

linked competitive assets that are used in combination

with one another

The are often cross-functional (i.e. they draw on several

different types of complementary expertise)
Example: H&Ms fast-fashion capabilities, which involve
information systems and logistical capabilities as well as
fashion design capabilities and talented designers.
Example: McDonalds capability to manage franchise
businesses efficiently depends on central sourcing
capabilities; management systems; information systems;
training capabilities; store design templates, etc.
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Dynamic Capabilities
What are they?
The ability of a company to modify its existing resources and
capabilities
Or create new ones
They act on other capabilities a higher order capability
Examples:
Merger and acquisition capabilities (a means of acquiring new
resources)
Product development and innovation capabilities result not
only in new products, but in the capability of producing them
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The VRIN Framework

A resource-based view of how companies attain a

sustainable competitive advantage

(Also called the 4 Tests of a Resources Competitive

Power in your textbook)

VRIN stands for:

Valuable

Rare
Inimitable (hard to imitate)
Non-substitutable

Before Applying the Tests

Identify which market(s) you are in
Resources create value in relation to market needs
Identify your direct competitors in the market
The tests assess the value of your resources relative to
the value of your rivals resources
Inventory your resources and capabilities
Tangible and intangible resources
Organizational capabilities
Integrated sets of resources and capabilities (bundles)
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Test #1: Is it Valuable?

Is the resource/capability competitively valuable?

Does it contribute to the effectiveness of the firms strategy?

Does it make the company a stronger competitor?

To be competitively valuable it must improve the firms

ability to produce something that customers want at a

price they are willing to pay and do so cost effectively

This means it must increase customer value (V) or decrease

product cost (C) - or do both

It must increase the total economic value produced!

Recall Total Economic Value

Customer Value (V)
(Willingness to Pay)
Total Economic
Value created
by the firm

Quantity

Product Cost (C)

A resource/capability is valuable if it increases the Total

Economic Value produced by the firm

Caution: dont get confused between the two different uses of the
letter V here - V in VRIN is not the same as customer value (V)
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it refers to Total Economic Value!

Test #2: Is it Rare?

Is the resource/capability something that the firm

possesses but competitors lack?

A resource/capability is considered rare if it is unique or

possessed by only few competitors
It is also considered rare if competitors possess the same
resource but in an inferior form

Note that this is a relative test. Being good at something

is not the same as being better than a competitor

Resources/capabilities that many competitors have cannot
be a source of competitive advantage

Testing for Competitive Advantage

If a resource/capability is both Valuable and Rare, then

it produces more economic value (V-C) than the R&Cs

of competitors
And a company that produces more economic value

(V-C) than competitors has a competitive advantage

(By definition recall the more precise definition of this term

that we provided earlier in this lecture)

Thus, a resource/capability that passes the first two test

gives a company a competitive advantage

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The Last Two VRIN Tests

The first two of the VRIN tests determine whether a

resource/capability gives a firm a competitive advantage

The last two VRIN tests determine whether that

competitive advantage is sustainable

The Inimitability Test and the Non-substitutability Test

What does it mean for an advantage to be sustainable?

It means that the advantage can persist even in the face of
direct efforts by competitors to overcome it
No specific amount of time that it will last

Not forever just longer than expected in the face of competition

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Test #3: Is it Inimitable?

Is the resource/capability difficult to imitate/copy?
What makes a resource/capability hard to imitate?
Physical uniqueness
e.g. location; mineral rights; patented technology
When they are due to a sequence of events that cannot be
repeated easily or require substantial time to develop
e.g., crash R&D programs dont work well; it takes time
to build a brand
When they entail large scale operations or financial outlays
that others cant readily undertake

More Imitation Barriers

When they are associated with Causal Ambiguity
A complex web of activities makes it difficult to know exactly
what leads to the observed successful outcomes
When it is unclear how complex combinations of resources
and capabilities work together, you have causal ambiguity
When they are associated with Social Complexity
e.g., interpersonal ties, company culture, and trust-based
relationships among managers, suppliers, and customers
When there are observable but difficult to duplicate or
replicate sequences of interpersonal events, you have social
complexity

Test #4: Non-substitutable

Are there other resources/capabilities that a rival can use instead

to achieve a similar outcome?

Consider Dirt Cowboy at corner of Main & Wheelock

Suppose convenience is an attribute that raises customer value and that

location is the resource that underlies this value driver
The great location is physically unique and cannot be copied
What other resource, capability, or bundle can substitute for its location?

Caution: We use the term substitute in multiple ways in this

course and it is important to keep them straight.

Here we are concerned with a substitute for the resource, not a substitute
for the product being produced and sold

VRIN Tests and Consequences

From: Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness and Globalization, 6th edition.
2004, South-Western (Cengage).

QUESTIONS?

Homework
Homework grades should be available late

tomorrow afternoon on Canvas

Grades ranged from 0 to 3 points
No comments, but see Feedback doc
Gives some idea of how the grading was done, main
issues in the analysis, and common mistakes

Homework #2 due by 1:00 A.M. on Tuesday,

4/21 - (night before class)

Homework not accepted after 1:15 A.M.

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Next Week
Tuesday:
The Walmart case
Applying the VRIN tests
Value chains

Calculating the size of a competitive advantage

Thursday:
Generic Strategies, Positioning, and the ValuePrice-Cost Framework
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