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

42

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.
43

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
44

Internal Analysis: Inside the Firm

Comparing two firms in same industry:
Internal focus
Core Competencies
Unique
Can

strengths deep inside that differentiate a firm

drive competitive advantage

Strategic Fit
Internal

strengths change with the

external environment
45

EXHIBIT 4.1

Creating Strategic Fit to Leverage Internal

Strengths

46

The Role of Strategy in Business is to Generate and

Sustain Value via the Linkages Between Position,
Organization, and Resources

Positioning

Organization

Resources &
Capabilities

47

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
4-9

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

Knowledge
Knowledge Types
Types and
and
Knowledge
Knowledge Conversion
Conversion
Levels
Levelsof
ofknowledge
knowledge
Individual
Individual

Explicit
Explicit
Types
Types
of
of
Knowledge
Knowledge
Tacit
Tacit

Information
Facts
Scientific kn.

Organization
Organization
Databases
Systems & procedures
Intellectual property
INDUSTRIAL
ENTERPRISES

CRAFT
ENTERPRISES

Skills

Organizational
capabilities
411

EXHIBIT 4.2

Linking Resources and Capabilities to Firm

Performance

EXHIBIT 4.3

Company Examples of Core Competencies & Applications

413

Canon:
Canon: Products
Products and
and Core
Core Technical
Technical Capabilities
Capabilities
Precision
Mechanics

Fine
Optics

35mm SLR camera

Plain-paper copier
Compact fashion camera
Color copier
EOS autofocus camera
Color laser copier
Digital camera
Basic fax Laser copier
Video still camera
Laser fax
Mask aligners
Inkjet printer
Excimer laser aligners
Laser printer
Color video printer
Stepper aligners
Calculator
Notebook computer

MicroElectronics

414

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.

415

EXHIBIT 4.4

Tangible and Intangible Resources

416

Appraising
Appraising Resources
Resources
RESOURCE

Tangible
Resources

CHARACTERISTICS
Financial

Borrowing capacity
Internal funds/ generation

Physical

Plant and equipment:

size, location, technology
flexibility.
Land and buildings.
Raw materials.

Debt/ Equity ratio

Credit rating
Net cash flow
Market value of
fixed assets.
Scale of plants
Alternatives for fixed
assets

Technology

Patents, copyrights, know how

R&D facilities.
Technical and scientific
employees

No. of patents owned.

Royalty income
R&D expenditure.
R&D staff

Reputation

Brands. Customer loyalty. Company

reputation (with suppliers, customers,
government)

Brand equity. Product

price premium.
Recognition.

Training, experience, adaptability,

commitment and loyability of customers

Employee qualifications,
pay rates, turnover.

Intangible
Resources

Human
Resources

INDICATORS

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
418

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
419

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.
420

EXHIBIT 4.5

Applying RBV: Decision Tree Competitive Implications

The
The Rent-Earning
Rent-Earning Potential
Potential
of
of Resources
Resources and
and Capabilities
Capabilities
THE EXTENT OF THE
COMPETITIVE ADVANTAGE
ESTABLISHED

THE PROFIT
EARNING POTENTIAL
OF A RESOURCE OR
CAPABILITY

Scarcity
Relevance
Durability

SUSTAINABILITY OF THE
COMPETITIVE
ADVANTAGE

Mobility
Replicability
Property rights

APPROPRIABILITY

Relative bargaining
power
Embeddedness of
resources

STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 4.1
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
123

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.
424

The Value Chain

Primary Activities
Add value directly in transforming inputs into outputs

Raw materials through production to customers

The Value Chain

General administration
Human resource management
Technology development
Procurement

Support Activities
Indirectly add value

Inbound
logistics

Operations

Marketing
and sales

Service

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.

Provide support to the primary activities

Information systems, human resources, accounting, etc.

Outbound
logistics

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

3-4

Managers can see how competitive advantage flows

from a system of activities (using activity-based
accounting).
425

EXHIBIT 4.6

Value Chain: Primary & Support

Activities

Hostesss Cost Components

80

70

Profit
Marketing: Promotions

Cents per unit

60

Marketing: Advertising
50

Outbound logistics
40

30

Operations: Packaging

20

Operations: Ingredients

10

1999 Pankaj Ghemawat

Operations: Manufacturing

Relative Cost Analysis

90
80

Profit

70

Marketing: Promotions

Cents per unit

60

Marketing: Advertising

50

Outbound logistics

40

Operations: Manufacturing

30
20

Operations: Packaging

10

Operations: Ingredients

0
Hostess

1999 Pankaj Ghemawat

Little Debbie Ontario Baking Savory Pastries

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. Thus,
managers should verify that
the firm does not outsource
activities that stimulate the
development of new
capabilities and competencies.
429

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, & Intl
Variety

Hub & Spoke System

Multiple Aircraft
Low number of
Aircraft per Route
Meals & Service
Higher Staffing

Southwest Airlines Activity System

No baggage
transfers

No meals

No seat
assignments

Frequent,
reliable
departures

High
compensation
of employees

Flexible
union
contracts

15-minute
gate
turnarounds

Lean, highly
productive
ground and
gate crews

High level
of employee
stock
ownership

Limited
passenger
amenities

Limited use
of travel
agents

No
connections
with other
airlines

Standardized
fleet of 737
aircraft

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

Automatic
ticketing
machines

Very low
ticket prices

High
aircraft
utilization

Southwest,
the low-fare
airline

31

Strategic Coherence
A fit among corporate, business, and functional strategy;
A fit between strategy formulation and implementation;
A balance of commitment and flexibility;
A balance among stakeholders;
A balance of competition and cooperation;
A balance of hiding and diffusing information;
A balance of centralization and decentralization; and
A balance between stability and change.
432

Strategic Coherence
Combining activities that complement and reinforce one
another. These activities dovetail together to help achieve
the overall objectives of the firm.
Such strategies, which may regarded as systems of
activities are often more successful because they are more
difficult to imitation. Thus, they can lead to a sustainable
competitive advantage.
Strategic coherence may not be a sufficient condition for
attaining a competitive advantage, but it is often a necessary
one.
433

Strategic Coherence
A sustainable competitive advantage often requires tradeoffs. These tradeoffs arise for at least three reasons:
Inconsistencies in image or reputation.
Tradeoffs arising from the activities themselves.
Limits on internal coordination and control

General management at its core is strategy:

Defining and communicating the companys unique position;
Making tradeoffs;
Forging a dynamic fit among activities (i.e., strategic coherence).

434

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
435

EXHIBIT 4.7

Vanguard Groups Activity System 1997

Legend
Core
Support

436

EXHIBIT 4.8

Vanguard Groups Activity System 2011

Legend
Core
Support

437

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

BYD

competency in batteries would gain advantage

Dynamic capabilities are an intangible resource

Resource stocks and flows are a useful view
438

EXHIBIT 4.10

Role of Inflows & Outflows in Building

Stocks

439

STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 4.2
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

140

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%

441

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.
442

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

443

The
The Evolution
Evolution of
of Honda
Honda Motor
Motor Company
Company
50cc 2-cycle engine
Founding of
Honda motor
company

1948 1950

First product:
clip-on engine
for bicycles

405cc
motor
cycle

4 cycle
engines

1955

Related products:
ground tillers, marine
engines, generators,
pumps, chainsaws

1960

The 50cc
super
-cub

1965

1970

N360 mini
car

1975

1980

1000cc
Goldwing
touring
motor cycle

1985

1990

Acura Car
division

1995

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

445

EXHIBIT 4.11

Strategic Questions in the SWOT Analysis

446