Chapter 4: Internal Analysis: Resources, Capabilities, and Core Competencies

resource stocks

the firm's current level of intangible resources

resource flows

the firm's level of investments to maintain or build a resource

capabilities

organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically

SWOT analysis

-combines external and internal analysis -purpose is to leverage internal strengths to exploit external opportunities and to mitigate internal weaknesses and external threats -a framework that allows managers to synthesize insights obtained from an internal analysis of the company's strengths and weaknesses (S and W) with those from an analysis of external opportunities and threats (O and T)

primary activities

-firm activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain ex. -supply chain management -operations -distribution -marketing and sales -after sales service

support activities

-firm activities that add value indirectly, but are necessary to sustain primary activities ex. -research and development -information resources -human resources -accounting and finance -firm infrastructure including processes, policies, and procedures

value chain

-the internal activities a firm engages in when transforming inputs into outputs -each activity adds incremental value: 1) primary activities add value directly 2) support activities add value indirectly

core competencies

-unique strengths, embedded deep within a firm, that are critical to gaining and sustaining competitive advantage -allow a firm to differentiate its products and services from those of its rival -results in: creating higher value for the customer or offering products and services at lower cost

VRIO Framework

A theoretical framework that explains and predicts firm-level competitive advantage. -valuable -rare -icostly to imitate -organized to capture the value of the resources

activities

distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services

a resource is costly to imitate if

firms that do not possess the resource are unable to develop or buy the resource at a reasonable price

resource based view (RBV)

-a model that sees certain types of resources as key to superior firm performance: valuable, rare, costly to imitate, and organized to capture value -2 categories: tangible and intangible

isolating mechanisms

-barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy How: -better expectations of future resource value -path dependence -casual ambiguity -social complexity -intellectual property (IP) protection

a resource is organized to capture value if

-it has an effective organizational structure -it has coordinating systems

intangible resources

1. resources that do not have physical attributes and thus are invisible -culture -knowledge -brand equity -reputation -intellectual property (patents, designs, copyrights, trademarks, and trade secrets)

tangible resources

1. resources that have physical attributes and thus are visible -labor -capital -land -buildings -plant -equipment -supplies

Resource is Valuable if

It enables the firm to exploit an external opportunity. It enables the firm to offset an external threat. It enables a firm to increase its economic value creation (V - C).

A resource is rare if

Only one or a few firms possess it Example: Beats Electronics Product Placement Vast Celebrity Endorsement

Two Critical Assumptions of the RBV

Resource Heterogeneity -A firm is bundle of resources and capabilities that differ across firms Resource Immobility -A firm has resources that tend to be "sticky" and that do not move easily from firm to firm

dynamic capabilities

a firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage

core rigidity

a former core competency that turned into a liability because the firm failed to hone, refine, and upgrade the competency as the environment changed

dynamic capabilities perspective

a model that emphasizes a firm's ability to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a constantly changing environment

resources

any assets that a firm can draw on when formulating and implementing a strategy

Compare and contrast 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.

Differentiate among a firm's core competencies, resources, capabilities, and activities.

■ Core competencies are unique, deeply embedded, firm-specific strengths that allow companies to differentiate their products and services and thus create more value for customers than their rivals, or offer products and services of acceptable value at lower cost. ■ Resources are any assets that a company can draw on when crafting and executing strategy. ■ Capabilities are the organizational and managerial skills necessary to orchestrate a diverse set of resources to deploy them strategically. ■ Activities are distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services.

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. ■ A resource is valuable (V) if it allows the firm to take advantage of an external opportunity and/or neutralize an external threat. A valuable resource enables a firm to increase its economic value creation (V − C). ■ A resource is rare (R) if the number of firms that possess it is less than the number of firms it would require to reach a state of perfect competition. ■ A resource is costly to imitate (I) if firms that do not possess the resource are unable to develop or buy the resource at a comparable cost. ■ The firm is organized (O) to capture the value of the resource if it has an effective organizational structure, processes, and systems in place to fully exploit the competitive potential.

Conduct a SWOT analysis to generate insights from external and internal analysis and derive strategic implications.

■ Formulating a strategy that increases the chances of gaining and 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). ■ The strategic implications of a SWOT analysis should help the firm to leverage its internal strengths to exploit external opportunities, while mitigating internal weaknesses and external threats.

Evaluate different conditions that allow a firm to sustain a competitive advantage.

■ Several conditions make it costly for competitors to imitate the resources, capabilities, or competencies that underlie a firm's competitive advantage: (1) better expectations of future resource value, (2) path dependence, (3) causal ambiguity, (4) social complexity, and (5) intellectual property (IP) protection. ■ These barriers to imitation are isolating mechanisms because they prevent rivals from competing away the advantage a firm may enjoy.

Evaluate the two critical assumptions behind the resource-based view.

■ The first critical assumption—resource heterogeneity—is that bundles of resources, capabilities, and competencies differ across firms. The resource bundles of firms competing in the same industry (or even the same strategic group) are unique to some extent and thus differ from one another. ■ The second critical assumption—resource immobility—is that resources tend to be "sticky" and don't move easily from firm to firm. Because of that stickiness, the resource differences that exist between firms are difficult to replicate and, therefore, can last for a long time.

Apply a value chain analysis to understand which of the firm's activities in the process of transforming inputs into outputs generate differentiation and which drive costs.

■ The value chain describes the internal activities a firm engages in when transforming inputs into outputs. ■ Each activity the firm performs along the horizontal chain adds incremental value and incremental costs. ■ A careful analysis of the value chain allows managers to obtain a more detailed and fine-grained understanding of how the firm's economic value creation breaks down into a distinct set of activities that helps determine perceived value and the costs to create it. ■ When a firm's set of distinct activities is able to generate value greater than the costs to create it, the firm obtains a profit margin (assuming the market price the firm is able to command exceeds the costs of value creation).

Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.

■ To sustain a competitive advantage, any fit between a firm's internal strengths and the external environment must be dynamic. ■ Dynamic capabilities allow a firm to create, deploy, modify, reconfigure, or upgrade its resource base to gain and sustain competitive advantage in a constantly changing environment.