Chapter 4- Internal Analysis: Resources, Capabilities, and Activities

Primary Activities

- Add value directly as the firm transforms inputs into outputs. Raw material through production to customers - Includes raw materials, intermediate goods/components, final assembly/manufacturing, marketing and sales, and customer service

Support Activites

- Add value indirectly. They provide support to the primary activities. - It includes research and development, information systems, operations management, human resources, finance, accounting, and general management

Value Chain

The internal activities a firm engages in when transforming inputs into outputs. It includes Primary and support activities. These resources and capabilities are needed to perform the firm's activities. Managers can see how competitive advantage flows from system of activities

War Games

simulation game to see competitive advantages of others and the outcomes of your strategies in the future. it is not always right, for could be unrealistic (ex: predicted myspace as big as fb).

Resource-Based View

A model that sees certain types of resources as key to superior firm performance

Costly to Imitate

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. It is hard to get a direct imitation or substitution

Rare

A resource is rare if only one or few firms possess it

Valuable

A resources that helps the firm increase the perceived value of its product or service in the eyes of consumer, either by adding attractive features or by lowering price because the resource helps the firm lower its cost and price, leading to higher profits

VRIO Framework

A theoretical framework that explains and predicts firm-level competitive advantage. Valuable, Rare, Costly to imitate, Organized to capture value. this is only for resources use to analyze resources, not companies

Casual Ambiguity

- Cause of success or failure are not apparent. ex: why has apple had such a string of successful products? was it Steve job's vision, unique talents of apple design team? timing of product introductions?- Describes a situation in which the cause and effect of a phenomenon are not readily apparent. - A tool to determine what strategic resources the company has avilable to them that the firm is using for its success

Dynamic Capabilities Perspective

- Competitive advantage is the outflow of a firm's capacity to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a constantly changing environment - a firm can modify its resource bas to gain and sustain a competitive advantage. An advantage is gained from reconfiguring a firm's resource base in response to environmental changes. - EX: Honda core competency in gas- powered engine design. this could decrease in value if consumers move toward electric powered cars. and BYD (Chinese auto manufacturer) competency in batteries would gain an advantage

Path Dependence

- Describes a process in which the options one faces in a current situation are limited by decisions made in the past - current alternatives are limited b past decisions. ex: Honda's corer competency in gas engines took decades to build. Will be hard to change to electric if needed.

Social Complexity

- Describes situations in which different social and business systems interact with one another - Two or more systems interact creating many possibilities - ex: a group of 3 people has 3 relationships, where as a group of 5 people has 12 relationships

SWOT Analysis

- Framework that allows managers to combine insights obtained from an internal analysis of the company's strengths and weaknesses and with those from an analysis of external opportunities and threats. - You conduct a SWOT after external and internal analysis is completed, for it combines external and internal analysis

Core Competencies

- This is part of an internal analysis, which is inside the firm. when comparing firms int he same industry, we have an internal focus. - core competences- Unique strengths, embedded deep within a firm, that allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. This can drive competitive advantage!!! -- able to do what others are not.

Resources

- raw material, no control over - Tangible versus Untangible - It is any asset such as cash, buildings, machinery, or intellectual property that a company can draw on when crafting and executing a strategy

Activities

Distinct and fine-grained business processes such as order taking, the physical delivery of products, or invoicing customers

How to protect a competitive advantage

1. Better expectations of future values- buy resources at a low cost. ex: real estate development, highway expansion 2. Path dependence 3. Casual Ambiguity 4. Social Complexity

Isolating Mechanisms

Barriers to imitation that prevent rivals from competing away the advantage a firm may enjoy

Resource Heterogeneity

Bundles of resources, capabilities, and competencies differ across firms ex: southwest airlines and Alaska airlines have different resources and capabilities

Dynamic Capabilities

Describes a firm's ability to create, deploy, modify, reconfigure, upgrade, or leverage its resource over time in its quest for competitive advantage. - they are intangible resources

Resource Stocks

Firm's current level of intangible resources

Resource Flows

Firm's level of investments to maintain or build a resource

Intangible Resources

Have no physical attributes; invisible because can't touch. Examples: Firm's culture, knowledge, brand equity, reputation, intellectual property (including patents, copyrights trademarks, trade secrets). - used to be tangible is more important but now it is intangible

Tangible Resources

Have physical attributes and are visable. Examples include: Labor, capital, land, buildings, plant, equipment, supplies, water access (agriculture)

Organized to Capture Value

It must have in place an effective organizational structure and coordinating systems. use that to exploit competitive potential using structure or coordinating systems

Strategic Questions of SWOT Analysis: How can managers use strengths to take advantage of opportunities?

Opportunities and strengths

Resource with VRIO Attributes

Resource enables the firm to gain and sustain a competitive advantage

Two critical assumptions in resource based view (RBV)

Resource heterogeneity ad resource immobility

Resource Immobility

Resources and capabilities tend to be "Sticky" and don't move easily from firm to firm. ex: southwest airlines sustained advantage: several decades of superior performance, and competitors have unsuccessfully imitated SWA model

Applying RBV: Decision Tree Competitive Implications

Sustained Competitive Advantage when: Resource or Capability is valuable, rare, and costly to imitate, and firm is organized to capture value. This is always a firms goal. Temporary Competitive Aadvantage: When the firm is valuable, rare, and could or could not be costly to imitate, but the firm is not organized to capture value. Competitive Parity: When the resource or capability is valuable and rare, but not costly to imitate Competitive Disadvantage: When the resource or capability is not valuable.

Capabilities

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

Strategic Questions of SWOT Analysis: How can managers use strengths to reduce the likelihood and impact of threats?

Threats and Strengths

Strategic Questions of SWOT Analysis: how can managers overcome weaknesses that will make threats a reality?

Threats and weaknesses

What drives competitive Advantage?

Value to me, cost, shareholder value (dividend payment, price appreciation). leads to superior firm performance

Linking Resources and Capabilities to Firm Performance

We start with resources that we reinforce or capabilities that we orchestrate. that leads us to core competencies (things we could do that others can't). with leverage, it goes to firm activities, then competitive advantage, then superior firm performance. Superior performance cannot last on its own, so it leads all the way back to capabilities and resources through reinvesting, refining your strategies, and upgrading.

Strategic Questions of SWOT Analysis: How can managers overcome weaknesses to prevent the firm from taking advantage of opportunities?

Weaknesses and Opportunities

Creating Strategic Fit to Leverage Internal Strengths

With the PESTEL environment and the global world putting force onto the industry environment, strategic groups, and then the inside of the firm, the inside firm uses a strategy to correctly use their resources, capabilities, core competencies, and firm activities to gain success.

SWOT stands for

[internal] strengths and weaknesses, [external] opportunities and threats. The internal is shown from VRIO framework, and external from PESTEL or competitive force analysis. - you want to leverage internal strengths to exploit external opportunities. --achieving such a dynamic fit yields sustained competitive advantage