CHAPTER THREE

COMPANY SITUATION ANALYSIS

Copyright ©2013 Pearson Education, Inc. 
publishing as Prentice Hall 1
 Internal analysis
• Internal environment analysis is a way of looking the firms internal
capabilities to determine its internal strengths and weaknesses.
• Enables an organization to determine what it can do- that is, the actions
permitted by its unique resources, capabilities and core competencies.
Internal analysis helps the firm:
• Determine if its resources and capabilities are likely sources of
competitive advantage.
• Identify attractive resources for which resource position barriers can be
built.
• Establish strategies that will exploit any sort of resource driven
competitive advantages
 Internal Analysis - Resources Vs. Capability

 Resources
◦ Anything which could be thought of as a strength or
weakness of a given firm.
◦ Tangible and intangible assets of a firm
◦ Used to conceive and implement strategies
 Capabilities
◦ A subset of resources that enable a firm to take full
advantage of other resources
 E.g. marketing skill, cooperative strategies
 The theory behind internal analysis- RBV

 The resource based view:

◦ Develop to answer the question: why do some firms
achieve better economic performance

◦ Used to help firms achieve competitive advantage and

superior economic performance

◦ Assumes that a firm’s resources and capabilities are the

primary drivers of competitive advantage and economic
performance
The theory behind internal analysis- RBV

 The resource based view

◦ addresses the question of an organization’s identity –
in terms of its unique resources or capabilities

◦ it is principally concerned with the source and nature

of strategic capabilities

◦ has an intra-organizational focus

◦ argues that performance is a result of firm specific

resources and capabilities
 The theory behind internal analysis- RBV

 The Resource based view:

◦ According to RBV, the essence of strategy is or should by defined by
the firm’s unique resources and capabilities.

◦ It suggests that competitive advantage and enduring economic

performance results are a consequences of firm specific resources
and capabilities that are costly to copy by other competitors.

◦ These Resources and capabilities can be important factors of

sustainable competitive advantage and superior firm performance if
they possess certain special characteristics –VRI(S)O
RBV within the conversation of strategy

 Strategy can be viewed as a continuous search for rent (Bowman,

1974), where rent is defined as a resource owner’s opportunity
costs.

 The generation of above normal rates of return (i.e. rent) is the

focus of analysis for competitive advantage (Porter, 1985)

 The competitive advantage of firms which is a good cause for rent

can be achieved either through superior skill or superior resource
or superior market position.
RBV within the conversation of strategy (Types of Rent)

 Ricardian Rent achieved by

◦ Ownership of Valuable Land

◦ Location Advantage

◦ Patents and Copyrights

 Monopolistic Rent may be achieved by:

◦ Government Protection , Collusive Arrangements

◦ Size- economics of scale

 Schumpeterian/Entrepreneurial Rent
◦ Risk Taking

◦ Entrepreneurial insight in an uncertain/complex environment

 Assumptions of RBV

 Two critical assumptions of RBV:

◦ Resource heterogeneity

 Different firms may have different resources

◦ Resource Immobility

 It may be costly for firms without resources to

acquire or develop

 Some resources may not spread from and to a firm

without substantial cost
 What does these assumptions really mean?

 If one firm has resources that are valuable and other firms don’t

 If other firms cannot imitate these resources without incurring costs

 The firm possessing the valuable resources will likely gain a sustained
competitive advantages.

Under what circumstances will a resource lead to high returns over longer
periods of time?
 The VRIO Frame Work
 The VRIO framework is a strategic analysis tool designed for
organizations to uncover and protect the resources and capabilities that
give them a long-term competitive advantage and a four basic question
the frame evaluates over capabilities and resources :

 Value : What are those resources/capabilities that increase the perceived

value of the company to the customer?

 Rarity: Is the resource/capabilities in the hands of a few(in the market)?

 Imitability: Are the resources/capabilities difficult to imitate?

 Organization: Is the organization able to exploit the resource/capability?

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 The VRIN(o) Frame Work
Valuable Rare Costly to None Exploited by Competitive Economic
imitate substitutable organization implications implication

No Competitive Below normal

Disadvantage

Yes No Competitive Normal

Parity

Yes Yes Yes Yes Temporary Above normal

competitive
advantage

Yes Yes Yes Yes Yes Sustained CA Above normal

 Resource and Market Based Theories

 There are different theory of strategic management do you think more

practical and appealing for a business firm to achieve sustainable
competitive advantage and enduring economic performance.

◦ Market based view/Industry specific factors/Product/Market

position theory- barriers to entry and exit

◦ Resource based view/Firm specific factors/Resource position

theory/ Barriers to imitation.

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 MBV Vs. RBV theories

 Many scholars believed that RBV is a rival paradigm to the MBV

paradigm.

 Some other researchers believed that they are complementary

paradigm rather than rival

 Grant argues that market attractiveness is based on resources and

capabilities of individual firms

◦ Structural sources of market attractiveness such as barriers to entry,

monopolistic price setting power or vertical bargaining power are
all, in the final analysis the consequences of individual firms
 MBV Vs. RBV – Grant argues…

 For example,

◦ Barriers to entry are the results of individual firms patent,

brands and retaliatory capability

◦ Monopolistic price setting power stems from market share which

is a consequence of cost efficiency, financial strength and
other resources and capabilities

◦ Vertical bargaining power depends up on individual firm size

and financial resources etc.

◦ Therefore, no market attractiveness but individual firms

resources and capabilities are the primary basis for inter-firm
potential differentials
 MBV Vs. RBV Grant argues…

 To Grant, the Porterian generic strategies are linked into firm-

specific resources and capabilities which are basis of value
creation process.

◦ For example, cost advantage is based up on firms resources and

capabilities as process technology, size of the plants, and
access to low cost inputs, while differentiation advantage comes
from brands, product technology, marketing, distribution and
service capabilities.

 Therefore, the resources and capabilities of a firm are primary

constraints in formulating strategy and creating high/low
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 MBV Vs. RBVGrant argues…

 On the other hand, Porter argues that the ultimate sources of

competitive advantage originates in the structural forces that shape
the market.

 To him, there are logically two answers to the sources of competitive

advantage

 The 1st is the resources and capabilities condition of firms to Porter are
basically called as Initial Conditions.

◦ As a result of their history, firms may have pre-existing reputations,

skills, service capabilities etc., influencing choices as well as
constrain them.
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 MBV Vs. RBV Grant argues …
 The 2nd is that competitive advantage may be through pure
managerial choice, independent of initial conditions.

 Then he argues that lying behind all initial conditions and

managerial choices are external market conditions.

 The proponents of RBV propose that

◦ What made them choose, at the first place,

◦ Where to compete (the choice of market).

◦ To them, there must be some kind of internal factors made them

believe that they were capable of doing business better in a
particular market.
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 MBV Vs. RBVGrant argues…

 The debate turns out to be the origins of the origin or to put it

differently, which one comes first, chicken or egg?

 The debate becomes as such fruitless, even worse, it is

impossible to put an end to the debate since it turns over
an empirically unjustifiable causal reasoning.


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 MBV Vs. RBVGrant argues…

 The founder of RBV, Wernerfelt, found that firm specific effect

explains about twice as much variance in profit rates as market
effect.

 Besides. empirical evidences confirmed that both organization (firm

effect) and competition (market effect) are clearly important in
shaping strategy and performance.

 Therefore, Strategy and Performance are the functions of:

◦ Market effects – barriers to entry and exit

◦ Firm specific Effects – barriers to imitation

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 Value Chain

 Value consists of the performance characteristics provided by

companies in the form of goods or services for which customers are
willing to pay.

 The firm creates value by performing a series of activities that

Porter identified as the value chain .

 Value Chain ...

 The value chain links the value of the activities of an

organization with its main functional parts.

 It attempts to make an assessment of the contribution

that each part makes to the overall added value of the
business.

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 Value chain…
 The focus of value-chain analysis is to examine the corporation in
the context of the overall chain of value-creating activities, of
which the firm may be only a small part.

 The concept was used in accounting analysis for some years before
Professor Michael Porter suggested that it could be applied to
strategic analysis in the year 1985.
 Value Chain Analysis

 Value chain analysis:

◦ is a template used to identify the firms cost position and whether
the cost stance of the firm allows the implementation of business
level strategies.

◦ allows a firm to identify the cost and the different set of value
drivers

◦ In short value chain analysis provides fundamental inputs that

can be used to maximize value creation and minimize cost.

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 Value Chain Analysis...

 Michael Porter Identified two different sets of activities in the value

chain;

◦ Primary Activities
 Upstream value chain/inbound logistics

 Operations

 Downstream value chain/outbound logistics

 Marketing and sales

 After sale services

◦ Support activities –that provide support for the primary activities

of the firm:- infrastructure, finance, procurement and so on.
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 Value Chain…

 According to porter, the primary activities of the company are:

◦ Inbound logistics - concerned with receiving the goods form

suppliers, storing them until required by operations, handling and
transporting them within the company.

◦ Operations -this is the production area of the company

 Value Chain

 Outbound logistics -these distribute the final product to the

customer. They would clearly include transport and warehousing.

 Marketing and sales-this function analyses customer’s want and

need and brings to the attention of customers what products or
service the company has for sale.

 Service -before or after a product or service has been sold, there is

often a need for installation or after-sales service
 Value Chain…

 Each of the primary activities will add value to the organization in

its own way.

◦ For example, higher standards of service, lower production costs,

faster and cheaper outbound delivery and so on. By this means,
they provide the areas of competitive advantage of the
organization.
 Value Chain

 Supporting Activities:

◦ Procurement

◦ Technology development

◦ Human resource management

◦ Firm infrastructure- planning and control system

 Value Chain…

 Essentially, Porter linked two areas together.

◦ The added value that each part of the organization contributes to

the whole organization

◦ The contribution to the competitive advantage of the whole

organization that each of these parts might then make.

 The value chain can also be taken as a key source for generating a
competitive advantage to firms.
 Competitive advantage

 Why do some companies outperform others? What is (are) the basis

of their competitive advantage?

◦ In retail industry, Wal-Mart has consistently outperformed Kmart.

◦ In the global auto industry Toyota has consistently outperformed

General Motors for most of the last twenty years
 Competitive advantage…
 A firm outperform its rivals due to the prevalence of superior efficiency,

superior quality, superior innovation and superior responsiveness to

the market.
 We refer to efficiency, quality, innovation, and customer responsiveness as
the four generic building blocks of competitive advantage.

 This days information technology, CSR and environmental issues are

also generating a competitive advantage for global firms.

 Are the positioning and resource based approaches competing or

complementary?

 The answer is they are complementary .

End of Chapter
Three