Chapter 4

Internal Analysis:
Resources, Capabilities,
and Core Competencies
Lecture: Doan Van Ha
Email: ha.doanvan@gmail.com
Mobile: 0988688371
Learning objectives
• Explain how shifting from an external to internal analysis of a firm can reveal
why and how internal firm differences are the root of competitive advantage.
• Differentiate among a firm’s core competencies, resources, capabilities, and
activities.
• Compare and contrast tangible and intangible resources.
• Evaluate the two critical assumptions about the nature of resources in the
resource-based view.
• Apply the VRIO framework to assess the competitive implications of a firm’s
resources.
• Evaluate different conditions that allow a firm to sustain a competitive
advantage
Learning objectives
• Outline how dynamic capabilities can enable a firm to sustain a
competitive advantage.
• 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.
• Identify competitive advantage as residing in a network of distinct
activities.
• Conduct a SWOT analysis to generate insights from external and
internal analysis and derive strategic implications.
Shifting from external to
internal analysis
• The AFI framework
Shifting from external to
internal analysis
• To formulate a strategy that leads to a
competitive advantage, the firm must have:
– Resources and capabilities must combine
to form core competencies.
– Firms should consciously work to
identify these
• Evaluation should occur in the context of
PESTEL
• Evaluation should occur in the context of
Competition.
– Use Porter’s Five Forces.
– Use the Strategic Group Map.
Core competencies
• Unique strengths.
• Embedded deep within a firm.
• Allows the firm to differentiate from rivals.
– Results in creating higher value for the customer or
– Results in products and services offered at lower cost.
• Expressed through structures, processes, routines
Core competencies
• Core competencies- tree metaphor
Core competencies
• Examples of Core Competencies
• Five Guys
– Offers highest quality ingredients, wide range of free toppings, simple menu.
– Chose not to have drive through or an expanded menu.
• Beats Electronics
– Perception of coolness marketing.
• Tesla
– Engineering expertise in designing battery powered motors and power
trains.
• Netflix
– Creates proprietary algorithms-based on individual customer preferences.
Core competencies
• Resources and capability
• Help organizations develop core competencies
through the interplay of resources and
capabilities
• Resources are any assets that a firm can draw
on when crafting and executing a strategy.
• Capabilities are the organizational and
managerial skills necessary to orchestrate a
diverse set of resources and to deploy them
strategically.
• Activities are distinct and fine-grained
business processes
The resource-based view
• This model aids in identifying core
competencies
• Resources are key to superior firm
performance
– Tangible resource: Resources that have
physical attributes and thus are visible.
– Intangible resources: Resources that do
not have physical attributes and thus
are invisible.
The resource-based view
• Resource heterogeneity and resource immobility
• In the resource-based view, a firm is assumed to be a unique bundle of
resources, capabilities, and competencies.
• Resource Heterogeneity.
– A firm is a unique bundle of resources, capabilities and competencies
– These bundles differ across firms.
• Resource Immobility
– Resources are “sticky,” and don’t move easily from firm to firm.
– Resources are difficult to replicate.
– Resources can last for a long time.
The resource-based view
• The VRIO framework
• Jay Barney was a pioneer of this framework
• VRIO is a tool for evaluating firm resource endowments.
• What resource attributes underpin competitive advantage?
• to be the basis of a competitive advantage, a resource must be:

• VALUABLE
RARE

IMITATE

ORGANIZED
The resource-based view
• A resource is……
• Valuable if:
• Rare if:
• Costly to Imitate if:
• The firm is organization to capture value through:.
The resource-based view
• VRIO Framework to Reveal Competitive Advantage
The resource-based view
• Isolating Mechanisms: Barriers to imitation that prevent
rivals from competing away the advantage a firm may enjoy
• They include:
– Better expectations of future resource value.
– Path dependence: past decisions limit current options.
– Causal ambiguity: cause and effect are vague.
– Social complexity: social and business systems interact.
– Intellectual property (IP) protection.
The Dynamic Capabilities
Perspective
• Core rigidities
• A former core competency turned into a liability.
– Result of an environmental change.
– No longer fits the external environment

– Turns a resource from an asset to a liability.

– Causes loss of competitive advantage.
– The firm may even go out of business.
The Dynamic Capabilities
Perspective
• Dynamic capabilities: describe a firm’s ability
• to create, deploy, modify, recon- figure, upgrade, or leverage its
resources over time in its quest for competitive advantage.
• to adapt resources over time.
• The goal:
• Create long-term competitive advantage.
• Develop resources, capabilities and competencies.
• Create a strategic fit with the firm’s environment.
• Change in a dynamic fashion.
The Dynamic Capabilities
Perspective
• Dynamic capabilities perspective
• A model that emphasizes a firm’s ability to:
– Modify and leverage its resource base.
– Gain and sustain competitive advantage.
• Respond to a constantly changing environment.
• Dynamic markets are due to:
– Technological change, deregulation, globalization, demographic
shifts.
• Resources are created, deployed, modified, reconfigured, or
upgraded
The Dynamic Capabilities
Perspective
• Resource Stocks and Flows: A way to think about developing
dynamic capabilities.
• Resource stocks:
– The firm’s current level of intangible resources.
– New product development, engineering expertise, innovation
capability.
• Resource flows:
– The firm’s level of investments to maintain or build a resource.
The Dynamic Capabilities
Perspective
• The Bathtub Metaphor
The Value Chain and Strategic
Activity Systems
• Value chain
• Internal activities a firm engages in when transforming inputs into
outputs.
• Through primary and support activities.
• Each activity adds incremental value.
• Raw materials -> components -> products
• Each activity also adds incremental costs
The Value Chain and Strategic
Activity Systems
• A Generic Value Chain
• primary activities that add
value directly by transforming
inputs into outputs.
• Focused on moving from raw
materials, through production
phases:
– Supply chain management.
– Operations.
– Distribution.
– Marketing and sales.
– After-sales service.
The Value Chain and Strategic
Activity Systems
• A Generic Value Chain
• Firm activities that add value
indirectly.
• Necessary to sustain primary
activities.
– Research and development (R&D)
– Information systems.
– Human resources.
– Accounting and finance.
– Firm infrastructure including
processes, policies, and
procedures.
The Value Chain and Strategic
Activity Systems
• Strategic activity system
– The conceptualization of a firm as a network of interconnected
activities.
– Can be the foundation of competitive advantage.
– Socially complex and causally ambiguous.
– Enhance likelihood of sustained competitive advantage
– Characteristics:
– One or more elements can be easily observed.
– How activities are managed is not as easily observed.
– Difficult to imitate.

–.
The Value Chain and Strategic
Activity Systems
• Strategic activity system
– Responding to changing environment
– Evolving a system over time
– Competitors develop their activity systems.
– How activity systems are updated:
– Add new activities.
– Remove activities that are no longer relevant.
– Upgrade activities that have become stale or somewhat
obsolete.
– This reconfigures the entire strategic activity system.

–
The Vanguard Group’s Activity
System⏤1997
The Vanguard Group’s Activity
System⏤2019
Using SWOT analysis to generate insights
from external and internal analysis
• SWOT analysis: 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)
– to derive strategic implications.
Using SWOT analysis to generate insights
from external and internal analysis
• 1. Focus on the Strengths–Opportunities quadrant (top left) to
derive “offensive” alternatives by using an internal strength to
exploit an external opportunity.
• 2. Focus on the Weaknesses–Threats quadrant (bottom right)
to derive “defensive” alternatives by eliminating or minimizing an
internal weakness to mitigate an external threat.
• 3. Focus on the Strengths–Threats quadrant (top right) to use
an internal strength to minimize the effect of an external threat.
• 4. Focus on the Weaknesses–Opportunities quadrant (bottom
left) to shore up an internal weakness to improve its ability to take
advantage of an external opportunity.
• END OF CHAPTER 4