North South University

School of Business and Economics (SBE)

EMB 690 Strategic Management

Intersession Semester, 2023
Lecture 4
 Assessing the Internal
Environment of the firm.
Resource-based view of the firm.
Today’s Lecture outline

❑Internal Environment:
oResources.
oCapabilities.
oCore Competencies.
oFour-criteria Test.
oValue-Chain Analysis.
oSWOT Analysis.
 Internal Environment Analysis

❑Importance?
❑What to focus on?
❑How to assess competitive advantage?
Components of Internal Analysis

Figure 3.2
 Definitions
Resources...are inputs into a firm’s
production process.
They cover a spectrum of individual,
social, and organizational phenomena,
such as capital, equipment, the skill of
individual employees, patents, finance
and talented managers.
 Resources
❑ Tangible resources: …are assets that are
relatively easy to identify. They include the
physical and financial assets that an
organization uses to create value for its
customers.
1. Physical resources: company’s plant,
equipment, land, buildings.
2. Financial resources: firm’s cash, accounts
receivable.
 Resources
❑Intangible resources: …organizational assets
that are difficult to identify and account for
and are typically embedded in unique routines
and practices, including human resources,
innovation resources, and reputational
resources.
❑Nonphysical entities created by managers and
other employees, brand names, company
reputation, employee knowledge and
experience, and intellectual property.
 Resources
Tangible Resources Examples
Financial resources The firm’s borrowing capacity;
The firm’s ability to raise equity;
Organizational The firm’s formal reporting structure and its formal
resources planning, controlling, and coordinating systems;
Physical resources Sophistication and location and a firm’s plant and
equipment
Access to raw materials;
Technological Stock of technology, such as patents, trademarks,
resources copyrights and trade secrets; Date analytic algorithms;
Intangible Resources Examples
Human resources Knowledge, Trust, Managerial Capabilities, Organizational
routines (firm-specific practices and procedures);
Innovation & creativity Ideas, Scientific capabilities, Capability to innovate;
Reputational resources Reputation with customers [brand name, perceptions of
product quality, durability, and reliability], Reputation
with suppliers [for efficient, effective, supportive, and
mutually beneficial interactions and relationships];
 Definitions
❑Capabilities...refer to ‘an organisation’s skills in co-
ordinating its resources & putting them to
productive use’ OR ‘Are the capacities for a set of
resources to integratively perform a task or activity’.
❑…are not specific tangible or intangible assets, but
rather the skills that a firm employs to transform
inputs into outputs.
❑Organizational capabilities or capacities refer to an
organization’s capacity to deploy tangible and
intangible resources over time and generally in
combination and to leverage those capabilities to
bring about a desired end.
 Capabilities
Functional areas Capabilities Examples of firms
Distribution Effective use of logistics management Dell
techniques;
Human resources Motivation, Empowering and retaining Microsoft, Dell
employees;
Management Effective and efficient control of inventories Wal-Mart, Dell
information through point-of-purchase data collection
systems methods;
Marketing Effective promotion of brand-name products, GIORGIO ARMANI, CK
Effective customer service, Innovative
merchandising;
Management Ability to envision the future of clothing, BHP Billiton, Nucor Steel
Effective organizational structure;
Manufacturing Design and production skills yielding reliable Komatsu, Sony
products, Product and design quality, and
Miniaturization of components and products;
Research & Innovation technology, Rapid transformation Apple computers,
development of technology into new products and Caterpillar, Samsung
processes;
 Definitions
❑A core competency is a concept in management theory
introduced by C.K. Prahalad and Gary Hamel.
❑A harmonized combination of multiple resources and
skills that distinguish a firm in the marketplace and
therefore are the foundation of companies’
competitiveness.
❑Resources and capabilities that serve as a source of
competitive advantage for a firm over its rivals.
❑A company's core competencies may include precision
mechanics, fine optics, and microelectronics. These help
it build cameras, but may also be useful in making other
products that require these competencies.
 Definitions

Core competencies fulfill three criteria:

1. Provides potential access to a wide variety of
markets.
2. Should make a significant contribution to the
perceived customer benefits of the end
product.
3. Difficult to imitate by competitors.
 Definitions
o Competitive advantage refers to factors that allow a
company to produce goods or services better or more
cheaply than its rivals.
o Competitive advantage is what makes an entity's
products or services more desirable to customers than
that of any other rival.
o Competitive advantages can be broken down into
comparative advantages and differential advantages.
o Comparative advantage is a company's ability to produce
something more efficiently than a rival, which leads to
greater profit margins.
o A differential advantage is when a company's products
are seen as both unique and of higher quality, relative to
those of a competitor.
Four criteria of sustainable advantage

Core
Valuable?
competencies

Competitive
Rare?
advantage

Costly to imitate/
Difficult to Value creation
imitate?

Non-
Above-average
substitutable/
Difficult to returns
substitute?
 Outcomes from Combinations of the Criteria
for Sustainable Competitive Advantage
Costly to Non-sub- Competitive Performance
Valuable Rare
Imitate stitutable Consequences Implications
Below
Competitive
NO NO NO NO Average
Disadvantage
Returns

Competitive Average
YES NO NO YES/NO Parity Returns

Temporary Aver./Above
YES YES NO YES/NO Competitive Average
Advantage Returns

Sustainable Above
YE YE YE YE Competitive Average
S S S S Advantage Returns
5-17
 Definitions
oStrategic Competitiveness: When a firm successfully
formulates and implements a value-creating
strategy.
oValue creation allows companies to outperform
their competitors by producing superior
performance.
oCompanies might have a great vision and mission.
They also have a good value proposition to
customers and design a strategic plan in detail.
However, all of that does not guarantee the success
of value creation, for example, for reasons of weak
strategy execution.
 Definitions
Above-average Returns: Returns over what an
investor expects to earn from other investments
with a similar amount of risk.
Superior Returns: Earning above-average returns
Risk: An investor’s uncertainty about the economic
gain or losses that will result from other
investments with a similar amount of risk.
Strategic flexibility: This is a set of capabilities firms
use to respond to various demands and
opportunities that are part of dynamic and
uncertain competitive environments.
 Value-chain analysis
oThe sequence of activities that a firm
undertakes to create value, including the
various steps of the supply chain but also
additional activities, such as marketing, sales,
and service.
o Value-chain analysis: a strategic analysis of an
organization that uses value-creating activities.
oPorter described two different categories of
activities.
1. Primary activities
2. Support activities
 Value-chain analysis
oPrimary activities: sequential activities of the value
chain that refer to the physical creation of the product
or service, its sale and transfer to the buyer, and its
service after the sale, including inbound logistics,
operations, outbound logistics, marketing and sales,
and service.
oSupport activities: activities of the value chain that
either add value by themselves or add value through
important relationships with both primary activities
and other support activities, including procurement,
technology development, human resource
management, and general administration.
 Typical Company Value Chain
Five Primary Activities and Costs

Distribution/
Inbound Production/
Outbound Marketing Service
logistics Operations
Logistics and Sales

General Administration
Human Resources Management Support
Activities
Technological Development and Costs
Procurement
Strength, Weakness, Opportunity, & Threat (SWOT) Analysis
o SWOT (strengths, weaknesses, opportunities, and
threats) analysis is a framework used to evaluate
a company’s competitive position and to develop
strategic planning.
o SWOT analysis assesses internal and external factors, as
well as current and future potential.
o A SWOT analysis is designed to facilitate a realistic, fact-
based, data-driven look at the strengths and
weaknesses of an organization, initiatives, or within its
industry.
o The organization needs to keep the analysis accurate by
avoiding pre-conceived beliefs or gray areas and instead
focusing on real-life contexts.
o Companies should use it as a guide and not necessarily
as a prescription.
 SWOT Analysis -What to Look For
Potential Resource Potential Resource Potential Company
Potential External Threats
Strengths Weaknesses Opportunities

Powerful strategy No clear strategic Serving additional Entry of potent new

Strong financial direction customer groups competitors
condition Obsolete facilities Expanding to new Loss of sales to
Strong brand name Weak balance geographic areas substitutes
image/reputation sheet; excess debt Expanding product Slowing market
Widely recognized Higher overall costs line growth
market leader than rivals Transferring skills Adverse shifts in
Proprietary Missing some key to new products exchange rates &
technology skills/competencies Vertical integration trade policies
Cost advantages Internal operating Take market share Costly new regulations
Strong advertising problems . . . from rivals Vulnerability to
Product innovation Falling behind in Acquisition of rivals business cycle
skills R&D Alliances or JVs to Growing leverage of
Good customer Too narrow expand coverage customers or suppliers
service product line Openings to exploit Reduced buyer needs
Better product Weak marketing new technologies for product
quality skills Openings to extend Demographic changes
Alliances or JVs brand name/image
 Resource-based view of the firm
o Resource-based view (RBV) of the firm perspective that firms’
competitive advantages are due to their endowment of
strategic resources that are valuable, rare, costly to imitate, and
costly to substitute.
o RBV combines two perspectives:
1. The internal analysis of phenomena within a company.
2. An external analysis of the industry and its competitive
environment.
o The RBV is a very useful framework for gaining insights as to why
some competitors are more profitable than others.
o The RBV is also helpful in developing strategies for individual
businesses and diversified firms by revealing how core
competencies embedded in a firm can help it exploit new
products and market opportunities.