CHAPTER

4
Internal Analysis:
Resources,
Capabilities, and
Activities

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Part 1 Strategy Analysis

4–2
LO 4-1 Distinguish among a firm’s resources, capabilities, core
competencies, and firm activities.
LO 4-2 Differentiate between tangible and intangible resources.
LO 4-3 Describe the critical assumptions behind the resource-based view.
LO 4-4 Apply the VRIO framework to assess the competitive implications
of a firm’s resources.
LO 4-5 Identify competitive advantage as residing in a network of firm
activities.
LO 4-6 Outline how dynamic capabilities can help a firm sustain
competitive advantage.
LO 4-7 Identify different conditions that allow firms to sustain their
competitive advantage.
LO 4-8 Conduct a SWOT analysis.
4–3
 Chapter Case 4 From Good to Great to Gone:

• Circuit City

 A great performer from 1982 – 2000:

 World-class logistics and customer responsiveness

 4S: service, selection, savings, and satisfaction

 6 times better investment than GE under Jack Welch

• Bankruptcy in fall of 2008

 Outflanked by firms like Best Buy and Amazon

4–4
 Internal Analysis: Inside the Firm

• Comparing two firms in same industry:

Internal focus

 Core Competencies

 Unique strengths deep inside that differentiate a firm

 Can drive competitive advantage

 Strategic Fit
 Internal strengths change with the
external environment
4–5
EXHIBIT 4.1 Creating Strategic Fit to Leverage Internal Strengths

4–6
The Role of Strategy in Business is to Generate and
Sustain Value via the Linkages Between Position,
Organization, and Resources

Positioning

Organization Resources &

Capabilities

4–7
 Positioning

• Scope of the Firm:

 Geographic scope

 Product-market scope: Choice of businesses

(corporate portfolio analysis)

 Product market positioning

within a business

 Vertical integration
decisions
 Organization

• Structure
 Formal definition of authority
 Conflict resolution

• Systems
 Rules, routines, evaluation and rewards

• Processes
 Informal communication, networks, and recruitment

4-9
 Resources and Capabilities

• Tangible resources
 e.g., physical capital

• Organizational capabilities
 e.g., routines and standard operating procedures

• Intangible resources
 e.g., trademarks, “know-how”
Knowledge
Knowledge Types
Types and
and
Knowledge
Knowledge Conversion
Conversion
Levels
Levelsof
ofknowledge
knowledge
Individual Organization
Organization
Individual

Databases
Information Systems & procedures
Explicit
Explicit Facts Intellectual property
Scientific kn. ‘INDUSTRIAL’
Types
Types ENTERPRISES

of
of
Knowledge
Knowledge CRAFT
ENTERPRISES

Tacit
Tacit Skills Organizational
capabilities

4–11
EXHIBIT 4.2 Linking Resources and Capabilities to Firm Performance
EXHIBIT 4.3 Company Examples of Core Competencies & Applications

4–13
Canon:
Canon: Products
Products and
and Core
Core Technical
Technical Capabilities
Capabilities

Precision Fine
Mechanics Optics

35mm SLR camera Plain-paper copier

Compact fashion camera Color copier
EOS autofocus camera Color laser copier
Digital camera
Basic fax Laser copier
Video still camera
Laser fax
Mask aligners Inkjet printer
Excimer laser aligners Laser printer
Stepper aligners Color video printer
Calculator
Notebook computer

Micro-
Electronics 4–14
LO 4-1 Distinguish among a firm’s resources, capabilities, core
competencies, and firm activities.
LO 4-2 Differentiate between tangible and intangible resources.
LO 4-3 Describe the critical assumptions behind the resource-based
view.
LO 4-4 Apply the VRIO framework to assess the competitive implications
of a firm’s resources.
LO 4-5 Identify competitive advantage as residing in a network of firm
activities.
LO 4-6 Outline how dynamic capabilities can help a firm sustain
competitive advantage.
LO 4-7 Identify different conditions that allow firms to sustain their
competitive advantage.
LO 4-8 Conduct a SWOT analysis. 4–15
EXHIBIT 4.4 Tangible and Intangible Resources

4–16
 Appraising
Appraising Resources
Resources
RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds/ generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternatives for fixed
Raw materials. assets

Technology Patents, copyrights, know how No. of patents owned.

R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure.
Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity. Product

reputation (with suppliers, customers, price premium.
government) Recognition.

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyability of customers pay rates, turnover.
 The Resource-based View

• Google Example
 Tangible resources valued at $5 billion
 Intangible brand valued at over $100 billion
 Googleplex has both tangible and intangible aspects

• Competitive Advantage More Likely…..

 From intangible resources

4–18
 Two Critical Assumptions in RBV
• Resource heterogeneity
 Bundles of resources and capabilities differ across firms
 Southwest Airlines and Alaska Airlines have different
resources
 SWA

– Higher employee productivity

– Informal organization, pilots help load luggage

• Resource immobility
 Resources tend to be “sticky” and do not move easily
 Southwest Airlines sustained advantage
 Severaldecades superior performance
 Competitors have unsuccessfully imitated SWA model

4–19
LO 4-1 Distinguish among a firm’s resources, capabilities, core
competencies, and firm activities.
LO 4-2 Differentiate between tangible and intangible resources.
LO 4-3 Describe the critical assumptions behind the resource-based view.
LO 4-4 Apply the VRIO framework to assess the competitive
implications of a firm’s resources.
LO 4-5 Identify competitive advantage as residing in a network of firm
activities.
LO 4-6 Outline how dynamic capabilities can help a firm sustain
competitive advantage.
LO 4-7 Identify different conditions that allow firms to sustain their
competitive advantage.
LO 4-8 Conduct a SWOT analysis.
4–20
EXHIBIT 4.5 Applying RBV: Decision Tree Competitive Implications
 The
The Rent-Earning
Rent-Earning Potential
Potential
of
of Resources
Resources and
and Capabilities
Capabilities
THE EXTENT OF THE Scarcity
COMPETITIVE ADVANTAGE
ESTABLISHED Relevance

Durability
THE PROFIT
EARNING POTENTIAL SUSTAINABILITY OF THE Mobility
OF A RESOURCE OR COMPETITIVE
CAPABILITY ADVANTAGE Replicability

Property rights

Relative bargaining
APPROPRIABILITY power

Embeddedness of
resources
STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 4.1
4.1 How Nintendo Focused on
the Casual Gamer

• Video Gaming Business

 $22 billion in 2009, growing to $60 billion in 2013

 Nintendo understands the casual gamer

 Game Boy handheld devices in 1990

 Nintendo DS in 2004
 Wii consoles in 2007
• 49% of game console market in 2010

 Microsoft Kinect introduced in November of 2010

 Competition continues…
1–23
LO 4-1 Distinguish among a firm’s resources, capabilities, core
competencies, and firm activities.
LO 4-2 Differentiate between tangible and intangible resources.
LO 4-3 Describe the critical assumptions behind the resource-based view.
LO 4-4 Apply the VRIO framework to assess the competitive implications
of a firm’s resources.
LO 4-5 Identify competitive advantage as residing in a network of firm
activities.
LO 4-6 Outline how dynamic capabilities can help a firm sustain
competitive advantage.
LO 4-7 Identify different conditions that allow firms to sustain their
competitive advantage.
LO 4-8 Conduct a SWOT analysis.
4–24
 The Value Chain

• Primary Activities
 Add value directly in transforming inputs into outputs
 Raw materials through production to customers
The Value Chain

General administration

Human resource management

Technology development

Procurement

• Support Activities Inbound

logistics
Operations
Outbound
logistics
Marketing
and sales
Service

 Indirectly add value Adapted from Exhibit 3.1 The Value Chain: Primary and Support Ac tivities
Source: Adapted with permission of The Free Press, a division of Simon &
Schuster, Inc., from Competitive Advantage: Creating and Sustaining

Provide support to the primary activities

Superior Performance by Michael E. Porter.


Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 3-4

 Information systems, human resources, accounting, etc.

• Managers can see how competitive advantage flows

from a system of activities (using activity-based
accounting).
4–25
EXHIBIT 4.6 Value Chain: Primary & Support Activities
 Hostess’s Cost Components

80

Profit
70

Marketing: Promotions
60

Marketing: Advertising
Cents per unit

50
Outbound logistics
40
Operations: Manufacturing
30 Operations: Packaging

20 Operations: Ingredients

10

© 1999 Pankaj Ghemawat

 Relative Cost Analysis

90

80
Profit
70
Marketing: Promotions
60
Marketing: Advertising
Cents per unit

50
Outbound logistics
40
Operations: Manufacturing
30

20 Operations: Packaging

10 Operations: Ingredients
0
Hostess Little Debbie Ontario Baking Savory Pastries

© 1999 Pankaj Ghemawat

 Value Chain Analysis

• Outsourcing activities can have

the unintended consequence
of damaging the firm’s potential
to evaluate continuously its
key assumptions, learn, and
create new capabilities and
core competencies. Thus,
managers should verify that
the firm does not outsource
activities that stimulate the
development of new
capabilities and competencies.

4–29
 Strategic Coherence
The Logic of How The Business Fits Together:

• Southwest Airlines • American Airlines

 Low Price  Premium Price
 Short Routes  Short, Long, & Int’l
• No Frills  Variety
• Point-to-Point • Hub & Spoke System
• One Aircraft -- • Multiple Aircraft
Boeing 737
• Low number of
• High number of
Aircraft per Route Aircraft per Route
• No Meals • Meals & Service
• Flexible/ Lower Staffing • Higher Staffing
Southwest Airline’s Activity System
No baggage
No meals transfers

Limited No
No seat
passenger connections
assignments
amenities with other
airlines

Short-haul,
point-to-point
Frequent, Limited use routes between
reliable 15-minute of travel Standardized midsize cities
departures gate agents fleet of 737 and secondary
turnarounds aircraft airports

Automatic
ticketing
Lean, highly machines
High
productive Very low
compensation
of employees ground and ticket prices
gate crews

High
Flexible High level “Southwest,
aircraft
union of employee the low-fare
stock utilization airline”
contracts
ownership

31
 Strategic Coherence
• A fit among corporate, business, and functional strategy;

• A fit between strategy formulation and implementation;

• A balance of commitment and flexibility;

• A balance among stakeholders;

• A balance of competition and cooperation;

• A balance of hiding and diffusing information;

• A balance of centralization and decentralization; and

• A balance between stability and change.

4–32
 Strategic Coherence
• Combining activities that complement and reinforce one
another. These activities dovetail together to help achieve
the overall objectives of the firm.

• Such strategies, which may regarded as systems of

activities are often more successful because they are more
difficult to imitation. Thus, they can lead to a sustainable
competitive advantage.

• Strategic coherence may not be a sufficient condition for

attaining a competitive advantage, but it is often a necessary
one.

4–33
 Strategic Coherence
• A sustainable competitive advantage often requires trade-
offs. These tradeoffs arise for at least three reasons:

 Inconsistencies in image or reputation.

 Tradeoffs arising from the activities themselves.

 Limits on internal coordination and control

• General management at its core is strategy:

 Defining and communicating the company’s unique position;

 Making tradeoffs;
 Forging a dynamic fit among activities (i.e., strategic coherence). 4–34
 Dynamic Strategic Activity Systems
• A network of interconnected activities in the firm
• Evolve over time – external environment changes
 Add new activities & upgrade or remove obsolete
ones

• Vanguard Example
 A global investment firm - $1.4 trillion managed assets
 Emphasis on low customer cost and quality service

– Among the lowest expense ratios in the industry (0.20%)

 Updated the activity system from 1997 to 2011
 New customer segmentation core
 Two new support activities
 Permits customized offerings: long-term and more active traders

4–35
EXHIBIT 4.7 Vanguard Group’s Activity System 1997

Legend

Core

Support

4–36
EXHIBIT 4.8 Vanguard Group’s Activity System 2011

Legend

Core

Support

4–37
 Dynamic Capabilities Perspective

• A firm can modify its resource base to gain & sustain

a competitive advantage
 Advantage is gained from reconfiguring a firm’s
resource base
 Honda core competency in gas-powered engine design
 Could decrease in value
 If consumers move toward electric-powered cars
 BYD competency in batteries would gain advantage

• Dynamic capabilities are an intangible resource

• Resource stocks and flows are a useful view

4–38
EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks

4–39
 STRATEGY
STRATEGY HIGHLIGHT
HIGHLIGHT 4.2
4.2 IBM’s Dynamic Strategic Fit

• From mainframes to services transformation

 In 1992, less than 8,000 people in global services

 In 2010, nearly 150,000 employees there

• IBM started the PC revolution…then became a misfit in the industry

• Lou Gerstner joined as CEO of a nearly bankrupt IBM

• Moved IBM downstream toward services and thus higher value added

• Transformation of core competency:

• Today, IBM is a nimble IT-services firm

1–40
EXHIBIT 4.9 IBM Product Scope 1993 and 2010

In 1993, hardware accounted

for 50% of IBM revenues

In 2010, software & services

accounted for 80% of IBM revenues,
hardware was down to 18%

4–41
LO 4-1 Distinguish among a firm’s resources, capabilities, core
competencies, and firm activities.
LO 4-2 Differentiate between tangible and intangible resources.
LO 4-3 Describe the critical assumptions behind the resource-based view.
LO 4-4 Apply the VRIO framework to assess the competitive implications
of a firm’s resources.
LO 4-5 Identify competitive advantage as residing in a network of firm
activities.
LO 4-6 Outline how dynamic capabilities can help a firm sustain
competitive advantage.
LO 4-7 Identify different conditions that allow firms to sustain their
competitive advantage.
LO 4-8 Conduct a SWOT analysis.
4–42
 How to Protect a
Competitive Advantage

1. Better Expectations of Future Values

 Buy Resources at a low cost
 Real Estate Development - highway expansion

2. Path Dependence
 Current alternatives are limited by past decisions
 U.S. is the only industrial nation not on the metric system
 Honda’s core competency in gas engines took decades to build

4–43
 The
The Evolution
Evolution of
of Honda
Honda Motor
Motor Company
Company

50cc 2-cycle engine

Related products:
ground tillers, marine
Founding of 405cc
engines, generators,
Honda motor motor
4 cycle pumps, chainsaws
company cycle
engines

1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

First product: The 50cc N360 mini 1000cc Acura Car

clip-on engine super car Goldwing division
for bicycles -cub touring
motor cycle
 How to Protect a
Competitive Advantage

3. Causal Ambiguity
 Cause of success or failure are not apparent
 Why has Apple had such a string of successful products?
– Role of Steve Jobs’ vision?
– Unique talents of the Apple design team?
– Timing of product introductions?

4. Social Complexity
 Two or more systems interact creating many possibilities
 A group of 3 people has 3 relationships

 A group of 5 people has 12 relationships

4–45
EXHIBIT 4.11 Strategic Questions in the SWOT Analysis

4–46