Internal Analysis

Objectives Resources and Capabilities

The RBV and the VRIO Framework
Core Competences
The Value Chain
Dynamic Capabilities
 Internal Analysis
We are moving more internal.
SWOT and Internal Attributes
What is SWOT, and how does it fit with the
course?
SWOT = Strengths, Weaknesses, Opportunities,
Threats
There are a lot of tools to analyze the external
environment (Industry Analysis), but there has
been less development of tools to analyze the
firms strengths and weaknesses
There is a need to have an approach to analyzing
the competitive implications of a firms INTERNAL
strengths and weaknesses
Resources and Capabilities
What are these internal attributes?
RESOURCES AND CAPABILITIES!
What are these resources and capabilities?
All of the financial, physical, human, and organizational
assets used by a firm to develop, manufacture, and
deliver products or services to its customers
Financial resources = debt, equity, retained earnings, etc
Physical resources = machines, manufacturing facilities,
and buildings
Human resources = all of the experience, knowledge,
judgment, risk taking propensity, and wisdom of
individuals
Organizational resources = the history, relationships,
trust, and organizational culture, along with a firms
formal reporting structure, explicit management control
systems, and compensation policies
Tangible and Intangible Resources
Tangible and Intangible Resources
Summary
Tangible resources = resources that are visible,
have physical attributes (buildings, factories,
equipment, etc.)
Intangible resources = resources that are
invisible, have no physical attributes
(knowledge, technology, patents)
Which is more likely to lead to a competitive
advantage?
intangible!
Google example:
Tangible resources valued at $5 billion
Intangible resources valued at over $100 billion
 VRIO
An easy-to-apply approach to analyzing the
competitive implications of a firms internal
strengths and weaknesses. What is this approach?
It is essentially a battery of tests to assess the
strategic value of each resource of a firm
It lets us really assess whether a resource will
provide SUSTAINABLE competitive advantage
Managers should address 4 questions about their
resources and capabilities:
1. The Question of Value
2. The Question of Rareness
3. The Question of Imitability
4. The Question of Organization
Lets go through each one.
The Question of Value
What is this?
Do a firms resources and capabilities add value by
enabling it to exploit opportunities and/or
neutralize threats?
Whats the basic idea here?
Identify what the firm is good at ?
Hondas engines are reliable
Think about your own resources and capabilities. Do
they pass the question of value?
Maybe you are good at:
Grilling
Networking
Picking stocks
Do they have the potential to boost your profits?
 The Question of Rareness
What is this?
How many competing firms already possess these valuable
resources and capabilities?
Whats the basic idea here?
Valuable but common resources are a source of competitive parity
To have better performance than competitors, you need to be unique!
To gain competitive advantage, a firm needs to exploit resources and
capabilities that are different from competitors
Knowledge often diffuses over time, eroding the rareness of resources
What are examples?
Toyota good at lean manufacturing. Is it rare anymore?
You start a sports bar. But there are tons of them.
Northstar veggie burger is no where else = rare
The Question of Imitability
What is this?
Do firms without a resource or capability face a
cost disadvantage in obtaining it compared to
firms that already possess it?
Why is this important?
This is about SUSTAINABILITY! If yes, firms with these
abilities can have abnormally high profits for a long time
If no, other firms will easily do what you are doing and
compete away your profits
Big question: Can firms imitate your skills?
Important: evaluate the relevant barriers to imitation!
Critical question: What determines Imitation?
Imitation can occur in two ways:
1. Duplication
2. Substitution
 Barriers to Imitation
What stops or slows Imitation?
1. Better Expectations of Future Resource Value
The firm may have anticipated how the market would evolve better than
everyone else and acquired a key resource on the cheap
You buy real estate in a run down neighborhood 20 years ago, art galleries
and restaurants start moving in, your real estate is now worth lots of $$$
Maybe due to talent, maybe due to luck

2. Importance of History (Path Dependence)

Historically unique circumstances may have played a part in creating the
resources. You cant replicate it!
Many resources take time to develop! Costly to rush it. (Time Compression
Diseconomies)
Caterpillar and WWII. Govt support.
Honda took years and years to develop their engines and engineering ability.
You cant do this overnight.
 Barriers to Imitation
What stops or slows Imitation?
3. Importance of Numerous Small Decisions (Causal Ambiguity)
Whether numerous small decisions play a large role in developing and
exploiting a firms resources and capabilities
Some firms are talented because of lots of little things. They are essentially
invisible.
Causal ambiguity = its unclear why the resources are good.
4. Importance of Socially Complex Resources (Social Complexity)
Socially complex = organizational phenomena like reputation, trust,
friendship, teamwork, and culture
A team of 3 people has 3 relationships.

A team of 5 people has 10 relationships.

Very tough to replicate!

Need to carefully evaluate the relevant Barriers to Imitation to

answer the Question of Imitability
The Question of Organization
What is this?
Is a firm organized to exploit the full competitive
potential of its resources and capabilities?
Whats the basic idea here?
You also need supporting complementary resources to
gain a competitive advantage
Complementary resources = resources that have limited
ability to generate a competitive advantage in isolation,
but in combination with other resources and
capabilities, they enable a firm to realize its full
competitive advantage
Examples of complementary resources?
Formal reporting structure
Explicit management control systems
Compensation policies
Sales networks
 Applying the framework
Costly to Exploited by
Valuable? Rare? Imitate? Organization? Assessment?

No No No No Competitive
Resource A
Disadvantage /
Weakness

Resource B Yes No No No Competitive

Parity /
Strength

Resource C Yes Yes No No Temporary Competitive

Advantage / Strength and
Distinct Competence

Resource D Yes Yes Yes Yes Sustained Competitive

Advantage / Strength and
Sustainable Distinctive
Competence

See Barney and Hesterly 2012

 Assumptions of RBV
Note that there are a few key assumptions
underlying the Resource Based View
(1) resource heterogeneity = bundles of resources
and capabilities tend to differ across firms
(2) resource immobility = resources tend to be
sticky and dont move easily from firm to firm
These assumptions suggest resource bundles
differ across firms, and these differences can
persist for long periods of time
 Summary
RBV (Resource Based View) provides a method to
study how a firms internal resources and
capabilities are a source of competitive advantage
Industry Analysis, studying the environment, and
picking good industries is not enough
You need to have unique resources and
capabilities that are valuable, rare, and costly to
imitate.
You then need to exploit these resources through
your organization
Barneys analysis lets us explicitly test each
resource for their potential for providing
sustainable competitive advantage
Carefully assess each question. Try to link to
financials. Provide evidence. Explain the logic.
 Summary
Graphical Depiction of VRIO:
 Core Competences
A related concept to the RBV is the notion of Core
Competences. What are these?
= unique strengths, embedded deep within the 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
Its basically the internal characteristics of the firm that makes the
firm have a competitive advantage
They are built through the interplay of resources and capabilities
Resources reinforce core competencies, while capabilities allow
managers to orchestrate their core competencies.
Core Competences came about at around the same time
as the RBV. (See Prahalad and Hamel 1990.) Very related
concepts.
The RBV VRIO framework is a little more precise, easier to
apply.
Examples of Core Competences
Link between RBV and Core Competences
 The Value Chain
Another useful tool for internal analysis is the value
chain. What is it?
It is an activity template that describes the internal
activities a firm engages in when transforming inputs
into outputs
Primary Activities = firm activities that add value directly by
transforming inputs into outputs as the firm moves a product
or service horizontally along the internal value chain
Inbound logistics, operations, outbound logistics, marketing and
sales, after-sales service
Support Activities = activities that add value indirectly, but
are necessary to sustain primary activities
R&D, information systems, operations management, HR,
finance, accounting, general management
The Value Chain
 The Value Chain
How is the value chain useful?
Use it to break down the firm and understand internal
firm characteristics at the activity level
Use the RBV to test the firms resources and capabilities for each activity
Use it to understand the firm as a system of
interconnected activities
Strategic activity system = the conceptualization of the firm as a
network of interconnected activities
A firms decisions for each activity are interconnected. They affect each
other
To gain competitive advantage, all of the firms decisions at the activity
level should work in concert. They should reinforce each other to
execute a firms strategy.
Thus, there are tradeoffs. The firm must decide what to do for each
activity and WHAT NOT TO DO. (Remember Porter said this?)
The Value Chain will be useful for many topics in the
course (especially generic strategies)
 Dynamic Capabilities
What are dynamic capabilities? What is the idea?
Industries constantly evolve. This suggests firms resources and capabilities can
get outdated. What can firms do to maintain a competitive advantage?
They can evolve! They can adjust their activity system and update their resources
and capabilities to keep up with the dynamically changing environment
Dynamic Capabilities = a firms ability to create, deploy, modify, reconfigure,
upgrade, or leverage its resources in its quest for competitive advantage. It
describes the firms ability to reconfigure its resource base and to create
external market change for others.
The dynamic capabilities perspective = a model that emphasizes a firms
ability to modify and leverage its resource base in a way that enables it to
gain and sustain competitive advantage in a constantly changing
environment
Dynamic capabilities are an intangible resource built through continuous
investments and experience over time.
Consider IBM as well as the bathtub metaphor.
IBM and Dynamic Capabilities

In 1993, IBM was all about hardware.

Fierce competition in the PC hardware

market ensued. Massive layoffs at IBM

Today, IBM has reconfigured itself

Into a global IT services company.
Dynamic Capabilities and the Bathtub
 SWOT
Recap: What is SWOT again? How does everything weve
discussed so far relate to SWOT?
A framework that allows managers to synthesize insights obtained from
an internal analysis of the companys strengths and weaknesses (S and W)
with those from an analysis of external opportunities and threats (O and
T).
You probably are thinking of the 2 by 2 matrices you sometimes see.
We basically have done a big SWOT analysis in the class so far.
Weve gone in depth into analyzing the external environment (this is the
O and T)
Weve gone in depth into analyzing the internal characteristics of the firm
(this is the S and W)
Use SWOT to try to link internal factors to external factors to develop
recommendations. Use it to synthesize your entire analysis.
SWOT