CHAPTER

Internal Analysis:
Resources,
Capabilities, and
Activities

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

42
LO 4-1 Distinguish among a firms 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 firms 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.
43
 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

44
 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
Internalstrengths change with the
external environment

45
EXHIBIT 4.1 Creating Strategic Fit to Leverage Internal Strengths

46
The Role of Strategy in Business is to Generate and
Sustain Value via the Linkages Between Position,
Organization, and Resources

Positioning

Organization Resources &

Capabilities

47
 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
411
EXHIBIT 4.2 Linking Resources and Capabilities to Firm Performance
EXHIBIT 4.3 Company Examples of Core Competencies & Applications

413
414
LO 4-1 Distinguish among a firms 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 firms 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. 415
EXHIBIT 4.4 Tangible and Intangible Resources

416
 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 418
 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
Several decades superior performance
Competitors have unsuccessfully imitated SWA model
419
LO 4-1 Distinguish among a firms 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 firms 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.
420
EXHIBIT 4.5 Applying RBV: Decision Tree Competitive Implications
STRATEGY HIGHLIGHT 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
123
LO 4-1 Distinguish among a firms 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 firms 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.
424
 The Value Chain

Primary Activities
Add value directly in transforming inputs into outputs
Raw materials through production to customers

Support Activities
Indirectly add value
Provide support to the primary activities
Information systems, human resources, accounting, etc.

Managers can see how competitive advantage flows

from a system of activities (using activity-based
accounting).
425
EXHIBIT 4.6 Value Chain: Primary & Support Activities
 Hostesss 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
Cents per unit

50 Marketing: Advertising
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 firms 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.

429
 Strategic Coherence
The Logic of How The Business Fits Together:

Southwest Airlines American Airlines

Low Price Premium Price
Short Routes Short, Long, & Intl
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 Airlines 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.

432
 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.

433
 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 companys unique position;

Making tradeoffs;
Forging a dynamic fit among activities (i.e., strategic coherence). 434
 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

435
EXHIBIT 4.7 Vanguard Groups Activity System 1997

Legend

Core

Support

436
EXHIBIT 4.8 Vanguard Groups Activity System 2011

Legend

Core

Support

437
 Dynamic Capabilities Perspective

A firm can modify its resource base to gain &

sustain a competitive advantage
Advantage is gained from reconfiguring a firms
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
438
EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks

439
 STRATEGY HIGHLIGHT 4.2 IBMs 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 revolutionthen 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

140
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%

441
LO 4-1 Distinguish among a firms 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 firms 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.
442
 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
Hondas core competency in gas engines took decades to build

443
 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

445
EXHIBIT 4.11 Strategic Questions in the SWOT Analysis

446