written case
Will9990
InternalAnalysis1.pptx
MGMT 4813
Strategic Management
Internal Analysis
Sharon D. James, PhD, CFA
Internal Analysis (SW of SWOT)
Identify strengths and weaknesses that generate competitive advantages and disadvantages
Qualitative and quantitative measures of competitive advantage
Qualitative assessment—VRIO analysis (Barney, 1995 article available for download on Blackboard)
VRIO framework helps to identify competitive advantages, disadvantages, competitive parity, and economic profits (normal or above normal)
Qualitative Assessment of Competitive Advantage--Conceptual Background
Identify
Internal strengths and weaknesses
Critical resources and capabilities using value chain analysis
Identify a firm’s sources of economic value added versus competitors
Resources and Capabilities
Resources
Tangible (i.e., physical property, financial resources) or intangible (i.e., intellectual property, goodwill)
Capabilities
A company’s skills at coordinating and using its resources
A distinctive (core) competency that can be leveraged across multiple products or markets
The Resource-Based View
Firm-specific theory to help explain why some firms perform better than others.
Assumes a firm’s resources and capabilities are the primary drivers of competitive advantage and economic performance (Wernerfelt, 1984; Barney, 1986, 1991; Peteraf, 1993).
Resource heterogeneity - firms have different resources/capabilities
Resource immobility
It may be costly for firms to acquire or develop resources/capabilities.
Some resources/capabilities may be difficult to transfer without selling the firm as a whole.
Implications of the RBV
If one firm has valuable resources/capabilities that others do not have, and
If these resources are difficult to imitate without incurring high costs, then
The firms that possesses these resources will likely achieve competitive advantage.
Q: What makes a competitive advantage sustainable?
Examine a firm’s value chain to identify potential sources of competitive advantage.
If any exist, assess the sustainability of competitive advantages using the VRIO framework (Barney, 1995)
How to Identify Potential Sources of Competitive Advantage
Look inside a firm’s value chain
If a firm has competitive advantage, then the value chain must have resources and capabilities that fit the business level strategy and create above normal economic profits
Sustainable competitive advantages lie in primary activities of the value chain
Research & Development (R&D)
Manufacturing/Production
Marketing and Sales (including distribution)
Customer Service
Temporary competitive advantages lie in support activities
The Value Chain
Source: Hill, C. W. L. & G. R. Jones, Strategic Management: An Integrated Approach, 6th Ed., 2004
The Value Chain
A company is a chain of activities for transforming inputs into outputs that provide value to customers
The transformation process is composed of primary and support activities that add value to the product
Primary activities
R&D, production, marketing & sales, and customer service
Support activities
Infrastructure, information systems, materials management, and human resources
Sources of Competitive Advantage in the Value Chain
Marketing & sales – market research/focus group analysis, branding, customer loyalty
Production – Economies of scale, minimum efficiency leads to low cost
Materials management – Just-in-time (JIT) inventory systems reduce inventory carrying costs
R&D – Innovation, first mover advantage/technology leader, technological standard
Human resources/Infrastructure – Culture of efficiency (employee productivity), employee training and empowerment
IS and the Internet – Automated customer service and supplier relationship management, big data analysis and management
Identifying Sources of Competitive Advantage Using the VRIO Framework
Valuable
Does the resource/capability enable the firm to exploit an opportunity or mitigate a threat?
Does the resource/capability help to increase revenues, decrease costs, or some combination of the two?
Rare
Is a resource currently controlled by only a small number of competing firms?
A resource/capability must be rare (scarce) enough that perfect competition does not set in.
Application of the RBV: VRIO Framework
Inimitable (Costly to imitate)
Do firms without a resource face a cost disadvantage in obtaining or developing it?
Competitive advantage can be sustained only if competitors face a cost disadvantage in imitating a resource/capability
Substitutability of a resource or capability is an alternative form of imitability.
When a rival develops a new and better way of providing a firm’s products or services.
Application of the RBV: VRIO Framework
Organization (Exploited by)
Are a firm’s policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources?
Examine the primary and support activities in the value chain.
Using its value chain, a firm that has a competitive advantage has created a wider wedge between customers’ willingness to pay and its opportunity costs associated with providing a product or service
Analyze cost of value chain activities and customers’ willingness to pay relative to the competition
Focus on differences in cost (relative to competitors) of individual value chain activities, not just on total costs
The VRIO Framework
Valuable?
Rare?
Costly to
Imitate?
Exploited by
Organization?
Competitive
Implications
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Disadvantage
Parity
Temporary
Advantage
Sustained
Advantage
Yes
Yes
No
No
No
VRIO – Competitive and Profit Effects
Valuable?
Rare?
Costly to
Imitate?
Exploited by
Organization?
Competitive
Implications
No
Yes
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Disadvantage
Parity
Temporary
Advantage
Sustained
Advantage
Economic
Implications
Below
Normal
Normal
Above
Normal
Above
Normal
No
Yes
Yes
No
No
Example: Apple Inc.
Internal Strengths (Competitive Advantages?):
Resources and Capabilities
Capabilities/core competencies
Innovation/Research & Development (R&D)
Vertical Integration
Dominance in creative industries/education
Resources
Patents
Ease of Use
Strong brand/high perceived quality
Customer loyalty
Proprietary (OS X) operating system
Ecosystem of complementary products
Apple Inc: VRIO Analysis
Exploited by
Valuable Rare Inimitable Organization
Capabilities
Innovation/R&D Yes Yes No Yes
Vertical Integration Yes No Yes Yes
Creative Industries Yes Yes Yes Yes
Resources
Patents Yes Yes Yes Yes
Ease of Use Yes No No Yes
Strong brand Yes No Yes Yes
Customer loyalty Yes Yes Yes No
Proprietary OS Yes Yes Yes No
Ecosystem Yes Yes Yes Yes
Apple Inc: VRIO Analysis (continued)
Competitive Economic Profit
Implications Implications
Capabilities
Innovation (R&D) Temporary Above normal
Vertical Integration Temporary Above normal
Creative Industries Sustainable Above normal
Resources
Patents Sustainable Above normal
Ease of use Parity Normal
Strong brand Temporary Above normal
Customer loyalty Temporary Above normal
Proprietary OS Temporary Above normal
Ecosystem Sustainable Above normal
