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Chapter 4
Internal Analysis:
Resources, Capabilities,
and Core Competencies
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The AFI Strategy Framework
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Learning Objectives, 1 through 8
1. Explain how shifting from an external to internal analysis of a firm can
reveal why and how internal firm differences are the root of
competitive advantage.
2. Differentiate among a firm’s core competencies, resources,
capabilities, and activities.
3. Compare and contrast tangible and intangible resources.
4. Evaluate the two critical assumptions about the nature of resources
in the resource-based view.
5. Apply the VRIO framework to assess the competitive implications of
a firm’s resources.
6. Evaluate different conditions that allow a firm to sustain a competitive
advantage.
7. Outline how dynamic capabilities can enable a firm to sustain a
competitive advantage.
8. Apply a value chain analysis to understand which of the firm’s
activities in the process of transforming inputs into outputs generate
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Learning Objectives, 9 and 10
9. Identify competitive advantage as residing in a network
of distinct activities.
10. Conduct a SWOT analysis to generate insights from
external and internal analysis and derive strategic
implications.
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Shifting from External to Internal Analysis of a Firm
To formulate a strategy that leads to a competitive
advantage,
• Resources and capabilities must combine to form core
competencies.
• Firms should consciously work to identify these.
Evaluation should occur in the context of PESTEL.
Evaluation should occur in the context of
Competition.
• Use Porter’s Five Forces.
• Use the Strategic Group Map.
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Inside the Firm: Competitive Advantage Exhibit 4.2
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Internal Firm Differences Lead to Competitive Advantage
Strengths should be
dynamic.
• Adjust along with the
external environment.
Strategically fit within
the environment:
• Resources.
• Capabilities.
• Competencies
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What Are Core Competencies?
Unique strengths.
Embedded deep within a firm.
Allows the firm to differentiate from rivals.
• Results in creating higher value for the customer or
• Results in products and services offered at lower cost.
Expressed through structures, processes, routines.
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Examples of Core Competencies
Five Guys
• Offers highest quality ingredients, wide range of free
toppings, simple menu.
• Chose not to have drive throughs or an expanded menu.
Beats Electronics
• Perception of coolness marketing.
Tesla
• Engineering expertise in designing battery powered motors
and power trains.
Netflix
• Creates proprietary algorithms-based on individual customer
preferences.
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Links to Competitive Advantage and Superior Firm Performance
Exhibit 4.4
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Resources, Capabilities and Activities
Help organizations develop core competencies.
Resources:
• Any assets that a firm can draw on.
• Examples: cash, buildings, machinery, or intellectual
property.
Capabilities:
• Organizational and managerial skills.
• Examples: structure, routines, and culture.
Activities:
• Distinct and fine-grained business processes (order-
taking, invoicing, etc.).
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The Resource Based View
This model aids in identifying core competencies.
• Resources are key to superior firm performance.
Resource:
• Assets, capabilities, and competencies.
Resources fall into two categories:
1. Tangible resources have physical attributes and
are visible.
2. Intangible resources do not have physical
attributes and are invisible.
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Tangible and Intangible Resources
Exhibit 4.5
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images.
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Two Critical Assumptions of the RBV
Resource
Heterogeneity.
• A firm is a unique bundle
of resources, capabilities
and competencies.
• These bundles differ
across firms.
Resource Immobility.
• Resources are “sticky,”
and don’t move easily
from firm to firm.
• Resources are difficult to
replicate.
• Resources can last for a
long time.
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The VRIO Framework
VRIO is a tool for evaluating firm resource
endowments.
• What resource attributes underpin competitive
advantage?
To be the basis of a competitive advantage, a
resource must be:
• Valuable.
• Rare.
• Costly to Imitate.
• Organized to capture the value of the resource.
Jay Barney was a pioneer of this framework.
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The VRIO Decision Tree
Exhibit 4.6
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A Resource Is…
Valuable if:
• It helps to exploit an opportunity or offset a threat.
Rare if:
• Only one or a few firms possess it.
Costly to Imitate if:
• Competitors can’t develop the resource for a reasonable
price.
• Imitation and substitution are risks.
The firm is organization to capture value through:
• Effective internal organizational structure and
coordinating systems.
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Isolating Mechanisms
Barriers to imitation.
Helps sustain a competitive advantage.
• Better expectations of future resource value.
• Path dependence: past decisions limit current options.
• Causal ambiguity: cause and effect are vague.
• Social complexity: social and business systems interact.
• Intellectual property (IP) protection.
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Core Rigidity
A former core competency turned into a liability.
• Result of an environmental change.
• No longer fits the external environment.
Turns a resource from an asset to a liability.
• Causes loss of competitive advantage.
• The firm may even go out of business.
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Dynamic Capabilities
A firm’s ability to:
• Adapt resources over
time.
• Create, deploy, modify,
reconfigure, upgrade,
leverage.
The goal:
• Create long-term
competitive advantage.
• Develop resources,
capabilities and
competencies.
• Create a strategic fit with
the firm’s environment.
• Change in a dynamic
fashion.
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The Dynamic Capabilities Perspective
A model that emphasizes a firm’s ability to:
• Modify and leverage its resource base.
• Gain and sustain competitive advantage.
• Respond to a constantly changing environment.
Dynamic markets are due to:
• Technological change, deregulation, globalization,
demographic shifts.
Resources are created, deployed, modified,
reconfigured, or upgraded.
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Resource Stocks and Flows
A way to think about developing dynamic
capabilities.
Resource stocks:
• The firm’s current level of intangible resources.
• New product development, engineering expertise,
innovation capability.
Resource flows:
• The firm’s level of investments to maintain or build a
resource.
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The Bathtub Metaphor
Exhibit 4.7
SOURCE: Figure based on metaphor used in I. Dierickx and K. Cool (1989), “Asset stock accumulation and sustainability of competitive
advantage,” Management Science 35: 1504–1513.
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The Value Chain
Internal activities a firm engages in when
transforming inputs into outputs.
• Through primary and support activities.
Each activity adds incremental value.
• Raw materials → components → products
Each activity also adds incremental costs.
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A Generic Value Chain Exhibit 4.8
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Primary Activities
Firm activities add value directly.
Transform inputs into outputs.
Focused on moving from raw materials, through
production phases, to sales and marketing, and
finally customer service.
• Supply chain management.
• Operations.
• Distribution.
• Marketing and sales.
• After-sales service.
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Support Activities
Firm activities that add value indirectly.
Necessary to sustain primary activities.
• Research and development (R&D).
• Information systems.
• Human resources.
• Accounting and finance.
• Firm infrastructure including processes, policies, and
procedures.
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Strategic Activity Systems
A network of
interconnected
activities:
• Can be the foundation of
competitive advantage.
• Socially complex and
causally ambiguous.
• Enhance likelihood of
sustained competitive
advantage.
Characteristics:
• One or more elements
can be easily observed.
• How activities are
managed is not as easily
observed.
• Difficult to imitate.
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Strategic Activity Systems Must Evolve
External environment changes.
Competitors develop their activity systems.
How activity systems are updated:
• Add new activities.
• Remove activities that are no longer relevant.
• Upgrade activities that have become stale or somewhat
obsolete.
This reconfigures the entire strategic activity
system.
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The Vanguard Group’s Activity System⏤1997
Exhibit 4.9 Source: Adapted from N. Siggelkow (2002), “Evolution toward fit,” Administrative Science Quarterly 47: 146.
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The Vanguard Group’s Activity System⏤2019
Exhibit 4.10 Source: Adapted from N. Siggelkow (2002), “Evolution toward fit,” Administrative Science Quarterly 47: 146. Access the text alternative for slide images.
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