Roth5_Ch4_W20_Internal.pptxChapter 4
Internal Analysis: Resources, Capabilities, and Core Competencies
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The AFI Strategy Framework
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Learning Objectives
Differentiate among a firm’s core competencies, resources, capabilities, and activities.
Compare and contrast tangible and intangible resources.
Evaluate the two critical assumptions about the nature of resources in the resource-based view.
Apply the VRIO framework to assess the competitive implications of a firm’s resources.
Evaluate different conditions that allow a firm to sustain a competitive advantage.
Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.
Apply a value chain analysis to understand which of the firm’s activities in the process of transforming inputs into outputs generate differentiation and which drive costs.
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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Competitive Advantage
Gaining & Sustaining
CORE COMPETENCIES
CAPABILITIES
Strategically Integrated Resources
Embedded Strengths Enabling Value-Creation
RESOURCES
Assets Leveraged for Strategy Formulation/ Implementation
What Are Core Competencies?
Unique strengths…embedded deep within a firm…that 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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Take Honda as an example of a company with a clearly defined core competency. Its life began with a small two-cycle motorbike engine. Through continuous learning over several decades, and often from lessons learned from failure, Honda built the core competency to design and manufacture small but powerful and highly reliable engines for which it now is famous. This core competency results from superior engineering know-how and skills carefully nurtured and honed over several decades. Honda’s business model is to find a place to put its engines. Today, Honda engines can be found everywhere: in cars, SUVs, vans, trucks, motorcycles, ATVs, boats, generators, snow blowers, lawn mowers and other yard equipment, and even small airplanes. Due to their superior performance, Honda engines have been the most popular in the Indy Racing League (IRL) since 2006. Not coincidentally, this was also the first year in its long history that the Indy 500 was run without a single engine problem.
Instructors:
The digital companion to this book McGraw-Hill Connect has an application exercise on this section of the textbook. It builds student confidence on the core competencies (LO 4-1).
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Examples of Core Competencies
Offers highest quality ingredients, wide range of free toppings, simple menu.
Chose not to have drive throughs or an expanded menu.
Perception of coolness marketing.
Engineering expertise in designing battery powered motors and power trains.
Creates proprietary algorithms-based on individual customer preferences.
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Looking Inside the Firm for Core Competencies
McDonald’s core competency is providing convenience when people need and want to eat fast food at prices that are competitive and provide best value for the customer's money.
McDonald’s competitive advantages:
is its focus on consistency of quality and production of food
their brand is recognized world wide
4-‹#›
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Looking Inside the Firm for Core Competencies
4-‹#›
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Would you buy a steak from McDonalds?
Why not?
What would it take for you to try it? Anything?
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Looking Inside the Firm for Core Competencies
Stay in your swim lanes!
4-‹#›
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Would you buy a car designed and built by McDonalds?
Why not?
What would it take for you to try it? Anything?
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Resources, Capabilities and Activities
Resources:
Any assets that a firm can draw on
Ex: cash, buildings, machinery, or
Intellectual property.
Capabilities:
Organizational and managerial skills
Ex: structure, routines, and culture.
Activities:
Distinct and fine-grained business processes
Ex. Order taking, invoicing, delivery
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Resources: Any assets that a firm can draw on when formulating and implementing a strategy.
Capabilities: Organizational and managerial skills necessary to orchestrate a diverse set of resources and deploy them strategically.
Activities: Distinct and fine-grained business processes that enable firms to add incremental value by transforming inputs into goods and services. Examples include: order taking, the physical delivery of products, or invoicing customers.
Key point: core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. And second, in analyzing a company’s success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as superior products or services. While these are the outward manifestation of core competencies, what is even more important is to understand the invisible part of core competencies.
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The Resource Based View
Resources are key to superior firm performance
Aids in identifying core competencies
Resources fall into two categories:
Tangible-Resources that have physical attributes and are visible
Intangible-Resources that do not have physical attributes and invisible
Apple
Tangible Resource Value: $15 Billion
Intangible Resource Value: $180 Billion
Alphabet/Google
Tangible Resource Value: $59 Billion
Intangible Resource Value: $310 Billion
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Competitive advantage is more likely to develop from intangible rather than tangible resources
In the resource-based view of the firm, a resource includes any assets as well as any capabilities and competencies that a firm can draw upon when formulating and implementing strategy.
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Tangible and Intangible Resources
Exhibit 4.4
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Google’s headquarters provides examples of both. The Googleplex is a piece of land with a futuristic building, and thus a tangible resource. The location of the company in the heart of Silicon Valley is an intangible resource that provides access to a valuable network of contacts and gives the company several benefits. It allows Google to tap into a large and computer-savvy work force and access graduates and knowledge spillovers from a large number of universities, which adds to Google’s technical and managerial capabilities.9 Another benefit stems from Silicon Valley’s designation as having the largest concentration of venture capital in the United States. This proximity benefits Google because venture capitalists tend to prefer local investments to ensure closer monitoring.
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Two Critical Assumptions of the RBV
Resource Heterogeneity (diverse in content/character)
Bundles of resources, core competencies and capabilities differ across firms
Resource Immobility
Resources tend to be “sticky” and do not move easily from firm to firm
Resources are difficult to replicate and can last for a long time
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Resource Heterogenayity: SWA vs. Alaska: Both compete as regional airlines, (low cost, point-to point), but they draw on different resource bundles. At SWA, everyone pitches in. (pilots load luggage, flight attendants clean cabin, all about leaving on time and15-min turnaround. This leads to higher productivity. NO UNIONS, (Unions impact cultures). This allows SWA to keep its planes flying for longer and lowers its cost structure, savings that SWA passes on to passengers in lower ticket prices. Alaska differentiates in other areas.
Resource Immobility: Continental and Delta both attempted to copy SWA, with Continental Lite and Song airline offerings, respectively. Neither airline, however, was able to successfully imitate the resource bundles and firm capabilities that make SWA unique.
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The VRIO Framework
Tool for evaluating a firm’s resource endowments
To be the basis of a competitive advantage, resources must be:
Valuable,
Rare,
Costly to Imitate
Organized to capture the value of the resource*
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*Of particular note is that the fourth characteristic is actually about the organization or firm itself rather than its resources.
According to this model, a firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria.
Tiffany=elegant jewelry design and craftsmanship delivered though a superior customer experience.
VRI for competitors, (Blue box protected, but not the name Tiffany in design)
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The VRIO Decision Tree
Exhibit 4.5
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If the answer is “yes” four times to the attributes listed in the decision tree, only then is the resource in question a core competency that underpins a firm’s sustainable competitive advantage.
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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.
The firm is organization to capture value through:
Effective internal organizational structure and coordinating systems.
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Valuable: Five Guys' superior ability to deliver fresh, customized hamburgers as well as hand-cut fries using the highest-quality ingredients is certainly valuable because it enables the firm to command a premium price due to its perceived higher value creation. Although Five Guys excels at driving up the perceived value of its offerings, it also needs to control costs to ensure that this valuable resource can lay the foundation for a competitive advantage.
Rare: When Five Guys was founded in 1986, its superior ability to deliver made-to-order hamburgers from the freshest ingredients and hand-cut fries made from the best potatoes was certainly rare, as was its restaurant concept: It was neither a fast food place nor a traditional sit-down establishment. It offered a limited menu, no drive-through option, and a self-service format. This remains the case and Five Guys has managed to charge premium prices for its product—prices that are multiple times higher than that of its fast food competitors. Today, restaurant models like Five Guys are called fast-casual restaurants, a term that didn't come into the dining vernacular until the 2000s, despite well-known Five Guys' competitors such as Chipotle Mexican Grill (founded in 1993) coming onto the scene much earlier.
Costly to imitate: Five Guys spent almost 20 years refining, honing, upgrading, and eventually perfecting its core competency before franchising nationally. This in turn enabled Five Guys to more easily duplicate its core competency in different geographic areas as it franchised throughout the United States and beyond.
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Isolating Mechanisms
Barriers to imitation - Prevents rivals from competing away firm advantage…
Better expectations of future resource value
Real Estate, Nike with young athletes
Path dependence- 80% of carpets made in Dalton
Causal ambiguity - Apple
Social complexity - Zappos
Intellectual property (IP) protection
Patents, designs, copyrights, trademarks, trade secrets
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BETTER EXPECTATIONS OF FUTURE RESOURCE VALUE. Sometimes firms can acquire resources at a low cost, which lays the foundation for a competitive advantage later when expectations about the future of the resource turn out to be more accurate. Example: obtain real estate/land at a low cost.
PATH DEPENDENCE: describes a process in which the options one faces in a current situation are limited by decisions made in the past. Ex; 80% of U.S. carpets are made in Dalton, GA.
CAUSAL AMBIGUITY. Causal ambiguity describes a situation in which the cause and effect of a phenomenon are not readily apparent. Ex: it is difficult to determine the exact root cause of Apple’s success
SOCIAL COMPLEXITY: describes situations where different social & business systems interact. Ex: the culture of Zappo’s leads to their excellence in cust. service
INTELLECTUAL PROPERTY PROTECTION. Intellectual property (IP) protection is a critical intangible resource that can also help sustain a competitive advance. Examples: patents, designs, copyrights, trademarks, trade secrets.
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Core Rigidity
A former core competency turned into a liability
Result of an environment change
No longer fits in the external environment
Causes loss of competitive advantage
The firm may even go out of business.
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Causes loss of competitive advantage…The firm may even go out of business.
Once a market leader, Circuit City’s core competencies were in efficient logistics and superior customer service. But the firm neglected to upgrade and hone them over time. As a consequence, Circuit City was outflanked by Best Buy and online retailer Amazon, and the company went bankrupt. Best Buy encountered the same difficulties competing against Amazon just a few years later. Core competencies might form the basis for a competitive advantage at one point, but as the environment changes, the very same core competencies might later turn into core rigidities, retarding the firm’s ability to change.
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Dynamic Capabilities
A firm’s ability to:
Adapt resources over time
Create, deploy, modify, reconfigure, upgrade, leverage
In consideration of the external environment
Dynamic markets are due to:
Technological change, deregulation, globalization, demographic shifts.
Resources are created, deployed, modified, reconfigured, or upgraded.
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Apple’s dynamic capabilities allowed it to redefine the markets for mobile devices and computing, in particular in music, smartphones, and media content. For the portable music market through its iPod and iTunes store, Apple generated environmental change to which Sony and others had to respond. With its iPhone, Apple redefined the market for smartphones, again creating environmental change to which competitors such as Samsung, BlackBerry, Google (with its Motorola Mobility unit), or Microsoft (with its Nokia unit) must respond. Apple’s introduction of the iPad redefined the media and tablet computing market, forcing competitors such as Amazon and Microsoft to respond. With the introduction of the Apple Watch it is attempting to shape the market for computer wearables in its favor.
iPod was incredible breakthru, but Apple has evolved it into obsolescence…creative destruction.
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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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Five Guys’ core competency is to offer a simple menu of fresh, high-quality burgers and fries and a great customer experience. To command a premium price for these products and service, Five Guys needs to engage in number of distinct activities. Though it may seem simple, the ability to implement diverse sets of distinct activities every day across multiple geographic locations is no small feat. Examples: sourcing ingredients, store setup, quality of toppings and condiments offered, development of processes prior to franchising.
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A Generic Value Chain
Exhibit 4.8
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Retail chain American Eagle Outfitters, for example, needs to identify suitable store locations, either build or rent stores, purchase goods and supplies, manage distribution and store inventories, operate stores both in the brick-and-mortar world and online, hire and motivate a sales force, create payment and IT systems or partner with vendors, engage in promotions, and ensure after-sales services including returns.
A maker of semiconductor chips such as Intel, on the other hand, needs to engage in R&D, design and engineer semiconductor chips and their production processes, purchase silicon and other ingredients, set up and staff chip fabrication plants, control quality and throughput, engage in marketing and sales, and provide after-sales customer support.
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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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SWOT Analysis
Synthesizes internal analysis of the company’s strengths and weaknesses with those from an analysis of external opportunities and threats
SWOT = VRIO framework + PESTEL + Porter’s five forces
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Draw on board
A SWOT analysis is still one of the most widely used tools of strategy in industry.
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SWOT Strategic Questions
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SO- how to manage strengths to take advantage of opportunities?
ST- how to use strengths to reduce likelihood and impact of threats?
WO-how to overcome weaknesses that prevent firm from taking advantage of opportunities?
WT-how to overcome weaknesses that make threats a reality?
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SWOT limitations
SWOT analysis is a widely used management tool but…
…a strength can also be a weakness…and an opportunity can also be a threat.
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The argument is that identifying SWOT is arbitrary. Is LeBron James a strength or a weakness to Cleveland Cavaliers? S=one of the most accomplished/acclaimed players. W=older and my intimidate younger players.
To be an effective management tool, the strategist must conduct a thorough external and internal analysis and then use as part of the solution to create a set of strategic options.
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Areas of Strength and Weaknesses
Financial Brand
Market Share Distribution
Growth Quality
Consistency Products
Service Geography
Talent R&D
Technology Consistency
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SWOT Analysis of Wireless Carriers
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