Post on 11-Nov-2014
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What Does Internal Analysis Tell Us?
Internal analysis provides a comparative look at a firm’s capabilities
• what are the firm’s strengths?
• what are the firm’s weaknesses?
• how do these strengths & weaknesses compareto competitors?
Why Does Internal Analysis Matter?
• establish strategies that will exploit any sourcesof competitive advantage
• determine if its resources and capabilities arelikely sources of competitive advantage
Internal analysis helps a firm:
The Theory Behind Internal Analysis
The Resource-Based View
• Developed to answer the question: Why do some firms achieve better economic performancethan others?
• assumes that a firm’s resources and capabilitiesare the primary drivers of competitive advantageand economic performance
• Used to help firms achieve competitive advantageand superior economic performance
The Resource-Based View
Resources and Capabilities
Resources:
• tangible and intangible assets of a firm» tangible: factories, products intangible: reputation
• used to conceive of and implement strategies
Capabilities:
• a subset of resources that enable a firm totake full advantage of other resources» marketing skill, cooperative relationships
The Resource-Based View
Resources and Capabilities
Firm Assets:
Machinery
Collective Product Design Skill
Recruiting Skill
Engineering Skill of Individuals
Mineral Deposits
Are these resourcesor capabilities?
?
?
?
?
?
The Resource-Based View
Four Categories of Resources
• Financial (cash, retained earnings)
• Physical (plant & equipment, geographic location)
• Human (skills & abilities of individuals)
• Organizational (reporting structures, relationships)
The Resource-Based View
Two Critical Assumptions of the RBV
• Resource Heterogeneity
» different firms may have different resources
• Resource Immobility
» it may be costly for firms without certainresources to acquire or develop them
» some resources may not spread from firm tofirm easily
The Resource-Based View
• heterogeneity of resources typically occurs as the result of ‘bundling’ the resources and capabilitiesof a firm (bundles of HR practices, p. 90)
Resource Heterogeneity
• managers of a firm could take resources that seemhomogeneous and ‘bundle’ them to createheterogeneous combinations
• competitive advantage typically stems from severalresources and capabilities ‘bundled’ together
Resource-Based View (RBV)
1. RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles
2. The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources
3. Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages
Value Chain Analysis (VCA)
• The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value
• Value chain analysis (VCA) attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value
• VCA takes a process point of view
The Value Chain
Conducting a VCA
1. Identify activities2. Allocate costs• VCA proponents hold that the
activity-based VCA approach would provide a more meaningful analysis of the procurement function’s costs and consequent value added than the traditional cost accounting approach
Traditional Cost Accounting VS Activity Based Cost Accounting
Value Chain Analysis (VCA)
• It is important to note that existing financial management and accounting systems in many firms are not set up to easily provide activity-based cost breakdowns
• Identify the activities that differentiate the firm
• Examine the value chain
The Internal Analysis Tool
The VRIO Framework
Four Important Questions:
• Value
• Rarity
• Imitability
• Organization
The VRIO Framework
If a firm has resources that are:
• valuable,
• rare, and
• costly to imitate, and…
• the firm is organized to exploit these resources,
then the firm can expect to enjoy a sustainedcompetitive advantage.
The VRIO Framework
• a resource or bundle of resources is subjected toeach question to determine the competitiveimplication of the resource
Applying the Tool
• each question is considered in a comparativesense (competitive environment)
Applying the VRIO Framework
The Question of Value
• in theory: Does the resource enable the firmto exploit an external opportunity or neutralizean external threat?
• the practical: Does the resource result in anincrease in revenues, a decrease in costs, orsome combination of the two? (Levi’s reputationallows it to charge a premium for its Docker’s pants)
Applying the VRIO Framework
The Question of Rarity
• a resource must be rare enough that perfect competition has not set in
• if a resource is not rare, then perfect competitiondynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)
• thus, there may be other firms that possess theresource, but still few enough that there is scarcity (several pharmaceuticals sell cholesterol-loweringdrugs, but the drugs are still scarce—look at prices)
Applying the VRIO Framework
Valuable and Rare
If a firm’s resources are: The firm can expect:
Not Valuable Competitive Disadvantage
Valuable, but Not Rare Competitive Parity
Valuable and Rare Competitive Advantage(at least temporarily)
Applying the VRIO Framework
The Question of Imitability
• the temporary competitive advantage of valuableand rare resources can be sustained only if competitors face a cost disadvantage in imitatingthe resource
» intangible resources are usually morecostly to imitate than tangible resources(Harley-Davidson’s styles may be easilyimitated, but its reputation cannot)
Applying the VRIO Framework
The Question of Imitability
• if there are high costs of imitation, then the firmmay enjoy a period of sustained competitiveadvantage
» a sustained competitive advantage will lastonly until a duplicate or substitute emerges
if a firm has a competitive advantage, otherswill attempt to imitate it (Razor scooterswere a big hit and others quickly imitated them)
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Unique Historical Conditions (Caterpillar)
• first mover advantages
• path dependence
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Causal Ambiguity (Southwest Airlines – HR)
• causal links between resources and competitive advantage may not be understood
• bundles of resources fog these causallinks
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Social Complexity (WordPerfect)
• the social relationships entailed in resources may be so complex thatmanagers cannot really manage themor replicate them
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Patents
• patents may be a two-edged sword
• offer a period of protection if the firm isable to defend its patent rights
• required disclosure may actually decreasethe cost of imitation, and the timing
Applying the VRIO Framework
Value, Rarity, & Imitability
If a firm’s resources are: The firm can expect:
Valuable, Rare, butnot Costly to Imitate
TemporaryCompetitive Advantage
Valuable, Rare, and Costly to Imitate
SustainedCompetitive Advantage
(if Organized appropriately)
Applying the VRIO Framework
The Question of Organization• a firm’s structure and control mechanisms
must be aligned so as to give people abilityand incentive to exploit the firm’s resources
• examples: formal and informal reporting structures,management controls, compensation policies,relationships, etc.
• these structure and control mechanisms complementother firm resources—taken together, they can help a firm achieve sustained competitive advantage(3M Company)
The VRIO Framework
Valuable? Rare?Costly toImitate?
Exploited byOrganization?
CompetitiveImplications
No
Yes
Yes
Yes
Yes
Yes Yes Yes
No
No
No Disadvantage
Parity
TemporaryAdvantage
SustainedAdvantage
The VRIO Framework
Valuable? Rare?Costly toImitate?
Exploited byOrganization?
CompetitiveImplications
No
Yes
Yes
Yes
Yes
Yes Yes Yes
No
No
No Disadvantage
Parity
TemporaryAdvantage
SustainedAdvantage
EconomicImplications
BelowNormal
Normal
AboveNormal
AboveNormal
Entrepreneurial and InternationalApplication of the VRIO Framework
The Logic Remains the Same
• small firms and start-ups can apply the VRIOframework to their resources and capabilities
» competitive advantage vis-à-vis largerfirms can often be identified
recognizing if and why larger firmsface high costs of imitation can becritical to small firm success
Entrepreneurial and InternationalApplication of the VRIO FrameworkThe International Context
Two Reasons for International Expansion:
1) to exploit current resource and capabilityadvantages in a new market
2) to develop new resources and capabilities ina foreign market
Entrepreneurial and InternationalApplication of the VRIO FrameworkThe International Context
Critical Caveat:
• resources and capabilities that generatean advantage in one market may or maynot generate an advantage in a new market
Firms should re-apply the VRIO frameworkwhen entering new markets!!
Competitive Dynamics of Resource Imitation
Competitive Dynamics:
• the strategic decisions and actions of firms inresponse to the strategic decisions and actionsof other firms
Firm A(strategy decisionslead to competitive
advantage)
Firm B’s Possible Responses
No Response
Change Tactics
Change Strategy
Competitive Dynamics
• the other firm is serving a different market
A firm may decide to take no action because:
• a response may hurt its own competitive advantage
• it does not have the resources and capabilitiesto mount an effective response
• it wants to reduce or manage rivalry in themarket through tacit collusion
“No Action” Response (Rolex Casio)
Competitive Dynamics
“Change” Responses
Tactics (Tide) Strategy (Monsanto)
• specific actions
» tweaking productcharacteristics
• usually imitated soquickly that there isno advantage
• a ‘leap frog’ movemay create advantage
• a fundamental changein a firm’s theory
• may be necessary if current strategybecomes obsolete
• a mimetic change mayachieve parity, but notadvantage
SWOT Components• A strength is a resource or capability controlled by or
available to a firm that gives it an advantage relative to its competitors in meeting the needs of the customers it serves
• A weakness is a limitation or deficiency in one or more of a firm’s resources or capabilities relative to its competitors that create a disadvantage in effectively meeting customer needs
• An opportunity is a major unfavorable situation in a firm’s environment
• A threat is a major unfavorable situation in a firm’s environment