Internal Analysis: Resources, Capabilities, and Activities
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Transcript of Internal Analysis: Resources, Capabilities, and Activities
4CHAPTER
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Internal Analysis: Resources, Capabilities, and Activities
Part 1 Strategy Analysis
4–2
LO 4-1 Distinguish among a firm’s 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 firm’s 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.4–3
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 Amazon4–4
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 Internal strengths change with the
external environment
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EXHIBIT 4.1 Creating Strategic Fit to Leverage Internal Strengths
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The Role of Strategy in Business is to Generate and Sustain Value via the Linkages Between Position,
Organization, and Resources
Positioning
Organization Resources & Capabilities
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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
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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”
IndividualIndividual OrganizationOrganization
ExplicitExplicit
TacitTacit
InformationFacts
Scientific kn.
DatabasesSystems & procedures
Intellectual property
Skills Organizationalcapabilities
CRAFTENTERPRISES
‘INDUSTRIAL’ ENTERPRISESTypes
ofKnowledge
Typesof
Knowledge
Levels of knowledgeLevels of knowledge
Knowledge Types and Knowledge ConversionKnowledge Types and Knowledge Conversion
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EXHIBIT 4.2 Linking Resources and Capabilities to Firm Performance
EXHIBIT 4.3 Company Examples of Core Competencies & Applications
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Precision Mechanics
FineOptics
Micro-Electronics
35mm SLR cameraCompact fashion cameraEOS autofocus camera
Digital cameraVideo still camera
Plain-paper copierColor copier
Color laser copier Laser copierBasic fax
Laser faxMask aligners
Excimer laser alignersStepper aligners
Inkjet printerLaser printer
Color video printerCalculator
Notebook computer
Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities
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LO 4-1 Distinguish among a firm’s 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 firm’s 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. 4–15
EXHIBIT 4.4 Tangible and Intangible Resources
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Appraising ResourcesAppraising ResourcesRESOURCE CHARACTERISTICS INDICATORS
Financial Borrowing capacity Debt/ Equity ratioInternal funds/ generation Credit rating
Tangible Net cash flowResources Physical Plant and equipment: Market value of
size, location, technology fixed assets.flexibility. Scale of plantsLand and buildings. Alternatives for fixedRaw materials. assets
Technology Patents, copyrights, know how No. of patents owned.R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure.Resources employees R&D staff
Reputation Brands. Customer loyalty. Company Brand equity. Productreputation (with suppliers, customers, price premium.government) Recognition.
Human Training, experience, adaptability, Employee qualifications,Resources commitment and loyability of customers pay rates, turnover.
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
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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
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LO 4-1 Distinguish among a firm’s 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 firm’s 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.4–20
EXHIBIT 4.5 Applying RBV: Decision Tree Competitive Implications
Scarcity
Relevance
Durability
Mobility
Replicability
Property rights
Relative bargainingpower
Embeddedness ofresources
THE EXTENT OF THE COMPETITIVE ADVANTAGE
ESTABLISHED
SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE
APPROPRIABILITY
THE PROFITEARNING POTENTIALOF A RESOURCE OR
CAPABILITY
The Rent-Earning Potential of Resources and Capabilities
The Rent-Earning Potential of Resources and Capabilities
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STRATEGY HIGHLIGHT 4.1 How Nintendo Focused onthe 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…
LO 4-1 Distinguish among a firm’s 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 firm’s 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.4–24
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).
3-4Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
The Value Chain
Adapted from Exhibit 3.1 The Value Chain: Primary and Support Ac tivities
Source: Adapted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter.
General administration
Human resource management
Technology development
Procurement
Inbound logistics
Operations Outbound logistics
Marketing and sales
Service
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EXHIBIT 4.6 Value Chain: Primary & Support Activities
© 1999 Pankaj Ghemawat
Hostess’s Cost Components
0
10
20
30
40
50
60
70
80
Cen
ts p
er u
nit
Profit
Marketing: Promotions
Marketing: Advertising
Outbound logistics
Operations: Manufacturing
Operations: Packaging
Operations: Ingredients
© 1999 Pankaj Ghemawat
Relative Cost Analysis
0
10
20
30
40
50
60
70
80
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Hostess Little Debbie Ontario Baking Savory Pastries
Cen
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nit
Profit
Marketing: Promotions
Operations: Manufacturing
Operations: Packaging
Operations: Ingredients
Marketing: AdvertisingOutbound logistics
Value Chain Analysis
• Outsourcing activities can have the unintended consequence of damaging the firm’s 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.
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Strategic Coherence The Logic of How The Business Fits
Together:
•Southwest Airlines Low Price Short Routes
•No Frills•Point-to-Point•One Aircraft --
Boeing 737•High number of
Aircraft per Route•No Meals•Flexible/ Lower Staffing
•American Airlines Premium Price Short, Long, & Int’l Variety
•Hub & Spoke System•Multiple Aircraft•Low number of
Aircraft per Route•Meals & Service•Higher Staffing
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Southwest Airline’s Activity System
Limitedpassengeramenities
Short-haul,point-to-pointroutes betweenmidsize cities
and secondaryairports
Highaircraft
utilization
Frequent,reliable
departures
Lean, highlyproductiveground andgate crews
Very lowticket prices
No meals
No seatassignments
No baggagetransfers
No connectionswith other
airlines
15-minutegate
turnarounds
Limited useof travelagents
Automaticticketingmachines
Standardizedfleet of 737
aircraft
Flexibleunion
contracts
High levelof employee
stockownership
“Southwest,the low-fare
airline”
Highcompensationof employees
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.
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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.
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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 company’s unique position; Making tradeoffs; Forging a dynamic fit among activities (i.e., strategic coherence). 4–34
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
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EXHIBIT 4.7 Vanguard Group’s Activity System 1997
Legend
Core
Support
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EXHIBIT 4.8 Vanguard Group’s Activity System 2011
Legend
Core
Support
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Dynamic Capabilities Perspective
• A firm can modify its resource base to gain & sustain a competitive advantage Advantage is gained from reconfiguring a firm’s
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
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EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks
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STRATEGY HIGHLIGHT 4.2 IBM’s 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 revolution…then 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
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%
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LO 4-1 Distinguish among a firm’s 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 firm’s 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.4–42
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 Honda’s core competency in gas engines took decades to build
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1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995
Founding ofHonda motor
company
50cc 2-cycle engine
4 cycle engines
405ccmotorcycle
Related products:ground tillers, marineengines, generators,pumps, chainsaws
First product: clip-on engine
for bicycles
The 50ccsuper-cub
N360 minicar
1000ccGoldwingtouring
motor cycle
Acura Cardivision
The Evolution of Honda Motor CompanyThe Evolution of Honda Motor Company
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
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EXHIBIT 4.11 Strategic Questions in the SWOT Analysis
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