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Key Points:Chapter 3: Internal Analysis

• Understand the following key concepts:• Resources, Capabilities, Core Competencies,

Sustainable Competitive Advantage, Strategic Competitiveness

• Understand how to determine if a capability is a core competency

• Four criteria of sustainable advantage• rare, valuable, costly to imitate, nonsubstitutable

• Value chain analysis

• SWOT Analysis

• Financial Analysis

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Internal Analysis

• Resource-Based Model: a firm possesses heterogeneous resources, capabilities, and core competencies that allow it to create a unique market position

• Internal analysis should be used in concert with an analysis of a firm’s external environment to develop a firm’s strategic intent and strategic mission• Internal analysis, external analysis, strategic intent, and

strategic mission are combined to formulate and implement strategy

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Figure 3.2Components of

Internal Analysis

Four Criteriaof SustainableAdvantages

ValueChain

Analysis

Resources * Tangible * Intangible

Capabilities Teams of resources

Core Competencies

DiscoveringCore

Competencies

CompetitiveAdvantage

StrategicCompetitiveness Above-average returns

• Rare• Valuable• Costly to Imitate• Nonsubstitutable

• What to do in-house• What to outsource

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Core Competencies

• What a firm does that distinguishes it from its competitors and is, therefore, strategically valuable

• An integration of capabilities• Examples: customer service, engine technology• Not a product or a single skill• Emerge over time–may take 5-10 years to develop• Become more valuable with use• Often learning and knowledge based

• Firms should focus on 3-4 core competencies

• Can become core rigidities if they are no longer competitively relevant

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Key Questions for Managers

• How do we assemble bundles of resources, capabilities, and competencies to create value for customers?

• Will environmental changes make our core competencies obsolete?

• Are substitutes available for our core competencies?

• Are our core competencies easily imitated?

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• Rare

• Valuable: help a firm exploit opportunities or neutralize threats

• Costly to Imitate• Unique historical conditions

• Casual ambiguity

• Social complexity

• Nonsubstitutable: no strategic equivalent (cannot achieve same outcome or strategy using different capabilities)

Four Criteria of Sustainable Advantages

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Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Valuable RareCostly to Imitate

Nonsub-stitutable

Competitive Consequences

Performance Implications

AboveAverageReturns

NO NO NO NO

YES NO NO YES/NO

YES NO YES/NOYES

YESYES YESYES

CompetitiveDisadvantage

Below AverageReturns

CompetitiveParity

AverageReturns

TemporaryCompetitiveAdvantage

Aver./Above AverageReturns

SustainableCompetitiveAdvantage

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Value Chain Analysis: Figure 3.6

SupportActivities

Primary Activities

Technological Development

Human Resource Management

Firm Infrastructure

Procurement

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Log

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Ser

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MARGIN

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• Identify which resources and capabilities add value

• Goal: add as much value as cheaply as possible

• To be a source of competitive advantage, a firm must either perform an activity:

• In a manner that is superior to other firms

• That other firms cannot perform

Value Chain Analysis

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STRENGTH: something a firm is good at doing or a characteristic that gives it an important capability (skills, expertise, resource, capability, or achievement)• Determine which strengths are most important

in determining performance, in competing successfully, and in forming a powerful strategy.

• Form the basis for competitive advantage and the cornerstone of strategy

SWOT Analysis

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WEAKNESS: something a company lacks or does poorly (in comparison to others) or a condition that puts it at a disadvantage

• Determine which weaknesses may be fatal, which are inconsequential, and which can be easily remedied

• Strategy must take into account weaknesses

SWOT Analysis

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OPPORTUNITY: something in the environment that may be exploited to the firm’s advantage

• Range from very attractive to marginally attractive

• Most relevant ones are those that offer: • avenues for profitable growth

• most potential for competitive advantage

• firm has the financial resources to pursue

SWOT Analysis

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THREAT: something in the environment that has the potential to reduce a firm’s performance or destroy its competitive advantage

SWOT Analysis

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SWOT Analysis

• Strategy must match firm’s situation

• More than just making lists; must evaluate and draw conclusions

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• Is the industry attractive?

• Where do the most important threats and opportunities exist?

• How attractive is the firm’s situation?

• What strategic actions need to be taken?

SWOT Questions

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• What opportunities does the company have the skills and resources to pursue with a real chance of success? Which opportunities are “best” from the company’s standpoint?

• What external threats should management be worried most about and what strategic moves should be considered to counter these threats?

SWOT Questions