CHAPTER 4

Internal Analysis: Resources,

Capabilities, and Core
Competencies

INTERNAL ANALYSIS
An internal analysis:
Focuses on assessing a firms resources,
capabilities, activities, and core competencies
Reveals a firms key strengths and weakness

Managers can formulate strategies to

leverage strengths and avoid relying on
weaknesses

RESOURCE BASED VIEW (RBV)

RBV contends that competitive advantage
is derived from a fi rms resources and
capabilities
A firms core competencies are based on the
interplay between its resources and its
capabilities

Two critical assumptions

Resource Heterogeneity
Resources and capabilities differ across firms

Resource Immobility
Resources tend to be sticky

DEFINITIONS
Core Competencies
Strengths that are fundamental to a firms
strategy and performance

Capabilities
A firms capacity to combine and deploy its
resources to achieve a desired objective

Resources
Assets that a firm can draw on when
formulating and implementing a strategy

EXAMPLES OF RESOURCES:
TANGIBLE AND INTANGIBLE
Two types of fi rm
resources:
Tangible resources
Easy to identify from
balance sheet

Intangible resources
Undervalued on
financial statements
Brands and intellectual
property are particularly
undervalued

DIFFERENCE BETWEEN RESOURCES

AND CAPABILITIES
Resources are the things the fi rm has
Capabilities are the processes and
procedures the fi rm does with those things
Examples
Southwest Airlines
Airplanes- Resource
Processes to effi ciently use airplanes- Capability

Coke
Brand name- Resource
Processes to exploit brand name- Capability

RESOURCES AND CAPABILITIES AS A

SOURCE OF COMPETITIVE
ADVANTAGE
To be a source of competitive advantage a
resource or capability must be:
Valuable
Rare
Imitable
Organized to capture value

VRIO FRAMEWORK

CRITICAL VS.
SOURCE OF COMPETITIVE
ADVANTAGE
Many critical resources and capabilities
are not sources of competitive advantage
To compete in airline industry a firm must
own airplanes
All firms own airplanes so they are not a
source of competitive advantage

ISOLATING MECHANISMS AS
BARRIERS TO IMITATION
Barriers to imitation are the KEY to
sustainable competitive advantage
Isolating mechanisms prevent imitation
Causal ambiguity
Cause of success or failure is not apparent

Complexity
Two or more systems interact creating many
possibilities

Path dependence
Current alternatives are limited by past decisions

Time compression
Some resources/capabilities can only be acquired
over time

VRIO ANALYSIS
Use the VRIO framework to analyze a
fi rms resources and capabilities
Do not try to list only those resources and
capabilities that you think lead to a
competitive advantage!

PUTTING IT ALL TOGETHER: SWOT

ANALYSIS
Synthesizes:
Internal analysis
Firms internal strengths (S) & weaknesses (W)

External analysis
Firms external opportunities (O) & threats (T)

SWOT = VRIO + PEST + Porters Five Forces

STRATEGIC IMPLICATIONS:
SWOT
Key strategic decision
How do we most effectively utilize scarce
resources?

SWOT analysis
How do we exploit our key strengths?
What do we do about our weaknesses?
Outsourcing is generally the best strategy