CHAPTER

Internal Analysis:
Resources,
Capabilities, and
Activities

McGraw-Hill/Irwin

Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

LO 4-1 Distinguish among a firms 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 firms 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.
4-2

Chapter
Circuit
Case
4 City

From Good to Great to Gone:

A GREAT performer from 1982 2000

World-class logistics & customer responsiveness

4S: service, selection, savings, & satisfaction

6 times better investment than GE under Jack

Welch!

Bankruptcy in fall of 2008!

Outflanked by firms like Best Buy and

Amazon

4-3

Chapter Case 4

Circuit City

What are the key issues in Circuit Citys

demise?
Management distracted by other businesses

Insufficient investments in core competencies

Laid-off 3,000 very experienced sales staff

Response to online retailers inadequate

Best Buy also having problems with this recently

4-4

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 external environment

4-5

EXHIBIT 4.1

Creating Strategic Fit to Leverage Internal Strengths

4-6

Internal Analysis: Link to Superior

Performance
Combination of Resources & Capabilities
Builds core competencies
Competencies drive activities

To transform inputs into goods & services

Activities can produce competitive advantage &

performance
Reinvest profits from superior performance

Hone and upgrade core competencies

4-7

EXHIBIT 4.2 Linking Resources & Capabilities to Firm Performance

4-8

THE RESOURCE-BASED VIEW

Tangible Resources
Visible, physical attributes

Intangible Resources
No physical attributes

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

4-9

EXHIBIT 4.4 Tangible & Intangible Resources

4-10

Two Critical Assumptions in RBV

Resource heterogeneity
Bundles of resources and capabilities differ across firms
Southwest Airlines & Alaska Airlines have different

resources

SWA
Higher employee productivity
Informal organization, pilots help load luggage

Resource immobility
Resources tend to be sticky & dont move easily
Southwest Airlines sustained advantage
Several decades superior performance
Competitors have unsuccessfully imitated SWA model

4-11

RBV Also linked to Human Resources

Firm Resources that can be part of the
competitive advantage.
Physical Capital Resources (plant, equipment,

finances)
Organizational Capital Resources(structure, planning,

controlling, coordinating, and HR systems)

Human Capital (skills, judgment, and intelligence of

employees)
(Barney & Wright, 1998)
112

What is the ultimate quest for the

function of the Human Resources
Department in a firm?
Developing employees who are skilled and
motivated, who can deliver high quality products
and services.
Developing and maintaining the culture of the
organization.
The encouragement of teamwork and trust.
(Barney & Wright, 1998)
1

The VRIO Framework

Valuable
Attractive features
Lower costs (& price)
Higher profits

Honda design & build

engines

Rare
Only a few firms

possess
Toyota lean
manufacturing

Temporary competitive
advantage

Costly to Imitate
Unable to develop or

buy at a reasonable
price
Apple Yes
Crocs No

Organized to Capture
Exploit competitive

potential
Structure
Coordinating systems

Xerox PARC No
Nintendo Wii Yes
4-14

(Barney & Hesterly, 2006)

(Bertsch & Wiseman, 2008)
115

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
4-16

EXHIBIT 4.6 Value Chain: Primary & Support Activities

4-17

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

4-18

EXHIBIT 4.8 Vanguard Groups Activity System 2011

Legend
Core
Support

4-19

Dynamic Capabilities Perspective

A firm can modify its resource base to gain &
sustain a competitive advantage
Advantage is gained from reconfiguring a firms

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
4-20

EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks

4-21

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
Hondas core competency in gas engines took decades to
build

4-22

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

4-23

Cloud Computing for small businesses

Can cloud computing boost competitive
advantage?
Outsource hosting server
Less cost in training staff
Scalable resources
Purchased with operational funds
Competition amongst providers

(Truong, D., 2010)

124

THE SWOT ANALYSIS

Conduct a SWOT after external and internal
analysis completed
SWOT combines external and internal analysis
Internal Strengths and Weaknesses

From VRIO framework

External Opportunities and Threats

From PESTEL or competitive forces analysis (Ch. 3)

Leverage internal strengths to exploit external

opportunities

Achieving such a dynamic fit yields sustained competitive

advantage
4-25

EXHIBIT 4.11

Strategic Questions in the SWOT Analysis

4-26

Healthy Business Annual Check-Up

Annual company-wide SWOT analysis
Should use 360 degree review

Involving employees will strengthen your relationship

Focus on key areas and assign ratings

Prioritize opportunities and threats

Use limited SWOT analysis for specific items

New products
Acquistion
Single business unit

127
(Simoneaux, S. L., & Stroud,
C. L., 2011)

STARBUCKS: Re-creating Its

Uniqueness
Create a Unique Experience
Soft music, comfortable
chairs and sofas.
Wireless hotspot for
working or surfing the net.
Handmade specialty drink.
Fresh ground coffee after
every pot (8 minutes).
STRONG CORE COMPETENCY

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

128

STARBUCKS VRIO FRAMEWORK

VALUABLE
Unique coffee house experience. Work or relax in
coffeehouse ambience. Value chain.

the

RARITY
Who else offers our product? Who else offers our
experience. How unique is our offering?

COST TO IMITATE
Can our service be duplicated? Who can compete?
McDonalds, Tim Hortons, Panera Bread.

ORGANIZED
Can we launch the necessary stores properly? 17,00
stores in 20 years.
129

Why and How did Starbucks lose its

uniqueness?
STRATEGIC MOVES
Opened up 16,000 new
stores across 50
countries.
Expanded Menu:
Desserts, Sandwiches,
Books, Music.
Tried to keep up with their
massive growth. Grinding
of beans.

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

OUTCOMES
Strayed from its core
business.
Forgot what made it
unique.
WHAT SERVICE DO YOU FEEL VERY
GOOD/COMFORTABLE ABOUT?

It changed what its

customers loved about it;
The Experience.

130

Re-creating what made Starbucks

Special
STRATEGIC MOVES
2009: Introduced VIA,
instant coffee.
2010: Baristas would no
longer multitask. Focus
would be more on the
customers experience.

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

CEO Howard Schultz

131

Starbucks ups and downs.

Strategy Activity Systems

Network of interconnected
activities within a firm.
Every decision has an
outcome:
Grinding beans:
Menu:
Retail:

Dynamic Capabilities Perspective

Intangible resource

Can be modified to gain

an advantage.
Starbucks forgot that its
intangible resources were
its core competencies.

Internal environment
changes when external
does.
132

STARBUCKS COFFEE
Stick to YOUR
business.
Different flavors,
blends, styles.
Larger stores.
Upgrade technology

133

Chapter Four Conclusion

A firms Resources and Capabilities and how
they impact Core Competencies and Activities.
Resource Based View.
Tangible vs. Intangible Resources.
Value Rarity Imitate Opportunity Framework.
Value Chain.
Dynamic Strategic Activities vs. Dynamic
Capabilities .
Protect a Competitive Advantage.
SWOT Analysis.
2013 by The McGraw-Hill Companies, Inc. All rights reserved.

134

References
Barney and Hesterly (2006). The VRIO Framework: An Overview. Retrieved from
http://faculty.tlu.edu/fgarza/Applying%20the%20VRIO%20Framework.doc
Barney, J., & Wright, P. (1998). On becoming a strategic partner: The role of human resources in
gaining competitive advantage. Human Resource Management, 37(1),
31-46. Retrieved from
http://search.proquest.com/docview/224323931?accountid=28644
Bertsch, T. & Wiseman, D. (2008). Growth for Tiffany & Co. Journal of the International
Academy for Case Studies 10(1), 83-89. Retrieved from http://
search.proquest.com/docview/216297353?accountid=28644
Simoneaux, S. L., & Stroud, C. L. (2011). BUSINESS BEST PRACTICES: SWOT analysis: The
annual check-up for a business. Journal of Pension Benefits, 18(3), 75-78. Retrieved from
http://search.proquest.com/docview/860007592?accountid=28644
Truong, D. (2010). How cloud computing enhances competitive advantages: A research model for
small businesses. The Business Review, Cambridge, 15(1), 59-65. Retrieved from
http://search.proquest.com/docview/347569664?accountid=28644

135