Strategic Management - Internal Analysis: Resources, Capabilities, and Core Competencies

Chapter 4: Internal Analysis - Resources, Capabilities, and Core Competencies

Learning Objectives

• Explain how shifting from an external to internal analysis of a firm can reveal why and how internal firm differences are the root of competitive advantage.
• Differentiate among a firm’s core competencies, resources, capabilities, and activities.
• Compare and contrast tangible and intangible resources.
• Evaluate the two critical assumptions about the nature of resources in the resource-based view.
• Apply the VRIO framework to assess the competitive implications of a firm’s resources.
• Evaluate different conditions that allow a firm to sustain a competitive advantage.
• Outline how dynamic capabilities let a firm sustain a competitive advantage.
• Apply value chain analysis to understand which firm activities in transforming inputs into outputs generate differentiation and which drive costs.
• Identify competitive advantage as residing in a network of distinct activities.
• Conduct a SWOT analysis to generate insights from external and internal analysis and derive strategic implications.

Shifting from External to Internal Analysis

• To formulate a strategy that leads to a competitive advantage:
  • Resources and capabilities must combine to form core competencies.
  • Firms should consciously work to identify these.
• Evaluation should occur in the context of PESTEL (Political, Economic, Sociocultural, Technological, Ecological, and Legal factors).
• Evaluation should occur in the context of competition:
  • Use Porter’s Five Forces.
  • Use the Strategic Group Map.

Competitive Advantage

• Strengths should be dynamic and adjust along with the external environment.
• Strategically fit within the environment:
  • Resources
  • Capabilities
  • Competencies

Core Competencies

• Unique strengths embedded deep within a firm.
• Allow the firm to differentiate from rivals.
  • Resulting in creating higher value for the customer, or
  • Resulting in products and services offered at a lower cost.
• Expressed through structures, processes, and routines.

Examples of Core Competencies

• Five Guys: Highest-quality ingredients, free toppings, simple menu, no drive-throughs, or expanded menu.
• Beats Electronics: Perception of coolness marketing.
• Tesla: Engineering expertise in battery-powered motors & power trains.
• Netflix: Creates proprietary algorithms based on individual customer preferences.

Linking Core Competencies, Resources, Capabilities, and Activities to Competitive Advantage

• Resources, capabilities, and activities help organizations develop core competencies.

Resources

• Any assets that a firm can draw on.
• Examples: cash, buildings, machinery, or intellectual property.

Capabilities

• Organizational and managerial skills.
• Examples: structure, routines, and culture.

Activities

• Distinct and fine-grained business processes (order-taking, invoicing, etc.).

Resource-Based View (RBV)

• This model aids in identifying core competencies.
• Resources are key to superior firm performance.
• Resource: Assets, capabilities, and competencies.
• Resources fall into two categories:
  • Tangible resources have physical attributes and are visible (e.g., labor, capital, land, buildings, plant, equipment, supplies).
  • Intangible resources do not have physical attributes and are invisible (e.g., culture, knowledge, brand equity, reputation, intellectual property like patents, designs, copyrights, trademarks, and trade secrets).

Two Critical Assumptions of the RBV

• Resource Heterogeneity: A firm is a unique bundle of resources, capabilities, and competencies. These bundles differ across firms.
• Resource Immobility: Resources are “sticky” and don’t move easily from firm to firm. They are difficult to replicate and can last for a long time.

VRIO Framework

• VRIO is a tool for evaluating firm resource endowments.
• What resource attributes underpin competitive advantage?
• To be the basis of a competitive advantage, a resource must be:
  • Valuable
  • Rare
  • Costly to Imitate
  • Organized to capture the value of the resource
• Jay Barney was a pioneer of this framework.

VRIO Attributes

• Valuable: It helps to exploit an opportunity or offset a threat.
• Rare: Only one or a few firms possess it.
• Costly to Imitate: Competitors can’t develop the resource for a reasonable price. Imitation and substitution are risks.
• Organized to Capture Value: Effective internal organizational structure and coordinating systems.

Isolating Mechanisms

• Barriers to imitation.
• Helps sustain a competitive advantage.
  • Better expectations of future resource value.
  • Path dependence: past decisions limit current options.
  • Causal ambiguity: cause and effect are vague.
  • Social complexity: social and business systems interact.
  • Intellectual property (IP) protection.

Core Rigidity

• A former core competency turned into a liability.
• Result of an environmental change.
• No longer fits the external environment.
• Turns a resource from an asset to a liability.
• Causes loss of competitive advantage.
• The firm may even go out of business.

Dynamic Capabilities

• A firm’s ability to adapt resources over time.
• Create, deploy, modify, reconfigure, upgrade, leverage.
• The goal:
  • Create long-term competitive advantage.
  • Develop resources, capabilities, and competencies.
  • Create a strategic fit with the firm’s environment.
  • Change in a dynamic fashion.

Dynamic Capabilities Perspective

• A model that emphasizes a firm’s ability to:
  • Modify and leverage its resource base.
  • Gain and sustain competitive advantage.
  • Respond to a constantly changing environment.
• Dynamic markets are due to:
  • Technological change, deregulation, globalization, demographic shifts.
• Resources are created, deployed, modified, reconfigured, or upgraded.

Resource Stocks and Flows

• A way to think about developing dynamic capabilities.
• Resource stocks: The firm’s current level of intangible resources (e.g., new product development, engineering expertise, innovation capability).
• Resource flows: The firm’s level of investments to maintain or build a resource.

The Bathtub Metaphor

• Illustrates resource stocks and flows.
• The water level in the bathtub represents the level of a specific intangible resource stock.
• Faucets filling the tub represent investments in building intangible resources.
• Leaks represent the reduction in the firm's intangible resource stocks (e.g., employee turnover).

The Value Chain

• Internal activities a firm engages in when transforming inputs into outputs.
• Through primary and support activities.
• Each activity adds incremental value (raw materials → components → products).
• Each activity also adds incremental costs.

Primary Activities

• Firm activities that add value directly.
• Transform inputs into outputs.
• Focused on moving from raw materials, through production phases, to sales and marketing, and finally customer service.
  • Supply chain management
  • Operations
  • Distribution
  • Marketing and sales
  • After-sales service

Support Activities

• Firm activities that add value indirectly.
• Necessary to sustain primary activities.
  • Research and development (R&D)
  • Information systems
  • Human resources
  • Accounting and finance
  • Firm infrastructure including processes, policies, and procedures

Strategic Activity Systems

• A network of interconnected activities.
• Can be the foundation of competitive advantage.
• Socially complex and causally ambiguous.
• Enhance likelihood of sustained competitive advantage.
• Characteristics:
  • One or more elements can be easily observed.
  • How activities are managed is not as easily observed.
  • Difficult to imitate.

Evolution of Strategic Activity Systems

• Must evolve because the external environment changes and competitors develop their activity systems.
• How activity systems are updated:
  • Add new activities
  • Remove activities that are no longer relevant
  • Upgrade activities that have become stale or somewhat obsolete
• This reconfigures the entire strategic activity system.

The Vanguard Group's Activity System

• Evolved over time.
• In 2019, customer segmentation was added as a new core activity to the six core activities that already existed in 1997.
• The 2019 activity-system configuration allows Vanguard to customize its service offerings and separate its more traditional customers from more active investors.
• The Vanguard Group had grown from $500$ billion (in 1997) to $6$ trillion (in 2019) of assets under management.