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 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.
4-2
Chapter Case 4 From Good to Great to Gone:
• Circuit City

➢ 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 City’s

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” & don’t 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)

1–12
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)
The VRIO Framework
• Costly to Imitate
• Valuable
➢ Unable to develop or
➢ Attractive features
buy at a reasonable
➢ Lower costs (& price) price
❖ Higher profits
➢ Apple – Yes
➢ Honda – design & build
➢ Crocs – No
engines
• Rare • Organized to Capture
➢ Exploit competitive
➢ Only a few firms
potential
possess
❖ Structure
➢ Toyota – lean ❖ Coordinating systems
manufacturing
➢ Xerox PARC – No
❖ Temporary competitive
advantage ➢ Nintendo Wii – Yes

4-14
(Barney & Hesterly, 2006)
(Bertsch & Wiseman, 2008)

1–15
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 Group’s 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 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
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
❖ Honda’s 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) 1–24

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

(Simoneaux, S. L., & Stroud, C. L., 2011) 1–27

 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. 1–28

STARBUCKS VRIO FRAMEWORK
• VALUABLE
Unique coffee house experience. Work or relax in the
coffeehouse ambience. Value chain.
• 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.
1–29
 Why and How did Starbucks lose its
uniqueness?

STRATEGIC MOVES OUTCOMES

• Opened up 16,000 new • Strayed from its core
stores across 50 countries. business.
• Expanded Menu: • Forgot what made it
Desserts, Sandwiches, unique.
Books, Music. • WHAT SERVICE DO YOU FEEL VERY
GOOD/COMFORTABLE ABOUT?
• Tried to keep up with their
• It changed what its
massive growth. Grinding
customers loved about it;
of beans.
The Experience.

© 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 1–30

 Re-creating what made Starbucks Special

STRATEGIC MOVES CEO Howard Schultz

• 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. 1–31

Starbucks up’s and down’s.

Strategy Activity Systems Dynamic Capabilities Perspective

• Network of interconnected • Intangible resource

activities within a firm.
• Every decision has an • Can be modified to gain an
outcome: advantage.
➢ Grinding beans:
➢ Menu:
➢ Retail:
• Starbucks forgot that its
intangible resources were
• Internal environment
its core competencies.
changes when external
does.

1–32
STARBUCKS COFFEE
• Stick to YOUR
business.

• Different flavors,
blends, styles.

• Larger stores.

• Upgrade technology

1–33
 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. 1–34

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

1–35