Week 6

Internal Analysis – Part 1

MGMT90146
Strategic Management
Dr. Erica Coslor
 Subject Overview
Week Topic Assessment Due*
1 Subject Introduction
2 Generic Strategy; Mission, Vision & Values
3 Strategic Positioning
4 External Analysis I (Pick capstone teams)
5 External Analysis II Team Practice Round
Capsim Quiz
- Non-Teaching Period This Week
6 Internal Analysis I Strategy Statement
Round 1
7 Internal Analysis II Round 2
8 Vertical Integration Round 3
9 Diversification I Round 4
10 Diversification II Round 5
11 TBD Round 6, Board Rept.
12 Exam review
*Capstone assessments and assignments due the night before workshop
Today’s Agenda

 Internal Analysis (I)

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INTERNAL ANALYSIS I
RECALL: Strategic Analysis

Vision, Mission

External Analysis

Internal Analysis

Vision, mission, values; External Analysis; and Internal

Analysis are inputs for Strategy Formulation.
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Remember:
…within a given industry, there are also marked
differences in profitability across firms…
Number of Firms
Industry B

…so that even in

unattractive
industries good
competitors enjoy
Industry A high levels of
profitability.

- 0 +
Profitability
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Remember:
Firm profitability is determined by industry structure and by
individual firm characteristics.

Proportion of firm ROA explained by:

Industry Effect Firm Effect

McGahan & Porter (1997) 18.7% 36.0%

Hawawini et al. (2003) 8.1% 35.8%

In virtually all studies: firm effects > industry effects

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Firm Characteristics

  A firm’s characteristics are likely to matter more

than its industry’s characteristics.

 Interpretation of firm characteristics:

Resources & Capabilities (RBV)

or
Positioning
(Porter on positioning plus next week)

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Some firms consistently outperform their industry!

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Resource-Based View (RBV)

 Has its roots in Penrose (1959); got its current name in 1984; took
off in early 1990s.

 Many scholars contributed.

 Firm seen as “unique bundle of resources and capabilities”

– Resources… what the company “has”, i.e. the productive assets controlled by
the firm.
– Capabilities… what the firm “does” with its resources, i.e. its ability to bring
together multiple resources for a particular purpose.

 Thrust:
– Competitive advantage through the creation and exploitation of
distinctive resources and capabilities.

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Key Assumptions of RBV

 Resource heterogeneity – firms represent unique bundles of

resources/capabilities

 Limited resource mobility – many resources and esp.

capabilities cannot be built rapidly (or bought in the market)
E.g. employee teamwork, technical know how, trust of customers and
employees… can only be built over time, require sustained
investments and incur significant risk.

 Without these assumptions, any firm could follow any

strategy !
 profits would rapidly erode as desirable strategies are imitated.

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Tangible Resources

– Financial resources
Cash, accounts receivable, capacity to borrow…

– Physical resources
Property, production facilities, raw materials…

Tangible resources recorded

in financial statements.

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 Intangible Resources
– Information: customer data, competitor intelligence…
– Knowledge in its many forms: copyrights, trade secrets,
patents, insights into customers …
– Relationships with customers, employees, suppliers,
alliance partners and the public: brands, reputation as
employer, buyer, partner, corporate citizen
– HR: skills, knowledge and experience of employees, their
ability to work as a team, top management leadership…
Knowledge is 
Generally missing from financial statements intangible…

 (growing) gap between book values and

values assigned by investors.
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The growing value of intangible resources
(Bryan & Zanini, 2005)

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 Resources (on their own) and Performance:
The Analogy of Soccer
Italian, Spanish and English premier soccer leagues (1998-2003)
League Teams with best on-field Teams with highest player expenditure
performance
Italy Juventus Lazio
Italy AC Milan Inter Milan
Italy Parma Juventus
Spain Valencia Real Madrid
Spain Real Madrid Barcelona
Spain Deportivo La Coruna Real Betis
UK Manchester United Chelsea
UK Arsenal Manchester United
UK Liverpool Arsenal Source: Grant 2005
Superior resources (here: highest-paid players) alone do not necessarily translate
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into superior (on-field) performance  capabilities
How to Use Resources to Best Advantage…
From Resources to Capabilities

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Capabilities: Definitions

 “…an organisation’s capacity to deploy tangible and intangible

resources… to bring about a desired end.” (Dess et al. 2007: p.93)

 “…the ability to perform a task or activity that involves complex

patterns of coordination and cooperation between people and other
resources.” (McGee et al. 2005: p.252)

Capability
Employee3

Employee2 Employee4

Employee1 EquipmentX Trade Secret Patent

EquipmentY
InformationA
InformationB
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Capabilities Examples

A hospital’s emergency response capability:

 Surgeon
 Anaesthetist
 Triage nurse
 Theatre nurse
 Operating theatre

Wal-Mart’s cross docking capability (Stalk et al. 1992):

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Capabilities

 Capabilities as routinised coordination patterns

 Capabilities develop over time (learning, sustained

investment)

 Some capabilities formally spelt out (flow chart, SOP);

but more often informal and reliant on tacit
knowledge elements.

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Distinctive Resources & Capabilities

 All companies are made up of resources and

capabilities.

 Strategy is interested chiefly in distinctive resources

and capabilities, i.e. those that distinguish the firm
from competitors; that give it competitive advantage
and above-average profitability.

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Appraisal of Resources and Capabilities (Res/Cap)
How to identify distinctive resources or capabilities:

Is it Valuable?
Extent of
Advantage
Is it Rare?
Potential
for above average
profits
Is it Inimitable?
Sustainability of
Advantage
Is it Non-
Substitutable? Based on Barney (1991)
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Conditions for CA

Valuable
 The res/cap must create value

Rare
 Unless rare, a valuable res/cap cannot be the basis for
competitive advantage.
 Needed “to be in the game” (competitive parity)
E.g. in engineering industry, CAD technology is very valuable but since
every firm adopted it, it no longer conferred CA.
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Conditions for Sustainable CA

Inimitable (or “Difficult to imitate”)

 Competitors find it very difficult/costly to imitate the
particular res/cap due to:
– property rights / physical uniqueness to prevent imitation (e.g. patents,
copyrights, mining leases)
– deterrence: large (sunk) investment coupled with limited market
– path dependence: resources/capabilities that have been cultivated over
time cannot be replicated quickly (e.g. brands, supplier relationships,
technical knowledge)
– causal ambiguity: lack of comprehension of the distinctive res/cap
elements (often tacit knowledge components!)
– social complexity: some resources/capabilities inherently difficult to
manage (e.g. culture, alliance and customer relationships)
– deterrence: large (sunk) investment coupled with limited market 23
VRIN

Factor
Valuable?

Rare?

Inimitable?

Non‐
substitutable?
Knowledge Economies:
Tacit knowledge – a likely source of inimitability

Codified KNOWLEDGE SPECTRUM Tacit

Knowledge Knowledge

Codified knowledge can be made independent of knowledge

carrier, i.e. it can be captured (instructions, mathematical
equations, flow charts, etc.) and readily transmitted to others.
Tacit knowledge cannot be expressed/captured by the
knowledge carrier and thus cannot readily be transmitted.
“We know more than we can tell” (Polanyi 1966)
Transfer of tacit knowledge typically requires prolonged observation of,
and interaction with, the knowledge carrier.
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 Knowledge Economies:
Tacit knowledge – a likely source of inimitability

Tacit knowledge…
… is path dependent
… tends to be causally ambiguous
… tends to be distributed and
hence socially complex

 Resources/capabilities with tacit knowledge components

are difficult to imitate!

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Conditions for Sustainable CA

 Non-Substitutable (or “Difficult to substitute”)

 Res/cap must not have a (readily available) substitute

– E.g. astute management team vs. advanced decision support system;
physical location vs. website

(See also Dranove & Marchiano, 2007)

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Conditions and their Implications for CA

Is the resource or capability…

Valuable? Rare? Inimitable and Implications for CA
Non-
substitutable?
No * * Comp. Disadvantage

Yes No * Comp. Parity

Yes Yes No Temporary CA

Yes Yes Yes Sustainable CA

*…inconsequential (Yes or No) Adapted from Barney (1991) 28

5th = Appropriability

 In addition to the four conditions, SCA requires

appropriability.
– I.e. the value created by a particular res/cap must not be captured
entirely by its provider(s).
– E.g. NHL players as “internal suppliers.”
– Internal suppliers may compete away the industry profits.
 Recall 2 B-C Value Creation Tactics (Dranove & Marchiano)
– Many different ways to achieve this goal.
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Resources vs. Capabilities

 Capabilities are more likely to be distinctive than

resources, thus capabilities a more likely source of
sustained competitive advantage than resources!

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Examples of Distinctive Resources/Capabilities

 Cochlear’s product innovation capability

 Toyota’s “lean manufacturing” capability
 Cisco’s capability in integrating acquired companies

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Can distinctive resources/capabilities be bought in the
market?
 Highly unlikely.

 A) Many res/cap cannot be readily bought (tacit knowledge,

relationships with various communities, org. culture, …)

 B) Some (distinctive) res/cap can be bought, however…

• non-exclusive purchase, i.e. they may also be purchased by other
competitors (e.g. superior production equipment)  parity
• exclusive purchase: we are likely to pay “full” price, i.e. the purchase
price reflects the value-creating potential of the res/cap (appropriability
condition!)

  Distinctive resources/capabilities that provide CA and

superior profitability have to be built/cultivated by the firm.
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Dark Side of Distinctive Capabilities

“The (distinctive) capabilities of an

organization also define its disabilities”
(Christensen 1997, The Innovator’s Dilemma)

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Toyota Hybrids vs.
Full EV example
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The Dark Side of Distinctive
Capabilities & Resources

When the (industry) environment changes and/or customer

demands change, distinctive capabilities may act as
distinctive rigidities (“core rigidities”).

Being used to success on the basis of particular res/cap,

managers find it hard to recognise and accept that these
are no longer valuable.
“Success doesn’t beget success. Success begets failure because the more
that you know a thing works, the less likely you are to think that it won’t
work. When you’ve had a long string of victories, it is harder to foresee your
own vulnerabilities.”
Leslie Wexner, CEO, The Limited, Inc.,
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Examples of this “Lock in” problem?

 Kodak and physical film + cameras

 Toyota and hybrid vehicles vs. all-electric push of other
manufacturers
 Etc.
Dark Side of Distinctive Res/Cap: Why?

 Even if the need for change is recognised, firms may

still find it hard to change:

 Distinctive resources and capabilities often linked to

a firm’s power structure
 resistance to change by powerful interests

 In-built inertia -- resources and capabilities are

extensively specialised.
Recall: capabilities developed over an extended period of
time; they are well-honed routines
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Next week

 Internal Analysis
Part 1I

 Capstone
ROUND 2