Chapter 3

Internal Analysis (continued)

Learning Outcomes
v appreciate the role a firm’s resources and capabilities
play in formulating strategy;
v identify and appraise the resources and capabilities of
a firm;
v evaluate the potential for a firm’s resources and
capabilities to confer sustainable competitive
advantage;
v use the results of resource and capability analysis to
formulate strategies that exploit internal strengths
while defending against internal weaknesses.
2
3. Internal Environment
3.2 Practical Approach
How a company can appraise its resources and
capabilities and then use their appraisal to guide
strategy formulation?
ü Step 1: IDENTIFYING KEY RESOURCES AND
CAPABILITIES:
Tool: Value chain or Key Success Factors
ü Step 2: DISTINGUISHING BETWEEN
THRESHOLD AND DISTINCTIVE RESOURCES
AND COMPETENCIES
Tool: the competency framework
Threshold and distinctive capabilities

Not distinctive – easy to buy/copy

Distinctive – hard to buy/copy

3.2 Practical Approach
How a company can appraise its resources and
capabilities and then use their appraisal to guide
strategy formulation?
ü Step 3: APPRAISING RESOURCES AND
CAPABILITIES:
Tool: VRIO framework
ü Step 4: DEVELOPING STRATEGY IMPLICATIONS
VRIO Framework
ü VRIO is a model which allows insight into whether
the organisation’s resources and capabilities
translate to the potential for sustained
competitive advantages
♦ The question of Value
♦ The question of Rarity
♦ The question of Imitability
♦ The question of Organisation
 V (value)

R (Rare)
VRIO framework
(Barney 1991, 2005)
I (Inimitable)

O (organised)
The question of value
ü Do a firm’s resources and capabilities enable the
firm to respond to environmental threats or
opportunities?
ü Does the organisation have the capacity to deliver
what the customer values?
ü Examples:
● Highly recognised brands
● Best locations
The question of rarity
ü How many competing firms already possess
particular valuable resources and capabilities?
ü Examples:
● Patents and copyrights
● Access to the best raw materials
The question of imitability
ü Are the resources or capabilities easy to imitate
which means easy to transfer or to replicate?
ü Who owns the competence and how easily
transferable is it?
ü Examples:
§ Easy to transfer: finance and raw materials
§ Not easy to transfer: geographical immobility of
natural resources and complementarity between
resources
Criteria for the inimitability of strategic capabilities

Johnson, Scholes and Whittington 2011

The question of organisation
ü Is a firm organised to exploit the full competitive
potential of its resources and capabilities?
ü Example: The firm is using the resources effectively
14
VRIO Framework

15
Linking VRIO to Creativity

Read the article on Pixar

in Guided Learning

Amibile T. 1996 Creativity in Context

Developing Strategy Implication
v EXPLOITING KEY STRENGTHS: the key task is to
formulate our strategy to ensure that these
resources are deployed to the greatest effect.
v MANAGING KEY WEAKNESSES:
ü Example: NIKE that contracts out manufacturing
and logistics..
v WHAT ABOUT SUPERFLUOUS STRENGTHS?:
lower the level of investment from these resources
and capabilities