Internal Analysis

Industry Vs. Firm Effects In Determining Firm

Performance
 RBV Perspective

Resources Firms Products / services

Analyzes firms from resource side rather than product side,

which is different from IO (Porter) perspective

Profit=f(Resource and Capabilities)

4
The Resource Based View
RBV argues that…..
the heterogeneous market positions of
close competitors arise from each
firms unique bundle of resources and
capabilities

(Source: Hoopes, Madesn and Walker, 2003)

Resource Based Theory of the
Firm
• RBV explains sustained competitive advantage in
terms of heterogeneity in resources and
capabilities
• Scarce resources and capabilities that are critical
for value creation can be imperfectly mobile and
cannot be acquired in the open market

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

The Resource Based View
• Resources: Inputs into a firms production process, such as capital
equipment, skills of individual employees, patents, finances and
talented managers. They are services rendered by the resources

Example: THE QUALITY OF ENTREPRENEURIAL SERVICES

1. Entrepreneurial Versatility- comprises of imagination and
vision, manifested in terms of vigorous, experimentative and
creative managers- altering range of products, develop new
markets
2. Fund-Raising Ingenuity- Successful raising of capital depends
on an entrepreneur’s ability to create confidence
3. Entrepreneurial Ambition- e.g. 1) product-minded and 2)
empire-builder- creating powerful industrial empire
4. Entrepreneurial Judgment- stems from information gathering
and consulting facilities built within the firm

(Source: Hitt el al., 2005)

The Resource Based View
• Capabilities: The capacity for a set of resources to
perform a task or an activity in an integrative
manner
• Competencies: Resources and capabilities that
serve as a source of competitive advantage for a
firm over rivals.

(Source: Hitt el al., 2005)

Resource Based Theory of the Firm

Firm resources

Tangible resources Intangible resources

• Land
• Buildings
• Materials
• Money Relational resources Capabilities
• Relationships • Knowledge
contracts (R&D)
• Reputation
brands
Sustaining Competitive
Advantage
• Competitive advantage is sustainable if
competitors can not duplicate/ neutralize it. This
happens when
• Firms may differ with respect to resources &
capabilities and the differences persist
• Isolating mechanisms (analogous to barriers to entry)
may work to protect the competitive advantage of
firms

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Isolating Mechanisms
•Impediments to imitation
• Market size and scale economies
• Superior access to inputs
• Distinctive organizational capabilities
• Superior access to customers
• Legal restrictions

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Market Size and Scale Economies
• Scale based barriers are likely to be effective in
markets for specialized products where the
demand is large enough for only one producer
• Scale based barriers may come down if the market
experiences growth

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Superior Access to
Inputs/Customers
• Firms often achieve exclusive access to key
resources either through vertical integration or
long term contracts
• Firms can deny rivals access to distribution
channels through the use of exclusive dealing
clauses

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Legal Restrictions
• Legal restrictions such as patents and copyrights as
well as government regulation through licensing
and certification can impede imitation

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Distinctive Organizational
Capabilities
• Barriers to imitation will be intangible if the firm’s
advantage lies in distinctive organizational
capabilities
• Three such barriers to imitation
• Social complexity
• Casual ambiguity
• Historical circumstances

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Social Complexity
• Competitive advantage may be hard to replicate
if the advantage is rooted in socially complex
processes
• Such processes include interpersonal interactions
among managers, both within the firm and of the
suppliers and customers
• Even if the rivals understand the source of
competitive advantage, they cannot replicate the
complex social interactions

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Causal Ambiguity
• A firm’s superior ability to create value may be
obscure and imperfectly understood, even by those
in the firm
• As source of competitive advantage is not clearly
understood, it can not be imitated

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

Historical Circumstances
• Distinctive capabilities may be bound up with the
history of the firm
• Historical dependence may mean that the
opportunity to copy such distinctive competences
no longer exist.

(Source: Besanko, Dranove, Shanley and Schaefer, 2004)

 Criteria for Sustainable Competitive Advantage and Strategic Implications

Is a Resource…

Difficult Without Implications

Valuable Rare to Imitate Substitutes for Competitiveness

No No No No Competitive disadvantage
Yes No No No Competitive parity
Yes Yes No No Temporary competitive
advantage
Yes Yes Yes Yes Sustainable competitive
advantage

Source: Adapted from Barney 1991. Firm Resources a Sustained Competitive Advantage. Journal of Management, 17:99-120.
Gregory G. Dess and G. T. Lumpkin
A Resource Is Organized to Capture
Value If…
• It has an effective organizational structure.
• It has coordinating systems.
The VRIO Decision Tree
 Core Competencies
Core Competence
Resources • A strategic capability
• Inputs to a firm’s production
process

YES
Does the capability
Capability satisfy the criteria of
The source of • Integration of a team of
sustainable competitive
resources
advantage?
NO

Capability
Resource Stocks and Flows

• Resource stocks
• The firm’s current level of intangible resources
• Resource flows
• The firm’s level of investments to maintain or build a
resource
The Dynamic Capabilities Perspective

• A model that emphasizes a firm’s ability to:

• Modify and leverage its resource base
• Gain and sustain competitive advantage in a constantly
changing environment
Dynamic Capabilities

• A firm’s ability to:

• Create, deploy, modify, reconfigure, upgrade, and leverage
its resources over time
• Helps prevent a core rigidity
• A former core competency that turned into a liability as the
environment changed
The Value Chain Analysis
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What Is the Value Chain?
• Internal activities a firm engages in when
transforming inputs into outputs
• Each activity adds incremental value
• Primary activities directly add value
• Support activities add value indirectly
Primary activities
• Relate to a product’s design, creation, delivery,
marketing, support, and after-sales service.
• Research and development
• Design of products and production processes.
• Superior product design increases a product’s
functionality and add value.
• Production
• Creation process of a good or service.
• Helps lower cost structure and leads to differentiation.
Primary activities
• Marketing and sales
• Brand positioning and advertising - increase customers’
perceived value of a product.
• Help create value by discovering customers’ needs.
• Customer service
• Provide after-sales service and support.
• Create superior utility by solving customer problems and
supporting customers after a purchase.
Support activities
• Provide inputs that allow the primary activities to
take place.
• Materials management
• Controls the transmission of physical materials through
the value chain.
• Lowers cost and creates more profit .
• Human resources
• Ensures value creation by making sure that the company
has the right combination of skilled people.
Support activities
• Information systems
• Electronic systems to improve efficiency and
effectiveness of a company’s value creation activities.
• Company infrastructure
• Companywide context within which all the other value
creation activities occur.
• Organizational structure, control system and company culture
Internal Analysis
Step 1: Identify Value Chain Activities where the
company excels at (superior value/lower cost)
Step 2: What resources and capabilities are helping
the company excel in such value chain activities?
Step 3: What isolating mechanism is used by the
company to prevent imitation of its superior
resources and capabilities?
Step 4: VRIO analysis and identification of core
competences that explains sustainable competitive
advantage of the company (if any?) Is the company
effective in reconfiguration/renewal?
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Thank You

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