Strategy

Session 2: Internal analysis

Agenda

• Internal analysis
• Resource based view

• Value chain analysis

 Deadline for project teams

 Internal Analysis:
Understanding Firms
 Scanning

External Environment
 General Env. (7s)
 Industry Env. (5f)
 Competitor Env. (4a)

Assessing Monitoring

Objectives / Strategy
Assumptions / Capabilities

Forecasting
Strategic Management Process (HIH)

Essential building
blocks to determine
appropriate strategy
Internal analysis: Understanding firms
 What is a firm?

 Firm is a bundle of resources under common ownership / governance

 Tangible resources
 Intangible resources

 Firms need core competencies to obtain and sustain competitive advantages

 What are core competencies?

 Based on resources and capabilities
 (HIH)
Resources
(examples)
Resources and core competencies
 The ability to combine resources into bundles in unique and valuable
ways determines the firm’s strengths vis-à-vis its rivals

 Firms can combine their resources with location specific advantages

(internationally)
 e.g., availability of specific resources, low-cost labor, sophisticated and
demanding local market etc.

 Can you think of any successful firm as the result of its ability to bundle
resources in unique and valuable ways (not in terms of products)?
Resources, Capabilities and Core Competencies

Capabilities
Competitive
Advantage
• Represent the capacity to deploy resources that have been purposely
integrated to achieve a desired end state

Core • Emerge over time through complex interactions among tangible and
Competencies intangible resources

• Often are based on developing, carrying and exchanging information

Capabilities and knowledge through the firm’s human capital

• Composed of the unique skills and knowledge of firm’s employees and

Resources include functional expertise of employees in specific functional areas
• Tangible
• Intangible
Capabilities (examples)
(HIH)
Analyzing the internal organization

 External analysis provides insights into what the firm might do or

should do given the opportunities and threats it faces

 Internal analysis will determine what they can do

 Examine the resources, capabilities and core competencies it possesses

 Determine how they can create value for customers

How to conduct an internal analysis?

1. Evaluate resources/capabilities based on 4 criteria (VRCN)

2. Produce a Value Chain Analysis

Sustainable competitive advantage: Criteria
Analyze capabilities on 4 specific criteria to determine potential
for a sustainable competitive advantage
 Valuable
 Rare
 Costly-to-imitate
 Non-substitutable

 Lead to core competencies

 Determine whether a competitive advantage can be obtained

and whether it can be sustained
In other words

Disadvantage

Resources /
Capability Valuable Parity

Competitive
Valuable + Rare
advantage

Cost/ability to
Determines how long the imitate How sustainable is
resource / capability this competitive
remains Valuable + Rare advantage?
Substitutability
Sustainable competitive advantage: Criteria

(HIH)
R&C  VR(CN)  (C)C  (S)CA  (A)AR

• Not core competencies (no CA)

• Competitive disadvantage (none)
• Below average returns
• Competitive parity (V)
• Average returns
• Resources
• Capabilities
• Integrated resources
• Core competencies (sources CA)
• Temporary competitive advantage (VR)
• Average / above average returns
• Sustained competitive advantage (VRCN)
• Above average returns
 (HIH)

Causal Ambiguity: hard to determine what is really the basis for the competitive
advantage of a firm  Difficult to imitate  Any example?
https://www.tinypulse.com/blog/10-great-examples-of-googles-company-culture
 Caution
• Core competencies can become core rigidities
but
• Core competencies can open up new opportunities
• (Corporate and International Strategy on transferability of core competencies)

• Example
• Ocado: British online grocery retailer
• Formed partnerships with other grocery retailers worldwide to provide its logistics technology
• Business model shifted from online grocery to technology platform with royalty fees from retailers
• Leverage their core competency

Source: https://www.ft.com/content/02e77bf0-4f60-11e9-b401-8d9ef1626294
Value Chain Analysis
Alternative or complementary way to analyze resources

Value Chain Analysis

 Primary activities
• Involved with product’s physical creation, sales and distribution to buyers, and
service after the sale
• Service, marketing/sales, outbound/inbound logistics and operations
 Support activities
• Provide assistance necessary for the primary activities to take place
• Includes firm infrastructure, HRM, technologies development and procurement

Determine where the firm’s core competencies are along the value chain
Basic Value Chain
Basic Value Chain
Value Chain Analysis

• Determine where the firm create value along the value chain

• Determine where firm has an advantage over competitors

• If not creating value and no advantage over competitors (others do it better)

Consider outsourcing the activity
Purchase the value-creating activity from an external supplier
What are some of the advantages and disadvantages of outsourcing?
 Outsourcing
 Outsource activities in which the firm is at a disadvantage compared to competitors
or in which cannot create value
 Outsourcing is the purchase of a value-creating activity from an external supplier

 If effective, it provides increase in flexibility, risk mitigation and reduction in capital

investment

But it is more complicated than it seems

(see vertical integration in Corporate Strategy)
Sources: The Economist & WSJ
Outsourcing

Outsourcing an activity creates a buyer/supplier relationship

 Think of the 5 forces  Bargaining power of suppliers

When not to outsource?
Problems with the contractibility of the exchange/relationship

 No contract is fully complete and/or fully enforceable

 Vulnerable to potential opportunistic behavior by the supplier

 Uncertainty/complexity increases potential opportunistic behavior

…
Corporate Strategy (Transaction Cost Theory and Vertical Integration)
Internal analysis: Understanding firms
(HIH)
I/O model vs. RBV model

•What a firm can do

•Function of resources,
INTERNAL capabilities, and core
ORGANIZATION competencies

STRATEGY
• What firm might/should do
• Function of opportunities and
EXTERNAL threats in the firm’s external
ENVIRONMENT environment
Strategy and internal / external analysis

 Strategy means effectively and efficiently matching a firm’s internal strengths (relative
to competitors) with the opportunities and challenges found in its environment

 Such matching is crucial to create value and satisfy stakeholder goals, both
domestically and internationally
 Recap
 Firms must identify their strengths and weaknesses (SWOT)
 Appropriate resources/capabilities are needed to develop and execute the desired
strategy and create value for customers/other stakeholders

 Outsourcing permits to focus on the core competencies that are the sources of
competitive advantages
 Caution  Core competencies have potential to become core rigidities (inertia)

 External environmental conditions and events impact a firm’s core competencies

 Match between internal resources/capabilities and external environment is essential

 Assess firms based on core competencies (not on the final products)

Next session
• Business-level strategy

• Organigram case
• Link to download case on Moodle
• Questions to prepare for discussion on Moodle

 Don’t forget to form a team and let your TA know