Day 4

Internal Analysis: Resources, Capabilities, and

Core Competencies
 What Are Core Competencies?

Unique strengths
Embedded deep within a firm
Allows differentiation of products and services from rivals
Results in:
• Creating higher value for the customer or
• Offering products and services at lower cost
E.g., Beats
• 65 percent market share in the premium headphone market
• a $3 billion acquisition by Apple

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 Examples of Core Competencies

IKEA
• Designing modern functional home furnishings at low cost
Beats Electronics
• Marketing: perception of coolness
Facebook (Meta)
• IT capabilities to provide reliable social network services
globally on a large scale.
Netflix
• Creating proprietary algorithms-based on individual
customer preferences.
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 Inside the Firm: Competitive Advantage based
on Core Competencies, Resources, and Capa’s.

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 Inside the Firm: Competitive Advantage based
on Core Competencies, Resources, and Capa’s.
Certain types of resources and capabilities → Combine to form
core competencies
The firm’s response is dynamic.
• Firms’ internal strengths need to change with its external environment
in a dynamic fashion.
• Goal: Create a strategic fit with the firm’s environment

Main question
• Why differences in firm performance exist even within
the same industry?
• Similar external opportunities and threats in the same industry → the
source for some of the observable performance difference must be
found inside the firm.

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 Resources, Capabilities and Activities

Help deliver core competencies

Resources:
• Any assets that a firm can draw on

Capabilities:
• Organizational and managerial skills to orchestrate a diverse set of
resources and deploy them strategically

Activities:
• Distinct and fine-grained business processes
• Add incremental value by transforming inputs into goods and services
• E.g., order taking, the physical delivery of products, or invoicing
customers.
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 Links to Competitive Advantage and Superior
Firm Performance

Profits (retained earnings) to further

hone and upgrade a firm’s resources
and capabilities in its pursuit of
achieving and maintaining a strategic
fit within a dynamic environment.

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 Links to Competitive Advantage and Superior
Firm Performance

Core competencies that are not continuously nourished

will eventually lose their ability to yield a competitive
advantage.
• Example: Best Buy vs. Circuit City → Best Buy vs.
Amazon.com?
Too easy to focus on the more visible elements
• More important is to understand the invisible part of
core competencies.

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 The Resource Based View

Jay Barney (Professor in strategic management at the University of Utah)

How the interplay between resources and capabilities
creates core competencies that drive firm activities leading
to competitive advantage
Resources are key to superior firm performance
• Aids in identifying core competencies
RBV uses the term resource much more broadly.
• A resource includes any assets as well as any
capabilities and competencies that a firm can draw
upon when formulating and implementing strategy.
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 Tangible and Intangible Resources

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 Two Critical Assumptions of the RBV

Resource Heterogeneity
• A firm is a unique bundle of resources and capabilities
• These bundles differ across firms in a same industry
• E.g., Southwest Airlines vs. Alaska Airlines
Resource Immobility
• Resources don’t move easily from firm to firm
• Resources are difficult to replicate
• Resources can last for a long time
• E.g., SWA vs. Continental Lite and Song airline (Delta)
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 The VRIO Framework

Tool for evaluating firm resource endowments

To be the basis of a competitive advantage, resources
must be:
• Valuable,
• Rare,
• Costly to Imitate, and the firm must be
• Organized to capture the value of the resource
A firm can gain and sustain a competitive advantage
only when it has resources that satisfy all of the VRIO
criteria.
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 The VRIO Decision Tree

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 A Resource Is…

Valuable if:
• Helps exploit an opportunity or offset a threat
• A positive effect on a firm’s competitive advantage
• Increase its economic value creation (V – C)
• Revenues rise if a firm is able to increase the perceived value of
its product or service
• Production costs, for example, fall if the firm is able to put an
efficient manufacturing process and tight supply chain
management in place
Example: Beats Electronics’ ability to design and market premium
headphones → $15 vs. $150 - $450 - $1000

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 A Resource Is…

Rare if:
• Only one or a few firms possess it
• If common, perfect competition where no firm is able to
maintain a competitive advantage
• Competitive parity at best
Example: Beats Electronics’ ability and reach in product placement
and celebrity endorsements

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 A Resource Is…

Costly to Imitate if:

• Competitors can’t develop the resource for a reasonable price
• Can achieve a temporary competitive advantage
Example: Beats Electronics’ intuition and feel for music and cultural
trends of Dr. Dre, his gut instinct in making decisions rather than
market research, etc.
➔ Direct imitation: A way to copy or imitate a valuable and rare
resource

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 A Resource Is…

The second avenue of imitation: Substitution

• Accomplished through strategic equivalence
Example: Amazon.com - The emergence of the internet allowed
Bezos to come up with a new distribution system: negating the
need for retail stores and thus high real-estate costs

➔ Combining Imitation and Substitution!

➔ Firms are able to combine direct imitation and substitution
when attempting to mitigate the competitive advantage of a
rival.
➔ E.g., Samsung Galaxy (vs. iPhone) – look and feel + Android OS

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 A Resource Is…

The firm is organized to capture value through:

• Effective organizational structure and coordinating systems
• If not effectively organized to exploit (VRI) resource, a
temporary competitive advantage.

Only a few competencies may turn out to be those specific core

competencies that fulfill the VRIO requirements.
A company cannot do everything equally well and must carve out a
unique strategic position for itself, making necessary trade-offs.

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 Isolating Mechanisms

No competitive advantage can be sustained indefinitely.

Prevent rivals from competing away firm advantage
• Example: Barriers to imitation
Better expectations of future resource value
• Sometimes firms can acquire resources at a low
cost, which lays the foundation for a competitive
advantage later when expectations about the future
of the resource turn out to be more accurate.
• Example: obtain real estate / land at a low cost
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 Isolating Mechanisms

Path dependence
• a process in which the options one faces in a current
situation are limited by decisions made in the past
• Example: Dalton, Georgia – a dominant (85%) cluster in the
U.S. carpet industry
• Readily access the required know-how, skilled labor,
suppliers, low-cost infrastructure, and so on needed to
be competitive.
• Catching up may lead to time compression diseconomies.
• Cannot imitate or create core competencies quickly.

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 Isolating Mechanisms

Causal ambiguity
• a situation in which the cause and effect of a phenomenon
are not readily apparent
Social complexity
• a situation in which different social and business systems
interact
Intellectual property (IP) protection
• protecting a critical intangible resource that can also help
sustain a competitive advance
• IP protection does not last forever, however.
• E.g., Patents: usually expire 20 years in the US.
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 Core Rigidity

A firm’s external environment is rarely stable.

A former core competency
• Turned into a liability
• Result of an environment change
• No longer fits in the external environment
Turns a resource from an asset to a liability
• if a firm relies too long on the competency without
honing, refining, and upgrading as the environment
changes.

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 Dynamic Capabilities

A firm’s ability to:

• Adapt resources over time
• Create, deploy, modify, reconfigure, upgrade, leverage
• In consideration of the external environment

The goal:
• Develop resources, capabilities, and competencies
• Create a strategic fit with the firm’s environment
• Change in a dynamic fashion

Furthermore, create market changes that can strengthen their

strategic position.
• Example: Apple – iPod → iPhone → iPad → Apple Watch
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 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 markets are due to:
• Technological change
• Deregulation
• Globalization
• Demographic shifts
➔ Competitive advantage is not derived from static resource or
market advantages, but from a dynamic reconfiguration of a
firm’s resource base.
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 Resource Stocks and Flows

Resource stocks
• The firm’s current level of intangible resources
• New product development
• Engineering expertise
• Innovation capability
• Reputation for quality
Resource flows
• The firm’s level of investments to maintain or build a
resource

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 The Bathtub Metaphor

Intangible
resource stocks
are built through
investments over
time.

SOURCE: Figure based on metaphor used in I. Dierickx and K. Cool (1989), “Asset stock accumulation and sustainability of competitive
advantage,” Management Science 35: 1504–1513.

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 The Value Chain

Internal activities a firm engages in when transforming

inputs into outputs
• Through primary and support activities
Each activity adds incremental value
• Raw materials → components → products
Each activity adds incremental costs
➔ How the firm’s economic value creation (V − C)
breaks down into a distinct set of activities
➔ Help determine perceived value (V) and the costs (C)
to create it.
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 A Generic Value Chain

A generic value chain

needs to be modified to
capture the activities of a
specific business.
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 Primary Activities

Firm activities that add value directly

Transform inputs into outputs as the firm moves a
product or service horizontally along the internal value
chain.
• Supply chain management
• Operations
• Distribution
• Marketing and sales
• After-sales service

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 Support Activities

Firm activities that add value indirectly

Necessary to sustain primary activities
• Research and development (R&D)
• Information systems
• Human resources
• Accounting and finance
• Firm infrastructure
• Processes, policies, and procedures

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 Strategic Activity Systems

A network of interconnected activities

• Socially complex and causally ambiguous
• Enhance likelihood of sustained competitive advantage
Characteristics:
• Elements can be easily observed
• How activities are managed is not easily observed
• Difficult to imitate
E.g., A Firm’s 25 activities with a 90 percent accuracy:
copying accuracy = 0.9 × 0.9 × 0.9 …, repeated 25 times
→ 0.925 = 0.07!
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 Strategic Activity Systems Must Evolve

External environment changes

Competitors develop their activity systems
How activity systems are updated:
• Add new activities
• Remove activities that are no longer relevant
• Upgrade activities that have become stale
Each of these changes would require changes to the
resources and capabilities involved.

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 The Vanguard Group’s Activity System - 1997

• The Vanguard
Group, one of the
world’s largest
investment
companies
• low-cost investing
and quality service
for its clients
• Lowest average
expense ratio (fees
as a percentage of
total net assets
paid by investors)
• Passive index-fund
investing

Source: Adapted from N. Siggelkow (2002), “Evolution toward fit,” Administrative Science Quarterly 47: 146.

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 The Vanguard Group’s Activity System - 2017

• The 2017 activity-

system
configuration
allows Vanguard to
customize its
service offerings.
• It now separates its
more traditional
customers, who
invest for the long
term, from more
active investors,
who trade more
often but are
attracted to
Vanguard funds by
the firm’s high
performance and Source: Adapted from N. Siggelkow (2002), “Evolution toward fit,” Administrative Science Quarterly 47: 146.

low cost.
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 Implications for Strategic Leaders

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 How to Generate Additional Insights

SWOT analysis combines external and internal analysis:

• External analysis: Covered on Day 3
• Internal analysis: Covered on Day 4
Purpose:
• Leverage internal strengths to exploit external
opportunities
• Mitigate internal weaknesses and external threats
A strategic fit increases the likelihood that a firm is able to
gain a competitive advantage.
If a firm achieves a dynamic strategic fit, it is likely to be
able to sustain its advantage over time.
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 SWOT Analysis

A framework that allows managers to synthesize

insights obtained from an internal and external
analysis to derive strategic implications
Internal Analysis
• Strengths  Core Competencies
• Weaknesses  Unvaluable Resources
External Analysis
• Opportunities  Attractive 5 Forces
• Threats  Unattractive 5 Forces
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 Strategic SWOT Questions

How can the firm use strengths to take advantage

of opportunities?
How can the firm eliminate or minimize an internal
weakness to mitigate an external threat?
How can the firm use strengths to reduce the
likelihood and impact of threats?
How can the firm overcome weaknesses to
improve its ability to take advantage of an external
opportunity?

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 Strategic SWOT Questions

Internal External to Firm

to Firm
Strategic Questions Opportunities Threats
How can the firm use
How can the firm use
internal strengths to
internal strengths to take
Strengths reduce the likelihood
advantage of external
and impact of external
opportunities?
threats?
How can the firm overcome How can the firm
internal weaknesses that overcome internal
Weaknesses prevent it from taking weaknesses that will
advantage of external make external threats a
opportunities? reality?

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 The Final Step…

Evaluate the pros and cons of each strategic

alternative.
Select one or more alternatives to implement.
Carefully explain decision rationale.
• Including why other strategic alternatives were
rejected

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 A Word of Caution

A strength can simultaneously be a weakness

An opportunity can simultaneously be a threat
Example:
• Google is located in Silicon Valley.
• Strength: near Universities
• Weakness: high cost of living
• In a similar fashion, is global warming an
opportunity or threat for car manufacturers?

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