Strategic Management

UNIST 2022-1

Module 3
Internal Analysis
Resources, Capabilities, Core Competences
VRIN Framework
Outsourcing
Airbnb’s Strong Signs of Recovery

*https://www.statista.com/chart/23717/monthly-gross-bookings-on-airbnb/
 Airbnb’s Strong Signs of Recovery

*https://secondmeasure.com/datapoints/airbnb-and-hotel-industry-show-signs-of-strong-recovery/
Airbnb’s Strong Signs of Recovery
What makes AirBnB different?

01 02

Number of Lower
Listings Price

03 04
Convenient
Brand
User
Experience Equity
Superior Firm Performance:
Firm Effects of Industry Effects?
Strategic Fit & Internal Analysis
• A firm’s strategy should align the internal elements of the firm with
its external environment
• Internal analysis is a critical step for developing a strategy, especially
one that creates competitive advantage

The Firm’s
The Firm’s External
Internal Condition Environment
- Economic,
- Mission, vision, political, & social
and values Strategy condition
- Resources and - Technological
capabilities change
- Competitors
- Systems and
- Customers
processes - Cooperators
1 Analyzing Internal Environment
What builds up firms’ competitive advantages?
 Why Analyze Internal Environment?
Creating ‘Economic Value Added (EVA)’
• Value is measured by a product’s performance characteristics 100

and by its attributes for which customers are willing to pay 90

• Firms create value by innovatively building and leveraging their 80

resources to form capabilities and core competencies 70 EVA

• Ultimately, creating value for customers is the source of above- 60

average returns for a firm 50

40
• Firms’ performance can be measured by a variety of different
alternative metrics 30

20
• Profitability Metrics: ROA, ROE, ROI, …
10
• Financial Value Metrics: EBITDA, Tobin’s Q, …
0
• How much a firm’s stocks are valued in the financial
Industry Average Firm
market
Value Cost
• Present Value of Future Cash Flows: NPV
Foundation of Competitive Advantages

03
01 02
Competitive
Core Advantages
Resources Capabilities
Competencies

• Facilities, human resources, financial capital, technological knowledge,

management experiences, ….
• Resources are bundled to create organizational capabilities
• In turn, capabilities are the source of a firm’s core competencies, which
are the basis of establishing competitive advantages
• Resources, capabilities, and core competencies come from:
Firms’ history, path dependence, managerial foresight, as well as luck
Foundation of Competitive Advantages
• Broad in scope, resources cover a spectrum of individual,
social, and organizational phenomena

01
• Some of a firm’s resources are tangible, while others are
Resources intangible
• Tangible resources are assets that can be observed and
quantified
• Examples: Production equipment, manufacturing
facilities, distribution centers, and formal reporting
structures
• Tangible resources are difficult to leverage
Tangible Intangible
Resources • It is especially hard to derive additional business
Resources
opportunities or value from a tangible resource
Foundation of Competitive Advantages
Tangible Resources
• The firm’s capacity to borrow finances externally
Financial Resources • The firm’s ability to generate funds through internal
operations
Organizational Resources • Formal reporting structures
• The sophistication of a firm’s plant and equipment
and the attractiveness of its location
Physical Resources
• Distribution facilities
• Product inventory
• Availability of technology-related resources such as
Technological Resources
copyrights, patents, trademarks, and trade secrets
Foundation of Competitive Advantages
• Intangible resources are assets that are rooted deeply in
the firm’s history, accumulate over time, and are relatively
difficult for competitors to analyze and imitate
01 • Examples: Knowledge, managerial capabilities,
organizational routines, brand name, and
Resources organizational culture
• Compared to tangible resources, intangible resources:
• Are less visible and more difficult for competitors to
understand, purchase, imitate, or substitute for (→
knowledge spillovers or leakage to competitors)
• Can be leveraged: its effectiveness on firm
performance can be multiplied
• Are more relied on to be the foundation for a firm’s
capabilities
Foundation of Competitive Advantages
Intangible Resources
• Knowledge
Intangible Resources
• Skills
Human Resources
• Abilities to collaborate with others
• Trust among organizational members
• Ideas
Innovation Resources • Scientific capabilities
• Capacity to innovate
• Brand name (e.g., AirBnB, Coupang)
• Perceptions of product quality, durability, and reliability
Reputational Resources perceived by consumers
• Positive reputation with stakeholders such as suppliers,
financial investors, and the media
*https://ipcloseup.com/2021
/01/19/latest-data-show-
that-intangible-assets-
comprise-90-of-the-value-of-
the-sp-500-companies/
*https://www.oceantomo.com/intangible-asset-market-value-study/
Foundation of Competitive Advantages
• Capabilities are:
• “The capacity to perform a particular activity in a reliable and
02 at least minimally satisfactory manner” (Helfat & Winter,
2011)
Capabilities • Created by combining individual tangible and intangible
resources
• Focused on enhancing firms’ specific functional abilities
• Used to complete the organizational tasks required to
produce, distribute, and service the goods or services the firm
provides to customers for the purpose of creating value for
them
• The foundation for building core competencies and hopefully
competitive advantages
• Often based on developing, carrying, and exchanging
information and knowledge through the firm’s human capital
Foundation of Competitive Advantages
Examples of Capabilities
Functional Areas Capabilities Examples of Firms
Distribution • Effective use of logistics management • Walmart
techniques
Human Resources • Motivating, empowering, and retaining • Microsoft
employees
Management Inform • Effective and efficient control of • Walmart
ation Systems inventories through point-of-purchase
data collection methods
Marketing • Effective promotion of brand-name • Procter & Gamble
products • Ralph Lauren Corp
• Effective customer service • McKinsey & Co.
• Innovative merchandising • Nordstrom Inc.
• Crate & Barrel
Foundation of Competitive Advantages
Examples of Capabilities
Functional Areas Capabilities Examples of Firms
Management • Ability to envision the future trend in the • Hugo Boss
market • Zara
Manufacturing • Design and production skills yielding • Komatsu
reliable products • Witt Gas
• Product and design quality Technology
• Miniaturization of components and • Sony
products
Research & Develop • Innovative technology • Caterpillar
ment • Development of sophisticated control • Otis Elevator Co
solutions • Chaparral Steel
• Rapid transformation of technology into • Thomson
new products and processes Consumer
• Digital technology Electronics
Foundation of Competitive Advantages
• Core competencies:
• Are capabilities that serve as a source of competitive
03
advantage for a firm over its rivals
Core • The activities the company performs especially well
Competences compared to competitors
• The activities through which the firm adds unique
value to the goods or services it sells to customers
• Emerge over time through an organizational process of
accumulating and learning how to deploy different
resources and capabilities

Two tools help firms identify their core competencies:

1. The four criteria of sustainable competitive advantage
2. Value chain analysis
Foundation of Competitive Advantages
Foundation of Competitive Advantages
2 Analyzing Internal Environment
Identifying firms’ core competences:
VRIN framework
Value chain analysis
 Sustainable Core Competence
The VRIN Framework

03 04
01 02
Costly to Non-
Valuable Rare
Imitate substitutable

Capabilities failing to satisfy these four criteria are not core competencies
 Sustainable Core Competence
VRIN Framework

• Core competencies are capabilities that are:

• Valuable
• Valuable capabilities allow the firm
to exploit opportunities or
neutralize threats in its external
environment, thereby providing
higher value to customers
• Rare
• Rare capabilities are capabilities
that few, if any, competitors
possess
• If a resource is valuable but
common (not rare), then it becomes
the source of competitive parity
 Sustainable Core Competence
VRIN Framework
• Costly to imitate
• Costly-to-imitate capabilities are capabilities that other
firms cannot easily develop
• Competitors find it difficult to copy a firm’s resource
when it is deeply embedded in the organization’s
unique history and culture (i.e., causal ambiguity)
• Imitation also becomes difficult when interpersonal
friendships, trust, and reputations complicate the
characteristics of the resources (i.e., social complexity)
• Nonsubstitutable
• Nonsubstitutable capabilities are capabilities that do
not have strategic equivalents
• Intangible and invisible capabilities are more non-
substitutable than tangible capabilities (e.g., trust in
employee relationships, culture, brand name)
Sustainable Core Competence
VRIN Framework
Valuable Capabilities
Rare Capabilities
Costly-to-Imitate Capabilities
Nonsubstitutable Capabilities
• Help a firm neutralize threats or exploit
opportunities
• Are not possessed by many others
• Historical: A unique and a valuable organizational
culture or brand name
• Ambiguous cause: The causes and uses of a
competence are unclear
• Social complexity: Interpersonal relationships,
trust, and friendship among managers, suppliers, and
customers
• No strategic equivalent
Sustainable Core Competence
 Sustainable Core Competence
A firm has a tremendously large set of resources and capabilities.

How can a firm organize these large set of resources and

capabilities into meaningful subsets?

How should a firm organize and orchestrate relationships among

those resources and capabilities?

There are two solutions:

1. Value Chain
2. Value Network
3 Organizing Internal Environment
Value Chain Analysis
Decisions for Outsourcing
 Value Chain Analysis
• The value chain is:
• A template that firms use to analyze their cost position
and to identify the multiple means that can be used to
facilitate implementation of a chosen strategy
• Segmented into primary activities and support
activities
• Primary activities are activities or tasks the firm
completes in order to produce products and then
sell, distribute, and service those products in ways
that create value for customers
• Support functions include the activities or tasks
• A firm can develop a capability and/or a
the firm completes in order to support the work
core competence in any of the value chain
being done to produce, sell, distribute, and service
process, creating value for customers
the products the firm is producing
 Value Chain Analysis
• Value chain analysis allows the firm to understand the parts of its operations that create
value and those that do not
• Understanding these issues is important because the firm earns above-average returns
only when the value it creates is greater than the costs incurred to create that value
 What to Look Out When Analyzing Internally
Core Rigidities

• Having a significant quantity of resources is not the same

as having the “right” resources
• The “right” resources are those with the potential to be
formed into core competencies as the foundation for
creating value for customers
• All core competencies have the potential to become
core rigidities that generate inertia and stifle
innovation
What to Look Out When Analyzing Internally
Challenges in Internal Analysis
 What is Required for Internal Analysis?
Challenges in Internal Analysis
• In making decisions affected by these three conditions,
effective judgment is required
• Judgment is the capability of making successful
decisions when no obviously correct model or rule is
available or when relevant data are unreliable or
incomplete
• When exercising judgment, decision makers:
• Must be aware of possible cognitive biases, such as
overconfidence
• Often take intelligent risks
• Strategic leaders are individuals with an ability to
examine the firm’s resources, capabilities, and core
competencies and make effective choices about their use
 When Should Firms Outsource?
Outsourcing
• When the firm cannot create value in its own value chain,
outsourcing is considered
• Outsourcing is the purchase of a primary activity or a
support function activity from an external supplier
• Firms engaging in effective outsourcing:
• Increase their flexibility
• Mitigate risks
• Reduce their capital investments
• Firms should use outsourcing only for activities where
they:
• Cannot create value
• Are at a substantial disadvantage compared to
competitors
 When Should Firms’ Outsource?
Outsourcing

• Outsourcing can be effective because few

organizations possess the resources and capabilities
required to achieve competitive superiority in each
value chain activity and support function
• By outsourcing activities in which it lacks competence,
a firm:
• Can fully concentrate/focus on those areas in
which it has the potential to create value
• Outsourcing to a foreign supplier is commonly called
offshoring