The Internal Environment:

Understanding how a Firms Resources and Capabilities

Lead to a Competitive Advantage
Agenda
Resource-based View of Strategy
Resources and Capabilities
SWOT Analysis
Value Chain and Cost Analysis

External
Environment
Macro
Industry
Operating

Company
Mission
and
Objectives

Desired?

Possible?

Internal
Environment
Resources
Current Strategy
Costs

Strategic
Options
and
Choice

Resource-based View of Strategy

Views the firm as a unique bundle of heterogeneous resources and capabilities
Strategy is concerned with matching a firms resources and capabilities to the
opportunities that arise in the external environment (or creating opportunities).
The key to profitability is not doing the same as other firms, but exploiting
differences between firms.

Resource-based View of Strategy

Resources are tangible, intangible and human.
Examples include:
Financial
Physical
Technology
Reputation
Culture
Specialized skills and knowledge
Communication patterns
Employee motivation

Different Types of Resources

Tangible Assets/Resources: Coca-Colas Formula
Intangible Assets/Resources: Nikes Brand Name,
Jack Welch as GEs former CEO, Reputation
Organizational Capabilities: Dell Computers Customer Service,
Wal-Marts purchasing and inbound logistics, 3Ms innovation process

How can one identify the key resources

upon which a strategy can be built?

Competitive Advantage comes from:

Scarcity of the Resource

Relevance of the Resource (Key Success Factors)

Resources and KSFs

P& Gs
Brand Management Program

Industry KSFs

Price Competitiveness
Market Share
Brand Equity
Access to Distribution
Channels
Product
Differentiation

Sustainable Advantage is based on the following:

Rare
Not easily imitated
(physical uniqueness, path dependency, causal ambiguity, economic deterrence)

Not easily substitutable

Transferability
Firm-specific resources whose ownership cannot be easily transferred

Durability
(How quickly will this resource depreciate? (Investments in Technology)

Competitive Superiority
(Requires some disaggregation)

Appropriability
(Who captures the value that the resource creates? Physician/Hospital Relationships)

Durability?

Transferability?

Replicability?

Financial Capital: Retained Earnings, Capital from Entrepreneurs, equity holders

Physical Capital (examples): Computer hardware and software technology,
automated warehouses, robots used in production, Geographic Location
(Wal-Mart/operations in rural markets generate higher returns than more competitive
urban markets)
Human Capital (examples): training, experience, judgment, relationships (DuPont
invests heavily in training their engineering staffs to be more assertive and open to
new technologies)
Organizational Capital (examples): formal reporting structures, formal and
informal planning systems, culture and reputation (Merck uses its management
reputation to gain access to managerial labor markets, distribution networks and
customer groups.)

Resource-Based View and SWOT Analysis

Strengths: something the company either possesses or is good
at
doing (e.g., assets, skills, knowledge, partnerships)
Weaknesses: an area of current or potential vulnerability
1. The Question of Value
2. The Question of Rarity
3. The Question of Imitability
4. The Question of Organization

SW Questions
The Question of Value: Does a resource enable a firm to exploit and
environmental opportunity or neutralize an environmental threat?

The Question of Rarity: Is a resource currently controlled by only a small

number of competing firms?

The Question of Imitability: Do firms without a resource face a cost

disadvantage in obtaining or developing it?

The Question of Organization: Are a firms other policies and procedures

organized to support the exploitation of its valuable, rare and costly to imitate
resources?

What is value?

What is meant by value-adding activities?

Do all of the activities of a firm create value?

Value Chain: Cost Analysis

Purchased
Supplies
Inbound
Logistics

Distribution
and
Operations
Outbound
Logistics

Sales
and
Marketing

Service

Technology: Product R&D, Systems Development, Design

Human Resource Management and Development
General Administration: Planning, Finance, MIS, Legal

Margin

Value Chain of Full Service Brokerages

Back office functions: clear trades, track account balances, distribute

information and research reports, install and operate administrative
and systems support for brokers.

Perform proprietary
research and gather
proprietary
information

Create unique
products
and
services

Build a
network of
local offices
to establish
a local
presence

Use
professional
brokers paid
by commission
to deliver
personal service
and advice to
clients

Value Chain of Discount Brokerages

Technical support and customer service personnel,

automated record keeping

Create Web page

and navigation
software;
install servers

Provide
clients
access to
trading
information
and
account
balances via
the Internet

Competitive Strategies
Agenda:
Generic Strategies
Low cost leadership
Differentiation
Best Cost
Focus
Grand Strategies
Concentration
Market Development
Product Development

Generic Strategies
Low Cost Leadership
Differentiation
Best Cost
Focus

Low Cost Leadership

The firm attempts to be the low cost provider of a product or service.
Sources of Cost Advantage:
Economies of Scale (OPERATIONS)
Economies of Learning (learning curve effects/improved coordination/
familiarity with technology, etc) (OPERATIONS/R&D)
Production Techniques (Efficient utilization of materials/increased
precision/automation) (OPERATIONS/AIS)

Low Cost Leadership

Sources of Cost Advantage:
Product Design (Designs economize on materials/design for
automation) (OPERATIONS/R&D/ENGINEERING)
Input Costs (Location advantages/ownership of inputs/exercising
bargaining power/supplier cooperation) (PROCUREMENT/
INTERNATIONALIZATION/VERTICAL INTEGRATION(C-L STRATEGY)
Capacity Utilization (OPERATIONS)
Managerial or Organizational efficiency (operational effectiveness)
(ALL FUNCTIONAL AREAS)

Motel 6

External Environment

Sources of Advantage
1. Selects relatively inexpensive sites
2. Builds only basic facilities
(no restaurant, no bar)
3. Relies on standard architectural designs
4. Uses inexpensive materials and
low-cost construction techniques
5. Simple room furnishings and
decorations

Low Cost
Strategy

Competitive
Advantage

Differentiation Strategy
When the firm attempts to provide something unique that is
valuable to buyers beyond simply offering a low price.
Firms pursue differentiation based on demand or supply:
Demand involves understanding customers and their needs and
preferences.
Supply involves being aware of the resources, capabilities, skills
and knowledge that a firm can leverage to create uniqueness.

Drivers of Uniqueness/Sources of
Advantage
Product features and product performance
Complementary service (delivery, credit, repair)
Intensity of marketing activities (advertising spending, signaling)
Reputation
Technology embedded in design and manufacture
Quality of purchased inputs

Drivers of Uniqueness/Sources of
Advantage continued..
Location (e.g., retail stores)
Degree of vertical integration
Skill and experience of employees
Procedures influencing the conduct of each value-adding activity
(e.g., rigor of quality control, service procedures, frequency of
visits to a customer)
Proper segmentation

External Environment

Sources of Advantage
1.
2.
3.
4.
5.
6.
7.
8.

Prime Location with Scenic Views

Custom Architectural Designs
Fine Restaurants
Elegantly appointed lobbies and
bar lounges.
Swimming pools, exercise facilities
Upscale Room Accommodations
Multiple Guest Services
Large Well Trained Staff

Differentiation
Strategy

Competitive
Advantage

Best Cost
Combines advantages based on both low cost and differentiation.
The firm is able to offer what customers perceive as valuable while
at the same time being cost efficient.

Kimpton Hotels

External Environment

Sources of Advantage
1.
2.
3.
4.
5.
6.
7.

Luxurious, yet comforting

atmosphere (D)
Well-chosen yet limited menu of
services (LC)
High quality dining (D)
Restaurants are profit centers (LC)
Each property has unique
personality(D)
Low building costs (LC)
Low costs of capital (LC)

Best Cost
Strategy

Competitive
Advantage

Focus Strategy: the firm focuses on a

narrower segment of the industry.
How would a firm select an
appropriate segment?
Can a firm pursue a just a focus
strategy?
Examples: Papa Joes Grocery, Oink Oink, Inc. (roasted pig ears)

Concentrated Growth
Increasing the use of present products in present markets
1. Increasing the rate at which present customers use the
product/service (Hospitals creating wellness programs)
2. Attracting competitors customers
3. Attracting nonusers of the product (Profiling and contacting
potential
cosmetic surgery patients)
Drs. Rodan & Fields have their own private practices,
specializing in dermatologic surgery, cosmetic surgery
and acne treatments. Seeing over 1,000 patients a month,
Drs. Rodan and Fields developed Proactiv Solution to
help relieve the endless frustration and suffering of their
patients.

Market Development
Selling present products in new markets
1.

Opening additional geographic markets

2. Attracting other market segments

Product Development
Developing new products for present markets
1.

Developing new product features

2. Combining quality variations

3. Brand Extension