Chapter 3

Examining the Internal

Environment: Resources,
Capabilities, and Activities
OBJECTIVES

1 Explain the internal context of strategy

Identify a firm’s resources and capabilities and explain

2
their role in its performance

Define dynamic capabilities and explain their role in both

3 strategic change and a firm’s performance

Explain how value‑chain activities are related to firm

4 performance and competitive advantage

Explain the role of managers with respect to resources,

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capabilities, and value‑chain activities

2
COMPARATIVE INDUSTRY REFORMANCE
ROA
Semiconductor Global Auto ROS

Grocery Store

How do
such differences in
profitability
materialize?

3
RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS

Resources

Managers

Competitive
Strategy advantage/ Performance
disadvantage

Management
strategic decision
making
Capabilities

4
RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING
BLOCKS OF STRATEGY

Strategy

lities
Resour Capabi cies)
ce ten
s (compe

The inputs that firms use to create goods
and services
• Undifferentiated or firms-specific
• Tangible or intangible
• Easy to acquire or difficult
A firm’s skill in using its resources
to create goods and services.
The combination of procedures
and expertise that the firm relies
on to engage in distinct activities
in the process of producing goods and
services

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TRUST AS AN ORGANIZATIONAL RESOURCE

1 Trust is an intangible resource

2 A trustworthy reputation for a firm can

be leveraged.

6
KNOWLEDGE

Explicit (easy
competitive
Knowledge as
intelligence)
a resource
Tacit (more
valuable)

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EXAMPLES OF CAPABILITIES
Company Capability
Logistics -- distributing vast amounts of
goods quickly and efficiently to remote
locations
An extraordinarily frugal system for
delivering the lowest cost structure in the
mutual fund industry, using both techno-
logical leadership and economies of scale
Generating new ideas then turning those
ideas into new, profitable products
1: Stalk, Evans, and Shulman, 1992
2: Makadok, 2003
Result
200,000-percent return to share-
holders during first 30 years
since IPO1
25,000-percent return to share-holders
during the 30-plus year tenure of CEO
John Connelly.2
As for ongoing expenses, share-
holders in Vanguard equity funds pay,
on average, just $30 per $10,000, vs.
a $159 industry average. With bond
funds, the
bite is just $17 per $10,000
30 percent of revenue from products
introduced within the past four years
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THE VRINE MODEL
Test
Valuable? Does the resource or capability allow the
firm to meet a market demand or protect
the firm from market uncertainties?
Rare? Assuming the resource or capability is
valuable, is it scarce relative to demand?
Or, is it widely possessed by most
competitors?
Inimitable Assuming a valuable and rare resource,
and non- how difficult is it for competitors to either
substitut- imitate the resource or capability or
able? substitute for it with other resources and
capabilities that accomplish similar
benefits?
Exploit- For each step of the preceding steps
able? of the VRINE test, can the firm actually
exploit the resources and capabilities that itwhich the firm is unable to exploit
owns or controls?
Competitive implication
If so, it satisfies the value requirement.
Valuable resources are needed just to
compete in the industry, but value by
itself does not convey an advantage
Valuable resources which are also rare
convey a competitive advantage, but its
relative permanence is not assured.
The advantage is likely only temporary.
Valuable resources and capabilities
which are difficult to imitate or substitute
provide the potential for sustained
competitive advantage
Resources and capabilities that
satisfy the VRINE requirements but
actually result in significant opportu-
nity costs (other firms would likely
pay large sums to purchase the
VRINE resources and capabilities).
Alternatively, exploitability unlocks
the potential competitive and perfor-
mance implications of the resource
or capability
Performance implication
Valuable resources and capabilities
convey the potential to achieve “normal
profits” (i.e., profits which cover the cost
of all inputs including the cost of capital)
A temporary competitive advantage
conveys the potential to achieve above
normal profits, at least until the
competitive advantage is nullified by other
firms
A sustained competitive advantage
conveys the potential to achieve above
normal profits for extended periods of time
(until competitors eventually find ways to
imitate or substitute or the environment
changes in ways that nullify the value of
the resources)
Firms which control unexploited VRINE
resources and capabilities generally
suffer from lower levels of financial
performance and depressed market
valuations relative to what they would
otherwise enjoy (though not as
depressed as firms lacking resources and
capabilities which do satisfy VRINE)
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SUSTAINABILITY

Sustainability:
Just having a
Durability
competitive
advantage is not
Imitability
enough. Can it
be sustained?

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TANGIBLE AND INTANGIBLE ADVANTAGES

Intangible Tangible

+ =

Location selection + Rural real-estate = Wal-Mart

High traffic
Brand + real-estate
= McDonald’s

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HOW WOULD YOU DO THAT?

Do patents on Zoloft ®
Valuable?
provide value?

Do Pfizer's patents provide

Rare?
“rarity”?
Pfizer’s
Zoloft ®
Inimitable and Can competitors imitate?
non-substitutable? Can they substitute?

Exploitable? Can Pfizer exploit?

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DYNAMIC CAPABILITIES

Mail Boxes Etc. franchise

Start-up plans

People

Brand Value

Location

Processes
Dynamic capability: Mail boxes, etc.,
how we integrate recon- has developed the
figure, acquire, or divest ability to combine
resources for competitive resources better
advantage? than the
competition

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VALUE CHAIN: INTERNET STARTUP EXAMPLE

Firm Financing, legal support, accounting

Infrastructure

Support Human Recruiting, training, incentive system, employee

Activities Resources feedback
Technology Inventory Site Pick & pack Site look & feel Return
Development system software procedures Customer research procedures

Procurement CDs Computers Shipping Media

Shipping Telecom lines services
Inbound Server Picking and Pricing Returned items
shipment of operations shipment of top Promotions
top titles titles from Customer
Billing warehouse Advertising feedback
Warehousing
Product
Collections Shipment of other information and
titles from third- reviews
party distributors Affiliations with
other websites

Inbound Operations Outbound Marketing After-Sales

Logistics Logistics & Sales Service

Primary Activities

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GUIDELEINES FOR OUTSOURCING

1 Activities that can create value for the

firm should not be outsourced.

2 Those activities that represent key

sources of learning for the firm should
not be outsourced.

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USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE

Identical Differentiated
Find a different
Longer-lasting
way to perform
advantage
activities

Shorter-term
Find a better way to
advantage
perform the same
(competitors
activities
catch up)

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TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU

Selected difference between Southwest and large Airlines

Southwest Major Airlines

Technology • Single aircraft • Multiple types of

and design aircrafts Southwest
made choices so
Operations • Short segment flights • Hub and spoke that competitors
• Smaller markets and secondary system did not copy -
airports in major markets • Meals because copying
• No baggage transfers to others • Seat assignments would require
airlines them to
• Multiple classes of
• No meals service abandon
activities
• Single class of service • Baggage transfer to
other airlines essential to their
• No seat assignments strategies

Marketing • Limited use of travel agents • Extensive use of

• Word of mouth travel agents

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INNOVATION AND INTEGRATION OF THE VALUE CHAIN

Area of innovation
As
So se De
u rc m l iv
e bl er
e
IKEA Transferred assembly and delivery
to the consumer

Dell Choose an entirely direct distribution model

(rather than through retailers) and
outsourced component manufacturing

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STRATEGIC LEADERSHIP

“Companies that overlook the role of leadership in

the early phases of strategic planning often find
themselves scrambling when it’s time to execute.
No matter how thorough the plan, with-out the right
leaders it is unlikely to succeed”
– McKinsey & Company

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