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Session 9Session 9

Internal Analysis

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Session TopicsSession Topics

Resource-Based View of the Firm Three Basic Resources What Makes a Resource Valuable? Using the Resource-Based View in Internal Analysis

SWOT AnalysisThe Functional ApproachValue Chain Analysis Internal Analysis: Making Meaningful Comparisons

Comparison with Past Performance Stages of Industry Evolution Benchmarking Comparison with Success Factors in the Industry

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Be consistent with conditions in the

competitive environment

Be consistent with conditions in the

competitive environment

Place realistic requirements on

the firm’s resources

Place realistic requirements on

the firm’s resources

Be carefully implemented/executed

Be carefully implemented/executed

Strategy must . . .

Ingredients Critical to a Successful StrategyIngredients Critical to a Successful Strategy

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What is the Resource-Based View of the Firm?What is the Resource-Based View of the Firm?

Firms differ in fundamental ways

because each firm possesses a

unique “bundle” of resources -

tangible and intangible assets and

organizational capabilities to make

use of those assets.

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The RBV of The FirmThe RBV of The Firm

More internally orientedKey analytic tool is value chain analysisResources are not mobile/transferable across

company and industry boundariesFocuses on sharpening your skills at executing

value chain activities that create superior efficiency, innovation, quality, and/or company responsiveness.

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The Industrial/Organizational Economics The Industrial/Organizational Economics PerspectivePerspective

More externally orientedKey Analytic tool is Porter’s Five Forces ModelAssumes that resources are transferable/mobile

across across company boundariesMore of a free-agent mentalityChoose your industry wisely and then set about

to develop resource proficiency

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The Three Basic ResourcesThe Three Basic Resources

Tangible assets Easiest to identify and often found on a firm’s balance sheet Include physical and financial assets Examples: Production facilities, raw materials, financial

resources, real estate, computers Intangible assets

Cannot be seen or touched Often very critical in creating competitive advantage Examples: Brand names, company reputation, company

morale, patents and trademarks, accumulated experience Organizational capabilities

Involve skills - ability to combine assets, people, and processes - used to transform inputs into outputs

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Examples of Different ResourcesExamples of Different Resources

Tangible Assets

• Hampton Inn’s reservation system

• McDonald’s locations

• Georgia Pacific’s land holdings

• Virgin Airlines’ plane fleet

• Coca-Cola’s Coke formula

Intangible Assets

• Nike’s brand name

• Dell Computer’s reputation

• Wendy’s advertising with Dave Thomas

• Disney’s image

• IBM’s management team

• Southwest Airlines culture

Organizational Capabilities

• Dell Computer’s customer service

• Wal-Mart’s purchasing and inbound logistics

• Sony’s product-development processes

• Coke’s global distribution coordination

• 3M’s innovation process

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What Makes a Resource Valuable?What Makes a Resource Valuable?

1. Competitive superiority: Does the resource help fulfill a customer’s need better than those of firm’s competitors?

1. Competitive superiority: Does the resource help fulfill a customer’s need better than those of firm’s competitors?

2. Resource scarcity: Is the resource in short supply? 2. Resource scarcity: Is the resource in short supply?

3. Inimitability: Is the resource easily copied or acquired?3. Inimitability: Is the resource easily copied or acquired?

4. Appropriability: Who actually gets the profit created by a resource?

4. Appropriability: Who actually gets the profit created by a resource?

5. Durability: How rapidly will the resource depreciate? 5. Durability: How rapidly will the resource depreciate?

6. Substitutability: Are other alternatives available? 6. Substitutability: Are other alternatives available?

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Characteristics Making Resources Difficult to ImitateCharacteristics Making Resources Difficult to Imitate

Physically unique resources Resources virtually impossible to imitate

Examples: One-of-a-kind real estate location, mineral rights, patents

Path-dependent resources Resources that must be created over time in a manner

that is often expensive and difficult to accelerate

Examples: Dell Computer’s system of direct sales of customized PCs via the Internet, Coca-Cola’s brand name, Gerber Baby Food’s reputation for quality

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Characteristics Making Resources Difficult to ImitateCharacteristics Making Resources Difficult to Imitate

Causal ambiguity (How do they do that?) Situations where it is difficult for competitors to

understand how a firm has created its advantage

Example: Southwest Airlines’ approach Same plane, routes, gate procedures, number of attendants

Culture of fun, family, and frugal yet focused services

Economic deterrence Involves large capital investments in capacity to

provide products or services in a given market that are scale sensitive

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Resource InimitabilityResource Inimitability

Easy to imitate• Cash• Commodities

Can be imitated• Capacity preemption• Economies of scale

Difficult to imitate• Brand loyalty• Employee satisfaction• Reputation for fairness

Cannot be imitated• Patents• Unique locations• Unique assets

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Guidelines: Using the RBV in Internal AnalysisGuidelines: Using the RBV in Internal Analysis

Disaggregate resources - break them into more specific competencies rather than use broad categories

Use a functional perspective in disaggregating tangible and intangible assets and organizational capabilities

Look at organizational processes and combinations of resources, not only at isolated assets or capabilities

Use the value chain approach to uncover potentially valuable capabilities, activities, and processes

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Marketing• Firm’s products/services• Concentration of sales in a few

products or to a few customers• Ability to gather needed information

about markets• Market share• Product-service mix and expansion

potential• Channels of distribution• Effective sales organization• Product-service image, reputation,

and quality’• Imaginativeness, efficiency,

effectiveness of sales promotion• Pricing strategy and flexibility• After-sale service and follow-up• Goodwill - brand loyalty

Financial and Accounting• Ability to raise short-term and long-

term capital; debt-equity• Corporate-level resources• Cost of capital relative to competitors• Tax considerations• Relations with owners, investors, and

stockholders• Leverage position• Cost of entry and barriers to entry• Price-earnings ration• Working capital• Effective cost control• Financial size• Efficiency and effectiveness of

accounting system

Key Resources Across Functional AreasKey Resources Across Functional Areas

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Production, Operations, Technical• Raw materials cost and availability,

supplier relationships• Inventory control systems• Location, layout, and use of facilities• Economies of scale• Technical efficiency of facilities• Effectiveness of subcontracting use• Degree of vertical integration• Efficiency and cost-benefit of

equipment• Effectiveness of operation control

procedures• Costs and technological competencies

relative to competitors• Research and development• Patents and trademarks

Personnel• Management personnel

• Employees’ skills and morale

• Labor relations costs compared to competitors

• Efficiency and effectiveness of personnel policies

• Effectiveness of incentives used to motivate performance

• Ability to level peaks and valleys of employment

• Employee turnover and absenteeism

• Specialized skills

• Experience

Key Resources Across Functional Areas (continued)Key Resources Across Functional Areas (continued)

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Quality Management

• Relationship with suppliers, customers

• Internal practices to enhance quality of products and services

• Procedures for monitoring quality

Information Systems

• Timeliness and accuracy of information about sales, operations, cash, and suppliers

• Relevance of information for tactical decisions

• Information to manage quality issues: customer service

• Ability of people to use information provided

Key Resources Across Functional Areas (continued)Key Resources Across Functional Areas (continued)

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Organization and General Management

• Organizational structure

• Firm’s image and prestige

• Firm’s record in achieving objectives

• Organization of communication system

• Overall organizational control system

• Organizational climate and culture

• Use of systematic procedures in decision making

• Top-management skills, capabilities, and interest

• Strategic planning system

• Intra-organizational synergy

Fig. 6-5: Key Resources Across Functional Areas (concluded)Fig. 6-5: Key Resources Across Functional Areas (concluded)

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SWOT AnalysisSWOT Analysis

Strengths

A resource advantage relative to competitors and the needs of markets firm serves

Weaknesses

A limitation or deficiency in one or more resources or competencies relative to competitors

Opportunities

A major favorable situation in a firm’s environment

Threats

A major unfavorable situation in a firm’s environment

Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation

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Numerous environmental opportunities

Major environmental threats

Substantial internal

strengths

Critical internal

weaknesses

Cell 3: Supports a turnaround-oriented strategy

Cell 1: Supports an aggressive strategy

Cell 4: Supports a defensive strategy

Cell 2: Supports a diversification strategy

SWOT Analysis Diagram SWOT Analysis Diagram

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What is Value Chain Analysis?What is Value Chain Analysis?

Focuses on how a business creates customer value by examining contributions of different internal activities to that value

Divides a business into sets of activities within the business Starts with inputs a firm receives Finishes with firm’s products or services and after-

sales service to customersAllows better identification of a firm’s strengths

and weaknesses since the business is viewed as a process

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Primary Activities

Su

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Act

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Research, technology, and systems development

Human resource management

General administration

Procurement

Inb

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Op

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logi

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Mar

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Ser

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Mar

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Margin

The Value ChainThe Value Chain

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1.1. Comparison with past Comparison with past performanceperformance

1.1. Comparison with past Comparison with past performanceperformance

2.2. Stages of industry evolution Stages of industry evolution2.2. Stages of industry evolution Stages of industry evolution

3.3. Benchmarking - Comparison Benchmarking - Comparison with competitorswith competitors

3.3. Benchmarking - Comparison Benchmarking - Comparison with competitorswith competitors

4.4. Comparison with success Comparison with success factors in the industry factors in the industry

4.4. Comparison with success Comparison with success factors in the industry factors in the industry

Perspectives to use in evaluating how a firm stacks up based on its internal capabilities

Perspectives to use in evaluating how a firm stacks up based on its internal capabilities

Internal Analysis: Making Meaningful ComparisonsInternal Analysis: Making Meaningful Comparisons