3-1 evaluating a firm’s internal capabilities. 3-2 what does internal analysis tell us? internal...
TRANSCRIPT
3-3-11
Evaluating a firm’s internal capabilities
3-3-22
What Does Internal Analysis Tell Us?
Internal analysis provides a comparative look at a firm’s capabilities
• what are the firm’s strengths?
• what are the firm’s weaknesses?
• how do these strengths & weaknesses compareto competitors?
3-3-33
Why Does Internal Analysis Matter?
• establish strategies that will exploit any sourcesof competitive advantage
• determine if its resources and capabilities arelikely sources of competitive advantage
Internal analysis helps a firm:
3-3-44
The Theory Behind Internal Analysis
The Resource-Based View
• developed to answer the question: Why do some firms achieve better economic performancethan others?
• assumes that a firm’s resources and capabilitiesare the primary drivers of competitive advantageand economic performance
• used to help firms achieve competitive advantageand superior economic performance
3-3-55
The Resource-Based View
Resources and Capabilities
Resources:
• tangible and intangible assets of a firm» tangible: factories, products intangible: reputation
• used to conceive of and implement strategies
Capabilities:
• a subset of resources that enable a firm totake full advantage of other resources» marketing skill, cooperative relationships
3-3-66
The Resource-Based View
Resources and Capabilities
Firm Assets:
Machinery
Collective Product Design Skill
Recruiting Skill
Engineering Skill of Individuals
Mineral Deposits
Are these resourcesor capabilities?
?
?
?
?
?
3-3-77
The Resource-Based View
Four Categories of Resources
• Financial (cash, retained earnings)
• Physical (plant & equipment, geographic location)
• Human (skills & abilities of individuals)
• Organizational (reporting structures, relationships)
3-3-88
The Resource-Based View
Two Critical Assumptions of the RBV
• Resource Heterogeneity
» different firms may have different resources
• Resource Immobility
» it may be costly for firms without certainresources to acquire or develop them
» some resources may not spread from firm tofirm easily
3-3-99
The Resource-Based View
What do these assumptions really mean?
• if one firm has resources that are valuableand other firms don’t, and…
• if other firms can’t imitate these resourceswithout incurring high costs, then…
• the firm possessing the valuable resourceswill likely gain a sustained competitive advantage
3-3-1010
The Resource-Based View
• heterogeneity of resources typically occurs as the result of ‘bundling’ the resources and capabilitiesof a firm
Resource Heterogeneity
• managers of a firm could take resources that seemhomogeneous and ‘bundle’ them to createheterogeneous combinations
• competitive advantage typically stems from severalresources and capabilities ‘bundled’ together
3-3-1111
The Internal Analysis Tool
The VRIO Framework
Four Important Questions:
• Value
• Rarity
• Imitability
• Organization
3-3-1212
The VRIO Framework
If a firm has resources that are:
• valuable,
• rare, and
• costly to imitate, and…
• the firm is organized to exploit these resources,
then the firm can expect to enjoy a sustainedcompetitive advantage.
3-3-1313
The VRIO Framework
• a resource or bundle of resources is subjected toeach question to determine the competitiveimplication of the resource
Applying the Tool
• each question is considered in a comparativesense (competitive environment)
3-3-1414
Applying the VRIO Framework
The Question of Value
• in theory: Does the resource enable the firmto exploit an external opportunity or neutralizean external threat?
• in practice: Does the resource result in anincrease in revenues, a decrease in costs, orsome combination of the two?
(Example: what makes the iPod so expensive?)
3-3-1515
Applying the VRIO Framework
The Question of Rarity
• a resource must be rare enough that perfect competition has not set in
• if a resource is not rare, then perfect competitiondynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)
• thus, there may be other firms that possess theresource, but still few enough that there is scarcity (Example: medicines are expensive, even though
there are several firms producing similar products)
3-3-1616
Applying the VRIO Framework
Valuable and Rare
If a firm’s resources are: The firm can expect:
Not Valuable Competitive Disadvantage
Valuable, but Not Rare Competitive Parity
Valuable and RareCompetitive Advantage
(at least temporarily)
3-3-1717
Applying the VRIO Framework
The Question of Imitability
• the temporary competitive advantage of valuableand rare resources can be sustained only if competitors face a cost disadvantage in imitatingthe resource
» intangible resources are usually morecostly to imitate than tangible resources(Harley-Davidson’s styles may be easilyimitated, but its reputation cannot)
3-3-1818
Applying the VRIO Framework
The Question of Imitability
• if there are high costs of imitation, then the firmmay enjoy a period of sustained competitiveadvantage
» a sustained competitive advantage will lastonly until a duplicate or substitute emerges
if a firm has a competitive advantage, otherswill attempt to imitate it
(Example: Intel and AMD)
3-3-1919
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Unique Historical Conditions (Coca Cola)
• first mover advantages
• path dependence
3-3-2020
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Causal Ambiguity (Pixar)
• causal links between resources and competitive advantage may not be understood
• bundles of resources fog these causallinks
3-3-2121
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Social Complexity (Steve Jobs/Steve Wozniak)
• the social relationships entailed in resources may be so complex thatmanagers cannot really manage themor replicate them
3-3-2222
Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Patents
• patents may be a two-edged sword
• offer a period of protection if the firm isable to defend its patent rights
• required disclosure may actually decreasethe cost of imitation, and the timing
3-3-2323
Applying the VRIO Framework
Value, Rarity, & Imitability
If a firm’s resources are: The firm can expect:
Valuable, Rare, butnot Costly to Imitate
TemporaryCompetitive Advantage
Valuable, Rare, and Costly to Imitate
SustainedCompetitive Advantage
(if Organized appropriately)
3-3-2424
Applying the VRIO Framework
The Question of Organization
• a firm’s structure and control mechanismsmust be aligned so as to give people abilityand incentive to exploit the firm’s resources
• examples: formal and informal reporting structures,management controls, compensation policies,relationships, etc.
• these structure and control mechanisms complementother firm resources—taken together, they can help a firm achieve sustained competitive advantage(Dell)
3-3-2525
Valuable? Rare?Costly toImitate?
Exploited byOrganization?
CompetitiveImplications
No
Yes
Yes
Yes
Yes
Yes Yes Yes
No
No
No Disadvantage
Parity
TemporaryAdvantage
SustainedAdvantage
EconomicImplications
BelowNormal
Normal
AboveNormal
AboveNormal
3-3-2626
The Resource-Based View
Resources &Capabilities
CompetitiveAdvantage
• Valuable
• Rare
• Costly to Imitate
• Organized to Exploit
CA will be sustained if:
• other firms’ costs of imitation are greaterthan benefit of imitation
• the firm is organizedto exploit advantages
3-3-2727
• List the main resources and capabilities of Baosteel• How do these resources and capabilities add value?• Are these resources rare?• Can they be easily imitated?• Is Baosteel organised to exploit these resources and
capabilities?
• It is important to identify weaknesses in the organisation. Only by identifying these weaknesses is it possible to develop a sustainable competitive strategy.
Internal Analysis
3-3-2828
Managers’ Job:
• bundle resources and capabilities to achieve competitive advantage
Internal Analysis
Tells us:
• what the firm should do, given the relativestrengths and weaknesses of resources andcapabilities
VRIO Framework Helps Managers RecognizeSources of Competitive Advantage
3-3-2929
• Traditional Circus• What are the characteristics of a traditional circus?• What resources and capabilities does it have?• Are these resources rare? Can they be imitated?• What things don’t you like about the traditional circus?
• Cirque du Soleil• How has Cirque du Soleil changed the circus? Think in terms of
target group, resources and capabilities.• Are these resources rare? Can they be imitated?• What is Cirque du Soleil’s biggest challenge?
Cirque du Soleil
3-3-3030
Cirque du Soleil
Socio-cultural changes:
Traditional Circus
Star performers
Animals
Multiple arenasPopcorn
FunDanger
Circus old fashioned Attitudes towards performing animals
Five Forces are affected by:
Fall in demand increases rivalry Substitutes become more popular
3-3-3131
Cirques solutionGo for a niche market
ValueFun
DangerTheme Dance and Music
Comfort
Unique Venue
Rare
Immitable
OrganisationStrong HR policy
Health care
Well paid
Concept was new, but resources and capabilities not
Yes, can be copied
3-3-3232
The Strategy Canvas of Cirque du Soleil
Smaller Regional Circus
Large Scale Traditional Circushi
off
eri
ng
lev
el
loPrice
Fun & Humor Unique VenueAisle Concessions
Multiple Show Arenas
Thrills & DangerAnimal Shows
Star Performers
Theme
Refined Viewing Environment
MultipleProductions
Artistic Music & Dance
Cirque du Soleil
© Kim & Mauborgne2006