Chapter 3

Examining the Internal Environment: Resources, Capabilities and Activities

Why Internal Analysis?

Early strategy theory rooted in industry structural analysis - external focus

This approach has lost its appeal because: internationalization & deregulation has all but

removed safe havens technology and changes in demand have

blurred industry lines

Components of Internal Analysis Leading to Competitive Advantage and Value Creation

Tangible Resources

Intangible Resources

Evaluation of Resources

Strength or Weakness relative to competitorsbasic business requirementskey vulnerabilities

Tangible

Resources

Intangible

Resources

Org.

Capabilities

Examples…..• Customer Service• Product Development• Employee Productivity

Inputs into Outputs

Examples of Firm’s Capabilities

Core Competencies central to the firm’s competitiveness rewarded in market place combination of skills & knowledge, not

products or functions flexible, long term platforms embedded in the organization’s systems distinctive competencies are those the firm

performs better than rivals All core competencies have the potential to

become core rigidities

Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace

Tools for Building Core Competencies

Four Criteria of Sustainable Competitive Advantage

Value Chain Analysis

Sustainable Competitive Advantage

Must be valuable, rare, inimitable, and non-substitutable, exploitable

Sustainability is a function of Durability - how long will it last?

Technology? Reputation? Fixed Assets? Imitability - how quickly can it be copied?

Transparent - easy to see? Transferable - can it be done

elsewhere? Replicable - can we do it here?

Factors that Limit Imitation

Physical Uniqueness – location, patents Path Dependency – accumulation effect Causal Ambiguity – unable to disentangle Social Complexity – social interactions are

not readily understood nor duplicated Absorptive Capacity – ability to identify, value,

assimilate and use knowledge

Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Creating Value

Key Terms

Value – measured by a product's performance characteristics and by its attributes for which customers are willing to pay

Value Creation per Unit

Comparing Toyota and General Motors

Relative costs and prices

Where do cost/price differences come from? raw materials and components differences in technology, plant, equipment efficiencies, learning, experience, wages,

productivity marketing, sales, promotion, warehousing,

distribution, administration costs distribution inflation, exchange and tax rates

Porter’s Value Chain

Views the organization as a series (chain) of activities, which may or may not create value

Porter’s Value Chain (cont.)

Primary Activities– Inbound logistics – Supply Chain Management– Operations– Outbound logistics - Distribution– Marketing and sales– After-sales service

– Contribute to the physical creation of the product/service, its sale and transfer to the buyer, and its service after the sale

Porter’s Value Chain (cont)

Support Activities Procurement Technological development Human resource management Firm infrastructure

The Value-Creating Potential of Support Activities

Firm Infrastructure

HRMTechnological Development

Procurement

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The Value ChainSupport

Primary

A low cost strategy…..

Firm Infrastructure

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…tries to pull the arrow back…..

Technological Development

Fewer layers of management

Policies to reduce turnover

IBM Printer - 150 to 62 parts, 3.5 minutes

Monitor supplier performance

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Low Cost - Support Activity examples…...

Low cost - Primary Activity examples….

Inbound - Toyota Operations - Subway Outbound - Campbell Soup’ Continuous

Replenishment Marketing/Sales - WalMart Customer Service - Federal Express

A differentiation strategy…..

Firm Infrastructure

HRM

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….tries to pull the arrow forward...

Technological Development

Commitment to quality

Compensation rewarding innovationAmazon Recommendations

Purchasing high-quality components

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Differentiation - Support Activity examples…...

Inbound - Dell Operations - Marriott Outbound - WebVan Market/Sales - Nordstrom’s Customer Service - Pirtek

Differentiation - Primary Activity examples…...

Suppliers Buyers

Your Firm

Your Rivals

Suppliers Buyers

Your Firm

Your Rivals

Opportunities forAdvantage

Suppliers Buyers

Your Firm

Your Rivals

Opportunities forAdding Value

Opportunities forAdding Value

Outsourcing

Key TermsOutsourcing – purchase of a value-

creating activity from an external supplier

Outsourcing Viability When a firm does not have the capabilities in the

areas needed to succeed When a firm lacks a resource or possesses

inadequate skills needed to implement a strategy When few organizations possess the resources and

capabilities needed for competitive superiority in all primary and support activities necessary to compete

When extensive internal capabilities exist for effectively coordinating external sourcing and internal core competencies

Benefits of Outsourcing

Increased flexibility Mitigation of risks Reduced capital investments