Internal Analysis: Resources, Capabilities,

and Activities

Joe Mahoney

Internal Analysis: Inside the Firm

• Comparing two firms in same industry:

Internal focus

Core Competencies

Unique strengths deep inside that differentiate a firm

Can drive competitive advantage

Strategic Fit Internal strengths fit with the external

environment

Creating Strategic Fit to Leverage Internal Strengths

4–3

The Role of Strategy in Business is to Generate and Sustain Value via the Linkages Between

Positioning, Organization, and Resources & Capabilities

Positioning

Organization Resources & Capabilities

4–4

Positioning

• Scope of the Firm:

Geographic scope

Product-market scope: Choice of businesses (corporate portfolio analysis)

Product market positioning within a business

Vertical integration (value chain) decisions

Organization

• Structure Formal definition of authority Conflict resolution

• Systems Rules, routines, evaluation and rewards

• Processes Informal communication, networks, and recruitment

4-6

Resources and Capabilities

• Tangible resources e.g., physical capital

• Organizational capabilities e.g., routines and standard operating procedures

• Intangible resources e.g., trademarks, “know-how”

IndividualIndividual OrganizationOrganization

ExplicitExplicit

TacitTacit

InformationFacts

Scientific kn.

DatabasesSystems & procedures

Intellectual property

Skills Organizationalcapabilities

CRAFTENTERPRISES

‘INDUSTRIAL’ ENTERPRISESTypes

ofKnowledge

Typesof

Knowledge

Levels of knowledgeLevels of knowledge

Knowledge Types and Knowledge ConversionKnowledge Types and Knowledge Conversion

4–8

Linking Resources and Capabilities to Firm Performance

Company Examples of Core Competencies and Applications

Precision Mechanics

FineOptics

Micro-Electronics

35mm SLR cameraCompact fashion cameraEOS autofocus camera

Digital cameraVideo still camera

Plain-paper copierColor copier

Color laser copier Laser copierBasic fax

Laser faxMask aligners

Excimer laser alignersStepper aligners

Inkjet printerLaser printer

Color video printerCalculator

Notebook computer

Canon: Products and Core Technical CapabilitiesCanon: Products and Core Technical Capabilities

4–11

Tangible and Intangible Resources

4–12

Appraising ResourcesAppraising Resources

RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds/ generation Credit rating

Tangible Net cash flow

Resources Physical Plant and equipment: Market value of

size, location, technology fixed assets.

flexibility. Scale of plants

Land and buildings. Alternatives for fixed

Raw materials. assets

Technology Patents, copyrights, know how No. of patents owned.

R&D facilities. Royalty income

Intangible Technical and scientific R&D expenditure.

Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity. Product

reputation (with suppliers, customers, price premium.

government) Recognition.

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyability of customers pay rates, turnover.

The Resource-based View

• Google Example

Tangible resources valued at $5 billion

Intangible brand valued at over $100 billion

Googleplex has both tangible and intangible aspects

• Competitive Advantage More Likely…..

From intangible resources4–14

Two Critical Resource Dimensions in RBV

• Resource heterogeneity Bundles of resources and capabilities differ across firms Southwest Airlines and Alaska Airlines have different

resources SWA

– Higher employee productivity

– Informal organization, pilots help load luggage

• Resource immobility Resources tend to be “sticky” and do not move easily Southwest Airlines sustained advantage

Several decades superior performance Competitors have unsuccessfully imitated SWA model

4–15

Applying RBV: Decision Tree Competitive Implications

Scarcity

Relevance

Durability

Mobility

Replicability

Property rights

Relative bargainingpower

Embeddedness ofresources

THE EXTENT OF THE COMPETITIVE ADVANTAGE

ESTABLISHED

SUSTAINABILITY OF THE COMPETITIVE ADVANTAGE

APPROPRIABILITY

THE PROFITEARNING POTENTIALOF A RESOURCE OR

CAPABILITY

The Rent-Earning Potential of Resources and Capabilities

The Rent-Earning Potential of Resources and Capabilities

The Value Chain

• Primary Activities Add value directly in transforming inputs into outputs

Raw materials through production to customers

• Support Activities Indirectly add value

Provide support to the primary activities Information systems, human resources, accounting, etc.

• Managers can see how competitive advantage flows from a system of activities (using activity-based accounting).

3-4Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

The Value Chain

Adapted from Exhibit 3.1 The Value Chain: Primary and Support Activities

Source: Adapted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter.

General administration

Human resource management

Technology development

Procurement

Inbound logistics

Operations Outbound logistics

Marketing and sales

Service

4–18

Value Chain: Primary and Support Activities

© 1999 Pankaj Ghemawat

Hostess’s Cost Components

0

10

20

30

40

50

60

70

80

Cen

ts p

er u

nit

Profit

Marketing: Promotions

Marketing: Advertising

Outbound logistics

Operations: Manufacturing

Operations: Packaging

Operations: Ingredients

© 1999 Pankaj Ghemawat

Relative Cost Analysis

0

10

20

30

40

50

60

70

80

90

Hostess Little Debbie Ontario Baking Savory Pastries

Cen

ts p

er u

nit

Profit

Marketing: Promotions

Operations: Manufacturing

Operations: Packaging

Operations: Ingredients

Marketing: Advertising

Outbound logistics

Value Chain Analysis

• Outsourcing activities can have the unintended consequence of damaging the firm’s potential to evaluate continuously its key assumptions, learn, and create new capabilities and core competencies. Thus, managers should verify that the firm does not outsource activities that stimulate the development of new capabilities and competencies.

4–22

Strategic Coherence

The Logic of How The Business Fits Together:

•Southwest Airlines Low Price Short Routes

•No Frills•Point-to-Point•One Aircraft --

Boeing 737•High number of

Aircraft per Route•No Meals•Flexible/ Lower

Staffing

•American Airlines Premium Price Short, Long, & Int’l Variety

•Hub & Spoke System•Multiple Aircraft•Low number of

Aircraft per Route•Meals & Service•Higher Staffing

24

Southwest Airline’s Activity System

Limitedpassengeramenities

Short-haul,point-to-pointroutes betweenmidsize cities

and secondaryairports

Highaircraft

utilization

Frequent,reliable

departures

Lean, highlyproductiveground andgate crews

Very lowticket prices

No meals

No seatassignments

No baggagetransfers

No connectionswith other

airlines

15-minutegate

turnarounds

Limited useof travelagents

Automaticticketingmachines

Standardizedfleet of 737

aircraft

Flexibleunion

contracts

High levelof employee

stockownership

“Southwest,the low-fare

airline”

Highcompensationof employees

Strategic Coherence: Fit and Balance

• A fit among corporate, business, and functional strategy;

• A fit between strategy formulation and implementation;

• A balance of commitment and flexibility;

• A balance among stakeholders;

• A balance of competition and cooperation;

• A balance of hiding and diffusing information;

• A balance of centralization and decentralization; and

• A balance between stability and change.

4–25

Strategic Coherence

• Combining activities that complement and reinforce one another. These activities dovetail together to help achieve the overall objectives of the firm.

• Such strategies, which may regarded as systems of activities are often more successful because they are more difficult to imitation. Thus, they can lead to a sustainable competitive advantage.

• Strategic coherence may not be a sufficient condition for attaining a competitive advantage, but it is often a necessary one.

4–26

Strategic Coherence

• A sustainable competitive advantage often requires trade-offs. These tradeoffs arise for at least three reasons:

Inconsistencies in image or reputation.

Tradeoffs arising from the activities themselves.

Limits on internal coordination and control

• General management at its core is strategy:

Defining and communicating the company’s unique position; Making tradeoffs; Forging a dynamic fit among activities (i.e., strategic coherence). 4–27

Dynamic Strategic Activity Systems

• A network of interconnected activities in the firm

• Evolve over time – external environment changes Add new activities & upgrade or remove obsolete

ones

• Vanguard Example A global investment firm - $1.4 trillion managed assets

Emphasis on low customer cost and quality service – Among the lowest expense ratios in the industry (0.20%)

Updated the activity system from 1997 to 2011 New customer segmentation core Two new support activities Permits customized offerings: long-term and more active traders

4–28

Vanguard Group’s Activity System 1997

Legend

Core

Support

4–29

Vanguard Group’s Activity System 2011

Legend

Core

Support

4–30

Dynamic Capabilities Perspective

• A firm can modify its resource base to gain & sustain a competitive advantage

Advantage is gained from reconfiguring a firm’s resource base

Honda core competency in gas-powered engine design Could decrease in value

If consumers move toward electric-powered cars

BYD competency in batteries would gain advantage

• Dynamic capabilities are an intangible resource

• Resource stocks and flows are a useful view4–31

Role of Inflows and Outflows in Building Stocks

4–32

IBM Product Scope 1993 and 2010

In 1993, hardware accounted for 50% of IBM revenues

In 2010, software & (IT) services accounted for 80% of IBM revenues,

hardware was down to 18%

4–33

How to Protect a Competitive Advantage

1. Better Expectations of Future Values Buy Resources at a low cost

Real Estate Development - highway expansion

2. Path Dependence Current alternatives are limited by past decisions

Honda’s core competency in gas engines took decades to build

4–34

1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995

Founding ofHonda motor

company

50cc 2-cycle engine

4 cycle engines

405ccmotorcycle

Related products:ground tillers, marineengines, generators,pumps, chainsaws

First product: clip-on engine

for bicycles

The 50ccsuper-cub

N360 minicar

1000ccGoldwingtouring

motor cycle

Acura Cardivision

The Evolution of Honda Motor CompanyThe Evolution of Honda Motor Company

How to Protect a Competitive Advantage

3. Causal Ambiguity Cause of success or failure are not apparent

Why has Apple had such a string of successful products?– Role of Steve Jobs’ vision?– Unique talents of the Apple design team?– Timing of product introductions?

4. Social Complexity Two or more systems interact creating many possibilities

A group of 3 people has 3 relationships

A group of 5 people has 12 relationships

4–36