introduction to internal analysis 2015

7/23/2019 Introduction to Internal Analysis 2015

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Internal Analysis

Resource and Capability Analysis

M. Peteraf Copyright ©

2015



Course Road Map

The competitive environment

Part I: External Analysis

Part II: Internal Analysis

International strategies

Diversification strategies

Company resources and

capabilities

Value chains and activities

Positioning and generic strategies

Part III: Corporate Strategy

1



Today’s Session

Profitability differences across and within

industries

Profitability differences and competitive advantage

Competitive advantage defined

Resource and Capability Analysis

Identifying resources and capabilities

The

VRIN

tests

Testing for sustainable competitive advantage

2



3© 2003 Giovanni Gavetti

Differences in Profi tability Across Selected Industries

-5 0 5 10 15 20 25

Scheduled air transport

Motor vehicles

Cable television service

Computer system design

Engineering services

Trucking except local

Race track operations

Petroleum / natural gas

Drug stores

Eating places

Dental equipment

Women's clothing stores

Semiconductors

Prepackaged software

Pharmaceuticals

Operating income / assets , 1988-95 (%)

Source: Pankaj Ghemawat and Jan W. Rivkin, “Creating Competitive Advantage”



4© 2003 Giovanni Gavetti

Differences in Profitability Within Selected Industries

-5 0 5 10 15 20 25

National Semiconductor

Analog Devices

AMD

Motorola

Texas Instruments

Intel

Operating income / assets, 1988-95 (%)

Semiconductor Indus try Air line Industry

-5 0 5 10

TWA

Continental

US Airways

Delta

United

American

Southwest

Operating income / assets, 1988-95 (%)

Source: Pankaj Ghemawat and Jan W. Rivkin, “Creating Competitive Advantage”



Profitability Differences and

Competitive Advantage

Why are some businesses in an industry more

profitable than others?

Some may be better positioned in the industry

Less subject to the competitive pressures of the five-forces

Some have a COMPETITIVE ADVANTAGE over

others

Studies show a strong correlation between competitiveadvantage and profitability over the medium/long term

We will look at a connection between positioning

and competitive advantage in chapter 5

5



Competitive Advantage

A measure of business performance relative to

competitors

But not performance in terms of profitability

May result in higher profitability, but this depends

on some other things as well

Comes from meeting customer needs more

effectively (i.e., with products or services that

customers value more highly), or doing so more

efficiently (i.e., at lower cost).

6



Competitive Advantage Defined

Definition in Text (p. 7 side box)

A company achieves a competitive advantage when it

provides buyers with superior value compared to rival sellers

or offers the same value at a lower cost to the firmAnother way to say this:

A business has a COMPETITIVE ADVANTAGE if it

creates more economic value than its competitors

But now we need to know what we mean by the term

economic value

7



Creating Economic Value

The

Transformation

Process

Customer Value per unit

(Willingness-to-Pay)

Per Unit Cost

Total Economic Value

Created (per unit)

Inputs

Products / Services



So the text is saying….

Competitive advantage means either deliver more value to the

customer or produce at lower cost

Rival firmMore value to

customer Lower costs

V

C

9



Value, Intrinsic Worth, and Price

Customer Value per unit reflect Intrinsic Worth

(perceived value)

It’s the maximum the customer would be willing to

pay per unit

But they prefer to pay less!

It’s generally NOT the same thing as Price

The price could be be the same

But more often it’s lower

If the price is higher, the customer won’t buy the good

since they are not willing to pay that price!

11



Resource and CapabilityAnalysis

A tool for assessing the likelihood of gaining a

Sustainable Competitive Advantage

11



Resources and Capabilities

The Resource-Based View of the firm (RBV) is

an analytical lens that views the firm as a

collection of resources & capabilities

Think of resources and capabilities as a firm’scompetitive assets – what it uses to compete

Resources and capabilities can vary in three ways: Form

Quality

Competitive importance



What are Resources?

Resources represent strategic assets (competitive assets)

that are owned or controlled by the firm

Think of them as what the firm has to work with as it makes

and sells its products and services – but not just inputs

All the things that make them a more effective competitor

Resources can be tangible or intangible

Categorizing them along these lines helps managers to

identify their resources

Examples of each type?



Types of Company Resources

Tangible Resources

Physical resources

Financial resources

Technological assets

Organizational resources

Intangible Resources

Human assets, skills, and intellectual capital

Brands, company image, and reputational assets

Relationships: alliances, joint ventures, or partnerships

Company culture and incentive system 14



What are Capabilities?

Capabilities are short for Organizational Capabilities

Capabilities are an organization’s capacity to perform some

activity proficiently

They are built from resources (and other capabilities) and draw on

resources as the capabilities are employed

Capabilities

Tend to emerge over time through complex interactions among tangibleand intangible resources

Are embedded in firm routines, processes, and systems

Are built up through learning and the accumulation of knowledge about

how to get things done

Are always intangible



How do we Identify Capabilities?

Two ways

Begin with clusters of resources in the firm

Think about what kinds of capabilities would beassociated with these

Examples?

Look at the various types of activities being

performed within specific functional areas

E.g. The marketing function; manufacturing

Examples?16



Resource or Capability?

Are the following resources or capabilities?

Machinery

Collective product design skills

Engineering skills of individuals An oil field

Brand reputation

Ability to build brand reputations

A capacity to create innovative new products

Good relations with suppliers

A “can-do” organizational culture

Which are tangible and which are intangible? 17



Resource and Capability Bundles

Resource and capability bundles are sets of tightly

linked competitive assets that are used in combination

with one another

The are often cross-functional (i.e. they draw on severaldifferent types of complementary expertise)

Example: H&M’s fast-fashion capabilities, which involve

information systems and logistical capabilities as well as

fashion design capabilities and talented designers. Example: McDonald’s capability to manage franchise

businesses efficiently – depends on central sourcing

capabilities; management systems; information systems;

training capabilities; store design templates, etc.18



Dynamic Capabilities

What are they?

The ability of a company to modify its existing resources and

capabilities

Or create new ones

They act on other capabilities – a higher order capability

Examples:

Merger and acquisition capabilities (a means of acquiring new

resources)

Product development and innovation capabilities – result not

only in new products, but in the capability of producing them

19



The VRIN Framework

A resource- based view of how companies attain asustainable competitive advantage

(Also called the 4 Tests of a Resource’s Competitive

Power in your textbook)

VRIN stands for:

Valuable

R are

Inimitable (hard to imitate)

Non-substitutable



Before Applying the Tests

Identify which market(s) you are in

Resources create value in relation to market needs

Identify your direct competitors in the market The tests assess the value of your resources relative to

the value of your rivals’ resources

Inventory your resources and capabilities Tangible and intangible resources

Organizational capabilities

Integrated sets of resources and capabilities (bundles)21



Test #1: Is it Valuable?

Is the resource/capability competitively valuable?

Does it contribute to the effectiveness of the firm’s strategy?

Does it make the company a stronger competitor?

To be competitively valuable it must improve the firm’s

ability to produce something that customers want at a

price they are willing to pay and do so cost effectively

This means it must increase customer value (V) or decrease product cost (C) - or do both

It must increase the total economic value produced!



Recall Total Economic Value

A resource/capability is valuable if it increases the TotalEconomic Value produced by the firm

Caution: don’t get confused between the two different uses of the

letter V here - V in VRIN is not the same as customer value (V) –

it refers to Total Economic Value!

Customer Value (V)

(Willingness to Pay)

Product Cost (C)

Total Economic

Value created

by the firm

Quantity

23



Test #2: Is it Rare?

Is the resource/capability something that the firm

possesses but competitors lack?

A resource/capability is considered rare if it is unique or

possessed by only few competitors It is also considered rare if competitors possess the same

resource but in an inferior form

Note that this is a relative test. Being good at something

is not the same as being better than a competitor Resources/capabilities that many competitors have cannot

be a source of competitive advantage



Testing for Competitive Advantage

If a resource/capability is both Valuable and Rare, then

it produces more economic value (V-C) than the R&Cs

of competitors

And a company that produces more economic value

(V-C) than competitors has a competitive advantage

(By definition – recall the more precise definition of this term

that we provided earlier in this lecture)

Thus, a resource/capability that passes the first two test

gives a company a competitive advantage

25



The Last Two VRIN Tests

The first two of the VRIN tests determine whether a

resource/capability gives a firm a competitive advantage

The last two VRIN tests determine whether that

competitive advantage is sustainable

The Inimitability Test and the Non-substitutability Test

What does it mean for an advantage to be sustainable?

It means that the advantage can persist even in the face of

direct efforts by competitors to overcome it

No specific amount of time that it will last

Not forever – just longer than expected in the face of competition

26



Test #3: Is it Inimitable?

Is the resource/capability difficult to imitate/copy?

What makes a resource/capability hard to imitate?

Physical uniqueness

e.g. location; mineral rights; patented technology

When they are due to a sequence of events that cannot be

repeated easily or require substantial time to develop

e.g., crash R&D programs don’t work well; it takes timeto build a brand

When they entail large scale operations or financial outlays

that others can’t readily undertake



More Imitation Barriers

When they are associated with Causal Ambiguity

A complex web of activities makes it difficult to know exactly

what leads to the observed successful outcomes

When it is unclear how complex combinations of resourcesand capabilities work together, you have causal ambiguity

When they are associated with Social Complexity

e.g., interpersonal ties, company culture, and trust- based

relationships among managers, suppliers, and customers

When there are observable but difficult to duplicate or

replicate sequences of interpersonal events, you have social

complexity



Test #4: Non-substitutable

Are there other resources/capabilities that a rival can use instead

to achieve a similar outcome?

Consider Dirt Cowboy at corner of Main & Wheelock

Suppose convenience is an attribute that raises customer value and thatlocation is the resource that underlies this value driver

The great location is physically unique and cannot be copied

What other resource, capability, or bundle can substitute for its location?

Caution: We use the term substitute in multiple ways in thiscourse and it is important to keep them straight.

Here we are concerned with a substitute for the resource, not a substitute

for the product being produced and sold



VRIN Tests and Consequences

From: Hitt, Ireland, Hoskisson, Strategic Management: Competitiveness and Globalization, 6th edition.2004, South-Western (Cengage).



QUESTIONS?



Homework

Homework grades should be available late

tomorrow afternoon on Canvas

Grades ranged from 0 to 3 points

No comments, but see Feedback doc

Gives some idea of how the grading was done, main

issues in the analysis, and common mistakes

Homework #2 due by 1:00 A.M. on Tuesday,

4/21 - (night before class)

Homework not accepted after 1:15 A.M.32



Next Week

Tuesday:

The Walmart case

Applying the VRIN tests

Value chains

Calculating the size of a competitive advantage

Thursday: Generic Strategies, Positioning, and the Value-

Price-Cost Framework

33

introduction to internal analysis 2015

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