Evaluating a Evaluating a Firm’sFirm’sInternal Internal CapabilitiesCapabilities
Chapter 3Chapter 3
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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?
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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:
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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
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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
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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?
?
?
?
?
?
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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)
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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
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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
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The Resource-Based View
• heterogeneity of resources typically occurs as the result of ‘bundling’ the resources and capabilitiesof a firm (bundles of HR practices, p. 90)
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
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The Internal Analysis Tool
The VRIO Framework
Four Important Questions:
• Value
• Rarity
• Imitability
• Organization
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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.
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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)
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Porter’s Generic Internal Value Chain
• Primary Activities– Inbound Logistics– Production– Warehousing & Distribution– Sales & Marketing– Dealer Support & Customer Service
• Support Activities– Procurement– Infrastructure– Technology: R&D– Human Resource Management
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Applying the VRIO Framework
The Question of Value
• in theory: Does the resource enable the firmto exploit an external opportunity or neutralizean external threat?
• the practical: Does the resource result in anincrease in revenues, a decrease in costs, orsome combination of the two? (Levi’s reputationallows it to charge a premium for its Docker’s pants)
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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 (several pharmaceuticals sell cholesterol-loweringdrugs, but the drugs are still scarce—look at prices)
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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)
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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)
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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 (Razor scooterswere a big hit and others quickly imitated them)
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Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Unique Historical Conditions (Caterpillar)
• first mover advantages
• path dependence
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Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Causal Ambiguity (Southwest Airlines – HR)
• causal links between resources and competitive advantage may not be understood
• bundles of resources fog these causallinks
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Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Social Complexity (WordPerfect)
• the social relationships entailed in resources may be so complex thatmanagers cannot really manage themor replicate them
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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
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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)
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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(3M Company)
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The VRIO Framework
Valuable? Rare?Costly toImitate?
Exploited byOrganization?
CompetitiveImplications
No
Yes
Yes
Yes
Yes
Yes Yes Yes
No
No
No Disadvantage
Parity
TemporaryAdvantage
SustainedAdvantage
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The VRIO Framework
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
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Entrepreneurial and InternationalApplication of the VRIO Framework
The Logic Remains the Same
• small firms and start-ups can apply the VRIOframework to their resources and capabilities
» competitive advantage vis-à-vis largerfirms can often be identified
recognizing if and why larger firmsface high costs of imitation can becritical to small firm success
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Entrepreneurial and InternationalApplication of the VRIO Framework
The International Context
Two Reasons for International Expansion:
1) to exploit current resource and capabilityadvantages in a new market
2) to develop new resources and capabilities ina foreign market
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Entrepreneurial and InternationalApplication of the VRIO Framework
The International Context
Critical Caveat:
• resources and capabilities that generatean advantage in one market may or maynot generate an advantage in a new market
Firms should re-apply the VRIO frameworkwhen entering new markets!!
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The International Context
Entrepreneurial and InternationalApplication of the VRIO Framework
As a firm enters a new market:
• a disciplined learning mentality is imperativefor success
» what resources and capabilities meetthe VRIO criteria in the new market?
» what can the firm learn from partners inthe new market? (GM learned from Toyotain the NUMMI alliance)
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Competitive Dynamics of Resource Imitation
Competitive Dynamics:
• the strategic decisions and actions of firms inresponse to the strategic decisions and actionsof other firms
Firm A(strategy decisionslead to competitive
advantage)
Firm B’s Possible Responses
No Response
Change Tactics
Change Strategy
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Competitive Dynamics
• the other firm is serving a different market
A firm may decide to take no action because:
• a response may hurt its own competitive advantage
• it does not have the resources and capabilitiesto mount an effective response
• it wants to reduce or manage rivalry in themarket through tacit collusion
“No Action” Response (Rolex Casio)
The roles of tacit cooperation and tacit collusion
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No Response
• Tacit cooperation– Small number of competing firms– Homogeneous products and costs– Market Share Leader– High Barriers to Entry
• Tacit collusion
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Competitive Dynamics
“Change” Responses
Tactics (Tide) Strategy (Monsanto)
• specific actions
» tweaking productcharacteristics
• usually imitated soquickly that there isno advantage
• a ‘leap frog’ movemay create advantage
• a fundamental changein a firm’s theory
• may be necessary if current strategybecomes obsolete
• a mimetic change mayachieve parity, but notadvantage
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Competitive Dynamics
Imitation will seldom lead to competitive advantage
• firms should use resources and capabilities to fillunique competitive space
CustomerNeeds
CompetitorOfferings
Price
Quality
Focal FirmOffering
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Competitive Dynamics
Similar strategies may lead to competitive advantage
• some firms can achieve competitive advantage evenif they are second movers
CustomerNeeds
CompetitorOfferings
Price
Quality
Focal FirmOffering
» higher quality/lower costoffering maylead to advantage
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Internal Analysis
Assumes:
• determinates of economic performance arefirm-level characteristics (resources & capabilities)
» firms may be different (heterogeneity)
» differences may be enduring (immobility)
• competitive advantage stems from resourcesand capabilities that meet the VRIO criteria
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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
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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
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Managerial Implications
• Competitive advantage is every employee’s responsibility.
• Imitation cannot lead to a competitive advantage.
• Socially complex resources can be a source of competitive advantage.
• International business activities enable a firm to exploit current resources and to develop new resources and capabilities.