1. Internal Analysis Resources and Capabilities
OSU Fisher College of Business Hawk • Strategic Management
Internal Analysis
Resources and Capabilities
The RBV and the VRIO Framework
Core Competences
The Value Chain
Dynamic Capabilities
Objectives
fisher.osu.edu

2. Industry Effects vs Firm Effects
What matters more: industry differences or firm differences?

3. Internal Analysis
We are moving more internal….

4. SWOT and Internal Attributes
Barney motivates the article with SWOT analysis. What is SWOT, and how does it fit with the course?
SWOT = Strengths, Weaknesses, Opportunities, Threats
Barney says there are a lot of tools to analyze the external environment (Industry Analysis), but there has been less development of tools to analyze the firm’s strengths and weaknesses
Barney provides an approach to analyzing the competitive implications of a firm’s INTERNAL strengths and weaknesses
Barney

5. Resources and Capabilities
What does Barney call these internal attributes?
RESOURCES AND CAPABILITIES!
What are these resources and capabilities?
All of the financial, physical, human, and organizational assets used by a firm to develop, manufacture, and deliver products or services to its customers
Financial resources = debt, equity, retained earnings, etc
Physical resources = machines, manufacturing facilities, and buildings
Human resources = all of the experience, knowledge, judgment, risk taking propensity, and wisdom of individuals
Organizational resources = the history, relationships, trust, and organizational culture, along with a firm’s formal reporting structure, explicit management control systems, and compensation policies
Barney

6. Tangible and Intangible Resources
Rothaermel Chapter 4

7. Tangible and Intangible Resources
Summary
Tangible resources = resources that are visible, have physical attributes (buildings, factories, equipment, etc.)
Intangible resources = resources that are invisible, have no physical attributes (knowledge, technology, patents)
Which is more likely to lead to a competitive advantage?
 intangible!
Google example:
Tangible resources valued at $5 billion
Intangible resources valued at over $100 billion
Rothaermel Chapter 4

8. Barney’s Approach (VRIO)
Barney says he provides an easy-to-apply approach to analyzing the competitive implications of a firm’s internal strengths and weaknesses. What is this approach?
It is essentially a battery of tests to assess the strategic value of each resource of a firm
It lets us really assess whether a resource will provide SUSTAINABLE competitive advantage
Managers should address 4 questions about their resources and capabilities:
1. The Question of Value
2. The Question of Rareness
3. The Question of Imitability
4. The Question of Organization
Let’s go through each one….
Barney

9. The Question of Value What is this?
Do a firm’s resources and capabilities add value by enabling it to exploit opportunities and/or neutralize threats?
What’s the basic idea here?
Identify what the firm is good at (ie, boosting ∏)
Honda’s engines are reliable
Northstar’s veggie burger is valuable
Think about your own resources and capabilities. Do they pass the question of value?
Maybe you are good at:
Grilling
Networking
Picking stocks
Do they have the potential to boost your profits?
Barney

10. The Question of Rareness
What is this?
How many competing firms already possess these valuable resources and capabilities?
What’s the basic idea here?
Valuable but common resources are a source of competitive parity
To have better performance than competitors, you need to be unique!
To gain competitive advantage, a firm needs to exploit resources and capabilities that are different from competitors
Knowledge often diffuses over time, eroding the “rareness” of resources
What are examples?
Toyota good at lean manufacturing. Is it rare anymore?
You start a sports bar. But there are tons of them.
Northstar veggie burger is no where else = rare

11. The Question of Imitability
What is this?
Do firms without a resource or capability face a cost disadvantage in obtaining it compared to firms that already possess it?
Why is this important?
This is about SUSTAINABILITY! If yes, firms with these abilities can have abnormally high profits for a long time
If no, other firms will easily do what you are doing and compete away your profits
Big question: Can firms imitate your skills?
Important: evaluate the relevant barriers to imitation!
Critical question: What determines Imitation?
Imitation can occur in two ways:
1. Duplication = an imitating firm builds the same kind of resources as the firm it is imitating
2. Substitution = us esome resource for other resources
Barney

12. Barriers to Imitation What stops or slows Imitation?
1. Better Expectations of Future Resource Value
The firm may have anticipated how the market would evolve better than everyone else and acquired a key resource on the cheap
You buy real estate in a run down neighborhood 20 years ago, art galleries and restaurants start moving in, your real estate is now worth lots of $$$
Maybe due to talent, maybe due to luck
2. Importance of History (Path Dependence)
Historically unique circumstances may have played a part in creating the resources. You can’t replicate it!
Many resources take time to develop! Costly to rush it. (Time Compression Diseconomies)
Caterpillar and WWII. Gov’t support.
Honda took years and years to develop their engines and engineering ability. You can’t do this overnight.

13. Barriers to Imitation What stops or slows Imitation?
3. Importance of Numerous Small Decisions (Causal Ambiguity)
Whether numerous “small decisions” play a large role in developing and exploiting a firm’s resources and capabilities
Some firms are talented because of lots of little things. They are essentially invisible.
Causal ambiguity = it’s unclear why the resources are good.
4. Importance of Socially Complex Resources (Social Complexity)
Socially complex = organizational phenomena like reputation, trust, friendship, teamwork, and culture
A team of 3 people has 3 relationships. 
A team of 5 people has 10 relationships. 
Very tough to replicate!
 Need to carefully evaluate the relevant Barriers to Imitation to answer the Question of Imitability

14. The Question of Organization
What is this?
Is a firm organized to exploit the full competitive potential of its resources and capabilities?
What’s the basic idea here?
You also need supporting complementary resources to gain a competitive advantage
Complementary resources = resources that have limited ability to generate a competitive advantage in isolation, but in combination with other resources and capabilities, they enable a firm to realize its full competitive advantage
Examples of complementary resources?
Formal reporting structure
Explicit management control systems
Compensation policies
Sales networks
Barney

15. Applying the Barney framework
Costly to Imitate?
Exploited by Organization?
Valuable?
Rare?
Assessment? No No No No
Competitive Disadvantage / Weakness
Resource A
Resource B
Yes No No No
Competitive Parity / Strength
Resource C
Yes
Yes No No
Temporary Competitive Advantage / Strength and Distinct Competence
Resource D
Yes
Yes
Yes
Yes
Sustained Competitive Advantage / Strength and Sustainable Distinctive Competence
See Barney and Hesterly 2012

16. Exploited by Organization?
Cane’s Chicken
Costly to Imitate?
Exploited by Organization?
Valuable?
Rare?
Assessment? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ? ?

17. Assumptions of RBV
Note that there are a few key assumptions underlying the Resource Based View
(1) resource heterogeneity = bundles of resources and capabilities tend to differ across firms
(2) resource immobility = resources tend to be sticky and don’t move easily from firm to firm
These assumptions suggest resource bundles differ across firms, and these differences can persist for long periods of time
Barney

18. Barney Summary
RBV (Resource Based View) provides a method to study how a firm’s internal resources and capabilities are a source of competitive advantage
Industry Analysis, studying the environment, and picking good industries is not enough
You need to have unique resources and capabilities that are valuable, rare, and costly to imitate.
You then need to exploit these resources through your organization
Barney’s analysis lets us explicitly test each resource for their potential for providing sustainable competitive advantage
Carefully assess each question. Try to link to financials. Provide evidence. Explain the logic.
Barney

19. Barney Summary
Graphical Depiction of VRIO (Barney):

20. Core Competences
A related concept to the RBV is the notion of “Core Competences”. What are these?
= unique strengths, embedded deep within the firm, that allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost
It’s basically the internal characteristics of the firm that makes the firm have a competitive advantage
“They are built through the interplay of resources and capabilities”
“Resources reinforce core competencies, while capabilities allow managers to orchestrate their core competencies.”
Core Competences came about at around the same time as the RBV. (See Prahalad and Hamel 1990.) Very related concepts.
The RBV VRIO framework is a little more precise, easier to apply.

21. Examples of Core Competences

22. Link between RBV and Core Competences

23. The Value Chain
Another useful tool for internal analysis is the value chain. What is it?
It is an activity template that describes the internal activities a firm engages in when transforming inputs into outputs
Primary Activities = firm activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain
Inbound logistics, operations, outbound logistics, marketing and sales, after-sales service
Support Activities = activities that add value indirectly, but are necessary to sustain primary activities
R&D, information systems, operations management, HR, finance, accounting, general management

24. The Value Chain
Note: You can also just set it up as a table.

25. The Value Chain How is the value chain useful?
Use it to break down the firm and understand internal firm characteristics at the activity level
Use the RBV to test the firm’s resources and capabilities for each activity
Use it to understand the firm as a system of interconnected activities
Strategic activity system = the conceptualization of the firm as a network of interconnected activities
A firm’s decisions for each activity are interconnected. They affect each other
To gain competitive advantage, all of the firm’s decisions at the activity level should work in concert. They should reinforce each other to execute a firm’s strategy.
Thus, there are tradeoffs. The firm must decide what to do for each activity and WHAT NOT TO DO. (Remember Porter said this?)
The Value Chain will be useful for many topics in the course (especially generic strategies)

26. Dynamic Capabilities What are dynamic capabilities? What is the idea?
Industries constantly evolve. This suggests firm’s resources and capabilities can get outdated. What can firms do to maintain a competitive advantage?
They can evolve! They can adjust their activity system and update their resources and capabilities to keep up with the dynamically changing environment
Dynamic Capabilities = a firm’s ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage. It describes the firm’s ability to reconfigure its resource base and to create external market change for others.
The dynamic capabilities perspective = a model that emphasizes a firm’s ability to modify and leverage its resource base in a way that enables it to gain and sustain competitive advantage in a constantly changing environment
Dynamic capabilities are an intangible resource built through continuous investments and experience over time.
Consider IBM as well as the bathtub metaphor….

27. IBM and Dynamic Capabilities
In 1993, IBM was all about hardware.
Fierce competition in the PC hardware
market ensued. Massive layoffs at IBM…
Today, IBM has reconfigured itself
Into a global IT services company.

28. Dynamic Capabilities and the Bathtub

29. SWOT
Recap: What is SWOT again? How does everything we’ve discussed so far relate to SWOT?
A framework that allows managers to synthesize insights obtained from an internal analysis of the company’s strengths and weaknesses (S and W) with those from an analysis of external opportunities and threats (O and T).
You probably are thinking of the 2 by 2 matrices you sometimes see.
We basically have done a big SWOT analysis in the class so far.
We’ve gone in depth into analyzing the external environment (this is the O and T)
We’ve gone in depth into analyzing the internal characteristics of the firm (this is the S and W)
Use SWOT to try to link internal factors to external factors to develop recommendations. Use it to synthesize your entire analysis.

30. SWOT

31. For next session… Business Level Strategies Read Rothaermel Chapter 6
Review Rothaermel Chapter 4