1. Session 10
Internal Analysis

2. Resource-Based View of the Firm
Session Topics
Resource-Based View of the Firm
Three Basic Resources
What Makes a Resource Valuable?
Using the Resource-Based View in Internal Analysis
SWOT Analysis
The Functional Approach
Value Chain Analysis
Internal Analysis: Making Meaningful Comparisons
Comparison with Past Performance
Stages of Industry Evolution
Benchmarking
Comparison with Success Factors in the Industry

3. Ingredients Critical to a Successful Strategy
Be consistent with conditions in the competitive environment
Strategy must . . .
Place realistic requirements on the firm’s resources
Be carefully implemented/executed

4. What is the Resource-Based View of the Firm?
Firms differ in fundamental ways because each firm possesses a unique “bundle” of resources - tangible and intangible assets and organizational capabilities to make use of those assets.

5. The RBV of The Firm
More internally oriented
Key analytic tool is value chain analysis
Resources are not mobile/transferable across company and industry boundaries
Focuses on sharpening your skills at executing value chain activities that create superior efficiency, innovation, quality, and/or company responsiveness.

6. The Industrial/Organizational Economics Perspective
More externally oriented
Key Analytic tool is Porter’s Five Forces Model
Assumes that resources are transferable/mobile across across company boundaries
More of a free-agent mentality
Choose your industry wisely and then set about to develop resource proficiency

7. The Three Basic Resources
Tangible assets
Easiest to identify and often found on a firm’s balance sheet
Include physical and financial assets
Examples: Production facilities, raw materials, financial resources, real estate, computers
Intangible assets
Cannot be seen or touched
Often very critical in creating competitive advantage
Examples: Brand names, company reputation, company morale, patents and trademarks, accumulated experience
Organizational capabilities
Involve skills - ability to combine assets, people, and processes - used to transform inputs into outputs

8. Examples of Different Resources
Tangible Assets
Hampton Inn’s reservation system
McDonald’s locations
Georgia Pacific’s land holdings
Virgin Airlines’ plane fleet
Coca-Cola’s Coke formula
Intangible Assets
Nike’s brand name
Dell Computer’s reputation
Wendy’s advertising with Dave Thomas
Disney’s image
IBM’s management team
Southwest Airlines culture
Organizational Capabilities
Dell Computer’s customer service
Wal-Mart’s purchasing and inbound logistics
Sony’s product-development processes
Coke’s global distribution coordination
3M’s innovation process

9. What Makes a Resource Valuable?
1. Competitive superiority: Does the resource help fulfill a customer’s need better than those of firm’s competitors?
2. Resource scarcity: Is the resource in short supply?
3. Inimitability: Is the resource easily copied or acquired?
4. Appropriability: Who actually gets the profit created by a resource?
5. Durability: How rapidly will the resource depreciate?
6. Substitutability: Are other alternatives available?

10. Characteristics Making Resources Difficult to Imitate
Physically unique resources
Resources virtually impossible to imitate
Examples: One-of-a-kind real estate location, mineral rights, patents
Path-dependent resources
Resources that must be created over time in a manner that is often expensive and difficult to accelerate
Examples: Dell Computer’s system of direct sales of customized PCs via the Internet, Coca-Cola’s brand name, Gerber Baby Food’s reputation for quality

11. Characteristics Making Resources Difficult to Imitate
Causal ambiguity (How do they do that?)
Situations where it is difficult for competitors to understand how a firm has created its advantage
Example: Southwest Airlines’ approach
Same plane, routes, gate procedures, number of attendants
Culture of fun, family, and frugal yet focused services
Economic deterrence
Involves large capital investments in capacity to provide products or services in a given market that are scale sensitive

12. Resource Inimitability
Cannot be imitated
Patents
Unique locations
Unique assets
Difficult to imitate
Brand loyalty
Employee satisfaction
Reputation for fairness
Can be imitated
Capacity preemption
Economies of scale
Easy to imitate
Cash
Commodities

13. Guidelines: Using the RBV in Internal Analysis
Disaggregate resources - break them into more specific competencies rather than use broad categories
Use a functional perspective in disaggregating tangible and intangible assets and organizational capabilities
Look at organizational processes and combinations of resources, not only at isolated assets or capabilities
Use the value chain approach to uncover potentially valuable capabilities, activities, and processes

14. Key Resources Across Functional Areas
Marketing
Firm’s products/services
Concentration of sales in a few products or to a few customers
Ability to gather needed information about markets
Market share
Product-service mix and expansion potential
Channels of distribution
Effective sales organization
Product-service image, reputation, and quality’
Imaginativeness, efficiency, effectiveness of sales promotion
Pricing strategy and flexibility
After-sale service and follow-up
Goodwill - brand loyalty
Financial and Accounting
Ability to raise short-term and long-term capital; debt-equity
Corporate-level resources
Cost of capital relative to competitors
Tax considerations
Relations with owners, investors, and stockholders
Leverage position
Cost of entry and barriers to entry
Price-earnings ration
Working capital
Effective cost control
Financial size
Efficiency and effectiveness of accounting system

15. Key Resources Across Functional Areas (continued)
Production, Operations, Technical
Raw materials cost and availability, supplier relationships
Inventory control systems
Location, layout, and use of facilities
Economies of scale
Technical efficiency of facilities
Effectiveness of subcontracting use
Degree of vertical integration
Efficiency and cost-benefit of equipment
Effectiveness of operation control procedures
Costs and technological competencies relative to competitors
Research and development
Patents and trademarks
Personnel
Management personnel
Employees’ skills and morale
Labor relations costs compared to competitors
Efficiency and effectiveness of personnel policies
Effectiveness of incentives used to motivate performance
Ability to level peaks and valleys of employment
Employee turnover and absenteeism
Specialized skills
Experience

16. Key Resources Across Functional Areas (continued)
Quality Management
Relationship with suppliers, customers
Internal practices to enhance quality of products and services
Procedures for monitoring quality
Information Systems
Timeliness and accuracy of information about sales, operations, cash, and suppliers
Relevance of information for tactical decisions
Information to manage quality issues: customer service
Ability of people to use information provided

17. Fig. 6-5: Key Resources Across Functional Areas (concluded)
Organization and General Management
Organizational structure
Firm’s image and prestige
Firm’s record in achieving objectives
Organization of communication system
Overall organizational control system
Organizational climate and culture
Use of systematic procedures in decision making
Top-management skills, capabilities, and interest
Strategic planning system
Intra-organizational synergy

18. SWOT Analysis Opportunities
Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation
Opportunities
A major favorable situation in a firm’s environment
Threats
A major unfavorable situation in a firm’s environment
Strengths
A resource advantage relative to competitors and the needs of markets firm serves
Weaknesses
A limitation or deficiency in one or more resources or competencies relative to competitors

19. SWOT Analysis Diagram Numerous environmental opportunities
Major environmental threats
Substantial internal strengths
Critical internal weaknesses
Cell 3: Supports a turnaround-oriented strategy
Cell 1: Supports an aggressive strategy
Cell 4: Supports a defensive strategy
Cell 2: Supports a diversification strategy

20. What is Value Chain Analysis?
Focuses on how a business creates customer value by examining contributions of different internal activities to that value
Divides a business into sets of activities within the business
Starts with inputs a firm receives
Finishes with firm’s products or services and after-sales service to customers
Allows better identification of a firm’s strengths and weaknesses since the business is viewed as a process

21. Research, technology, and systems development
The Value Chain
Primary Activities
Support
Activities
Research, technology, and systems development
Human resource management
General administration
Procurement
Inbound
Logistics
Operations
Outbound
logistics
Marketing
and sales
Service
Margin 21

22. Internal Analysis: Making Meaningful Comparisons
1. Comparison with past performance
Perspectives to use in evaluating how a firm stacks up based on its internal capabilities
2. Stages of industry evolution
3. Benchmarking - Comparison with competitors
4. Comparison with success factors in the industry