Internal Analysis: Resources and Capabilities Chapter 3 The major objective of this lesson: The Company Diamond is the most important concept and tool in this chapter. The company diamond brings together the concepts of activities, resources, capabilities, and values in a coherent picture of how firms create competitive advantages. I want to designate about 20 minutes of the session for discussing the diamond and how to use the tool. I have the students practice in one of two ways: If they are doing a semester project on a company, and have chosen the company already, I’ll have them use the time to begin their analysis on the company. Alternatively (if students have not yet selected a company for the project), I’ll have them do a diamond analysis on themselves. I tell them that they are CEO of a firm called Me, Inc. and they need to think through how they intend to create competitive advantage. Internal Analysis: Resources and Capabilities

Disney’s Strategy (Opening Minicase) What Markets Served 2. What Unique Value (why we win with customers) 3. What Resources and Capabilities (how we deliver unique value) 4. What Barriers to Imitation

Purpose of Internal Analysis An organization’s future success depends on its own internal conditions as well as external conditions Managers need to be able to identify Strengths that the company can relay on in order to compete Weaknesses that need to be corrected or minimized as competitive factors

Managers must understand The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profit The importance of superior efficiency, innovation, quality, and responsiveness to customers The sources of their company’s competitive advantage (strengths and weaknesses)

Competitive Advantage The collection of factors that sets a company apart from its competitors and gives it a unique position in the industry/market Means to add value for stakeholders Focus especially on adding value for customers

Core Competence(ies) A unique set of lasting capabilities that a company relies on to achieve competitive advantage and add value Innovation Efficiency Customer Responsiveness Quality Special Expertise

Value-Chain Analysis Sequential process of value-creating activities The amount that buyers are willing to pay for what a firm provides them Value is measured by total revenue Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service

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.

Value Chain Interpretation Represents a company or any organization Simplified illustration of all activities that an organization must perform Framework for analyzing a company’s strengths and weaknesses Margin represents profit- expand margin by Being able to charge a higher price Operating at a lower cost within the Value Chain

Support Activity: General Administration Firm Infrastructure Typically supports the entire value chain and not individual activities Effective planning systems Ability of top management to anticipate and act on key environmental trends and events Ability to obtain low-cost funds for capital expenditures and working capital Excellent relationships with diverse stakeholder groups Ability to coordinate and integrate activities across the value chain Highly visible to inculcate organizational culture, reputation, and values

Support Activity: Human Resource Management Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel Effective recruiting, development, and retention mechanisms for employees Quality relations with trade unions Quality work environment to maximize overall employee performance and minimize absenteeism Reward and incentive programs to motivate all employees

Support Activity: Technology Development Related to a wide range of activities and those embodied in processes and equipment and the product itself Effective R&D activities for process and product initiatives Positive collaborative relationships between R&D and other departments State-of-the art facilities and equipment Culture to enhance creativity and innovation Excellent professional qualifications of personnel Ability to meet critical deadlines

Support Activity: Procurement Function of purchasing inputs used in the firm’s value chain Procurement of raw material inputs Development of collaborative “win-win” relationships with suppliers Effective procedures to purchase advertising and media services Analysis and selection of alternate sources of inputs to minimize dependence on one supplier Ability to make proper lease versus buy decisions

Applying Value Chain Analysis Framework for identifying company’s strengths and weaknesses Means to focus on where the company’s core competencies exist and can be used to achieve competitive advantage and add value Comparison with competitors reveals opportunities for improving company’s competitive position

Resource-Based View (RBV) RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages

Resource-Based View of the Firm Three key types of resources Tangible and Intangible Resources Organizational capabilities Priorities

Types of Resources: Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment

Types of Resources: Tangible Resources Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks Organizational resources Effective strategic planning processes Excellent evaluation and control systems

Types of Resources: Intangible Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures

Types of Resources: Intangible Resources Innovation and creativity Technical and scientific skills Innovation capacities Reputation Brand name Reputation with customers Reputation with suppliers

Types of Resources: Organizational Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital

Types of Resources: Priorities Driven by Organization’s Values Reflects Organization’s Culture Priorities Guide Resource Allocation Priorities Maintain Allocations Over Timr

Sustainable Competitive Advantage: VRIO Model Implications Is the resource or capability… Valuable Rare Inimitable Organized to Exploit Neutralize threats and exploit opportunities Not many firms possess Physically unique Path dependency Tacit knowledge Causal ambiguity Social complexity No equivalent strategic resources or capabilities Adapted from Exhibit 3.7 Four Criteria for Assessing Sustainability of Resources and Capabilities

Inimitable Resources Unique History—Coke Path Dependence—Boeing Complex Systems—Merck Tacit Knowledge—Apple Property Rights—Chevron Coke’s historical advantage comes from WWII, when the US military subsidized bottling plants all over the world so that soldiers could have “a coke within arm’s reach” Boeing’s path dependence has a military origin as well. During WWII, the British focused on building fighters and the US on bombers (like the B-17). Those bombers gave Boeing the technical know how to build commercial aircraft and a lead over the British in creating safe jet travel. The complex regulatory approval process that Merck has to endure to bring drugs to market mean that the company needs to develop and maintain a set of very complex organizational systems and routines. Apple’s design capabilities (think of the innovations that Steve Jobs came up with) represent tacit, difficult to transfer, knowledge and skill. Property rights, mainly land ownership and drilling rights, provide companies like Chevron with a legally protected resource base.

Resources and competitive advantage Is the resource Valuable? Is the resource Rare? Is the resource Inimitable? Is the company Organized to exploit? No Competitive Failure Yes Competitive Parity Competitive Advantage Durable Competitive Advantage Sustained Competitive Advantage I’ll spend a few minutes here. The chart can easily apply to resources and capabilities. The important thing to reinforce is the last column—because this is the essence of the Diamond. Unless companies are organized to both create and exploit their resources and capabilities, their sources of competitive advantages will fade over time. Source: adapted from Jay Barney, “Firm Resources and Sustained Competitive Advantage,” Journal of Management 17, no. 1 (March 1, 1991): 99–120. and Jay Barney and Bill Hesterly, Strategic Management and Competitive Advantage, 4e, Pearson.

Financial Ratio Analysis Six types of financial ratios Short-term solvency or liquidity Long-term solvency measures Asset management (or turnover) Profitability Market value Growth Meaningful ratio analysis must include Analysis of how ratios change over time How ratios are interrelated

Combining Internal and External Analyses Internal and External Analyses commonly referred to as SWOT: Strengths Weaknesses Opportunities Threats Strengths and Weaknesses identified from Internal Analysis Opportunities and Threats identified from External Analyses

Internal Analysis Strengths and Weaknesses identified through the use of tools including: Stakeholder Analysis Core Competencies Value Chain Resource-Based View VRIO - Sustainable Competitive Advantage Financial Analysis Strategic Issues

External Analysis Opportunities and Threats identified through the use of tools such as: Five Force Analysis General Environment Assessment Key Success Factors in Industry Competitive Changes during Industry Evolution

Results of Internal and External Analysis Requires creative interpretation Understanding of company’s competitive position in its industry Identification of strategic issues the company faces Strategic issues Represent dangers to the company’s long-term survival Suggest areas where the company should concentrate its efforts in order to grow

Strategic Alternatives Internal Analysis Strengths Weaknesses External Analysis Opportunities Threats Tools Tools Strategic Issues Strategic Alternatives Strategy