1. Chapter 3

2. What Does Internal Analysis Tell Us?
Internal analysis provides a comparative look at
a firm’s capabilities
• Internal analysis is a way of looking inside a firm
to determine what the firm’s strengths and weaknesses
might be compare to competitors

3. Why Does Internal Analysis Matter?
Internal analysis helps a firm:
• determine if its resources and capabilities are
likely sources of competitive advantage
• establish strategies that will exploit any sources
of competitive advantage

4. The Theory Behind Internal Analysis
The Resource-Based View
• developed to answer the question: Why do some
firms achieve better economic performance
than others?
• used to help firms achieve competitive advantage
and superior economic performance
• assumes that a firm’s resources and capabilities
are the primary drivers of competitive advantage
and economic performance

5. 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 to
take full advantage of other resources
» marketing skill, cooperative relationships

6. The Resource-Based View
Resources and Capabilities
Are these resources
or capabilities?
Firm Assets:
Machinery ?
Collective Product Design Skill ?
Recruiting Skill ?
Engineering Skill of Individuals ?
Mineral Deposits ?

7. The Resource-Based View
Four Categories of Resources
financial—the money available to the firm from whatever source (debt, equity, retained earnings, etc.)
physical—machinery, factories, offices, raw materials, geographic location, technology
human—training, experience, individual intelligence, judgment, work ethic
organizational—reporting structures, reward systems, coordinating systems, relationships, etc.

8. 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 certain
resources to acquire or develop them
» some resources may not spread from firm to
firm easily

9. The Resource-Based View
What do these assumptions really mean?
• if one firm has resources that are valuable
and other firms don’t, and…
• if other firms can’t imitate these resources
without incurring high costs, then…
• the firm possessing the valuable resources
will likely gain a sustained competitive advantage

10. The Resource-Based View
Resource Heterogeneity
• A firm may possess resources that are similar to the resources of other firms (homogeneous). However, the managers of that firm may employ firm capabilities in such way as to create heterogeneous bundles of resources. In other words, managers
can take common resources and create uncommon bundles of resources so that firm differences exist— even if the original basic building blocks (resources) are the same.
• competitive advantage typically stems from several
resources and capabilities ‘bundled’ together

11. The Internal Analysis Tool
The VRIO framework is the analysis ‘tool’ of the RBV. This framework is a way of examining resources to determine if a resource is likely to be a source of competitive advantage. Four criteria must be met if a resource is to lead to competitive advantage.
Four Important Questions :
Value – Does the resource enable the firm to exploit an opportunity or neutralize a threat? The evidence of a positive response to this question is usually that the resource somehow increases revenue or decreases cost.
Rarity – Is the resource rare? Is the resource rare enough that there is still scarcity in the marketplace for this resource?

12. The Internal Analysis Tool
Imitability – Is the resource costly to imitate? Specifically, is the resource so costly to imitate that no one would try to imitate it?
Organization – Is the firm organized in such a way that the resource can be exploited?

13. 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 sustained
competitive advantage.

14. The VRIO Framework Applying the Tool
• a resource or bundle of resources is subjected to
each question to determine the competitive
implication of the resource
• each question is considered in a comparative
sense (competitive environment)

15. Applying the VRIO Framework
The Question of Value
in theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat?
This is a straightforward question intended to ascertain whether or not the resource is strategically relevant. There is a cost to the firm of carrying any resource and if the firm does not receive some benefit that outweighs the cost, then the firm is at a competitive disadvantage. If the firm receives a benefit that outweighs the carrying cost of the resource, then we would conclude that the resource is valuable, and could, therefore, be a potential source of competitive advantage.
(Levi’s reputation allows it to charge a premium for its Docker’s pants)

16. Applying the VRIO Framework
The Question of Rarity
Having established that a resource is valuable, we next turn our attention to the question of rarity. We are interested in whether a resource is rare enough that it creates a difference between the focal firm and its competitors such that the focal firm realizes some advantage from the difference. This question is tied to the assumption of resource heterogeneity. If there is to be any advantage in having a resource, it must create differences between firms.
Some firm resources that are valuable but not rare are still very important to the firm (e.g., telephone systems).

17. 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
Competitive Advantage
(at least temporarily)
Valuable and Rare

18. Applying the VRIO Framework
The Question of Imitability
• the temporary competitive advantage of valuable
and rare resources can be sustained only if
competitors face a cost disadvantage in imitating
the resource
» intangible resources are usually more
costly to imitate than tangible resources
(Harley-Davidson’s styles may be easily
imitated, but its reputation cannot)

19. Applying the VRIO Framework
The Question of Imitability
• if there are high costs of imitation, then the firm
may enjoy a period of sustained competitive
advantage
» a sustained competitive advantage will last
only until a duplicate or substitute emerges
if a firm has a competitive advantage, others
will attempt to imitate it (Razor scooters
were a big hit and others quickly imitated them)

20. Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
There are several categories of cost that firms may face as they attempt to imitate valuable and rare resources. These sources of cost are examined with the aim of helping students understand and exploit these costs. If a firm is protected by the high costs of imitation that competitors face, then the firm can expect the competitive advantage to be sustained.

21. Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Causal Ambiguity (Southwest Airlines – HR)
• A firm may face a cost disadvantage in acquiring valuable and rare resources because it is unclear exactly which resources need to be imitated in order to get the desired effect. •

22. Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Social complexity may create a cost disadvantage
for a firm attempting to imitate a valuable and rare
resource because the desired resource may be the
result of a set of complex social relationships.
Duplicating these relationships may be extremely
costly or even impossible.
• the social relationships entailed in resources may be so complex that managers cannot really manage them
or replicate them

23. Applying the VRIO Framework
The Question of Imitability
Costs of Imitation
Patents help to create cost disadvantages for imitators, but they are not an ironclad protection for patent holders. One problem for those seeking a patent is that potentially sensitive information has to be disclosed to get the patent in the first place. This information could prove useful to others attempting to develop a similar product or solution. Another problem for patent holders is that the patent must be enforced if others choose to infringe on the patent. For these reasons, some firms opt for a trade secret instead of a patent. Trade secrets offer a different level of protection, but there is little, if any, a priori disclosure requirement.

24. Applying the VRIO Framework
Value, Rarity, & Imitability
If a firm’s resources are:
The firm can expect:
Valuable, Rare, but
not Costly to Imitate
Temporary
Competitive Advantage
Sustained
Competitive Advantage
Valuable, Rare, and
Costly to Imitate

25. Applying the VRIO Framework
The Question of Organization
The logic behind the question of organization is simply that a firm must be appropriately organized to be able to exploit the potential competitive advantage stemming from valuable, rare, and costly-to-imitate resources and capabilities. Conceivably a firm could have a valuable, rare, and costly-to-imitate resource and never realize a competitive advantage because of inadequate organization.
examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc.

26. The VRIO Framework Costly to Imitate? Exploited by Organization?
Competitive
Implications
Valuable?
Rare? No No
Disadvantage
Yes No
Parity
Temporary
Advantage
Yes
Yes No
Sustained
Advantage
Yes
Yes
Yes
Yes

27. The VRIO Framework Costly to Imitate? Exploited by Organization?
Competitive
Implications
Economic
Implications
Valuable?
Rare?
Below
Normal No No
Disadvantage
Yes No
Parity
Normal
Temporary
Advantage
Above
Normal
Yes
Yes No
Sustained
Advantage
Above
Normal
Yes
Yes
Yes
Yes

28. Internal Analysis Tells us: Managers’ Job:
• what the firm should do, given the relative
strengths and weaknesses of resources and
capabilities
Managers’ Job:
• bundle resources and capabilities to achieve competitive advantage
VRIO Framework Helps Managers Recognize
Sources of Competitive Advantage

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Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall