1. Chapter 3 Examining the Internal Environment: Resources, Capabilities, and Activities

2. OBJECTIVES 1 2 3 4 5 Explain the internal context of strategy
Identify a firm’s resources and capabilities and explain their role in its performance 2
Define dynamic capabilities and explain their role in both strategic change and a firm’s performance 3
Explain how value‑chain activities are related to firm performance and competitive advantage 4
Explain the role of managers with respect to resources, capabilities, and value‑chain activities 5

3. COMPARATIVE INDUSTRY PERFORMANCE
ROA
Semiconductor
Global Auto
ROS
Grocery Store
How do such differences in profitability materialize?

4. TWO THEORIES How and why some firms perform better than others
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
A firm’s resources and capabilities determine performance
A firm’s activities determine performance
Success is driven by a firm’s value chain activities: how it configures these activities to add more value than competitors
Success follows from fundamental differences in what firms own and what they can do

5. RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS : The Resource-based View of the Firm
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Resources
Managers
Competitive advantage/ disadvantage
Strategy
Performance
Management strategic decision making
Capabilities

6. RESOURCES AND CAPABILITIES: Fundamental Building Blocks of Strategy
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Strategy
Capabilities (competencies)
Resources
The inputs that firms use to create goods and services
Undifferentiated or firm-specific
Tangible or intangible
Easy or difficult to acquire
A firm’s skill in using its resources to create goods and services. The combination of procedures and expertise that the firm relies on to engage in distinct activities in the process of producing goods and services

7. THE VRINE MODEL Test Competitive implication Performance implication
Valuable?
Does the resource or capability allow the firm to meet a market demand or protect the firm from market uncertainties?
IYES - satisfies the value requirement. Valuable resources are needed just to compete in the industry, but value by itself does not confer advantage.
Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits that cover the cost of all inputs including the cost of capital).
Rare?
Is this resource scarce relative to demand? Or, is it widely possessed by most competitors?
YES - Valuable resources that are also rare convey a competitive advantage,
but relative permanence is not assured.
Advantage is likely only temporary.
A temporary competitive advantage conveys the potential to achieve above- normal profits, at least until the competitive advantage is nullified by other firms.
Inimitable and non- substitut- able?
How difficult is it for competitors to
a) imitate the resource or capability ,or b) substitute for it with other resources and capabilities that provide similar benefits?
Valuable and rare resources and capabilities that are also difficult to imitate or substitute provide potential for sustained competitive advantage.
A sustained competitive advantage conveys the potential to achieve above- normal profits for extended periods of time (until competitors eventually find ways to imitate or substitute, or the environment changes in ways that nullify the value of the resources).
Exploit- able?
For each of the preceding steps of the VRINE test, can the firm actually exploit
the resources and capabilities that it owns or controls?
Resources and capabilities that satisfy the VRIN requirements but which the firm is unable to exploit actually result in significant opportunity costs. Alternatively, exploitability unlocks the potential competitive and performance implications of the resource or capability.
Firms that control unexploited VRINE resources and capabilities suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy .

8. THE VRINE MODEL: VALUE
Example
Union Pacific Railroad’s rail system is a tangible resource that allows UP to compete with other carriers in the long-haul transportation of a variety of goods
Definition
Maintains an extensive network of rail-line property and equipment on the U.S. Gulf cost
Operates in the western two-thirds of the United States serving 23 states, linking every major West Coast and Gulf Coast port, and reaching east through major gateways in Chicago, St.Louis, Memphis, and New Orleans
Also operates in key north-south corridors
The only U.S. railroad serving all six gateways to Mexico
Interchanges traffic with Canadian rail systems
Value: A resource or capability is valuable if it allows a firm to take advantage of opportunities or to fend off threats in its environment

9. THE VRINE MODEL: RARITY
Example
When McDonald’s signs an agreement to build a restaurant inside a Wal-Mart store, it has an intangible advantage over Burger King that is both valuable and rare
Definition
A useful resource or capability that is scarce relative to demand.
Valuable resources that are available to most competitors (i.e., that are not rare) simply allow firms to achieve parity

10. THE VRINE MODEL: INIMITABILITY AND NON-SUBSTITUTABILITY
Example
Barnes & Noble’s large store network gave it wide access to customers and purchasing power that was inimitable …
Definition
A resource or capability is inimitable if competitors cannot acquire the valuable and rare resource quickly, or face a disadvantage in doing so
It is non-substitutable if a competitor cannot achieve the same benefit using different combinations of resources and capabilities
… but Amazon.com found a substitute

11. THE VRINE MODEL: EXPLOITABLITY
Example
Novell: “I walk down Novell hallways and marvel at the incredible potential for innovation here, but Novell has had a difficult time in the past turning innovation into product in the market place”
- CEO Eric Schmidt
Xerox: Xerox invented the laser printer, Ethernet, graphical user-interface, and computer mouse but could not capitalize on these
Definition
A resource or capability that the organization has the capability to exploit (i.e., the capability to generate value from)

12. STOCKS AND FLOWS OF CAPABILITIES
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Capability
Flow
Stock

13. VALUE CHAIN: INTERNET RETAIL EXAMPLE
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Firm
Infrastructure
Financing, legal support, accounting
Support
Activities
Human Resources
Recruiting, training, incentive system, performance management
Technology
Development
Inventory system
Site software
Pick & pack procedures
Site look & feel
Customer research
Return procedures
Procurement
Merchandise
Shipping
Computers
Telecom lines
Shipping services
Media
Inbound shipment of top items
Server operations
Billing
Collections
Picking and shipment of top items from warehouse
Shipment of other items from third- party distributors
Pricing
Promotions
Advertising
Product information and reviews
Affiliations with other websites
Returned items
Customer feedback
Warehousing
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
After-Sales Service
Primary Activities

14. USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Identical
Differentiated
Find a different way to perform activities
Longer-lasting advantage
Shorter-term advantage (competitors catch up)
Find a better way to perform the same activities

15. TRADEOFF PROTECTION: YOUR RIVALS CHOOSE NOT TO COPY YOU
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Selected differences between Southwest, when new, and large airlines
Technology and design
Operations
Marketing
Southwest
Single aircraft
Short segment flights
Smaller markets and secondary airports in major markets
No baggage transfers to other airlines
No meals
Single class of service
No seat assignments
Limited use of travel agents
Word of mouth
Major Airlines
Multiple types of aircrafts
Hub and spoke system
Meals
Seat assignments
Multiple classes of service
Baggage transfer to other airlines
Extensive use of travel agents
Southwest made choices so that competitors did not copy it - because copying would require them to abandon activities that were essential to their strategies

16. INNOVATION AND INTEGRATION OF THE VALUE CHAIN
INNOVATION AND INTEGRATION OF THE VALUE CHAIN
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Area of innovation
Source
Assemble
Deliver
IKEA
Transferred assembly and delivery to the consumer
Dell
Chose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing

17. STRATEGIC LEADERSHIP
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Companies that overlook the role of leadership in the early phases of strategic planning often find themselves scrambling when it’s time to execute. No matter how thorough the plan, without the right leaders, it is unlikely to succeed
– McKinsey & Company

18. SENIOR VS. MIDDLE MANAGERS
Full quote:
“The creation of something new is not accomplished by the intellect but by the play of instinct acting from inner necessity. The creative mind plays with the objects it loves.”
- Carl Jung
Decide how to use other resources and capabilities, configure their firm’s value-chain activities, and set the context that determines how front-line and middle managers can add value
Senior
Are better positioned than senior managers to contribute to competitive advantage and firm success in four areas
Entrepreneurship
Communications
Psychoanalyst
Tightrope walker
Middle
Source: Quy Nguyen Huy, 2001

19. SUMMARY 1 2 3 4 5 Explain the internal context of strategy
Identify a firm’s resources and capabilities and explain their role in its performance 2
Define dynamic capabilities and explain their role in both strategic change and a firm’s performance 3
Understand how value‑chain activities are related to firm performance and competitive advantage 4
Explain the role of managers with respect to resources, capabilities, and value‑chain activities 5