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

1. 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

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

3. RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS
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

4. 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 firms-specific
Tangible or intangible
Easy to acquire or difficult
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

5. EXAMPLES 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
Company
Capability
Result
Logistics -- distributing vast amounts of goods quickly and efficiently to remote locations
200,000-percent return to share-holders during first 30 years since IPO1
An extraordinarily frugal system for delivering the lowest cost structure in the mutual fund industry, using both techno-logical leadership and economies of scale
25,000-percent return to share-holders during the 30-plus year tenure of CEO John Connelly.2 As for ongoing expenses, share-holders in Vanguard equity funds pay, on average, just $30 per $10,000, vs. a $159 industry average. With bond funds, the bite is just $17 per $10,000
Generating new ideas then turning those ideas into new, profitable products
30 percent of revenue from products introduced within the past four years
1: Stalk, Evans, and Shulman, 1992
2: Makadok, 2003

6. TRUST AS AN ORGANIZATIONAL RESOURCE
Trust is an intangible resource 1
A trustworthy reputation for a firm can be leveraged. 2

7. KNOWLEDGE Explicit (easy competitive intelligence)
KNOWLEDGE
Knowledge as a resource
Explicit (easy competitive intelligence)
Tacit (more valuable)

8. 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?
If so, it satisfies the value requirement. Valuable resources are needed just to compete in the industry, but value by itself does not convey an advantage
Valuable resources and capabilities convey the potential to achieve “normal profits” (i.e., profits which cover the cost of all inputs including the cost of capital)
Rare?
Assuming the resource or capability is valuable, is it scarce relative to demand? Or, is it widely possessed by most competitors?
Valuable resources which are also rare convey a competitive advantage, but its relative permanence is not assured.
The 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?
Assuming a valuable and rare resource, how difficult is it for competitors to either imitate the resource or capability or substitute for it with other resources and capabilities that accomplish similar benefits?
Valuable resources and capabilities which are difficult to imitate or substitute provide the 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 step 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 VRINE requirements but which the firm is unable to exploit actually result in significant opportu- nity costs (other firms would likely pay large sums to purchase the VRINE resources and capabilities). Alternatively, exploitability unlocks the potential competitive and perfor-
mance implications of the resource or capability
Firms which control unexploited VRINE resources and capabilities generally suffer from lower levels of financial performance and depressed market valuations relative to what they would otherwise enjoy (though not as depressed as firms lacking resources and capabilities which do satisfy VRINE)

9. SUSTAINABILITY Sustainability:
Just having a competitive advantage is not enough. Can it be sustained?
Durability
Imitability

10. TANGIBLE AND INTANGIBLE ADVANTAGES+ =
Location selection +
Rural real-estate =
Wal-Mart
High traffic real-estate
Brand + =
McDonald’s

11. DYNAMIC 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
Mail Boxes Etc. franchise
Start-up plans
People
Value
Brand
Location
Processes
Dynamic capability: how we integrate recon- figure, acquire, or divest resources for competitive advantage?
Mail boxes, etc., has developed the ability to combine resources better than the competition

12. VALUE CHAIN: INTERNET STARTUP 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, employee feedback
Technology
Development
Inventory system
Site software
Pick & pack procedures
Site look & feel
Customer research
Return procedures
Procurement
CDs
Shipping
Computers
Telecom lines
Shipping services
Media
Inbound shipment of top titles
Server operations
Billing
Collections
Picking and shipment of top titles from warehouse
Shipment of other titles 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

13. 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

14. 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
Choose an entirely direct distribution model (rather than through retailers) and outsourced component manufacturing

15. TRADE OFF 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 difference between Southwest 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 others 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 (based on class of service)
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 - because copying would require them to abandon activities essential to their strategies

16. GUIDELINES FOR OUTSOURCING
Activities that can create value for the firm should not be outsourced. 1
Those activities that represent key sources of learning for the firm should not be outsourced. 2

17. Outsourcing and Offshoring
What is Outsourcing?
Sourcing the function, product, or service of a value chain activity from another company.
Outsourcing arrangements are put in place to improve competitiveness in a function or set of functions.
What is Offshoring?
Taking the activity from a high-cost country to a low-cost country.
What are some examples of outsourcing?

18. BUSINESS CASE FOR OUTSOURCING: ANALYSIS AND ACCURACY
More than 80% of organizations base their sourcing decisions on inadequate financial information.
Organizations fail to include up to 20% of internal costs in their calculations of a business case.
More than 70% of discrete projects and longer-term outsourcing initiatives exceed original business case costing estimates.
Building a financial business case for sourcing is a challenge – difficult to identify and estimate all possible costs
Also difficult to quantify choices and assess risks

19. HIDDEN COSTS OF GLOBAL SOURCING
Project Management
Onshore/Offshore Coordination Demands
Relationship Management
Cross-Cultural Issues
Connectivity and Telecom
Single Domestic vs. Multiple Cross-Border
Project Trips
Multiple Personnel, Long Trips
Transition and Knowledge Transfer
Virtual Decentralized Teams

20. OUTSOURCING KEYS TO SUCCESS
Commit time and effort – beyond the initial cost savings, corporations must be prepared to invest in quality control and training to keep the outsourced or offshored activity competitive and efficient
Treat outsourcing partners as partners: what was previously handled internally is now managed by a third party. Take advantage of the relationship to learn new things about product and process innovation.
Involve middle management: middle management is the lifeblood of strategy execution. Middle managers bridge offshore activities with internal ones and put additional outsourcing arrangements into place as opportunities arise.

21. 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

22. BOTH SENIOR AND MIDDLE MANAGERS PLAY KEY ROLES
Key tasks in the role of management:
Identify resources and capabilities
Specify the resources that will create competitive advantage
Locate an attractive industry in which to deploy them
Select the strategy to get the most out of them
Choose when to change the mix of resources, capabilities, and targeted markets
Middle managers contribute to corporate success within many roles:
Entrepreneur
Communicator
Psychoanalyst
Tightrope walker “In Praise of Middle Managers”, HBR (see text endnotes)