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

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

2. Internal Drivers of Strategy and 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
Resources, Capabilities, and Managerial Decisions
Resources
Managers
Competitive advantage/ disadvantage
Strategy
Performance
Management strategic decision making
Capabilities

3. Resources and 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
Strategy
Capabilities (competencies)
Resources
The inputs that firms use to create goods and services
Undifferentiated or firm-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 on which a firm relies to produce goods and services.

4. Resources and 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 IPO.
Wal-Mart
Vanguard
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 shareholders during the 30-plus year tenure of CEO John Connelly. Shareholders in Vanguard equity funds pay, on average, $30 per $10,000, vs. a $159 industry average. With bond funds, the bite is just $17 per $10,000.
Generating new ideas and turning them into innovative and profitable products.
30 percent of revenue from products introduced within the past four years. 3M

5. Resources and Capabilities
Value Chain:
Total of primary and support value-adding activities by which a company produces, distributes, and markets a product.

6. Resources and Capabilities
Outsourcing:
Activity performed for a company
by people other than its full-time
employees.

7. Resources and Capabilities
Distinctive competence:
Capability that sets a company apart
from other companies; something that a company can do that competitors cannot duplicate easily.
Core competence:
Capability that is central to a corporation’s main business operations and allows it to generate new products and services.

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 other 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. The VRINE Model
VALUE:
A resource or capability is valuable if it enables a company to take advantage of opportunities or to fend off threats in its environment.
RARITY:
Rarity is scarcity relative to demand. An otherwise valuable resource that isn’t rare won’t necessarily contribute to competitive advantage.

10. The VRINE Model
INIMITABILITY:
That which cannot be imitated is inimitable. But imitation is typically a matter of time as aspiring competitors can eventually imitate most resources.
Several factors can limit the ability of competitors to imitate resources or capabilities:
1. high cost
2. property rights
3. time
4. causal ambiguity

11. NON-SUBSTITUTABILITY:
The VRINE Model
NON-SUBSTITUTABILITY:
The non-substitutability criterion is satisfied if a competitor cannot achieve the same results using a different combination of resources and capabilities.
EXPLOITABILITY:
The business can be organized to exploit the full
potential of the resource or capability. The organizational capabilities include organizational structure, systems,
and processes.

12. 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
Dynamic capability: How do we integrate,
reconfigure, acquire, or
divest resources for
competitive advantage?
Value
Brand
Location
Processes
Mail Boxes, Etc., has developed the ability to combine resources better than the competition

13. control of input materials.
Value Chain Analysis
Primary Activities
The primary activities deal with the flow of the product or service through the business, such as:
■ inbound logistics, which include receiving, warehousing, and inventory
control of input materials.
■ operations, which include machining, assembling, and all other activities
that transform inputs into the final product.
■ outbound logistics, which include warehousing, order fulfillment, and
other activities required to get the finished product to the customer.
■ marketing and sales, which include channel selection, advertising, pricing,
and other activities associated with getting buyers to purchase the product.
■ service, which includes customer support, repair services, and other
activities that maintain and enhance the product’s value to the customer.

14. The support activities are the activities that support the primary
Value Chain Analysis
Support Activities
The support activities are the activities that support the primary
value-chain activities, such as:
■ procurement, which includes purchasing raw materials, components,
supplies, and equipment.
■ technology development, which includes research and development,
process automation, and other technology development.
■ human resources management, which includes recruiting, hiring,
training, development, and compensating employees.
■ company infrastructure, which includes finance, legal, quality
management, information systems, organizational structure, control
systems, company culture, and so on.

15. Value Chain Analysis
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
Comparing Competing Businesses
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

16. Value Chain Analysis
Outsourcing is sourcing the function, product, or service of a value-chain activity from another company.
Offshoring is taking that activity from a high-cost country to a low-cost country.
These are separate decisions and a “yes” to one could be a “no” to the other.

17. Value Chain Analysis
Management may consider the following when selecting activities to outsource:
■ Would outsourcing an activity improve results such as reduced lead time,
higher flexibility, reduced inventory, and/ or lower cost?
■ Would outsourcing reduce the risk associated with performing the activity
in-house? If the activity relies on fast-changing technology or the product is
sold in a rapidly changing market, it may be advantageous to outsource the
activity in order to maintain flexibility and avoid the risk of investing in
specialized assets.
■ Is the activity a source of competitive advantage that stems from a cost
advantage or product differentiation?

18. Strategic Leadership: Linking Resources and Capability to Strategy
SENIOR MANAGERS
Decide how to use resources and capabilities.
Configure a company’s value-chain activities.
Senior managers also set the context that
determines how front-line and middle managers
can add value.

19. Strategic Leadership: Linking Resources and Capability to Strategy
MIDDLE MANAGERS
Middle managers are responsible for executing
what senior managers want done.
They play a key role in what the firm is doing and
what it may be adept at doing in the future.
This is why senior management considers the firm’s
leadership pool as they shape strategy and align
their leadership-development programs with long-
term aspirations.