1. 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

2. 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

3. 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

4. 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)

5. 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

6. 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

7. 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

8. 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.

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

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

17. 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

18. 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

19. 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

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

21. 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

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

23. 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

24. 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.

25. 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.

26. 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

27. 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

28. 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

29. 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

30. 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

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