CHAPTER 4 Internal Analysis Resources Capabilities and Activities
CHAPTER 4 Internal Analysis: Resources, Capabilities, and Activities Mc. Graw-Hill/Irwin Copyright © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved.
LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. LO 4 -2 Differentiate between tangible and intangible resources. LO 4 -3 Describe the critical assumptions behind the resource-based view. LO 4 -4 Apply the VRIO framework to assess the competitive implications of a firm’s resources. LO 4 -5 Identify competitive advantage as residing in a network of firm activities. LO 4 -6 Outline how dynamic capabilities can help a firm sustain competitive advantage. LO 4 -7 Identify different conditions that allow firms to sustain their competitive advantage. LO 4 -8 Conduct a SWOT analysis. 4 -2
Chapter Case 4 From Good to Great to Gone: • Circuit City Ø A GREAT performer from 1982 – 2000 v World-class logistics & customer responsiveness v 4 S: service, selection, savings, & satisfaction v 6 times better investment than GE under Jack Welch! • Bankruptcy in fall of 2008! Ø Outflanked by firms like Best Buy and Amazon 4 -3
Chapter Case 4 Circuit City • What are the key issues in Circuit City’s demise? Ø Management distracted by other businesses v Insufficient v Laid-off investments in core competencies 3, 000 very experienced sales staff Ø Response to online retailers inadequate v Best Buy also having problems with this recently 4 -4
INTERNAL ANALYSIS: Inside the Firm • Comparing two firms in same industry: Internal focus Ø Core Competencies v Unique v Can strengths deep inside that differentiate a firm drive competitive advantage Ø Strategic Fit v Internal strengths change with external environment 4 -5
EXHIBIT 4. 1 Creating Strategic Fit to Leverage Internal Strengths 4 -6
Internal Analysis: Link to Superior Performance • Combination of Resources & Capabilities Ø Builds core competencies Ø Competencies drive activities v To transform inputs into goods & services Ø Activities can produce competitive advantage & performance Ø Reinvest profits from superior performance v Hone and upgrade core competencies 4 -7
EXHIBIT 4. 2 Linking Resources & Capabilities to Firm Performance 4 -8
THE RESOURCE-BASED VIEW • Tangible Resources Ø Visible, physical attributes • Intangible Resources Ø No physical attributes • Google Example Ø Tangible resources valued at $5 billion Ø Intangible brand valued at over $100 billion Ø Googleplex has BOTH tangible and intangible aspects • Competitive Advantage More Likely…. . Ø From INTANGIBLE resources 4 -9
EXHIBIT 4. 4 Tangible & Intangible Resources 4 -10
Two Critical Assumptions in RBV • Resource heterogeneity Ø Bundles of resources and capabilities differ across firms Ø Southwest Airlines & Alaska Airlines have different resources v SWA – Higher employee productivity – Informal organization, pilots help load luggage • Resource immobility Ø Resources tend to be “sticky” & don’t move easily Ø Southwest Airlines sustained advantage v Several decades superior performance v Competitors have unsuccessfully imitated SWA model 4 -11
RBV – Also linked to Human Resources • Firm Resources that can be part of the competitive advantage. Ø Physical Capital Resources (plant, equipment, finances) Ø Organizational Capital Resources(structure, planning, controlling, coordinating, and HR systems) Ø Human Capital (skills, judgment, and intelligence of employees) (Barney & Wright, 1998) 1– 12
What is the ultimate quest for the function of the Human Resources Department in a firm? • Developing employees who are skilled and motivated, who can deliver high quality products and services. • Developing and maintaining the culture of the organization. • The encouragement of teamwork and trust. (Barney & Wright, 1998)
The VRIO Framework • Costly to Imitate • Valuable Ø Attractive features Ø Lower costs (& price) Higher profits v Ø Honda – design & build engines Ø Only a few firms possess Ø Toyota – lean manufacturing advantage buy at a reasonable price Ø Apple – Yes Ø Crocs – No • Organized to Capture • Rare v Temporary Ø Unable to develop or competitive Ø Exploit competitive potential v Structure v Coordinating systems Ø Xerox PARC – No Ø Nintendo Wii – Yes 4 -14
(Barney & Hesterly, 2006) (Bertsch & Wiseman, 2008) 1– 15
THE VALUE CHAIN • Primary Activities Ø Add value directly in transforming inputs into outputs v Raw materials through production to customers • Support Activities Ø Indirectly add value v Provide support to the primary activities v Information systems, human resources, accounting, etc. • Managers can see how competitive advantage flows from a system of activities 4 -16
EXHIBIT 4. 6 Value Chain: Primary & Support Activities 4 -17
Dynamic Strategic Activity Systems • A network of interconnected activities in the firm • Evolve over time – external environment changes Ø Add new activities & upgrade or remove obsolete ones • Vanguard Example Ø A global investment firm - $1. 4 trillion managed assets v Emphasis on low customer cost and quality service – Among the lowest expense ratios in the industry (0. 20%) Ø Updated the activity system from 1997 to 2011 v New customer segmentation core v Two new support activities v Permits customized offerings: long-term and more active traders 4 -18
EXHIBIT 4. 8 Vanguard Group’s Activity System 2011 Legend Core Support 4 -19
Dynamic Capabilities Perspective • A firm can modify its resource base to gain & sustain a competitive advantage Ø Advantage is gained from reconfiguring a firm’s resource base Ø Honda core competency in gas-powered engine design v Could v If decrease in value consumers move toward electric-powered cars v BYD competency in batteries would gain advantage • Dynamic capabilities are an intangible resource • Resource stocks and flows are a useful view 4 -20
EXHIBIT 4. 10 Role of Inflows & Outflows in Building Stocks 4 -21
HOW TO PROTECT A COMPETITIVE ADVANTAGE 1. Better Expectations of Future Values Ø Buy Resources at a low cost v Real Estate Development - highway expansion 2. Path Dependence Ø Current alternatives are limited by past decisions v U. S. is the ONLY industrial nation not on the metric system v Honda’s core competency in gas engines took decades to build 4 -22
HOW TO PROTECT A COMPETITIVE ADVANTAGE 3. Causal Ambiguity Ø Cause of success or failure are not apparent v Why has Apple had such a string of successful products? – Role of Steve Jobs’ vision? – Unique talents of the Apple design team? – Timing of product introductions? 4. Social Complexity Ø Two or more systems interact creating many possibilities v. A group of 3 people has 3 relationships v. A group of 5 people has 12 relationships 4 -23
Cloud Computing for small businesses • Can cloud computing boost competitive advantage? Ø Outsource hosting server v Less cost in training staff v Scalable resources v Purchased with operational funds v Competition amongst providers (Truong, D. , 2010) 1– 24
THE SWOT ANALYSIS • Conduct a SWOT after external and internal analysis completed • SWOT combines external and internal analysis Ø Internal Strengths and Weaknesses v From VRIO framework Ø External Opportunities and Threats v From PESTEL or competitive forces analysis (Ch. 3) Ø Leverage internal strengths to exploit external opportunities v Achieving such a dynamic fit yields sustained competitive advantage 4 -25
EXHIBIT 4. 11 Strategic Questions in the SWOT Analysis 4 -26
Healthy Business Annual Check-Up • Annual company-wide SWOT analysis Ø Should use 360 degree review v Involving employees will strengthen your relationship Ø Focus on key areas and assign ratings Ø Prioritize opportunities and threats • Use limited SWOT analysis for specific items Ø New products Ø Acquistion Ø Single business unit (Simoneaux, S. L. , & Stroud, C. L. , 2011) 1– 27
STARBUCKS: Re-creating Its Uniqueness Create a Unique Experience • Soft music, comfortable chairs and sofas. • Wireless hotspot for working or surfing the net. • Handmade specialty drink. • Fresh ground coffee after every pot (8 minutes). • STRONG CORE COMPETENCY © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 1– 28
STARBUCKS VRIO FRAMEWORK • VALUABLE Unique coffee house experience. Work or relax in the coffeehouse ambience. Value chain. • RARITY Who else offers our product? Who else offers our experience. How unique is our offering? • COST TO IMITATE Can our service be duplicated? Who can compete? Mc. Donalds, Tim Hortons, Panera Bread. • ORGANIZED Can we launch the necessary stores properly? 17, 00 stores in 20 years. 1– 29
Why and How did Starbucks lose its uniqueness? STRATEGIC MOVES • Opened up 16, 000 new stores across 50 countries. • Expanded Menu: Desserts, Sandwiches, Books, Music. • Tried to keep up with their massive growth. Grinding of beans. © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved. OUTCOMES • Strayed from its core business. • Forgot what made it unique. • WHAT SERVICE DO YOU FEEL VERY GOOD/COMFORTABLE ABOUT? • It changed what its customers loved about it; The Experience. 1– 30
Re-creating what made Starbucks Special STRATEGIC MOVES • 2009: Introduced VIA, instant coffee. • 2010: Baristas would no longer multitask. Focus would be more on the customers experience. © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved. CEO Howard Schultz 1– 31
Starbucks up’s and down’s. Strategy Activity Systems • Network of interconnected activities within a firm. • Every decision has an outcome: Ø Grinding beans: Ø Menu: Ø Retail: • Internal environment changes when external does. Dynamic Capabilities Perspective • Intangible resource • Can be modified to gain an advantage. • Starbucks forgot that its intangible resources were its core competencies. 1– 32
STARBUCKS COFFEE • Stick to YOUR business. • Different flavors, blends, styles. • Larger stores. • Upgrade technology 1– 33
Chapter Four Conclusion • A firms Resources and Capabilities and how they impact Core Competencies and Activities. • Resource Based View. • Tangible vs. Intangible Resources. • Value Rarity Imitate Opportunity Framework. • Value Chain. • Dynamic Strategic Activities vs. Dynamic Capabilities. • Protect a Competitive Advantage. • SWOT Analysis. © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 1– 34
References Barney and Hesterly (2006). The VRIO Framework: An Overview. Retrieved from http: //faculty. tlu. edu/fgarza/Applying%20 the%20 VRIO%20 Framework. doc Barney, J. , & Wright, P. (1998). On becoming a strategic partner: The role of human resources in gaining competitive advantage. Human Resource Management, 37(1), 31 -46. Retrieved from http: //search. proquest. com/docview/224323931? accountid=28644 Bertsch, T. & Wiseman, D. (2008). Growth for Tiffany & Co. Journal of the International Academy for Case Studies 10(1), 83 -89. Retrieved from http: //search. proquest. com/docview/216297353? accountid=28644 Simoneaux, S. L. , & Stroud, C. L. (2011). BUSINESS BEST PRACTICES: SWOT analysis: The annual check-up for a business. Journal of Pension Benefits, 18(3), 75 -78. Retrieved from http: //search. proquest. com/docview/860007592? accountid=28644 Truong, D. (2010). How cloud computing enhances competitive advantages: A research model for small businesses. The Business Review, Cambridge, 15(1), 59 -65. Retrieved from http: //search. proquest. com/docview/347569664? accountid=28644 1– 35
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