3
Examining Chapter the Internal
Environment: Resources,
Capabilities, and Activities
OBJECTIVES
1
Explain the internal context of strategy
2
Identify a firms resources and capabilities and explain
their role in its performance
3
Define dynamic capabilities and explain their role in both
strategic change and a firms performance
4
Explain how valuechain activities are related to firm
performance and competitive advantage
5
Explain the role of managers with respect to resources,
capabilities, and valuechain activities
2
COMPARATIVE INDUSTRY REFORMANCE
ROA
Global Auto
Semiconducto
r
ROS
Grocery Store
Howdo
suchdifferencesin
profitability
materialize?
3
RESOURCES, CAPABILITIES, AND MANAGERIAL DECISIONS
Resources
Managers
Strategy
Competitive
advantage/
disadvantage
Performance
Management
strategicdecision
making
Capabilities
4
RESOURCES AND CAPABILITIES: FUNDAMENTAL BUILDING
BLOCKS OF STRATEGY
Strategy
Resour
ces
The inputs that firms use to create goods
and services
Undifferentiated or firms-specific
Tangible or intangible
Easy to acquire or difficult
es
pabiliti
Ca
s)
etencie
(comp
Afirmsskillinusingitsresources
tocreategoodsandservices.
Thecombinationofprocedures
andexpertisethatthefirmrelies
ontoengageindistinctactivities
intheprocessofproducinggoodsand
services
5
TRUST AS AN ORGANIZATIONAL RESOURCE
1 Trust is an intangible resource
2 A trustworthy reputation for a firm can
be leveraged.
6
KNOWLEDGE
Knowledge as
a resource
Explicit (easy
competitive
intelligence)
Tacit (more
valuable)
7
EXAMPLES OF CAPABILITIES
Company
Capability
Result
Logistics -- distributing vast amounts of
goods quickly and efficiently to remote
locations
200,000-percent return to shareholders during first 30 years
since IPO1
An extraordinarily frugal system for
delivering the lowest cost structure in the
mutual fund industry, using both technological 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, shareholders 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
8
THE VRINE MODEL
Test
Competitiveimplication
Performanceimplication
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 nonsubstitutable?
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)
Exploitable?
For each step of the preceding steps
Resources and capabilities that
of the VRINE can test, the firm actually
satisfy the VRINE requirements but
exploit the resources and capabilities that itwhich the firm is unable to exploit
owns or controls?
actually result in significant opportunity costs (other firms would likely
pay large sums to purchase the
VRINE resources and capabilities).
Alternatively, exploitability unlocks
the potential competitive and performance 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)
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SUSTAINABILITY
Sustainability:
Just having a
competitive
advantage is not
enough. Can it
be sustained?
Durability
Imitability
10
TANGIBLE AND INTANGIBLE ADVANTAGES
Intangible
Tangible
+
=
Locationselection
+
Ruralrealestate
=
WalMart
Brand
+
Hightraffic
realestate
=
McDonalds
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HOW WOULD YOU DO THAT?
Valuable?
DopatentsonZoloft
provide value?
Rare?
DoPfizer'spatentsprovide
rarity?
Pfizers
Zoloft
Inimitableand
nonsubstitutable?
Exploitable?
Cancompetitorsimitate?
Cantheysubstitute?
CanPfizerexploit?
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DYNAMIC CAPABILITIES
Startupplans
MailBoxesEtc.franchise
People
Brand
Value
Location
Processes
Dynamiccapability:
howweintegraterecon
figure,acquire,ordivest
resourcesforcompetitive
advantage?
Mailboxes,etc.,
hasdevelopedthe
abilitytocombine
resourcesbetter
thanthecompetition
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VALUE CHAIN: INTERNET STARTUP EXAMPLE
Firm
Infrastructure
Support
Activities
Financing, legal support, accounting
Human
Resources
Recruiting, training, incentive system, employee
feedback
Technology
Development
Inventory
system
Site
software
Procurement
CDs
Shipping
Computers
Telecom lines
Inbound
shipment of
top titles
Server
operations
Warehousing
Billing
Collections
Inbound
Logistics
Operations
Pick & pack
procedures
Shipping
services
Picking and
shipment of top
titles from
warehouse
Shipment of other
titles from thirdparty distributors
Site look & feel
Return
Customer research procedures
Media
Pricing
Promotions
Advertising
Returned items
Customer
feedback
Product
information and
reviews
Affiliations with
other websites
Outbound
Logistics
Marketing
& Sales
After-Sales
Service
Primary Activities
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GUIDELEINES FOR OUTSOURCING
1 Activities that can create value for the
firm should not be outsourced.
2 Those activities that represent key
sources of learning for the firm should
not be outsourced.
15
USING VALUE CHAINS TO GAIN COMPETITIVE ADVANTAGE
Identical
Differentiated
Findadifferentway
toperformactivities
Findabetterwayto
performthesame
activities
Longerlasting
advantage
Shorterterm
advantage
(competitors
catchup)
16
TRADE OFF PROTECTION YOUR RIVALS CHOOSE NOT TO COPY YOU
SelecteddifferencebetweenSouthwestandlargeAirlines
Southwest
MajorAirlines
Technology
anddesign
Single aircraft
Multiple types of
Operations
Short segment flights
Smaller markets and secondary
aircrafts
airports in major markets
No baggage transfers to others
airlines
No meals
Single class of service
No seat assignments
Marketing
Limited use of travel agents
Word of mouth
Hub and spoke
system
Meals
Seat assignments
Multiple classes of
service
Baggage transfer to
other airlines
Southwest
madechoicesso
thatcompetitors
didnotcopy
becausecopying
wouldrequire
themtoabandon
activities
essentialtotheir
strategies
Extensive use of
travel agents
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INNOVATION AND INTEGRATION OF THE VALUE CHAIN
Areaofinnovation
So
u
rc
e
As
se
m
bl
De
e
liv
er
IKEA Transferredassemblyanddelivery
totheconsumer
Dell
Chooseanentirelydirectdistributionmodel
(ratherthanthroughretailers)andoutsourced
componentmanufacturing
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STRATEGIC LEADERSHIP
Companies that overlook the role of leadership in
the early phases of strategic planning often find
themselves scrambling when its time to execute.
No matter how thorough the plan, with-out the right
leaders it is unlikely to succeed
McKinsey & Company
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