Assessing firm internal characteristics

Understanding how firms differ in their competitive advantages

S V Horner 2008
Why assess internal characteristics?
• Firms in same industry using same strategies
often vary in performance
– Not due to industry or strategy
– Must be due to individual organizational
differences: resource

• Resources not equally distributed across firms

S V Horner 2008
Overview of internal analysis
• Use the value chain to identify internal
potential for creating value

• Explain competitiveness using the resource-

based view of the firm

S V Horner 2008
 Internal analysis
• The resource-based view

– identifies key resources that are potential sources of

capabilities
– Sustained competitiveness depends on capabilities that
are valuable, rare, difficult to imitate, and non-substitutable

S V Horner 2008
Strategic capability
• Strategic capability is the resources and competences of an
organisation needed for it to survive and prosper.

• Resources:
– Tangible: physical assets of an organisation such as plant, people and
finance.
– Intangible: Non physical assets such as information, reputation, and
knowledge.
Strategic capability
• Competences are the skills and abilities by which
resources are deployed effectively through an
organisation’s activities and processes.

• Two basic questions:

What are the threshold resources required to support certain strategies?

What are the threshold skills necessary for organize resources in order to
satisfy the requirements of customers and support certain strategies?
Strategic capabilities and competitive advantage
Unique resources and core competences
• Unique resources are those resources that critically
underpin competitive advantage and that others
cannot easily imitate or obtain.

• Core competences are the skills and abilities by

which resources are deployed through an
organisation’s activities and processes such to
achieve competitive advantage in ways that other
cannot imitate or obtain.
Strategic capability: the terminology
Diagnosing strategic capabilities
Analyzing resources

Analyzing the Chain Value

Usage of resources
Control of resources

Obtaining comparisons: Product portfolio analysis

Historical analysis Skills and competences
Industry norms analysis
Benchmarking

Identifying key issues

Analyse weakness and strenghts
Defining core competences and
resources
 Competitive Advantage

Capacities
(Organizational Routines)

Resources

Tangible Inangible
Physical assets, Human, knowledge,
Financial, etc. Skills, etc.
Cost efficiency
• Managers often refer to the management of
cost as as key strategic capability.

• Customer can benefit from cost efficiencies in

terms of lower prices or more product features
for the same price.
Sources of cost efficiency
 The experience curve

•Growth is not optional in may

markets

•Unit cots should decline year on

year as a result of cumulative
experience

•First mover advantage can be

important
Creating sustainable competitive advantage through
resources and capabilities (VRIN framework)
• Value. In order to build a competitive advantage
organisations must have capabilities that are of value for
its customers.
• Rarity. Competive advantage could also be based on rare
competences: for example unique skills developed over
time. However the following must me take in account:
– Ease of transferability (who owns the competence and how easily
transferable is it)
– Sustainability (it is dangerours to assume that competences will
remain the same always)
– Core ridigities (dificult to change and therefore damaging to the
organisation)

S V Horner 2008
Creating sustainable competitive advantage through
resources and capabilities (VRIN framework)

• Difficult to imitate
– Physical uniqueness
– Path dependence: series of events occurring at
various junctures in firm’s development
– Causal ambiguity: difficulty in precisely identifying
cause-effect relationships of what a firm does and the
product it produces
– Social complexity: interpersonal relations among the
employees and managers of a firm, its culture, and its
reputation among suppliers and customers

S V Horner 2008
Creating sustainable competitive advantage through
resources and capabilities (VRIN framework)

• Non-substitutable
• Limited availability of strategically
equivalent substitutes:
– Substitute a similar resource that leads to
same strategy
– Different resources become substitutes for
each other (e.g., Amazon and Barnes and
Noble)

S V Horner 2008
 Capabilities and skills of the organization

¿Is the company

organized in
¿Are this order to exploit
¿Are this ¿Are this competences these
Skills competences difficult to capabilities? Competetive Economic
valuable? rare? imitate? consequences results

Results
No -- -- Competive
No below
disadvantage
normal

-- Competitive Normal
Yes No
Parity results

Competitive Results
Yes Yes No above
Advantage
normal
Sustainable Results
Yes Yes Yes Yes Competitive above
Advantage normal

Barney & Griffin, 1992 p. 220

!19
Value chain
• Organization as sequential process of activities
that create value

S V Horner 2008
Value chain
• Exists within larger context
– Industry supply chain: suppliers, customers,
alliance partners
• Value chain primary activities
– Contribute to physical creation of product or
service
– Inbound logistics, operations, outbound logistics,
marketing and sales, service

S V Horner 2008
Value chain
• Support activities add value
1. By themselves or
2. Through important relationships with primary and
other support activities
– Procurement, technology development, human
resource management, general administration

S V Horner 2008
Inbound logistics
• Receiving, storing, and distributing (within the
firm) product inputs
• Materials handling, warehousing, inventory
control, vehicle scheduling, returns to
suppliers

S V Horner 2008
Operations
• Transforming inputs into final form
• Machining, packaging, assembly, testing,
printing, facility operations

S V Horner 2008
Outbound logistics
• Collecting, storing, and distributing product or
service to buyers
• Finished goods, warehousing, material
handling, delivery vehicle operation, order
processing, scheduling

S V Horner 2008
Marketing and sales
• Purchases of products and services by end
users, sales activities by firm members, and
inducements to influence the purchases

S V Horner 2008
Service
• Providing service to enhance or maintain
product value
• Installation, repair, training, parts supply,
product adjustment

S V Horner 2008
Procurement
• All activities related to the arrangement for
purchasing (not handling) inputs used in the
firm’s value chain

S V Horner 2008
Technology development
• Knowledge, techniques, processes,
procedures, and methods used at various
stages of the value chain

S V Horner 2008
Human resource management
• Recruiting, hiring, training, development, and
compensation of all types of personnel
• Supports both individual primary and support
activities and entire value chain

S V Horner 2008
General administration
• General management, planning, finance,
accounting, legal and government affairs,
quality management, information systems
• Typically supports entire value chain rather
than individual activities

S V Horner 2008
Interrelationships of the value chain
• Interrelationships exist among value chain
activities within and across organizations
• Interrelationships with the firm
• Relationships among activities within the firm
and with other organizations (e.g., customers
and suppliers) that are part of the firm’s
expanded value chain

S V Horner 2008
Value chain and service organizations
• Service firms also have operations activities

– Accounting firms: convert records of transactions (inputs)

into financial records
– Travel agency: creates itinerary including transportation,
accommodations, and activities customized to one’s
budget and travel dates

S V Horner 2008
The value network
• The value network is the set of organisational
links and relationships that are necessary to
create a product or service.

• Organisations needs to be clear about what

activities it ought to undertake itself and which
it should not and, perhaps, should outsource.
The value network
Four key issues about the value network
1. Which activities are centrally important to an organisation’s strategic
capability and which are less central?

2. Where are the profit pools? Profit pools refers to the different levels of
profit available at diferent parts of the value network.

3. To ‘make or buy’ decision for a particular activity or component is

therefore critical. This is the outsourcing decision.

4. Partnering. Who might be the best partners int the parts of the value
network and what type of relationships are important to develop with
each partner?
Activity map
• An activity map tries to show how different
activities of an organisation are linked
together.

• The aim of activity map is to:

– Identify the critical success factors
– Which of these activities outperform competition
Activity map
Benchmarking
Benchmarking is a systematic process that allows to connect the
definition of strategies with the analysis of the industry and competition. It
is a method that allows you to:

1) Measure the results of best-in-class’ competitors with respect to the key

success factors in the industry.
2) Determine how the best-in-class achieve those results.
3) Use this results as a basis for setting goals and strategies and deploy
them in the company.

A rigorous process of benchmarking will ensure that business strategy will

provide a superior competitive position regards competition based on the
key success factors.
SWOT
• SWOT summarises the key issues from the business
environment and the strategic capability of an organisation
that are most likely to impact on strategy development.

• The aim is to identify the extent to which strenghts and

weaknesses are relevant to, or capable to of dealing with the
changes taking place in the business environment.

• A SWOT analysis should help focus discussion on future

choices and the extent to which an organisation is capable of
supporting theses stratategies.
SWOT Analysis framework
Strenghts
• A firm’s strenghts are its resources and capabilities
that can be used as a basis for developing a
competitive advantage: Example of such strenghts
include:
– Patents
– Strong brand names
– Good reputation among customers
– Cost advantages from propietary know-how
– Exclusive access to high grade natural resources
– Favorable access to distribution networks
Weaknesses
• The absecence of certain strenghts may be viewed as a
weaknesses:

– Lack of patents
– Weak brand name and reputation
– High cost structure
– Lack of access to channels of distribution

• In some cases, a strenght for a company (large amount of

manufacturing capacity) can act as the opposite (inflexible to
adapt quickly to changes)
Opportunities
• The external environment may reveal new
opportunitties for profit and gowth:

– Unfullfiled customer need

– Arrival of new technologies
– Loosening of regulations
– Removal of international trade barriers
Threats
• Changes in the environment also may present
threats to the firm:

– Shifts in consumers tastes away from the firm’s product

– Emergence of substitute products
– New regulations
– Increased trade barriers
The SWOT/TOWS Matrix

S-O strategies pursue opportunities that are a good fit to the company’s stregnths
W-O strategies overcome weakness to pursue opportunities
S-T strategies identify ways that the firm can use its strenghts to reduce its
vulnerability to external threats
W-T strategies establish a defensive plan to prevent the firm’s weaknesses from
making it highly susceptible to external threats.