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Assessing the Internal

Environment of the
Firm

Lecture 3 BUS4301
Prof. Nina Xie

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only for instructor use in the classroom.
No reproduction or further distribution permitted
without the prior written consent of McGraw Hill.
 Learning Objectives

• After reading this chapter, you should be able to:

1. Identify the primary and support activities of a firm’s value
chain.
2. Understand how value-chain analysis can help managers create
value by investigating relationships among activities within the
firm and between the firm and its customers and suppliers.
3. Describe the resource-based view of the firm and the different
types of tangible and intangible resources, as well as
organizational capabilities.
4. Explain the four criteria that a firm’s resources must possess
to maintain a sustainable advantage and how value created can
be appropriated by employees and managers.
5. Explain the usefulness of financial ratio analysis, its inherent
limitations, and how to make meaningful comparisons of
performance across firms.
6. Identify the value of the “balanced scorecard” in recognizing
how the interests of a variety of stakeholders can be
interrelated.

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 Looking Ahead

• Value-Chain Analysis.

• Resource-Based View of the Firm.

• Evaluating Firm Performance: Two Approaches – Finance

Ratio & Balance Scorecard

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 The Important of the Internal Environment

• Consider … Being the only in market means a sure win?

• Which activities must a firm effectively manage and

integrate in order to attain competitive advantages in the
marketplace?

Which resources and capabilities must a firm create and

nurture in order to sustain a competitive advantage?

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 Customer needs, value and
satisfaction
Recall: understanding who your customer is, what they want and
what they like, not just dissimilar (Allan Zeman)

 Demand is unfulfilled needs backed up by

purchasing power.

 Customers are willing to pay for something that

meets their needs, preferences
Maximum Willingness and habits.
to pay =
Benefits gained
 Value is the difference between benefits gained
and price paid by the customers. ( i . e . , B - P ).
Price actually
paid
Value
Profit

5
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 Value-Chain Analysis

• Value-chain analysis looks at the sequential

process of value-creating activities.
• Value is the amount buyers are willing to pay for
what a firm provides.
• How is value created within the organization?
• How is value created for other organizations in
the overall supply chain or distribution channel?
• The value received must exceed the costs of
production.

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 Value-Chain Analysis Primary Activities

• Primary activities contribute to the direct

physical creation of the product or service;
the sale and transfer to the buyer; and
service after the sale.
• Inbound logistics.

• Operations.

• Outbound logistics.

• Marketing and sales.

• Service.

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 Question - Menti

• In assessing its primary activities, an airline would examine ?

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 Value-Chain Analysis Support Activities

• Support activities either add value by

themselves or add value through important
relationships with both primary activities
and other support activities.
• Procurement.
• Technology development.
• Human resource management.
• General administration.

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 The Value Chain

• Exhibit 3.1 The Value Chain: Primary and Support

Activities
• Adapted from Competitive Advantage: Creating and Sustaining
Superior Performance by Michael E. Porter. Copyright © 1985, 1998
• Access the text alternative for
s l i dby
e i mThe
a g e s .Free Press.
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 Differences between Supply Chain and Value Chain
• S
Mucpdpolny aC
l dh’
a isn

11

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 Primary Activity: Inbound Logistics

• Inbound logistics are primarily associated

with receiving, storing and distributing inputs
to the product.
• Material handling.
• Warehousing.
• Inventory control.
• Vehicle scheduling.
• Returns to suppliers.
• Factors to consider include:
• Location of distribution facilities.
• Warehouse layout.
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 Primary Activity: Operations

• Operations include all activities associated with

transforming inputs into the final product form.

• Machining.

• Packaging and Assembly.

• Testing or quality control.

• Printing.

• Facility operations.

• Factors to consider include:

• Efficient plant operations and layout.

• Incorporation of appropriate process technology.

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 Primary Activity: Outbound Logistics

• Outbound logistics includes collecting, storing, and

distributing the product or service to buyers.

• Finished goods and warehousing.

• Material handling.

• Delivery vehicle operation.

• Order processing, scheduling and distribution.

• Factors to consider include:

• Effective shipping processes.

• Minimizing shipping costs by grouping goods into

large lot sizes.

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 Apple City
• Where the Iphone and Mac made?

• Supply Chain Vulnerability

15

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 Primary Activity: Marketing and Sales

• Marketing and sales activities involve purchases of products

and services by end users, and how to get buyers to make
those purchases.

• Advertising and promotion.

• Sales force management.

• Pricing and price quoting.

• Channel selection and channel relations.
• Factors to consider include:

• Innovative approaches to promotion and advertising.

• Identification of customer segments and needs.

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 Primary Activity: Service

• Service includes all actions associated with providing

service to enhance or maintain the value of the
product.

• Installation and repair.

• Training.

• Parts supply.

• Product adjustment.

• Factors to consider include:

• Quick response to customer needs.

• Quality of service personnel, ongoing training.

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 Analyzing the
value chain

 Assess impact of each resource, capability and activity on

product and service attributes and cost.

 Alternative ways of obtaining resources and capabilities and

of arranging the activities, and the effects of using the
alternative ways on customer value should be identified and
evaluated .

 Each activity should be examined relative to competitor’s

abilities so as to evaluate the firm’s ability to deliver
customer value.

18
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 What makes the differences?

• Will you spend 3000 or 800 HKD for a flight ticket from HK
to Singapore?

19

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 • Capture 20

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from:https://www.youtube.com/watch?v=bg3Xt8B135Y
 Support Activity: Procurement

• Procurement involves how the firm purchases inputs used in

its value chain.

• Procurement of raw material inputs.

• Optimizing quality and speed.

• Minimizing associated costs.

• Development of collaborative win-win relationships with

suppliers.

• Analysis and selection of alternative sources of inputs to

minimize dependence on one supplier.

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 Support Activity: Technology Development

• Technology development is related to a wide

range of activities.
• Effective research and development activities for process and product initiatives.

• Collaborative relationships between research and development and other

departments.

• State-of-the-art facilities and equipment.

• Excellent professional qualifications of personnel.

• Use of data analytics.

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 Support Activity: Human Resource Management

• Human resource management consists of activities involved

in recruitment, hiring, training and development, and
compensation of all types of personnel.

• Effective employee recruiting, development, and retention

mechanisms.

• Quality relations with trade unions.

• Reward and incentive programs to motivate all employees.

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 Talents
• E-Sports Trainning

24

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 Support Activity: General Administration

• General administration involves:

• Effective planning systems to attain overall goals and

objectives.

• Excellent relations with diverse stakeholder groups.

• Effective information technology to coordinate and

integrate value-creating activities across the value chain.

• Ability of top management to anticipate and act on key

environmental trends and events, create strong values,
culture and reputation.

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 Differences between Supply Chain and Value Chain
• V
Macl d
uoe nCahl da’
i ns

26

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 Interrelationships Among Value-Chain Activities

• Managers must not ignore the importance of relationships

among value-chain activities.

• What are the interrelationships among activities within the

firm?

• What are the relationships among activities within the firm

and with other stakeholders such as customers and
suppliers?

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 Example: The Value Chain in Service Organizations

• Exhibit 3.4 Some Examples of Value Chains in

Service Industries
• Access the text alternative for
slide images
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 RBV

• Resource-Based View of the Firm

29

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 Resource-Based View of the Firm

• The resource-based view of the firm (RBV) integrates two

activities.
1. An internal analysis of phenomena within a company.
2. An external analysis of the industry and its competitive
environment.
• Resources can lead to a competitive advantage.
• If they are valuable, rare, hard to duplicate
• If tangible resources, intangible resources, and
organizational capabilities are combined.

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 The Resource-Based View
Critical Assumptions of the RBV
 A firm’s resources and capabilities are
the primary drivers of competitive
advantage and economic performance
 Competitive advantages (value, cost,
barriers) can ultimately be traced to
differences in resource and capabilities
between firms.

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 The Resource-Based View
Critical Assumptions of the RBV (Cont’d)
 Resource Heterogeneity
 different firms may have different
resources
 Resource Immobility
 it may be costly for firms to acquire or
develop those resources they don’t
possess
 some resources may not spread from
firm to firm easily
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 The Resource-Based View

What do these assumptions really mean?

 if one firm has resources that are valuable
and other firms don’t, and…
 if other firms can’t imitate (copy) these
resources without incurring high costs, then…
 the firm possessing the valuable resources
will likely gain a sustained competitive
advantage

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 The Resource-Based View
Source of Resource Heterogeneity
 heterogeneity of resources typically occurs as the
result of ‘bundling’ the resources and capabilities
of a firm
 managers of a firm could take resources that
seem homogeneous and ‘bundle’ them to create
heterogeneous combinations
 competitive advantage typically stems from
several resources and capabilities ‘bundled’
together
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 Types of Tangible Firm Resources

• Tangible resources are assets that are

relatively easy to identify.
• Physical assets: plant and facilities, location, machinery and equipment.

• Financial assets: cash and cash equivalents, borrowing capacity, capacity to raise
equity.

• Technological resources: data analytic algorithms, patents, copyrights, trademarks.

• Organizational resources: effective planning processes, evaluation and control

systems.

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 Types of Intangible Firm Resources

• Intangible resources are difficult for competitors to account

for or imitate. They are embedded in unique routines and
practices.
• Human resources: trust, experience and capabilities of
employees; managerial skills, firm specific practices and
procedures.
• Innovation resources: technical and scientific expertise and
ideas; innovation capabilities.
• Reputation resources: brand names, reputation for fairness
with suppliers, non-zero sum relationships; reputation for
reliability and product quality with customers.

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 Technology workers
• What happened to white collar(professionals) laid off?

• How is it impacting Big Tech’s intangible asset?

• Surely a decline?

37

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 Types of Firm Resources: Organizational Capabilities

• Organizational capabilities are competencies or skills that a

firm employs to transform inputs into outputs.

• Capacity to combine tangible and intangible resources, using

organizational processes to attain desired ends.

• Outstanding customer service.

• Excellent product development capabilities.

• Innovativeness of products and services, and flexibility in

manufacturing processes

• Ability to hire, motivate, and retain human capital.

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 Question - Menti

• Gillette combines several technologies to attain

unparalleled success in the wet-shaving industry. This
is an example of their

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 Firm Resources and Sustainable Competitive Advantages

• Resources that can provide a firm with the potential for a

sustainable competitive advantage have four attributes.

1. Valuable in formulating and implementing strategies to

improve efficiency or effectiveness.

2. Rare or uncommon; difficult to exploit.

3. Difficult to imitate or copy due to physical uniqueness,

path dependency, causal ambiguity, or social complexity.

4. Difficult to substitute with strategically equivalent

resources or capabilities.

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 Sustainable Competitive Advantage:

Google’s first search engine,

now in Museum of Computer
History (right), is built with
ordinary hard discs and wired up
with cables。

Google’s search technology is

valuable, rare and enduring
 Sustained comp. adv.

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 Sources of Inimitability

• Physical uniqueness: these are resources that

are physically unique, therefore impossible to
duplicate.
• Path dependency: hard to duplicate because
of all that has happened along the path
followed in the development and/or
accumulation of resources.
• Causal ambiguity: impossible to explain what
caused a resource to exist or how to re-create
it.
• Social complexity: resources that result from
social engineering such as interpersonal
relations, culture .

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 Sustainable Competitive Advantages

The Question of Imitability

Costs or obstacles of Imitation
2. Path dependency
 a characteristic of resources that is developed and or
accumulated through a unique series of events.
 hard to duplicate because of all that has happened
along the path followed in the development and/or
accumulation of resources.
 e.g., The benefits from experience and learning
through trial and error cannot be duplicated
overnight.
43

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 Sustainable Competitive Advantages

The Question of Imitability

Costs or obstacles of Imitation
3. Causal Ambiguity
 causal links between resources and competitive
advantage may not be understood
 bundles of resources fog these causal links
 there may be many causes and it is difficult to
identify the contributions of different resources
and/or their relative importance.
44

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 Sustainable Competitive Advantages
The Question of Imitability
Costs or obstacles of Imitation
4. Social Complexity (e.g., )

 the social relationships entailed in

resources may be so complex that
managers cannot really manage them or
replicate them
 things like innovativeness, morale,
teamwork, trust, loyalty and productivity
are hard to duplicate even though you
know that it is important. 45

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 Criteria for Sustainable Competitive Advantage

Is a resource or Is a resource Is a resource or Is a resource or What are the

capability or capability capability capability WITHOUT IMPLICATIONS FOR
VALUABLE? RARE? DIFFICULT TO SUBSTITUTES? COMPETITIVENESS?
IMITATE?

No No No No Competitive
disadvantage
Yes No No No Competitive
parity
Yes Yes No No Temporary
competitive
advantage
Yes Yes Yes Yes Sustainable
competitive
advantage

• Exhibit 3.7 Criteria for Sustainable Competitive Advantage

and Strategic Implications
• Source: Adapted from Barney, J.B. 1991. Firm Resources and Sustained
Competitive Advantage. Journal of Management, 17:99 – 120.

© McGraw Hill
 Example: Building Sustainable Competitive Advantages
Through AI

• Firms can use the power of artificial intelligence to build an

in-imitable sustainable advantage.
• Through path dependency based on accumulated data
that yields an in-depth understanding of markets and
operations over time.
• Through social complexity as the firm leverages the data
it collects to increase value chain efficiencies in
specialized ways.
• Through a strong culture and managerial communication
that focuses on a continual improvement of products and
services.

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 Case Study

Nintendo

48

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 Sustainable Competitive Advantages

Costly to Without Competitive Economic

Valuable? Rare? Imitate? Substitutes? Implications Implications

No No Disadvantage Below
Normal

Yes No Parity Normal

Temporary Above
Yes Yes No Advantage Normal

Sustained Above
Yes Yes Yes Yes
Advantage Normal

49

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 Value Chain: Primary Activities

Value Chain How did Nintendo create value?

Activity Primary:
Inbound logistics. Not in the case: Poor assessment of product
popularity could create shortage of materials.
Operations. Cost efficient production process.
Outbound logistics. Difficulty meeting shipping schedules, distribution to
retail centers. Game development and console delays.
Marketing and Developed a product for all ages, effective and
sales. creative promotion via TV, Internet, and word-of-
mouth, encouraged product trial and purchase by all.
Some concern that products were mainly for children.
Service. Presumed good due to loyal customers.

© McGraw Hill
 Value Chain: Secondary Activities

Value Chain How did Nintendo create value?

Activity
Secondary:
Procurement. Relationships with third-party developers appear to be
essential for console sales.
Technology Not in the case: Open-ended, team-based approach to
development. innovation, access to state-of-the-art technology,
created culture of creativity.
Human resource Excellent recruitment and retention of key talent was
management. assumed by firm performance.
General Poor planning, lack of anticipation of product popularity,
administration. but product development decisions kept profit margins
in excellent shape. Communication between key
decision-makers seemed productive.

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 Resource-Based View
Resource-Based View of the Firm.

• Two perspectives:

1. Internal analysis of phenomena within a company.

2. External analysis of the industry and its competitive

environment.

• Three key types of resources:

1. Tangible resources.

2. Intangible resources.

3. Organizational capabilities.

© McGraw Hill
 Tangible Resources

Tangible Resources:
• Financial: Large holdings in cash and equivalents.
• Physical: Assumed adequate.
• Technological: Access to state-of-the-art technology tools,
support for independent research created new
technological development opportunities in the past.
• Organizational: Not in the case: Team-based approach to
management structure further encouraged creativity;
decisions to keep it simple (no advanced graphics) gave
clear direction to developers.

© McGraw Hill
 Intangible Resources

Intangible Resources:

• Human: Creative culture gave Nintendo developers the

initial opportunity to acquire a unique skill set, thereby
attracting and retaining talent.

• Innovation and Creativity: An assumed culture of

experimentation encouraged innovation without fear of
failure.

• Reputation: Legacy games such as Donkey Kong, Zelda,

Mario created strong brand loyalty.

© McGraw Hill
 VRIN Analysis Model
Firm Resources and Sustainable Competitive Advantages
(VRIN)
Is the resource Implications:
or capability…
Valuable? Neutralize threats and exploit opportunities.
Rare? Not many firms possess.
Difficult to • Physically unique.
imitate? • Path dependency (how accumulated over time).
• Causal ambiguity (difficult to disentangle what is
or how it could be re-created).
• Social complexity (trust, interpersonal
relationships, culture, reputation).
Difficult to No equivalent strategic resources or capabilities.
substitute?
Exhibit 3.6 Four Criteria for Assessing Sustainability of
Resources and Capabilities
© McGraw Hill
 VRIN Analysis
VRIN analysis: Nintendo had resources that were
both valuable and rare.

Its approach to managing its human resources (the

path dependence of its history, the social
complexity of its team-based development) had
made Nintendo’s reputational and creative
resources inimitable for quite a while.

In an industry where innovation created a

competitive advantage, it was no wonder Nintendo
was so successful.

BUT Microsoft and Sony were able to copy the

technology, perhaps even improve on it.
Nintendo had to continue to innovate.
© McGraw Hill
 Evaluation of Firm’s Competitive Advantages

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 The Generation and Distribution of the Firm’s Profits

• Four factors help explain the extent to which employees and

managers may be able to obtain a disproportionately high level
of the profits that they generate.
1. Employee bargaining power.
2. Employee replacement cost.
3. Employee exit costs.
4. Manager bargaining power.

• Other stakeholder groups can also appropriate a portion of

rents.
• Monopoly suppliers or a single buyer.
• Excessive taxation by the government.

© McGraw Hill
 Evaluating Firm Performance

• Balanced Scorecard Analysis • Financial Ratio Analysis

• Employees. • Balance sheet.

• Owners.
• Income statement.
• Customer satisfaction.
• Internal processes. • Market valuation.
• Innovation, learning • Historical comparison.
and improvement
activities. • Comparison with
• Financial perspectives. industry norms.

• Comparison with key

competitors.

© McGraw Hill
 Financial Ratio Analysis

• Five types of financial ratios:

1. Short-term solvency or liquidity.

2. Long-term solvency measures.

3. Asset management or turnover.

4. Profitability.

5. Market value.

• Meaningful ratio analysis must include:

• Analysis of how ratios change over time.

• Comparison with industry norms.

• Comparison with key competitors.

© McGraw Hill
 The Balanced Scorecard

• A meaningful integration of many issues

that come into evaluating performance
• Four key perspectives:
1. How do customers see us? (customer perspective)

2. What must we excel at? (internal perspective)

3. Can we continue to improve and create value?

(innovation and learning perspective)

4. How do we look to shareholders? (financial

perspective)

© McGraw Hill
 Customer Perspective vs. Internal Business Perspective

• Using the balanced scorecard, managers articulate goals

for customer concerns.

• Time versus Quality.

• Performance and service versus cost.

• Then focus on those critical internal operations that enable

them to satisfy customer needs.

• Business processes.

• Cycle time, quality, employee skills, productivity.

• Decisions.

• Coordinated actions.

• Key resources and capabilities.

© McGraw Hill
 Innovation and Learning Perspective

• The balanced scorecard requires managers to make

frequent changes to existing products and services
as well as introduce entirely new products with
extended capabilities. This requires:

• Human capital (skills, talent, knowledge).

• Information capital (information systems,

networks).

• Organization capital (culture, leadership).

© McGraw Hill
 Financial Perspective

• Managers must measure how the firm’s strategy,

implementation, and execution are indeed contributing
to bottom line improvement.
• Financial goals include:
• Profitability, growth, shareholder value.

• This should lead to:

• Improved sales.
• Increased market share.
• Reduced operating expenses.
• Higher asset turnover.

© McGraw Hill
 Limitation of the Balanced Scorecard

• A focus on improving balance across a set of criteria

can yield consistent performance, but:
• It’s not a “quick fix” – needs proper execution.
• Needs a commitment to learning.
• Needs employee involvement in continuous process
improvement.
• Needs cultural change.
• Needs a focus on nonfinancial rather than financial
measures.
• Needs data on actual performance.

© McGraw Hill
 Summarizing internal and external
analyses: VRIO & External environment

 External analysis is linked to internal analysis

because external factors can affect the four
criteria of resources, e.g.
 Value of a resource depends on its effect on
product/ service attributes and cost. Changes in
customer demand and preference may affect the
importance of certain product/ service attribute and
therefore the value of resource.
 Technology may change the rarity of a resource
 Technology and legal environment (e.g. copyright
protection) may affect imitability

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 Summarizing internal and external
analyses: SWOT
Internal
 Strength: A resource or capability that enables the
firm to develop a competitive advantage.
 Weakness: A resource or capability that undermines
the firm’s competitive advantage.

External
 Opportunity: A condition which, if exploited, will
increase the company’s competitive advantage.
 Threat: A condition that may hinder a company’s
efforts to improve or maintain its competitive
advantage.

67
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 Summarizing internal and external
analyses: SWOT ( c o n t ’ d )
 SWOT cannot be determined without regard to the
strategies of the firm and its competitors.
 The same factor (e.g. economic growth or recession)
could be an opportunity to one company and a threat
to another depending on their positioning, cost
structure and core competency, e.g.
 Low-end vs. high-end;

 Geographical focus

 Labor/capital intensity;

 Dependence on different technologies

68
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 Summarizing internal and external
analyses: SWOT ( c o n t ’ d )
 Similarly, the same characteristic (e.g. above-
average staff qualifications, above-average
advertising spending) may be a sign of
wastefulness or a sign of above average staff
competencies and brand building efforts
depending on the company’s strategy and the
external environment.
 SWOT is just a way of summarizing the
findings of strategic analyses and NOT a
substitute of strategic analyses.
 Strategic analysis is about understanding ANY
factors that are driving changes in the industry
and competitive advantages of companies. 69
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