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CHAPTER 4 Internal Analysis: Resources, Capabilities, and Activities Mc. Graw-Hill/Irwin Copyright © 2013 by CHAPTER 4 Internal Analysis: Resources, Capabilities, and Activities Mc. Graw-Hill/Irwin Copyright © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Part 1 Strategy Analysis 4– 2 Part 1 Strategy Analysis 4– 2

LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. 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– 3

Chapter Case 4 From Good to Great to Gone: • Circuit City Ø A Chapter Case 4 From Good to Great to Gone: • Circuit City Ø A great performer from 1982 – 2000: v World-class logistics and customer responsiveness v 4 S: service, selection, savings, and 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– 4

Internal Analysis: Inside the Firm • Comparing two firms in same industry: Internal focus 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 the external environment 4– 5

EXHIBIT 4. 1 Creating Strategic Fit to Leverage Internal Strengths 4– 6 EXHIBIT 4. 1 Creating Strategic Fit to Leverage Internal Strengths 4– 6

The Role of Strategy in Business is to Generate and Sustain Value via the The Role of Strategy in Business is to Generate and Sustain Value via the Linkages Between Position, Organization, and Resources Positioning Organization Resources & Capabilities 4– 7

Positioning • Scope of the Firm: Ø Geographic scope Ø Product-market scope: Choice of Positioning • Scope of the Firm: Ø Geographic scope Ø Product-market scope: Choice of businesses (corporate portfolio analysis) Ø Product market positioning within a business Ø Vertical integration decisions

Organization • Structure Ø Formal definition of authority Ø Conflict resolution • Systems Ø Organization • Structure Ø Formal definition of authority Ø Conflict resolution • Systems Ø Rules, routines, evaluation and rewards • Processes Ø Informal communication, networks, and recruitment 4 -9

Resources and Capabilities • Tangible resources Ø e. g. , physical capital • Organizational Resources and Capabilities • Tangible resources Ø e. g. , physical capital • Organizational capabilities Ø e. g. , routines and standard operating procedures • Intangible resources Ø e. g. , trademarks, “know-how”

4– 11 4– 11

EXHIBIT 4. 2 Linking Resources and Capabilities to Firm Performance EXHIBIT 4. 2 Linking Resources and Capabilities to Firm Performance

EXHIBIT 4. 3 Company Examples of Core Competencies & Applications 4– 13 EXHIBIT 4. 3 Company Examples of Core Competencies & Applications 4– 13

4– 14 4– 14

LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. 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– 15

EXHIBIT 4. 4 Tangible and Intangible Resources 4– 16 EXHIBIT 4. 4 Tangible and Intangible Resources 4– 16

The Resource-based View • Google Example Ø Tangible resources valued at $5 billion Ø The Resource-based View • 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– 18

Two Critical Assumptions in RBV • Resource heterogeneity Ø Bundles of resources and capabilities Two Critical Assumptions in RBV • Resource heterogeneity Ø Bundles of resources and capabilities differ across firms Ø Southwest Airlines and Alaska Airlines have different resources v SWA – Higher employee productivity – Informal organization, pilots help load luggage • Resource immobility Ø Resources tend to be “sticky” and do not move easily Ø Southwest Airlines sustained advantage v Several decades superior performance v Competitors have unsuccessfully imitated SWA model 4– 19

LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. 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– 20

EXHIBIT 4. 5 Applying RBV: Decision Tree Competitive Implications EXHIBIT 4. 5 Applying RBV: Decision Tree Competitive Implications

STRATEGY HIGHLIGHT 4. 1 How Nintendo Focused on the Casual Gamer • Video Gaming STRATEGY HIGHLIGHT 4. 1 How Nintendo Focused on the Casual Gamer • Video Gaming Business Ø $22 billion in 2009, growing to $60 billion in 2013 Ø Nintendo understands the casual gamer v Game Boy handheld devices in 1990 v Nintendo v Wii • DS in 2004 consoles in 2007 49% of game console market in 2010 Ø Microsoft Kinect introduced in November of 2010 v Competition continues… 1– 23

LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. 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– 24

The Value Chain • Primary Activities Ø Add value directly in transforming inputs into 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 Provide support to the primary activities v Information systems, human resources, accounting, etc. v • Managers can see how competitive advantage flows from a system of activities (using activity-based accounting). 4– 25

EXHIBIT 4. 6 Value Chain: Primary & Support Activities EXHIBIT 4. 6 Value Chain: Primary & Support Activities

Value Chain Analysis • Outsourcing activities can have the unintended consequence of damaging the Value Chain Analysis • Outsourcing activities can have the unintended consequence of damaging the firm’s potential to evaluate continuously its key assumptions, learn, and create new capabilities and core competencies. Thus, managers should verify that the firm does not outsource activities that stimulate the development of new capabilities and competencies. 4– 29

Strategic Coherence The Logic of How The Business Fits Together: • Southwest Airlines Ø Strategic Coherence The Logic of How The Business Fits Together: • Southwest Airlines Ø Low Price Ø Short Routes • No Frills • Point-to-Point • One Aircraft -Boeing 737 • High number of Aircraft per Route • No Meals • Flexible/ Lower Staffing • American Airlines Ø Premium Price Ø Short, Long, & Int’l Ø Variety • Hub & Spoke System • Multiple Aircraft • Low number of Aircraft per Route • Meals & Service • Higher Staffing

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Strategic Coherence • A fit among corporate, business, and functional strategy; • A fit Strategic Coherence • A fit among corporate, business, and functional strategy; • A fit between strategy formulation and implementation; • A balance of commitment and flexibility; • A balance among stakeholders; • A balance of competition and cooperation; • A balance of hiding and diffusing information; • A balance of centralization and decentralization; and • A balance between stability and change. 4– 32

Strategic Coherence • Combining activities that complement and reinforce one another. These activities dovetail Strategic Coherence • Combining activities that complement and reinforce one another. These activities dovetail together to help achieve the overall objectives of the firm. • Such strategies, which may regarded as systems of activities are often more successful because they are more difficult to imitation. Thus, they can lead to a sustainable competitive advantage. • Strategic coherence may not be a sufficient condition for attaining a competitive advantage, but it is often a necessary one. 4– 33

Strategic Coherence • A sustainable competitive advantage often requires tradeoffs. These tradeoffs arise for Strategic Coherence • A sustainable competitive advantage often requires tradeoffs. These tradeoffs arise for at least three reasons: Ø Inconsistencies in image or reputation. Ø Tradeoffs arising from the activities themselves. Ø Limits on internal coordination and control • General management at its core is strategy: Ø Defining and communicating the company’s unique position; Ø Making tradeoffs; Ø Forging a dynamic fit among activities (i. e. , strategic coherence). 4– 34

Dynamic Strategic Activity Systems • A network of interconnected activities in the firm • 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 New customer segmentation core v Two new support activities v Permits customized offerings: long-term and more active traders v 4– 35

EXHIBIT 4. 7 Vanguard Group’s Activity System 1997 Legend Core Support 4– 36 EXHIBIT 4. 7 Vanguard Group’s Activity System 1997 Legend Core Support 4– 36

EXHIBIT 4. 8 Vanguard Group’s Activity System 2011 Legend Core Support 4– 37 EXHIBIT 4. 8 Vanguard Group’s Activity System 2011 Legend Core Support 4– 37

Dynamic Capabilities Perspective • A firm can modify its resource base to gain & 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– 38

EXHIBIT 4. 10 Role of Inflows & Outflows in Building Stocks 4– 39 EXHIBIT 4. 10 Role of Inflows & Outflows in Building Stocks 4– 39

STRATEGY HIGHLIGHT 4. 2 IBM’s Dynamic Strategic Fit • From mainframes to services transformation STRATEGY HIGHLIGHT 4. 2 IBM’s Dynamic Strategic Fit • From mainframes to services transformation Ø In 1992, less than 8, 000 people in global services Ø In 2010, nearly 150, 000 employees there • IBM started the PC revolution…then became a misfit in the industry • Lou Gerstner joined as CEO of a nearly bankrupt IBM • Moved IBM downstream toward services and thus higher value added • Transformation of core competency: • Today, IBM is a nimble IT-services firm 1– 40

EXHIBIT 4. 9 IBM Product Scope 1993 and 2010 In 1993, hardware accounted for EXHIBIT 4. 9 IBM Product Scope 1993 and 2010 In 1993, hardware accounted for 50% of IBM revenues In 2010, software & services accounted for 80% of IBM revenues, hardware was down to 18% 4– 41

LO 4 -1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. 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– 42

How to Protect a Competitive Advantage 1. Better Expectations of Future Values Ø Buy 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 U. S. is the only industrial nation not on the metric system v Honda’s core competency in gas engines took decades to build v 4– 43

How to Protect a Competitive Advantage 3. Causal Ambiguity Ø Cause of success or 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– 45

EXHIBIT 4. 11 Strategic Questions in the SWOT Analysis 4– 46 EXHIBIT 4. 11 Strategic Questions in the SWOT Analysis 4– 46