Analytical Methods of Internal Environment
Ing. Šárka Zapletalová, Ph.D.
Department of Business Economics and Management
STRATEGIC MANAGEMENT

Outline of the lecture
1.Resources and capabilities
2.
2.A resource based approach
3.
3.Value-chain analysis
4.
4.Scanning functional resources and capabilities
5.
5.

Introduction
•Analysts must also look within the corporation itself to identify internal strategic factors -
critical strengths and weaknesses that are likely to determine whether a firm will be able to take
advantage of opportunities while avoiding threats.
•
•This internal scanning, often referred to as organizational analysis, is concerned with
identifying and developing an organization’s resources and competencies.
•

Resources and Capabilities
•Resources are an organization’s assets and are thus the basic building blocks of the organization.
•
•They include tangible assets, such as its plant, equipment, finances, and location, human assets,
in terms of the number of employees, their skills, and motivation, and intangible assets, such as
its technology (patents and copyrights), culture, and reputation.
•
•Capabilities refer to a corporation’s ability to exploit its resources.
•
•A capability is functionally based and is resident in a particular function. Thus, there are
marketing capabilities, manufacturing capabilities, and human resource management capabilities.
When these capabilities are constantly being changed and reconfigured to make them more adaptive to
an uncertain environment, they are called dynamic capabilities.
•

Resources and Capabilities
•Four factors help a company to build and sustain competitive advantage - superior efficiency,
quality, innovation, and customer responsiveness.
•The durability of a company’s competitive advantage depends upon the height of barriers to
imitation, the capability of competitors to imitate its innovation, and the general level of
dynamism in the industry environment.
•The distinctive competencies of an organization arise from its resources (its financial, physical,
human, technological, and organizational assets) and capabilities (its skills at coordinating
resources and putting them to productive use).
•If a company’s managers are to perform a good internal analysis, they need to be able to analyze
the financial performance of their company, identifying how the strategies of the company relate to
its profitability, as measured by the return on invested capital.
•

Resources and Capabilities
•Barney, in his VRIO framework of analysis, proposes four questions to evaluate a firm’s
competencies:
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1.Value: Does it provide customer value and competitive advantage?
2.
2.Rareness: Do no other competitors possess it?
3.
3.Imitability: Is it costly for others to imitate?
4.
4.Organization: Is the firm organized to exploit the resource?
•

•
Prostor pro doplňující informace, poznámky
Applying the VRIO
V
R
I
O
Sustainable Competitive Advantage
Competitive Disadvantage
Competitive Parity
Temporary Competitive Advantage
Temporary Competitive Advantage

Resource-Based Approach
•Proposing that a company’s sustained competitive advantage is primarily determined by its resource
endowments, Grant proposes a five-step, resource-based approach to strategy analysis.
1.Identify and classify the firm’s resources in terms of strengths and weaknesses.
2.Combine the firm’s strengths into specific capabilities and core competencies.
3.Appraise the profit potential of these capabilities and competencies in terms of their potential
for sustainable competitive advantage and the ability to harvest the profits resulting from their
use. Are there any distinctive competencies?
4.Select the strategy that best exploits the firm’s capabilities and competencies relative to
external opportunities.
5.Identify resource gaps and invest in upgrading weaknesses.
•

Prostor pro doplňující informace, poznámky
Resource-Based Approach
resource-based-view-model.png

A Resource-Based Approach
Determining the sustainability of an advantage
•Just because a firm is able to use its resources, capabilities, and competencies to develop a
competitive advantage does not mean it will be able to sustain it.
•Two characteristics determine the sustainability of a firm’s distinctive competency(ies):
durability and imitability.
•
•Durability is the rate at which a firm’s underlying resources, capabilities, or core competencies
depreciate or become obsolete. New technology can make a company’s core competency obsolete or
irrelevant.
•For example, Intel’s skills in using basic technology developed by others to manufacture and
market quality microprocessors was a crucial capability until management realized that the firm had
taken current technology as far as possible with the Pentium chip.
•

A Resource-Based Approach
Determining the sustainability of an advantage
•Imitability is the rate at which a firm’s underlying resources, capabilities, or core competencies
can be duplicated by others.
•To the extent that a firm’s distinctive competency gives it competitive advantage in the
marketplace, competitors will do what they can to learn and imitate that set of skills and
capabilities.
•
•Competitors’ efforts may range from reverse engineering (which involves taking apart a
competitor’s product in order to find out how it works), to hiring employees from the competitor,
to outright patent infringement.
•
•A core competency can be easily imitated to the extent that it is transparent, transferable, and
replicable.
•

A Resource-Based Approach
Determining the sustainability of an advantage
•Transparency is the speed with which other firms can understand the relationship of resources and
capabilities supporting a successful firm’s strategy.
•
•For example, Gillette has always supported its dominance in the marketing of razors with excellent
R&D.
A competitor could never understand how the Sensor or Mach 3 razor was produced simply by taking
one apart.
Gillette’s razor design was very difficult to copy, partially because the manufacturing equipment
needed to produce it was so expensive and complicated.
•

A Resource-Based Approach
Determining the sustainability of an advantage
•Transferability is the ability of competitors to gather the resources and capabilities necessary
to support a competitive challenge.
•For example, it may be very difficult for a winemaker to duplicate a French winery’s key resources
of land and climate, especially if the imitator is located in Iowa.
•
•Replicability is the ability of competitors to use duplicated resources and capabilities to
imitate the other firm’s success.
•

A Resource-Based Approach
Determining the sustainability of an advantage
•Transferability is the ability of competitors to gather the resources and capabilities necessary
to support a competitive challenge.
•For example, it may be very difficult for a winemaker to duplicate a French winery’s key resources
of land and climate, especially if the imitator is located in Iowa.
•
•Replicability is the ability of competitors to use duplicated resources and capabilities to
imitate the other firm’s success.
•

A Resource-Based Approach
Continuum of Resource Sustainability
•An organization’s resources and capabilities can be placed on a continuum to the extent they are
durable and can’t be imitated (that is, aren’t transparent, transferable, or replicable) by another
firm.
•
SOURCE: Copyright © 1992 by the Regents of the University of California. Reprinted from the
California Management Review, Vol. 34, No. 3.

Value-Chain Analysis
•A value chain is a linked set of value-creating activities that begin with basic raw materials
coming from suppliers, moving on to a series of value-added activities involved in producing and
marketing a product or service, and ending with distributors getting the final goods into the hands
of the ultimate consumer.
•
•The focus of value-chain analysis is to examine the corporation in the context of the overall
chain of value-creating activities, of which the firm may be only a small part.
•
Typical Value Chain for a Manufactured Product
•

Value-Chain Analysis
Industry value chain
•The value chains of most industries can be split into two segments, upstream and downstream
segments.
•In the petroleum industry, for example, upstream refers to oil exploration, drilling, and moving
of the crude oil to the refinery, and downstream refers to refining the oil plus transporting and
marketing gasoline and refined oil to distributors and gas station retailers.
•In analyzing the complete value chain of a product, note that even if a firm operates up and down
the entire industry chain, it usually has an area of expertise where its primary activities lie. A
company’s center of gravity is the part of the chain that is most important to the company and the
point where its greatest expertise and capabilities lie - its core competencies.
•After a firm successfully establishes itself at this point by obtaining a competitive advantage,
one of its first strategic moves is to move forward or backward along the value chain in order to
reduce costs, guarantee access to key raw materials, or to guarantee distribution - this process,
called vertical integration.
•

Value-Chain Analysis
Corporate value chain
•Each corporation has its own internal value chain of activities.
•
•Porter proposes that a manufacturing firm’s primary activities usually begin with inbound
logistics (raw materials handling and warehousing), go through an operations process in which a
product is manufactured, and continue on to outbound logistics (warehousing and distribution), to
marketing and sales, and finally to service (installation, repair, and sale of parts).
•
•Several support activities, such as procurement (purchasing), technology development (R&D), human
resource management, and firm infrastructure (accounting, finance, strategic planning), ensure that
the primary value chain activities operate effectively and efficiently.
•

Value-Chain Analysis
Corporate value chain
•
SOURCE: COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance by Michael E. Porter.

Value-Chain Analysis
•Corporate value chain analysis involves the following three steps:
1.Examine each product line’s value chain in terms of the various activities involved in producing
that product or service.
2.Examine the “linkages” within each product line’s value chain: Linkages are the connections
between the way one value activity (for example, marketing) is performed and the cost of
performance of another activity (for example, quality control).
3.Examine the potential synergies among the value chains of different product lines or business
units: Each value element, such as advertising or manufacturing, has an inherent economy of scale
in which activities are conducted at their lowest possible cost per unit of output. If a particular
product is not being produced at a high enough level to reach economies of scale in distribution,
another product could be used to share the same distribution channel.
•

Scanning Functional Resources and Capabilities
•The simplest way to begin an analysis of a corporation’s value chain is by carefully examining its
traditional functional areas for potential strengths and weaknesses.
•
•Functional resources and capabilities include not only the financial, physical, and human assets
in each area but also the ability of the people in each area to formulate and implement the
necessary functional objectives, strategies, and policies.
•
•In addition to the usual business functions of marketing, finance, R&D, operations, human
resources, and information systems/technology, structure and culture as key parts of a business
corporation’s value chain.
•

Scanning Functional Resources and Capabilities
Strategic Marketing Issues
•The marketing manager is a company’s primary link to the customer and the competition. The
manager, therefore, must be especially concerned with the market position and marketing mix of the
firm as well as with the overall reputation of the company and its brands.
•
Marketing Mix Variables
•
SOURCE: KOTLER, PHILIP, MARKETING MANAGEMENT, 11th edition

Scanning Functional Resources and Capabilities
Product Life Cycle
•The product life cycle is a graph showing time plotted against the monetary sales of a product as
it moves from introduction through growth and maturity to decline.
•
Brand and Corporate Reputation
•A brand is a name given to a company’s product which identifies that item in the mind of the
consumer. Over time and with proper advertising, a brand connotes various characteristics in the
consumers’ minds.
•A corporate reputation is a widely held perception of a company by the general public. It consists
of two attributes:
1.stakeholders’ perceptions of a corporation’s ability to produce quality goods and
2.a corporation’s prominence in the minds of stakeholders.

Scanning Functional Resources and Capabilities
Strategic Financial Issues
•A financial manager must ascertain the best sources of funds, uses of funds, and control of funds.
•All strategic issues have financial implications. Cash must be raised from internal or external
(local and global) sources and allocated for different uses. The flow of funds in the operations of
an organization must be monitored.
•
•The concept of financial leverage (the ratio of total debt to total assets) is helpful in
describing how debt is used to increase the earnings available to common shareholders.
•
•Capital budgeting is the analyzing and ranking of possible investments in fixed assets such as
land, buildings, and equipment in terms of the additional outlays and additional receipts that will
result from each investment.

Scanning Functional Resources and Capabilities
Strategic Research and Development Issues
•The R&D manager is responsible for suggesting and implementing a company’s technological strategy
in light of its corporate objectives and policies. The manager’s job, therefore, involves:
•
1.choosing among alternative new technologies to use within the corporation,
2.
2.developing methods of embodying the new technology in new products and processes, and
3.
3.deploying resources so that the new technology can be successfully implemented.

Scanning Functional Resources and Capabilities
Strategic Human Resource (HRM) Issues
•The primary task of the manager of human resources is to improve the match between individuals and
jobs.
•Research indicates that companies with good HRM practices have higher profits and a better
survival rate than do firms without these practices.
•
•A good HRM department should know how to use attitude surveys and other feedback devices to assess
employees’ satisfaction with their jobs and with the corporation as a whole.
•
•HRM managers should also use job analysis to obtain job description information about what each
job needs to accomplish in terms of quality and quantity.

Scanning Functional Resources and Capabilities
Strategic Information Systems/Technology Issues
•The primary task of the manager of information systems/technology is to design and manager the
flow of information in an organization in ways that improve productivity and decision making.
•
•Information must be collected, stored, and synthesized in such a manner that it will answer
important operating and strategic questions.
•
•A corporation’s information system can be a strength or a weakness in multiple areas of strategic
management.