CLASS FOUR: INTERNAL ANALYSIS

2. CORE COMPETENCIES

• Core competencies = unique strengths generated by firms’ resources and capabilities, which are embedded in
firm. [They are part of the firm].

• Basis for various views of internal factors driving firm competitiveness

2.1. What makes core competencies

• Resources = any asset within firm

o Tangible: (e.g., land; buildings, plants, equipment; # of employees/labor; R&D cash, cash flows, all
other capital; supplies)

o Intangible: more “underneath the hood” but expressed in products and services etc. (e.g., culture;
knowledge accumulated (tacit or explicit) and inventions; brand equity and reputation, relationships,
geographic proximity)

• Capabilities = skills (managerial and organizational) within firm to strategically utilize resources to meet
objectives

2.2. Core rigidities

• Core competencies are typically helpful, BUT can turn into “core rigidities” (e.g., Blockbuster)

• Firms need to beware!

3. RBV AND VRIO

3.1. Resource-based view (RBV)

• Seeks to explain internal factors that make a company more or less competitive

• Term “resources” generally used interchangeably w/“capabilities” and/or “competencies”

• Assumptions:

o Resource heterogeneity – resource bundles differ across firms.

o Resources immobility – resources are “sticky” (don’t always move easily among firms).
3.2. VRIO model is way to operationalize the RBV

“VRIO” resources are best for sustained competitive advantage:

• V (valuable) = resource to exploit external opportunity or offset external threat

o “Beats” example: Dr. Dre’s “coolness”/image (intangible) underpins value of Beats headphones.

• R (rare) = resource that only one or a few firms possess.

o Example continued: Exact type of coolness/image is rare.

• I (costly to imitate) = resource that, if not already possessed, cannot be bought or developed at a comparable
cost.

o Example continued: Difficult to imitate Dr. Dre’s exact coolness/image (reflected in artistic talent of Dr.
Dre, social capital in music industry, etc.).

• O (firm organized to capture value from resource) = effective organizational structure, processes and systems
to exploit VRI resources.

o Example continued: Seems so, Apple acquired, seem to be deriving good revenue from Beats.

3.3. Practical matrix for assessing VRIO resources

RESOURCE VALUABLE RARE COSTLY TO ORGANIZED TO COMPETITIVE

1. Yes/No Yes/No Yes/No Yes/No

2. Yes/No Yes/No Yes/No Yes/No

• Different from “ordinary” capabilities: enable an organization to CHANGE competencies over time to ensure
they fit with changes in the external environment (general or industry level). Other perspectives more static.

o Important cause the environment does change!

▪ Especially important in fast-changing competitive landscapes (e.g., due to technological,

o Help avoid core rigidities problem

• Based on effectively learning from individuals’ experiences, group dialogue, organizational routines, etc.

• Considered “higher-order” capabilities. Can overlap with core competencies. Basis for “organizational agility.”

4.1.Types of dynamic capabilities

• Sensing – identifying and assessing opportunities outside one’s firm

• Seizing – choices, mobilizing resources to capture value from identified opportunities

• Transforming – continuous renewal of efforts

Examples: Apple vs Nokia in smartphones; IBM from comp. hardware to big data and cloud computing

5. VALUE CHAIN ANALYSIS

• VCA depicts internal activities (actions) a firm engages in when transforming inputs to outputs.

• Each activity should add value along a “chain”.

• Allows easy analysis of individual links on chain (calculating cost and value generated by each).

• Informs decisions to continue, cut, or ramp up activities.

5.1. Visualizing activities in VCA

• Some figures have “supporting activities” (may help production) listed horizontally to “primary activities” (all
directly involved in production), some figures don’t make this distinction.

o Disagreement if R&D is “supporting” activity or “primary” one.

• Some figures have different activities listed

• The sequence w/which some activities are listed may differ

1. Identify value chain activities

2. Identify firm’s strengths and weaknesses in each activity

3. Conduct VRIO analysis per main resources in each activity

4. Formulate strategies to shed weak resources, enhance weak resources, change resource holdings, or bolster
strong resources

6. MICRO-FOUNDATIONS OF MANAGERIAL DECISION- MAKING

• Individuals are most granular units of internal analysis.

• Often focus on CEOs, but can also look at other top management team (TMT) members.

• Look at these individuals’ decision-making abilities to determine how they might contribute to strengths or
weaknesses of firm.

o Often focus on narcissism, hubris, and over-confidence, but can look at other characteristics.

Athlete sponsorship and design. Create heroes. Reputation and brand name. Loyal clients.

Non-core activities: manufacturing and much of retailing.