Because learning changes everything.

Chapter 4
Internal Analysis:
Resources, Capabilities,
and Core Competencies

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 The AFI Strategy Framework

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 Learning Objectives
1. Explain how shifting from an external to internal analysis of a firm can
reveal why and how internal firm differences are the root of competitive
advantage.
2. Differentiate among a firm’s core competencies, resources,
capabilities, and activities.
3. Compare and contrast tangible and intangible resources.
4. Evaluate the two critical assumptions about the nature of resources in
the resource-based view.
5. Apply VRIO framework to assess competitive implications of a firm’s
resources.
6. Evaluate different conditions that allow a firm to sustain a competitive
advantage.
7. Outline how dynamic capabilities let a firm sustain a competitive
advantage.

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 Learning Objectives (continued)
8. Apply value chain analysis to understand which firm activities in
transforming inputs into outputs generate differentiation and which
drive costs.

9. Identify competitive advantage as residing in a network of distinct

activities.
10. Conduct a SWOT analysis to generate insights from external and
internal analysis and derive strategic implications.

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 Shifting from External to Internal Analysis
of a Firm
To formulate a strategy that leads to a competitive
advantage,
• Resources and capabilities must combine to form core
competencies.
• Firms should consciously work to identify these.

Evaluation should occur in the context of PESTEL.

Evaluation should occur in the context of Competition.
• Use Porter’s Five Forces.
• Use the Strategic Group Map.

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 Inside the Firm: Competitive Advantage
Exhibit 4.2

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 Internal Firm Differences Lead to Competitive Advantage

Strengths should be Strategically fit within

dynamic. the environment:
• Adjust along with the • Resources.
external environment. • Capabilities.
• Competencies

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 What Are Core Competencies?

Unique strengths.
Embedded deep within a firm.
Allow the firm to differentiate from rivals.

• Result in creating higher value for the customer or

• Result in products and services offered at lower cost.

Expressed through structures, processes, routines.

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 Examples of Core Competencies
Five Guys
• Offers highest-quality ingredients, free toppings, simple menu.
• Chooses not to have drive-throughs or an expanded menu.
Beats Electronics
• Perception of coolness marketing.
Tesla
• Engineering expertise in battery-powered motors & power trains.
Netflix
• Creates proprietary algorithms based on individual customer
preferences.

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 Linking Core Competencies, Resources, Capabilities,
and Activities to Competitive Advantage

Exhibit 4.4

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 Resources, Capabilities and Activities
Help organizations develop core competencies.
Resources:
• Any assets that a firm can draw on.
• Examples: cash, buildings, machinery, or intellectual property.
Capabilities:
• Organizational and managerial skills.
• Examples: structure, routines, and culture.
Activities:
• Distinct and fine-grained business processes (order-taking,
invoicing, etc.).

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 The Resource-Based View

This model aids in identifying core competencies.

• Resources are key to superior firm performance.
Resource:
• Assets, capabilities, and competencies.
Resources fall into two categories:
1. Tangible resources have physical attributes and
are visible.
2. Intangible resources do not have physical
attributes and are invisible.

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 Tangible and Intangible Resources
Exhibit 4.5

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s.

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 Two Critical Assumptions of the RBV

Resource Resource Immobility.

Heterogeneity. • Resources are “sticky,”
• A firm is a unique bundle and don’t move easily
of resources, capabilities from firm to firm.
and competencies. • Resources are difficult to
• These bundles differ replicate.
across firms. • Resources can last for a
long time.

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 The VRIO Framework
VRIO is a tool for evaluating firm resource endowments.
• What resource attributes underpin competitive
advantage?
To be the basis of a competitive advantage, a resource
must be:
• Valuable.
• Rare.
• Costly to Imitate.
• Organized to capture the value of the resource.

Jay Barney was a pioneer of this framework.

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 VRIO Framework to Reveal Competitive
Advantage
Exhibit 4.6

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 A Resource Is…

Valuable if:
• It helps to exploit an opportunity or offset a threat.
Rare if:
• Only one or a few firms possess it.
Costly to Imitate if:
• Competitors can’t develop the resource for a reasonable price.
• Imitation and substitution are risks.
The firm is organized to capture value through:
• Effective internal organizational structure and coordinating
systems.

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 Isolating Mechanisms

Barriers to imitation.
Helps sustain a competitive advantage.
• Better expectations of future resource value.
• Path dependence: past decisions limit current options.
• Causal ambiguity: cause and effect are vague.
• Social complexity: social and business systems interact.
• Intellectual property (IP) protection.

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 Core Rigidity

A former core competency turned into a liability.

• Result of an environmental change.
• No longer fits the external environment.

Turns a resource from an asset to a liability.

• Causes loss of competitive advantage.
• The firm may even go out of business.

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 Dynamic Capabilities

A firm’s ability to: The goal:

• Adapt resources over • Create long-term
time. competitive advantage.
• Create, deploy, modify, • Develop resources,
reconfigure, upgrade, capabilities and
leverage. competencies.
• Create a strategic fit with
the firm’s environment.
• Change in a dynamic
fashion.

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 The Dynamic Capabilities Perspective

A model that emphasizes a firm’s ability to:

• Modify and leverage its resource base.
• Gain and sustain competitive advantage.
• Respond to a constantly changing environment.
Dynamic markets are due to:
• Technological change, deregulation, globalization,
demographic shifts.
Resources are created, deployed, modified,
reconfigured, or upgraded.

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 Resource Stocks and Flows

A way to think about developing dynamic

capabilities.
Resource stocks:
• The firm’s current level of intangible resources.
• New product development, engineering expertise,
innovation capability.
Resource flows:
• The firm’s level of investments to maintain or build a
resource.

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 The Bathtub Metaphor

Exhibit 4.7
SOURCE: Figure based on metaphor used in I. Dierickx and K. Cool (1989), “Asset stock accumulation and sustainability of competitive
advantage,” Management Science 35: 1504–1513.

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 The Value Chain

Internal activities a firm engages in when

transforming inputs into outputs.

• Through primary and support activities.

Each activity adds incremental value.

• Raw materials 🡪 components 🡪 products

Each activity also adds incremental costs.

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 A Generic Value Chain
Exhibit 4.8

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 Primary Activities
Firm activities add value directly.
Transform inputs into outputs.
Focused on moving from raw materials, through
production phases, to sales and marketing, and finally
customer service.
• Supply chain management.
• Operations.
• Distribution.
• Marketing and sales.
• After-sales service.
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 Support Activities

Firm activities that add value indirectly.

Necessary to sustain primary activities.
• Research and development (R&D).
• Information systems.
• Human resources.
• Accounting and finance.
• Firm infrastructure including processes, policies, and
procedures.

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 Strategic Activity Systems

A network of Characteristics:
interconnected • One or more elements
activities: can be easily observed.
• Can be the foundation of • How activities are
competitive advantage. managed is not as easily
• Socially complex and observed.
causally ambiguous. • Difficult to imitate.
• Enhance likelihood of
sustained competitive
advantage.

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 Strategic Activity Systems Must Evolve

External environment changes.

Competitors develop their activity systems.
How activity systems are updated:
• Add new activities.
• Remove activities that are no longer relevant.
• Upgrade activities that have become stale or somewhat
obsolete.

This reconfigures the entire strategic activity

system.

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 The Vanguard Group’s Activity
System⏤1997

Exhibit 4.9 Access the text alternative for slide images.

Source: Adapted from N. Siggelkow (2002), “Evolution toward fit,” Administrative Science Quarterly 47: 146.
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 The Vanguard Group’s Activity
System⏤2019

Exhibit 4.10
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