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What Does Internal Analysis Tell Us?  Internal analysis provides a comparative look at  a firm’s capabilities       • what...
Why Does Internal Analysis Matter?  Internal analysis helps a firm:       • Determine if its resources and capabilities ar...
The Theory Behind Internal Analysis The Resource-Based View Value Chain Analysis (VCA) VRIO Framework SWOT Analysis
The Resource-Based View• Developed to answer the question: Why do our firm  achieve better or worse economic performance  ...
The Resource-Based View   Resources and Capabilities      Resources:        • tangible and intangible assets of a firm    ...
The Resource-Based View     Resources and Capabilities                                         Are these resources Firm As...
The Resource-Based View   Four Categories of Resources     • Financial (cash, retained earnings)     • Physical (plant & e...
The Resource-Based View  Two Critical Assumptions of the RBV    • Resource Heterogeneity        » different firms may have...
The Resource-Based View  Resource Heterogeneity   • Heterogeneity of resources typically occurs as the     result of ‘bund...
Resource-Based View (RBV)1.   RBV is a method of analyzing and identifying a     firm’s strategic advantages based on exam...
Value Chain Analysis (VCA)   The term value chain describes a way of looking at    a business as a chain of activities th...
The Value Chain
Conducting a VCA1.   Identify activities2.   Allocate costs     VCA proponents hold that the activity-based VCA     approa...
Traditional Cost Accounting VSActivity Based Cost Accounting
Value Chain Analysis (VCA)   It is important to note that existing financial    management and accounting systems in many...
The Internal Analysis Tool   The VRIO Framework      Four Important Aspects         • Value         • Rarity         • Imi...
The VRIO Framework If a firm has resources that are:   • valuable,   • rare, and   • costly to imitate, and…   • the firm ...
The VRIO Framework Applying the Tool   • A resource or bundle of resources is subjected to     each question to determine ...
Applying the VRIO Framework The Question of Value   • In theory: Does the resource enable the firm     to exploit an exter...
Applying the VRIO Framework The Question of Rarity    • If a resource is not rare, then perfect competition      dynamics ...
Applying the VRIO Framework   Valuable and RareIf a firm’s resources are:     The firm can expect:      Not Valuable      ...
Applying the VRIO Framework The Question of Imitability    • the temporary competitive advantage of valuable      and rare...
Applying the VRIO Framework The Question of Imitability    • If there are high costs of imitation, then the firm      may ...
Applying the VRIO Framework The Question of Imitability    Costs of Imitation      Social Complexity (WordPerfect)        ...
Applying the VRIO Framework The Question of Imitability    Costs of Imitation      Patents           • Patents may be a tw...
Applying the VRIO Framework   Value, Rarity, & ImitabilityIf a firm’s resources are:        The firm can expect:   Valuabl...
Applying the VRIO Framework  The Question of Organization   • a firm’s structure and control mechanisms     must be aligne...
The VRIO Framework                    Costly to   Exploited by     CompetitiveValuable?   Rare?   Imitate?    Organization...
The VRIO Framework                    Costly to   Exploited by      Competitive     EconomicValuable?   Rare?   Imitate?  ...
Entrepreneurial and InternationalApplication of the VRIO Framework The Logic Remains the Same   • small firms and start-up...
Entrepreneurial and InternationalApplication of the VRIO Framework The International Context    Two Reasons for Internatio...
Entrepreneurial and InternationalApplication of the VRIO Framework The International Context     Critical Caveat:        •...
Entrepreneurial and InternationalApplication of the VRIO Framework The International Context    As a firm enters a new mar...
Competitive Dynamics of Resource Imitation      Competitive Dynamics:           • the strategic decisions and actions of f...
Competitive Dynamics  “No Action” Response (Rolex Casio)      A firm may decide to take no action because:        • the ot...
Competitive Dynamics  “Change” Responses    Tactics (Tide)           Strategy • specific actions        • a fundamental ch...
SWOT Components   A strength is a resource or capability controlled by or    available to a firm that gives it an advanta...
Stragegy
Stragegy
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Stragegy

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Stragegy

  1. 1. What Does Internal Analysis Tell Us? Internal analysis provides a comparative look at a firm’s capabilities • what are the firm’s strengths? • what are the firm’s weaknesses? • how do these strengths & weaknesses compare to competitors?
  2. 2. Why Does Internal Analysis Matter? Internal analysis helps a firm: • Determine if its resources and capabilities are likely sources of competitive advantage • Establish strategies that will exploit any sources of competitive advantage
  3. 3. The Theory Behind Internal Analysis The Resource-Based View Value Chain Analysis (VCA) VRIO Framework SWOT Analysis
  4. 4. The Resource-Based View• Developed to answer the question: Why do our firm achieve better or worse economic performance than others? • Used to help firms achieve competitive advantage and superior economic performance • Assumes that a firm’s resources and capabilities are the primary drivers of competitive advantage and economic performance
  5. 5. The Resource-Based View Resources and Capabilities Resources: • tangible and intangible assets of a firm » tangible: factories, products intangible: reputation • used to conceive of and implement strategies Capabilities: • a subset of resources that enable a firm to take full advantage of other resources » marketing skill, cooperative relationships
  6. 6. The Resource-Based View Resources and Capabilities Are these resources Firm Assets: or capabilities? Machinery ? Collective Product Design Skill ? Recruiting Skill ? Engineering Skill of Individuals ? Mineral Deposits ?
  7. 7. The Resource-Based View Four Categories of Resources • Financial (cash, retained earnings) • Physical (plant & equipment, geographic location) • Human (skills & abilities of individuals) • Organizational (reporting structures, relationships)
  8. 8. The Resource-Based View Two Critical Assumptions of the RBV • Resource Heterogeneity » different firms may have different resources • Resource Immobility » it may be costly for firms without certain resources to acquire or develop them » some resources may not spread from firm to firm easily
  9. 9. The Resource-Based View 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
  10. 10. Resource-Based View (RBV)1. RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangibles2. The RBV’s underlying premise is that firms differ in fundamental ways because each firm possesses a unique “bundle” of resources3. Each firm develops competencies from these resources, and these become the source of the firm’s competitive advantages
  11. 11. Value Chain Analysis (VCA) The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value Value chain analysis (VCA) attempts to understand how a business creates customer value by examining the contributions of different activities within the business to that value VCA takes a process point of view
  12. 12. The Value Chain
  13. 13. Conducting a VCA1. Identify activities2. Allocate costs VCA proponents hold that the activity-based VCA approach would provide a more meaningful analysis of the procurement function’s costs and consequent value added than the traditional cost accounting approach
  14. 14. Traditional Cost Accounting VSActivity Based Cost Accounting
  15. 15. Value Chain Analysis (VCA) It is important to note that existing financial management and accounting systems in many firms are not set up to easily provide activity-based cost breakdowns Identify the activities that differentiate the firm Examine the value chain
  16. 16. The Internal Analysis Tool The VRIO Framework Four Important Aspects • Value • Rarity • Imitability • Organization
  17. 17. The VRIO Framework If a firm has resources that are: • valuable, • rare, and • costly to imitate, and… • the firm is organized to exploit these resources, then the firm can expect to enjoy a sustained competitive advantage.
  18. 18. The VRIO Framework Applying the Tool • A resource or bundle of resources is subjected to each question to determine the competitive implication of the resource • Each question is considered in a comparative sense (competitive environment)
  19. 19. Applying the VRIO Framework The Question of Value • In theory: Does the resource enable the firm to exploit an external opportunity or neutralize an external threat? • In practical: Does the resource result in an increase in revenues, a decrease in costs, or some combination of the two?
  20. 20. Applying the VRIO Framework The Question of Rarity • If a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits) • A resource must be rare enough that perfect competition has not set in • Thus, there may be other firms that possess the resource, but still few enough that there is scarcity
  21. 21. Applying the VRIO Framework Valuable and RareIf a firm’s resources are: The firm can expect: Not Valuable Competitive DisadvantageValuable, but Not Rare Competitive Parity Competitive Advantage Valuable and Rare (at least temporarily)
  22. 22. Applying the VRIO Framework The Question of Imitability • the temporary competitive advantage of valuable and rare resources can be sustained only if competitors face a cost disadvantage in imitating the resource » intangible resources are usually more costly to imitate than tangible resources
  23. 23. Applying the VRIO Framework The Question of Imitability • If there are high costs of imitation, then the firm may enjoy a period of sustained competitive advantage » sustained competitive advantage will last only until a duplicate or substitute emerges  If a firm has a competitive advantage, others will attempt to imitate it
  24. 24. Applying the VRIO Framework The Question of Imitability Costs of Imitation Social Complexity (WordPerfect) • the social relationships entailed in resources may be so complex that managers cannot really manage them or replicate them
  25. 25. Applying the VRIO Framework The Question of Imitability Costs of Imitation Patents • Patents may be a two-edged sword • Offer a period of protection if the firm is able to defend its patent rights • Required disclosure may actually decrease the cost of imitation, and the timing
  26. 26. Applying the VRIO Framework Value, Rarity, & ImitabilityIf a firm’s resources are: The firm can expect: Valuable, Rare, but Temporary not Costly to Imitate Competitive Advantage Sustained Valuable, Rare, and Competitive Advantage Costly to Imitate (if Organized appropriately)
  27. 27. Applying the VRIO Framework The Question of Organization • a firm’s structure and control mechanisms must be aligned so as to give people ability and incentive to exploit the firm’s resources • examples: formal and informal reporting structures, management controls, compensation policies, relationships, etc. • these structure and control mechanisms complement other firm resources—taken together, they can help a firm achieve sustained competitive advantage (3M Company)
  28. 28. The VRIO Framework Costly to Exploited by CompetitiveValuable? Rare? Imitate? Organization? Implications No No Disadvantage Yes No Parity Temporary Yes Yes No Advantage Sustained Yes Yes Yes Yes Advantage
  29. 29. The VRIO Framework Costly to Exploited by Competitive EconomicValuable? Rare? Imitate? Organization? Implications Implications No No Disadvantage Below Normal Yes No Parity Normal Temporary Above Yes Yes No Advantage Normal Sustained Above Yes Yes Yes Yes Normal Advantage
  30. 30. Entrepreneurial and InternationalApplication of the VRIO Framework The Logic Remains the Same • small firms and start-ups can apply the VRIO framework to their resources and capabilities » competitive advantage vis-à-vis larger firms can often be identified  recognizing if and why larger firms face high costs of imitation can be critical to small firm success
  31. 31. Entrepreneurial and InternationalApplication of the VRIO Framework The International Context Two Reasons for International Expansion: 1)to exploit current resource and capability advantages in a new market 2) to develop new resources and capabilities in a foreign market
  32. 32. Entrepreneurial and InternationalApplication of the VRIO Framework The International Context Critical Caveat: • resources and capabilities that generate an advantage in one market may or may not generate an advantage in a new market Firms should re-apply the VRIO framework when entering new markets!!
  33. 33. Entrepreneurial and InternationalApplication of the VRIO Framework The International Context As a firm enters a new market: • a disciplined learning mentality is imperative for success » what resources and capabilities meet the VRIO criteria in the new market? » what can the firm learn from partners in the new market? (GM learned from Toyota in the NUMMI alliance)
  34. 34. Competitive Dynamics of Resource Imitation Competitive Dynamics: • the strategic decisions and actions of firms in response to the strategic decisions and actions of other firms Firm B’s Possible Responses Firm A No Response(strategy decisions Change Tacticslead to competitive advantage) Change Strategy
  35. 35. Competitive Dynamics “No Action” Response (Rolex Casio) A firm may decide to take no action because: • the other firm is serving a different market • a response may hurt its own competitive advantage • it does not have the resources and capabilities to mount an effective response • it wants to reduce or manage rivalry in the market through tacit collusion
  36. 36. Competitive Dynamics “Change” Responses Tactics (Tide) Strategy • specific actions • a fundamental change » tweaking product in a firm’s theory characteristics • may be necessary if • usually imitated so current strategy quickly that there is becomes obsolete no advantage • a mimetic change may • a ‘leap frog’ move achieve parity, but not may create advantage advantage
  37. 37. SWOT Components A strength is a resource or capability controlled by or available to a firm that gives it an advantage relative to its competitors in meeting the needs of the customers it serves A weakness is a limitation or deficiency in one or more of a firm’s resources or capabilities relative to its competitors that create a disadvantage in effectively meeting customer needs An opportunity is a major unfavorable situation in a firm’s environment A threat is a major unfavorable situation in a firm’s environment

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