Key Points: Chapter 3: Internal Analysis

1. Key Points: Chapter 3: Internal Analysis • Understand the following key concepts: • Resources, Capabilities, Core Competencies, Sustainable Competitive Advantage, Strategic Competitiveness • Understand how to determine if a capability is a core competency • Four criteria of sustainable advantage • rare, valuable, costly to imitate, nonsubstitutable • Value chain analysis • SWOT Analysis • Financial Analysis

2. Internal Analysis • Resource-Based Model: a firm possesses heterogeneous resources, capabilities, and core competencies that allow it to create a unique market position • Internal analysis should be used in concert with an analysis of a firm’s external environment to develop a firm’s strategic intent and strategic mission • Internal analysis, external analysis, strategic intent, and strategic mission are combined to formulate and implement strategy

3. Figure 3.2 Components of Internal Analysis Strategic Competitiveness Above-average returns Competitive Advantage Discovering Core Competencies Core Competencies Value Chain Analysis Four Criteria of Sustainable Advantages Capabilities Teams of resources • What to do in-house • What to outsource • Rare • Valuable • Costly to Imitate • Nonsubstitutable Resources * Tangible * Intangible

4. Core Competencies • What a firm does that distinguishes it from its competitors and is, therefore, strategically valuable • An integration of capabilities • Examples: customer service, engine technology • Not a product or a single skill • Emerge over time–may take 5-10 years to develop • Become more valuable with use • Often learning and knowledge based • Firms should focus on 3-4 core competencies • Can become core rigidities if they are no longer competitively relevant

5. Key Questions for Managers • How do we assemble bundles of resources, capabilities, and competencies to create value for customers? • Will environmental changes make our core competencies obsolete? • Are substitutes available for our core competencies? • Are our core competencies easily imitated?

6. Four Criteria of Sustainable Advantages • Rare • Valuable: help a firm exploit opportunities or neutralize threats • Costly to Imitate • Unique historical conditions • Casual ambiguity • Social complexity • Nonsubstitutable: no strategic equivalent (cannot achieve same outcome or strategy using different capabilities)

7. Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Costly to Imitate Nonsub-stitutable Competitive Consequences Performance Implications Valuable Rare Below Average Returns Competitive Disadvantage NO NO NO NO Competitive Parity Average Returns YES NO NO YES/NO Temporary Competitive Advantage Aver./Above Average Returns YES YES NO YES/NO Sustainable Competitive Advantage Above Average Returns YES YES YES YES

8. Value Chain Analysis: Figure 3.6 Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics MARGIN Operations Primary Activities

9. Value Chain Analysis • Identify which resources and capabilities add value • Goal: add as much value as cheaply as possible • To be a source of competitive advantage, a firm must either perform an activity: • In a manner that is superior to other firms • That other firms cannot perform

10. SWOT Analysis • STRENGTH: something a firm is good at doing or a characteristic that gives it an important capability (skills, expertise, resource, capability, or achievement) • Determine which strengths are most important in determining performance, in competing successfully, and in forming a powerful strategy. • Form the basis for competitive advantage and the cornerstone of strategy

11. SWOT Analysis • WEAKNESS: something a company lacks or does poorly (in comparison to others) or a condition that puts it at a disadvantage • Determine which weaknesses may be fatal, which are inconsequential, and which can be easily remedied • Strategy must take into account weaknesses

12. SWOT Analysis • OPPORTUNITY: something in the environment that may be exploited to the firm’s advantage • Range from very attractive to marginally attractive • Most relevant ones are those that offer: • avenues for profitable growth • most potential for competitive advantage • firm has the financial resources to pursue

13. SWOT Analysis THREAT: something in the environment that has the potential to reduce a firm’s performance or destroy its competitive advantage

14. SWOT Analysis • Strategy must match firm’s situation • More than just making lists; must evaluate and • draw conclusions

15. SWOT Questions • Is the industry attractive? • Where do the most important threats and opportunities exist? • How attractive is the firm’s situation? • What strategic actions need to be taken?

16. SWOT Questions • What opportunities does the company have the skills and resources to pursue with a real chance of success? Which opportunities are “best” from the company’s standpoint? • What external threats should management be worried most about and what strategic moves should be considered to counter these threats?