Internal Analysis: Resources, Capabilities, and Activities By Cecilia, Christine, and Savanna

1. Internal Analysis: Resources, Capabilities, and ActivitiesBy Cecilia, Christine, and Savanna

2. ChapterCase4 From Good to Great to Gone: • Circuit City • A GREAT performer from 1982 – 2000 • CC created world-class logistics & customer responsiveness • 4S: service, selection, savings, & satisfaction • 6 times better investment than GE under Jack Welch! • In a book by Jim Collins in 2001, he reported that “CC outperformed the market 18.5 times during 1982-1997.” • Bankruptcy in fall of 2008! • Outflanked by firms like Best Buy and Amazon 4-2 Christine

3. ChapterCase4 From Good to Great to Gone: • 4 S’s • Service – describe it • Selection – define it • Savings – how does that work? • Satisfaction – what makes them come back? 4-3 Christine

4. ChapterCase4 Circuit City (cont’d) • What are the key issues in Circuit City’s demise? • Management distracted by other businesses • Creation of CarMax, DivX DVD player, and the merger with Blockbuster (who also filed for bankruptcy in 2010) • CC wanted to become more cost-competitive with Best Buy and on-line retailers such as Amazon • Insufficient investments in core competencies • Neglected to upgrade and protect them • Laid-off 3,000 highly paid, dedicated, very experienced sales staff • Loyal to company and better able to provide superior customer service • Recruited by Best Buy 4-4 Christine

5. INTERNAL ANALYSIS: Inside the Firm • Comparing two firms in same industry: Internal focus • Core Competencies • Unique strengths deep inside that differentiate products and services unique to a firm • Can drive competitive advantage • Important note: Core Competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage (e.g. Circuit City) • Strategic Fit • Internal strengths change with external environment 4-5 Christine

6. Creating Strategic Fit to Leverage Internal Strengths EXHIBIT 4.1 Christine 4-6

7. Internal Analysis: Link to Superior Performance • Combination of Resources & Capabilities • Builds core competencies • Competencies drive activities • To transform inputs into goods & services • Activities can produce competitive advantage & performance • Reinvest profits from superior performance • Hone and upgrade core competencies 4-7

8. EXHIBIT 4.2 Linking Resources & Capabilities to Firm Performance Assets such as cash, buildings, intellectual property that a company can draw on FA enable firms to add value by transforming inputs into goods and services SFP in the marketplace generates profits that can be reinvested into the firm – helps to upgrade a firm’s resources and capabilities in its pursuit of competitive advantage and improved profitability Organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically 4-8 Christine

9. Company Examples of Core Competencies & Applications EXHIBIT 4.3 4-9 Christine

10. THE RESOURCE-BASED VIEW • Resource-Base View The core competences * This model include all assets that a firm can draw upon when formulating and implementing strategies Is a model that aids to identify 4-10 Cecilia

11. THE RESOURCE-BASED VIEW Two Categories of Resources: • Tangible Resources • Visible; physical attributes • Intangible Resources • Invisible; no physical attributes 4-11 Cecilia

12. Tangible & Intangible Resources EXHIBIT 4.4 4-12 Cecilia

13. THE RESOURCE-BASED VIEW • Example: Google • Has its Tangible resources: “Fixed Assets” valued at $5 billion • Has its Intangible resources: “The Google brand” valued at over $100 billion • Googleplex has BOTH tangible and intangible aspects 4-13 Cecilia

14. THE RESOURCE-BASED VIEW • Tangible resources: Fixed Assets • Buy them if you have money • Intangible resources: Brand name • Is built often over long periods of time * Google brand name – Faster– than Microsoft, Coca-Cola, IBM, and McDonald —took much longer • According to Rothaermel (2013) “Competitive Advantage is more likely to spring from intangible rather than tangible resources” 4-14 Cecilia

15. Exercise: When Brands = Categories CONDITIONS: • Brand valuation can be a major intangible resource for the firm • Some product brands are so well established that the entire category of products (incl. competitors) may be called by the brand name • Can you tell me an example of firm or company where this is happening in the marketplace? 4-15 Cecilia

16. Exercise: When Brands = Categories “IPot”----- when referring to any type of personal portable media player “Jell-O”----- when people mean gelatin dessert “Hoover”----- when people mean vacuum cleaner “Power Point”----- when people mean electronics presentations “Post - its”----- when people mean sticky notes “Jell-O”----- when people mean gelatin dessert 4-16 Cecilia

17. Two Critical Assumptions in Resource-Base View • Resource heterogeneity • Bundles of resources and capabilities differ across firms • Resource immobility • Resources tend to be “sticky” and don’t move easily from firm to firm 4-17 Cecilia

18. Two Critical Assumptions in RBV • Resource heterogeneity (differ across firm) Example • Southwest Airlines (SWA) & Alaska Airlines have different resources • SWA – Higher employee productivity • Job descriptions are informal; pilots help load luggage • Resource immobility (difficult to replicate) Example • Southwest Airlines sustained advantage • Several decades superior performance • Competitors (Continental and Delta) have unsuccessfully imitated SWA model 4-18 Cecilia

19. LO 4-1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. LO 4-2Differentiate between tangible and intangible resources. LO 4-3Describe the critical assumptions behind the resource-based view. LO 4-4Apply the VRIO framework to assess the competitive implications of a firm’s resources. LO 4-5Identify competitive advantage as residing in a network of firm activities. LO 4-6Outline how dynamic capabilities can help a firm sustain competitive advantage. LO 4-7Identify different conditions that allow firms to sustain their competitive advantage. LO 4-8Conduct a SWOT analysis. 4-19 Cecilia

20. The VRIO Framework • Valuable • Rare • Evaluation of firm’s competitive advantage • Must satisfy VRIO criteria to sustain • Costly to Imitate • Organized to Capture Savannah 4-14

21. EXHIBIT 4.5 Applying RBV: Decision Tree Competitive Implications 4-21 Savannah

22. The VRIO Framework • Valuable • Increase perceived value in the eye of customer • Attractive features, lower price • Increase revenues • Increase profitability • Honda • Competency in design • Efficient engines • Lean manufacturing, built-in Savannah

23. The VRIO Framework cont. • Rare • Few firms possess • Commonality = perfect competition • Toyota • Leading innovator of lean manufacturing • Lower production costs + high quality ‘mass-customized’ cars • Valuable + common = competitive parity Savannah

24. The VRIO Framework cont. • Costly to Imitate • unable to buy or develop at reasonable price • Apple • V+R+I • Sony has strength in inventing • Difficult to imitate design, integration, marketing • Crocs • Imitators pop up • Share price $74.75 in 2007, $0.94 in 2008 Savannah

25. The VRIO Framework cont. • Organized to Capture • Firm’s ability to capture value • Effective organizational structure • Coordinating systems • Xerox PARC • First word processing application • Failure to exploit PARC breakthroughs • Nintendo Wii • Casual Gamer • 52 million world wide, 31 Xbox, 23 Playstation Savannah

26. STRATEGY HIGHLIGHT 4.1 How Nintendo Focused on the Casual Gamer • Video Gaming Business • $22 billion in 2009, growing to $60 billion in 2013 • Nintendo understands the casual gamer • Game Boy handheld devices in 1990 • DS in 2004 • Wii consoles in 2007 • 49% of game console market in 2010 • Microsoft Kinect introduced in November of 2010 • Competition continues… 4-26 Nintendo Marketing Video Savannah

27. Porter’s Value Chain Savannah • Not focused on departments or accounting costs • Focus on systems • How inputs change into outputs purchased by the consumer • Not focused on departments or accounting costs • Broken down into activities • Activities add incremental value

28. THE VALUE CHAIN • Primary Activities • Add value directly in transforming inputs into outputs • Raw materials through production to customers • Support Activities • Indirectly add value • Provide support to the primary activities • Information systems, human resources, accounting, etc. • System of Activities • Firm = network of interconnected activities • Managers use to gain and sustain competitive advantage 4-28 Savannah

29. Primary • Inbound logistics • Receiving, storing, distributing inputs internally • Operations • Transformational activities-change inputs to outputs sold • Outbound logistics • Activities to deliver product or service to customer • Marketing and sales • Process to persuade clients to purchase from you • Service • Activities to maintain value of product or service Savannah

30. Support Activities • Procurement • Process of getting resources needed • Human resource management • Recruit, hire, train, motivate, reward, & retain workers • Technological development • Managing and processing information, protecting company’s knowledge base • Infrastructure • Company’s support system, functions that allow day to day operation • Accounting, legal, admin, general management Savannah

31. Value Chain: Primary & Support Activities EXHIBIT 4.6 4-31 Savannah

32. Value Chain Savannah

33. Dynamic Strategic Activity Systems In order for a firm to sustain competitive advantage, strategic activity systems need to evolve over time. Christine

34. Dynamic Strategic Activity Systems • A network of interconnected activities in the firm • Evolve over time – external environment changes • Add new activities & upgrade or remove obsolete ones • Vanguard’s Mission • “ . . . to help clients reach their financial goals by being the world’s highest-value provide of investment products and services” 4-34 Christine

35. Dynamic Strategic Activity Systems (cont.) • Vanguard Example • A global investment firm - $1.4 trillion managed assets • Emphasis on low-cost investing and quality service • Among the lowest expense ratios in the industry (0.20%) • Updated the activity system from 1997 to 2011 • New customer segmentation core – catering to the more traditional as well as those who trade often Christine

36. Vanguard Group’s Activity System 1997 EXHIBIT 4.7 Six large circles depict Vanguard’s strategic core activities – these six are supported by tightly linked activities reinforcing the strategic activity network Legend Core Support 4-36 Christine

37. Six large symbolize Vanguard’s strategic core activities that help it realize its strategic position as the low-cost leader in the industry. However, system evolved over time as mgmt added a new core activity – customer segmentation. Vanguard Group’s Activity System 2011 EXHIBIT 4.8 Legend Core Support 4-37 Christine

38. Dynamic Capabilities Perspective Dynamic Capabilities Perspective describes a firm’s ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources in its quest for competitive advantage Essential in order to gain and sustain competitive advantage 4-38 Christine

39. Dynamic Capabilities Perspective (cont.) • A firm can modify its resource base to gain & sustain a competitive advantage • Advantage is gained from reconfiguring a firm’s resource base • Honda core competency in gas-powered engine design • Could decrease in value if consumers move toward electric-powered cars • BYD (Chinese automaker) competency in batteries would gain advantage over Honda Christine

40. Dynamic Capabilities Perspective (cont.) • Dynamic capabilities are an intangible resource • Intangible is something that cannot be touched or grasped – basically it doesn’t have a physical presence • Resource stocks (firm’s current level of intangible resources) and flows (firm’s level of investments to maintain or build a resource) are a useful view • Exhibit 4.10 uses the bathtub example • Outflows are a reduction in the firm’s intangible-resource stocks, employee turnover (e.g key employees), or if they don’t engage in an activity for a period of time, and then forget how to do that activity. Christine

41. EXHIBIT 4.10 Role of Inflows & Outflows in Building Stocks 4-41 Christine

42. LO 4-1 Distinguish among a firm’s resources, capabilities, core competencies, and firm activities. LO 4-2Differentiate between tangible and intangible resources. LO 4-3Describe the critical assumptions behind the resource-based view. LO 4-4 Apply the VRIO framework to assess the competitive implications of a firm’s resources. LO 4-5Identify competitive advantage as residing in a network of firm activities. LO 4-6Outline how dynamic capabilities can help a firm sustain competitive advantage. LO 4-7Identify different conditions that allow firms to sustain their competitive advantage. LO 4-8Conduct a SWOT analysis. 4-42 Cecilia

43. HOW TO PROTECT A COMPETITIVE ADVANTAGE • Better Expectations of Future Values • Buy Resources at a low cost • Real Estate Development - highway expansion • Path Dependence • Current alternatives are limited by past decisions • U.S. is the ONLY industrial nation not on the metric system • Honda’s core competency in gas engines took decades to build • Sony took many decades to build its core competences in electronic miniaturization 4-43 Cecilia

44. HOW TO PROTECT A COMPETITIVE ADVANTAGE 3. Causal Ambiguity • Describe a situation in which the cause of success or effect are not apparent • Apple: iMac, iPod, iPhone • Why has Apple had such a string of successful products? • Role of Steve Jobs’ vision? • Unique talents of the Apple design team? • Timing of product introductions? 4. Social Complexity (describe situations in which different social and business systems interact) • Two or more systems interact creating many possibilities • A group of 3 people has 3 relationships • A group of 5 people has 12 relationships 4-44 Cecilia

45. THE SWOT ANALYSIS • External and internal analysis completed • SWOT combines the two • Evaluate current situation + future prospects • Internal Strengths and Weaknesses • From VRIO framework • External Opportunities and Threats • From PESTEL or competitive forces analysis • Internal strengths to exploit external opportunities • Achieving a dynamic fit yields sustained competitive advantage Savannah 4-31

46. EXHIBIT 4.11 Strategic Questions in the SWOT Analysis 4-46 Savannah

47. THE SWOT MATRIX (cont.) • The SWOT matrix utilizes the SWOT analysis to develop strategic alternatives for the firm • Look for combinations of internal and external factors that might lead to an alternative 4-47 Savannah

48. SWOT Matrix: (Text Extension)4 Categories of Alternatives • Strength-Opportunity: “Offensive” alternatives, utilize a strength to address an opportunity • Weaknesses-Threat: “Defensive” alternatives, eliminate or minimize a weakness in order to minimize the effect of a threat • Strength-Threat: Utilize a strength to minimize the effect of a threat • Weakness-Opportunity: Shore up a weakness to enable the organization to take advantage of an opportunity 4-48 Savannah

49. Opportunities 1. Growth in developing nations 2. Health consciousness of U.S. population Threats 1. Possible increase in minimum wage 2. Popularity of easy-to-prepare grocery items Strengths 1. Financial stability/resources 2. Brand name/recognition 3. Consistency • Launch new locations in China & Mexico (S1, S2, O1)  • 2) Develop and emphasize more healthy food menu items (W1, W2, O2)  • 3) Launch McDonald’s frozen foods in grocery outlets (S2, S3, T2) • 4) New ads showing ease of drive-thru order/take home (W1, T2) Weaknesses 1. Market share decline 2. Dependence on fried foods on menu SWOT Matrix: Hypothetical Example for McDonald’s Alternatives: 4-49 Savannah

50. Strategic Alternatives • SWOT matrix to develop alternatives-combination of internal and external factors with each alternative • Pros and cons to each alternative • Select one or more alternatives to implement 4-50 Savannah