Internal analysis:
distinctive competencies,
competitive advantage and
profitability
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Why, within a particular industry or
market, do some companies outperform
others?
What is the basis for their of their
(sustained) competitive advantage?
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Strategy making process
Existing
business model Strategic
Purpose
Mission, Vision, Values and Goals
External analysis: Internal analysis:
SWOT: Strategy
Opportunities & Strenghts &
Strategic Choice Inputs
Threats Weaknesses
Business-level strategies
Strategy
Corporate-level strategies
Formulation
International strategies
Entrepreneurship and innovation
Strategic Structure and Strategy
leadership Controls Implementation
“Developing a sound and
healthy organization requires
understanding the environment
as much as understanding the
organization.”
- Gary Hamel
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Internal analysis
Internal analysis pinpoints the strengths
and weaknesses of the organization.
It includes assessments of:
q Firm’s resources & capabilities
q Distinctive competencies
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3-step process of Internal Analysis
1. Understanding the process by which company
creates value for customers and profit for
organization, need to understand the role of
resources, capabilities and distinctive competencies.
2. Understanding how important superior efficiency,
innovation, quality and customer responsiveness
are in creating value and generating high profitability
3. Ability to analyse the sources of company’s
competitive advantage to identify what drives the
profitability + opportunities to improve it.
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Value creation
1. Exploiting core competencies to meet if not exceed
the standards of global competition, firms create
value for customers.
2. Measured by a product’s performance
characteristics and its attributes for which customers
are willing to pay.
3. Firms with competitive advantage offer value to
customers that is superior to the value competitors
provide.
4. Creating value for customers is a source of above
average returns.
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Resource-based strategy
The resource-based view (RBV) of strategy
asserts that the competitive advantage and
superior performance of an organisation is
explained by the distinctiveness of its
capabilities.
Resources
“…assets of a company”.
„Inputs into a
firm’s production process”
1) Tangible (physical entities)- assets that can be
observed and quantified
2) Intangible (nonphysical entities created by
managers & other employees)- relatively difficult
for competitors to analyse and imitate
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Tangible Resources
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Intangible Resources
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Capabilities
“…a company’s skills at
coordinating its resources
and putting them to
productive use.”
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Resources and capabilities
• Resources are the assets that organisations
have or can call upon (e.g. from partners or
suppliers),that is, ‘what we have’ .
• Capabilities are the ways those assets are
used or deployed effectively, that is, what we
do well’.
Components of strategic capabilities
Examples of firms’ capabilities (1)
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Examples of firms’ capabilities (2)
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Dynamic capabilities
Dynamic capability is the ability of an
organisation to renew and recreate its strategic
capabilities to meet the needs of changing
environments.
Core competences
Core competences1 are the linked set of
skills, activities and resources that, together:
• deliver customer value
• differentiate a business from its competitors
• potentially, can be extended and developed as
markets change or new opportunities arise.
1G. Hamel and C.K. Prahalad, ‘The core competence of the corporation’, Harvard Business Review, vol.
68, no. 3 (1990), pp. 79–91.
Strategic capabilities and
competitive advantage
The four key criteria by which capabilities can
be assessed in terms of providing a basis for
achieving sustainable competitive advantage
are:
• value,
• rarity, VRIN1
• inimitability and
• non-substitutability
Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17 (1991), no. 1, pp. 99–
120.
VRIN (1)
V – Value of strategic capabilities
Strategic capabilities are of value when they:
• take advantage of opportunities and
neutralise threats,
• provide value to customers
• provide potential competitive advantage
• at a cost that allows an organisation to realise
acceptable levels of return
VRIN (2)
R – Rarity
• Rare capabilities are those possessed uniquely
by one organisation or by a few others only. (E.g.
a company may have patented products, have
supremely talented people or a powerful brand.)
• Rarity could be temporary.
(Eg: Patents expire, key individuals can leave or
brands can be de-valued by adverse publicity.)
VRIN (3)
I – Inimitability
Inimitable capabilities are those that competitors find
difficult to imitate or obtain.
• Competitive advantage can be built on unique
resources (a key individual or IT system) but
these may not be sustainable (key people leave or
others acquire the same systems).
• Sustainable advantage is more often found in
competences (the way resources are managed,
developed and deployed) and the way
competences are linked together and integrated.
VRIN (4)
N - Non-substitutability
Competitive advantage may not be sustainable
if there is a threat of substitution.
• Product or service substitution from a different
industry/market. For example, postal services
partly substituted by e-mail.
• Competence substitution. For example, a skill
substituted by expert systems or IT solutions
Criteria for the inimitability of
strategic capabilities
Organisational knowledge: how resources and
capabilities create competitive advantage
Organisational knowledge is the collective
intelligence, specific to an organisation,
accumulated through both formal systems and the
shared experience of people in that organisation.
Some of this knowledge is ‘Tacit’ knowledge that
is, more personal, context-specific and hard to
formalise and communicate – so it is difficult to
imitate, for example, the knowledge and
relationships in a top R&D team.
Building Blocks
of Competitive Advantage
` Efficiency – fewer inputs to produce given output
Efficiency = Outputs / Inputs
` Quality – customers perceive product’s attributes
provide higher utility in excellence & reliability
` Innovation
• Product
• Process
` Customer Responsiveness – customers attribute more
utility (value) by creating differentiation with competitive
advantage
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Diagnosing strategic capabilities:
Benchmarking
Benchmarking is a means of understanding how an
organisation compares with others – typically
competitors.
Two approaches to benchmarking:
• Industry/sector benchmarking - comparing performance
against other organisations in the same industry/sector
against a set of performance indicators.
• Best-in-class benchmarking - comparing an
organisation’s performance or capabilities against ‘best-
in-class’ performance – wherever that is found even in a
very different industry. (E.g. BA benchmarked its
refuelling operations against Formula 1).
Diagnosing strategic capabilities:
The value chain
• The value chain describes the categories of
activities within an organisation which,
together, create a product or service.
• The value chain invites the strategist to think of
an organisation in terms of sets of activities –
sources of competitive advantage can be
analysed in any or all of these activities.
The Value Chain
“…company is a chain of activities for transforming
inputs into outputs customers value – including primary
& support activities.
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Strategy in Action
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Uses of the value chain
• A generic description of activities –
understanding the discrete activities and how
they both contribute to consumer benefit and
how they add to cost.
• Identifying activities where the organisation has
particular strengths or weaknesses
• Analysing the competitive position of the
organisation using the VRIN criteria – thus
identifying sources of sustainable advantage.
• Looking for ways to enhance value or decrease
cost in value activities (e.g. outsourcing)
Uses of SWOT analysis
• Key environmental impacts are identified using the
analytical tools explained in Chapter 2.
• Major strengths and weaknesses are identified
using the analytic tools explained in Chapter 3.
• Scoring (e.g. + 5 to - 5) can be used to assess the
interrelationship between environmental impacts
and the strengths and weaknesses.
• SWOT can be used to examine strengths,
weaknesses, opportunities and threats in relation
to competitors.
• SWOT can be used to generate strategic options–
using a TOWS matrix.
Dangers in a SWOT analysis
• Long lists with no attempt at prioritisation.
• Over generalisation – sweeping statements
often based on biased and unsupported
opinions.
• SWOT is used as a substitute for analysis – it
should result from detailed analysis using the
frameworks in Chapters 2 and 3.
• SWOT is not used to guide strategy – it is
seen as an end in itself.
The TOWS matrix
