AB3602

Strategic Management
Chapter 3:
Internal Environment Analysis

Caleb Tse
Strategy, IB and Entrepreneurship Division
Nanyang Business School
Nanyang Technological University
Y2023-24 S2
 Agenda

• Group formations
• Internal Analysis
• Core Competences
• VRIN Analysis
• Value Chain Analysis
- Break –
• Group Activity: Café Wars
• Announcements for next week
 So Far…

• What is strategy
• We know about we know about the strategic
management framework
• Analysis, formulation, and implementation
• How the vision and mission are situated in this framework
• …and we know how to utilize external analysis tools to
perform general environment, industry, strategic
group, and competitor analysis

• Now, we look inside the firm: Internal analysis

Strategic Management Framework:
Analyses
Resource-Based Model
of Above-Average Returns

❖ Internal Environment Analyses

To determine the firm’s core
competencies as competitive
advantages (configuration of
resources & capabilities)

❖ VRIN – valuable, rare,

inimitable, non-substitutable
resources/capabilities
 Differences Across the Tools

• External Analysis
• Views the firm as a ‘black box’: it does not really matter what happens within the firm – IT
TELLS NOTHING ABOUT FIRM ADVANTAGE
Industry
Industry Firm B
Firm
Analysis A

• Internal Analysis All the black boxes look

alike
• Opens the ‘black box’
Looking Inside the firm

General Environment

Rothaermel, 2017
Lesson Outcomes
❖ Identify core competencies through selected
frameworks
❖ VRIN analysis
❖ Value Chain analysis
❖ Sustainability considerations in internal analysis
Overview of Internal Analysis
 RBV: Internal Analysis
Resource-based View
❖ Management/General Resources
❖ Strategic Resources

WHY
Source: Adapted from Barney 1991 Prof. Jay Barney
 Resource-Based View (RBV)

❖ The RBV…
❖ Sees the firm as a bundle of resources
❖ Sees the resources as the key source of performance

Competitive
Resources
Advantage
Resources, Capability and Competencies
❖ Recall: What is strategy?
❖ The foundations of competitive advantage are:
❖ Resources
❖ Capabilities
❖ Core competencies
❖ Resources are bundled to create organizational capabilities.
❖ Capabilities are the source of a firm’s core competencies, which are the basis
of establishing competitive advantages.

Source of
Core
Resource Capability Competitive
Competence
Advantage
Resources
❖ Tangible Resources ❖ Intangible Resources
(visible assets that can be (invisible assets rooted
observed and quantified) deeply in firm’s history;
❖ Financial difficult for competitors to
analyse and imitate)
❖ Organizational
❖ Human
❖ Physical
❖ Innovation
❖ Technological
❖ Reputation
Tangible Resources
Financial • The firm’s capacity to borrow
Resources • The firm’s ability to generate funds through internal operations
Organizational • Formal reporting structures
Resources
Physical • The sophistication of a firm’s plant and equipment and the attractiveness of
Resources its location
• Distribution facilities
• Product inventory

Technological • Availability of technology-related resources such as copyrights, patents,

Resources trademarks, and trade secrets
Intangible Resources
Human • Knowledge
Resources • Trust
• Skills
• Abilities to collaborate with others
• Culture
Innovation • Ideas
Resources • Scientific capabilities
• Capacity to innovate
Reputational • Brand name
Resources • Perceptions of product quality, durability, and reliability
• Positive reputation with stakeholders such as suppliers and customers

Q: Tangible vs. Intangible - which are generally a greater source of competitive advantage?
 Example: Google Headquarters

• Tangible Resource
• Googleplex: land + futuristic building
• Intangible Resource
• Nonphysical location: Heart of Silicon Valley
• Large & computer savvy workforce (human capital)
• Largest gathering of emerging market players
• Largest concentration of venture capitalists in the U.S.
 Resource-Based View (RBV)

• Competitive advantage is more likely to develop from intangible rather than

tangible resources
• Indivisible and non-scale free tangible resources: Hard to leverage/derive additional value
(e.g. physical asset like a plane)
• Intangible: Takes longer to develop, and usually harder to be imitated, can be leveraged (e.g
reputational asset like brand name)
• Tangible and Intangible Resources – Examples:
• Apple
• Tangible Resource Value: $344 Billion
• Intangible Resource Value: $2.50 Trillion
• Microsoft
• Tangible Resource Value: $360 Billion
• Intangible Resource Value: $2.15 Trillion
Example of Firms’ Capabilities
Functional Areas Capabilities Examples of Firms
Distribution • Effective use of logistics management • Walmart
techniques

Human Resources • Motivating, empowering, and retaining • Microsoft

employees

Management Information • Effective and efficient control of inventories • Walmart

Systems through point-of-purchase data collection
methods

Marketing • Effective promotion of brand-name products • Procter & Gamble

• Effective customer service • Ralph Lauren Corp.
• Innovative merchandising • McKinsey & Co.
• Nordstrom Inc.
• Crate & Barrel 18
Example of Firms’ Capabilities
Functional Areas Capabilities Examples of Firms
Management • Ability to envision the future of clothing • Hugo Boss
• Zara

Manufacturing • Design and production skills yielding reliable • Komatsu

products • Witt Gas Technology
• Product and design quality • Sony
• Miniaturization of components and products
Research & • Innovative technology • Caterpillar
Development • Development of sophisticated elevator control • Otis Elevator Co.
solutions • Chaparral Steel
• Rapid transformation of technology into new • Thomson Consumer
products and processes Electronics
• Digital technology
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What are Core Competencies?
❖ Core competencies are capabilities that serve as a
source of competitive advantage for a firm over its
rivals.
❖ Resources
❖ Tangible
❖ Intangible
❖ Capabilities
❖ Integrated set of resources that are used to complete
organizational tasks
Core Competencies
❖ Are capabilities that serve as a source of competitive
advantage for a firm over its rivals
❖ Distinguish a company competitively and reflect its personality.
❖ Emerge over time through an organizational process of
accumulating and learning how to deploy different resources
and capabilities
❖ The activities the company performs especially well compared
to competitors
❖ The activities through which the firm adds unique value to the
goods or services it sells to customers
Resource:
Fresh Ingredients
Core Competence?
+ Replicable “freshness”
customer service at
Capability: mass scale
Customer service
“freshness”

Resource:
Trained Staff
 What are Core Competencies?

• Unique capabilities compared to rivals: V – C

• They are foundations for competitive advantages

Ability to design and manufacture small,

powerful, and highly reliable internal
combustion engines

Ability to create and deploy algorithms

based on data collected from different
participants
 Core Competencies

Visible Side of It’s what the

Products/ customer can
Competition Services see.

Invisible Side of Core Features that

Competition Competencies are inside the
firm.
 Examples of Core Competencies of
Historically Successful Corporates

• IKEA
• Superior in designing modern functional home furnishings at low cost
• Beats Electronics
• Superior marketing: perception of coolness
• Facebook (now Meta)
• Superior algorithms to offer targeted online ads
• General Electric
• Superior expertise in industrial engineering, designing and implementing
efficient management processes, and developing and training leaders
Nike’s Core Competency
 Nike’s Core Competency

The Risky Business of Fairy Tales

• Nike, a company created by Bill Bowerman and Phil
Knight in 1964, today has 60% − 90% market share
(depending on the sport) and $25 billion in annual
revenues
• Nike’s core competency of creating heroes: selecting
athletes who succeed against all odds
• This core competency does have its risks, as heroes do
sometimes fall, resulting in public relations disasters.
• When we think about creating ‘heroes’…
• Who is in a better position, Nike or Disney?
Building Core Competencies
Two tools help firms identify their core competencies:
❖ VRIN - the four criteria of sustainable competitive advantage
❖ Value chain analysis
 VRIN - Four Criteria of Competitive Advantages
Valuable Capabilities • Help a firm neutralize threats or exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate • Historical: A unique and a valuable organizational culture or brand
Capabilities name
• Ambiguous cause: The causes and uses of a competence are
unclear
• Social complexity: Interpersonal relationships, trust, and friendship
among managers, suppliers, and customers
Non-substitutable • No strategic equivalent
Capabilities
 How to
Sustain a Competitive Advantage?
VRIN If these elements are
not protected, then
they can lead to a
temporary…

Core Competitive
Resources Capabilities Competencies Advantage

With isolating
mechanisms, then they
can lead to a
sustainable…
Because, for instance, some other
organization might ‘steal’ a strategic Isolating Barriers to imitation
resource. Mechanisms
 Isolating Mechanisms

• Barriers to imitation
• Protect resources, capabilities, or competencies that underlie a firm’s
competitive advantage
• How:
• Better expectations of future resource value
• Path dependence
• Causal ambiguity
• Social complexity
• Formal institution: Intellectual property (IP) protection
 How to
Sustain a Competitive Advantage?
Isolating Mechanisms

• Better Expectations of Future Value of a Resource

• Buy Resources at a low cost
• Nike signing young & promising athletes
• Record labels finding ‘cheap’ talent
• Path Dependence
• Current alternatives are limited by past decisions
• Historical legacy: Rolex, Patek Philippe, and so on
• GM’s problems competing with Toyota Prius was decades in the making
 How to
Sustain a Competitive Advantage?
Isolating Mechanisms

• Causal Ambiguity
• Cause of success or failure is not apparent.
• In some cases, it is hard to identify specifically how the firm has been able to
be successful: Honda’s presence in US
• Social Complexity
• Two or more systems interact creating many possibilities: “Guanxi” in China
• IP Protection
• Decision to patent or to keep things “secret” within an organization
 How to
Sustain a Competitive Advantage?

• In sum, a firm may be able to protect its competitive advantage –for long periods
of time – when its managers have consistently:
• Better expectations about the future value of resources
• Have accumulated a resource advantage that can be imitated only over long periods of time
• When the source of their competitive advantage is causally ambiguous or socially complex
 VRIN Framework
Is the Is the Is the Capability Is the Capability Competitive Performance
Capability Capability Costly to Nonsubstitutable? Consequences Implications
Valuable? Rare? Imitate?
No No No No Competitive Below-average
disadvantage returns

Yes No No Yes/No Competitive parity Average returns

Yes Yes No Yes/No Temporary Average returns

competitive to above-average
advantage returns
Yes Yes Yes Yes Sustainable Above-average
competitive returns
advantage
• A firm can sustain a competitive advantage only when it has resources that satisfy all of the VRIN criteria
• Don’t look for some resources that fit in each bucket (V,R,I, & N) instead look for a few resources that meet all of the
criteria
 Capability:
Group buying model - connecting
buyers & sellers using deeply
discounted coupons for members
+ daily deals + small deadline

Valuable?

Rare?

Costly to Imitate?

Non-substitutable?
Value Chain Analysis Increase Decrease

❖ Two main ways to increase firm returns

V–C
❖ Increase customers’ willingness to pay (by
increasing differentiation)
❖ Lower costs of supplying the product/service
❖ Value Chain Analysis:
❖ Identify the activities in the firm that create
value and those that do not.
❖ Value-creating activities are those that help to
do the following as cheaply as possible:
❖ Differentiate the product/service
❖ Lower costs of supplying the product/service.
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Steps to conduct a Value Chain Analysis
❖ Divide the firm into a chain of activities, beginning at the point
where the firm receives inputs (e.g., raw materials) and ending at
the point of after-sales service to customers
❖ Primary activities
❖ Support activities
❖ A firm can develop a capability and/or a core competence in any of
the value chain activities and support functions.
❖ Allocate the costs of executing those activities
❖ When it does so, it has the ability to create value for shareholders
and customers.

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Internal Analysis: Value Chain

also known as also known as

Supply-Chain Distribution
Management
Steps to conduct a Value Chain Analysis
❖ Evaluate whether those activities (resources and/or
capabilities relating to that activity) help to differentiate
and/or lower the costs of the firm’s product/service
❖ Differentiation drivers
❖ Cost drivers
❖ Evaluate against competitors (benchmarking)
❖ Can the firm perform the activity in a manner that is superior to
that of rivals?
❖ Can the firm perform a value-creating activity that rivals cannot?

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 Generic Value Chain
❖ Need to be modified for each firm
❖ Value increasing (V) or lower relative costs (C)
 Value Chain Analysis: Next Steps?

• What if some activities can not create value cheaply

(compared to other firms)? Outsource!
• Let external professionals handle some activities: Legal concerns
(Baker McKenzie), HR (Mercer), production (Original Equipment
Manufacturers such as Foxconn), R&D (Rolls Royce lab with NTU), and
so on
• Benefits: Flexibility, costs reduction, risks/investments cutback
• Concerns? Loss of innovativeness, loss of jobs
• How to outsource?
• More in later chapters (e.g., international outsourcing, licensing, and
so on)
A Model of the Value Chain

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Creating Value through Value Chain Activities

44
Creating Value through Support Functions

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Sustainability Considerations in
Internal Analysis
❖ Sustainability considerations include understanding the impact of
sustainability, such as environment (E) and social (S) factors on a
firm’s value chain activities. Examples include:
❖ Human Resource Management oversight of safe working conditions.
❖ Technology Development to consider product safety and recycling.
❖ Inbound Logistics to reduce greenhouse gas emissions.
❖ More examples may be found in Porter and Kramer’s “Strategy and
Society” article in the Dec 2006 issue of Harvard Business Review
(available online via NTU Library).
Sustainability Considerations in Internal Analysis
Yvon Chouinard
Patagonia’s Core
Competence:
Truly “green” capabilities in
production & operations

Value Chain:
Pioneer in reducing
negative chemical impacts
of fashion industry by
emphasizing repair, re-
wear, circularity of apparel.
 Internal & External Analysis Learned:
Now What?

• Combining external analysis and internal analysis (implied in the

book but not discussed): SWOT Analysis sneak peek (more next
week)

Rothaermel, 2017
10-min Break

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52
Battle of the Cafés in Singapore

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Group Activity
❖ Café Industry in Singapore
❖ Internal Analysis:
❖ What resources/capabilities do they have?
❖ VRIN Analysis to identify possible core competencies
❖ Value Chain Analyses to understand what their source
of competitive advantage may be..

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 Next Week:

- Review Session
- More Info on Strategic Audit (Group)
&
- Where’s the Beef Case

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