Business Policy Chapter 3: Evaluating a Firm’s Internal Capabilities

Answers the question: *Why are some industries more attractive than others? 1. Firm performance depends on the industry in which the firm competes 2.

Assumes that firms in industry have identical resources and that resources are mobile (easily bought and sold) 3. Used to examine industry profitability 4. Assessed using analyses of general and local environments (DEPICT and 5 Forces)

Answers the question: *Why are some firms more profitable than others? 1. Firm performance depends on the internal resources and capabilities of the firm 2. Used to examine firm heterogeneity 3. Assumes firms do not have identical resources and resources are not perfectly mobile 4.

Assessed using analysis of internal resources and capabilities (VIRO)

-Assess firm -Compare strengths and weaknesses to competitors -Determine if firm resources and capabilities are sources of competitive advantage -Develop strategies that exploit sources of competitive advantage

Answers the question: *Why are some firms more successful than others? -Jay Barney (1991) -Used to help firms achieve above-average economic value and competitive advantage -Assumes firm resources and capabilities are primary drivers of performance and competitive advantage

are tangible & intangible assets that a firm controls that it can use to conceive & implement its strategies.

are tangible & intangible assets that enable a firm to take full advantage of the other resources it controls.

1. Resource heterogeneity 2. Resource immobility

Different firms have different resources

-It may be costly for firms without certain resources to acquire or develop other resources -Some resources may not spread from firm-to-firm easily

(VIRO) 1. Valuable 2. Inimitable 3. Rare 4.

Organizational *then the firm is likely to achieve a sustained competitive advantage.

*Does the resource enable the firm to exploit an external opportunity or neutralize an external threat? -Practical application: Does the resource result in increased revenues, decreased costs, or both?

*Do firms without the resource face a cost disadvantage obtaining or developing it? -Practical application: Is it difficult for other firms to duplicate the resource?

1.

Unique Historical Conditions: When a firm gains low-cost access to resources because of its place in time & space Other firms may find these resources costly to imitate 2. Causal Ambiguity: When competitors cannot tell, for sure, what enables a firm to gain an advantage, that advantage may be costly to imitate 3. Social Complexity: When the resources & capabilities a firm uses to gain a competitive advantage to involve interpersonal relationships, trust, culture, and other social resources are costly to imitate in the short run 4. Patents and Intellectual Property: Legal protections that may be critical to provide the product/service

*Is the resource currently controlled by a small number of firms? -Practical application: If a resource is not rare, then perfect competition dynamics are likely to be observed (i.e., no competitive advantage, no above normal profits).

*Are a firm's policies and procedures organized to support the exploitation of its valuable, rare, and costly-to-imitate resources? -Practical application: structure and control mechanisms complement other firm resources—taken together, they can help a firm achieve sustained competitive advantage

The strategic decisions and actions of firms in response to the strategic decisions and actions of other firms

*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/capabilities to mount an effective response -It wants to reduce or manage rivalry in the market through tacit collusion

-Internal analysis identifies what the firm should do given the strengths/weaknesses of resources/capabilities -Duty of the manager/TMT to use resources/capabilities to achieve competitive advantage -VIRO framework helps managers recognize sources of competitive advantage -A competitive dynamics analysis can help managers decide what type of response/change is needed