Part 2: Analyzing Environments
Chapter 4: Analyzing the Firm
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Reading and studying this chapter should
enable you to:
1. Explain how to identify the firm’s strengths and
weaknesses by using an internal analysis.
 2. Define resources, capabilities, and core
competencies and explain their relationships.
 3. Describe the four characteristics that core
competencies must have to be competitive
advantages.

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
Reading and studying this chapter should
enable you to:


4. Explain the value chain and describe the
differences between primary and support
activities.
5. Define outsourcing and describe its advantages
and disadvantages.
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

A firm cannot successfully implement any
strategy without being able to use the
appropriate set of resources, capabilities, and
core competencies.
These must be identified and understood as a
precursor to selecting a strategy:


Strengths
Weaknesses
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

In general terms, strengths suggest possibilities
while weaknesses suggest constraints.
Firms deal with two kinds of resources –
tangible and intangible.

Tangible resources are valuable assets that can be
seen or quantified, such as manufacturing
equipment and financial capital.
 Financial capital
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
Intangible resources are assets that contribute to
creating value for customers but are not physically
identifiable.
 Reputation
 Brand know-how
 Organizational culture
The full set of resources a firm holds is called a resource
portfolio.
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Tangible resources may be bought and sold.
Not hard to identify: human capital, money, physical
assets.
Not hard to evaluate through accounting systems
and external auditors.
Intangible resources must be constantly attended to.
Harder to identify: organization culture, reputation,
brand names.
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Real options – Strategic flexibility for firms
- Future oriented
- Controlling uncertainty
- Examples: Rolls Royce and Pharmaceutical Companies
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

True value of resources emerges when
converted to capabilities and eventually
converted to core competencies.
Commonly, capabilities are part of
organizational functions such as marketing,
manufacturing, finance, and so forth.

Example: Apple’s new products
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

Each of them is a product of deliberate
attempts to integrate several resources with the
purpose of completing one or more work tasks.
Capabilities result when employees think
carefully about which combination of resources
will allow the firm to create a capability with
potential to become a core competence.
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
When core competencies allow the firm to
create value for customers by performing a key
activity better than competitors, it has a
competitive advantage.




Product innovation: LG Electronics, Apple, Honda
Product leadership
People leadership
Market leadership
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14

Valuable


Rare


E. g. Coca-Cola and PepsiCo
Difficult to Imitate


E.g. Apple’s iTunes
E.g. Challenging Motorola, Nokia & Samsung
Nonsubstitutable

E.g. Lexus’ after-sales service
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

Using resources, capabilities and core
competencies in ways that create more value
for customers compared to competitors’
Enable firms to capture larger shares of the
market and increase their returns creating
value for owners and other shareholders
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

The value chain is the structure of activities the
firm uses to implement its business level
strategy.
The focus of value chain analysis is on primary
and secondary activities. Primary activities
include:



inbound logistics (such as sources of parts),
operations (such as manufacturing if dealing with a physical
product),
sales and distribution of products, and after-sales service.
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
Support activities provide support to the primary activities so that
they can be completed effectively. Secondary activities include
Human resources
 Information Technology Support
 Purchasing
 Accounting

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Each stage of the value chain adds costs, but
(hopefully) creates value.
Support activities create value for customers,
but their effects are indirect.
Firms analyze their value chain continuously to
find ways to operate more efficiently thereby
creating more value for customers.
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

Outsourcing involves acquiring a capability
from an external supplier that contributes to
the focal firm’s ability to create value for
customers.
Firms seek one or more benefits when they
decide to outsource the performance of an
activity to an external supplier.
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22

Benefits



Concentrating resources on primary activities
Reducing the risks assumed
Challenges


Cost cutting is not a long term fix
Often tactical in orientation rather than strategic
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

A vision disconnected from the realities of
internal capabilities is doomed to failure
A systematic assessment of how the company
compares to the competition is important in
strategy development
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