Lecture 03 — Internal Analysis

Resources, Capabilities, and Value Creation

Strategy: The Big Picture

  • Strategy integrates external and internal analysis
  • Goal: diagnose the core problem and design solutions

Strategy Framework

From diagnosis to action

  • Industry / environment
  • Firm / internal analysis
  • SWOT
  • Strategic recommendations

Review: Industry Analysis

Five Forces

  • Threat of new entrants
  • Supplier power
  • Buyer power
  • Threat of substitutes
  • Rivalry

Internal Analysis: Overview

Internal analysis asks:

  • What resources do we have?
  • What can we do with them (Linkage between resources capability to value creating activities)?
  • Why does this create/sustain commercial performance?

Internal Analysis: Theories and Frameworks

  • Value Capture Theory (Brandenburger & Stuart (1996))
  • Value Creation Activities
  • VRIN Test of firm resources/capabilities (RBV Resource-based View)

Value Creation & Capture

  • Competitive advantage = bigger value wedge (Brandenburger & Stuart (1996))

Worked Example

  • WTP = $500
  • Price = $350
  • Cost = $200
  • SOC = $150

Total value created = $350 * Added value is the value lost if the firm disappears * Drives bargaining power, Key to sustainability —

How Firms Gain Advantage

  • Do similar activities better (e.g., Cost leadership)
  • Do different activities (e.g., Differentiation)
  • Build new capabilities
  • Avoid competition

Value Chain Analysis

Purpose:

  • Decompose activities
  • Identify value drivers
  • Diagnose costs and WTP

Value Chain Activities

Steps in Value Chain Analysis

  1. Identify activities
  2. Analyze costs
  3. Analyze willingness to pay
  4. Make strategic choices

Applied Example

Uber (Form 10-K)

  • Cost structure
  • Platform economics
  • Value capture logic

Cost Breakdown

Source: Uber 2022-10k

Revenue Breakdown

Source: Uber 2022-10k

RBV Value Creation Logic

Resources → Activities → Capabilities → Value → Performance

Value Creation Diagram (Placeholder)

Figure: Resources → Capabilities → Competitive Advantage

Resources

  • Inputs into the production process
  • Broad in scope (people, assets, systems)
  • Do not create value alone

Types of Resources

  • Tangible & Intangible

Tangible Resources Table

Category Examples
Financial Cash, borrowing capacity
Physical Plants, equipment
Organizational Reporting structures
Technological Patents, IP

Intangible Resources

  • Accumulate over time
  • Hard to imitate
  • Often socially embedded

Intangible Resources

Category Examples
Human Skills, experience, trust
Innovation R&D, know-how
Reputation Brand, legitimacy

Capabilities

  • Result from bundling resources
  • Enable firms to perform tasks
  • Often tacit and collective

Examples of Capabilities

Function Capability Firm
Logistics Supply chain efficiency Walmart
Marketing Branding & service P&G
HR Talent retention Microsoft

Core Competencies

Capabilities that:

  • Distinguish the firm
  • Create customer value
  • Are difficult to replicate
  • Shape organizational identity

The VRIN Test

A capability is strategic if it is:

  • Valuable
  • Rare
  • Inimitable
  • Non-substitutable

VRIN Framework Diagram (Placeholder)

Figure: VRIN decision tree

VRIN Example: Walmart

  • Valuable: logistics & scale
  • Rare (historically)
  • Costly to imitate
  • Substitution risk: Amazon

VRIN Outcomes

VRIN Result Performance
Not valuable Disadvantage
Valuable only Parity
Valuable + rare Temporary advantage
VRIN Sustained advantage

Key takeaways

  • VRIN framework
  • Value creation framework

Next Session Feb 25

Capsim Competition