Week 4 / Chapter 3 (VRIO Model, Comp Adv Pyramid) Flashcards
Chapter 3: Internal Analysis: Strengths,
Weaknesses, and
Competitive Advantage
Chapter 3: Internal Analysis: Strengths,
Weaknesses, and
Competitive Advantage
Internal abilities
the resources and capabilities that can create and sustain a competitive advantage.
Winning in time
means that a
firm has a competitive advantage
Winning over time
requires that advantage to be sustainable
Value Chain definition
A visual description of the steps required to turn raw
materials into finished products and/or services.
The value chain also describes key functions of the
company linked to each stage and
functions that span its productive activities.
Four administrative elements in the Value Chain
1) firm infrastructure,
2) human resource management,
3) technology
4) development,
5) procurement
Figure 3.1 The value chain
Support (enabling) activities:
- Firm infrastructure
- Human Resource management -Technology development
- Procurement
Primary (core) Activities
- Inbound logistics
- Operations
- Outbound logistics
- Marketing and Sales
- After-Sales Services
What is the Value Chain helpful for?
The value chain helps managers identify areas in which a firm has an absolute strength
but provides no guidance about strength relative to competitors
So, the value chain can be used to answer the important question, “What is a firm good at?”
However, it can’t be used to answer the critical question, “What is the firm better at than relevant competitors?”
The Resource-Based View
Resources, capabilities, and priorities can be thought of as answers to basic questions that
firms face.
Comprises of Resources, Capabilities, Priorities
Resources definition (“Tools”)
Provide the answer to the question, “What creates the firm’s strengths?”
All assets, brands, land, information, knowledge,
and so on, controlled by a firm that enable it to conceive of and implement strategies that improve
its efficiency and effectiveness.
-what a firm employs to create value and competitive advantage
Capabilities
Represent the “how” of competitive advantage
The procedures, processes, and routines firms
employ in their activities.
-represent how firms do things
Priorities definition
Best related to the 3 C Strategy
A firm’s values and rankings of what is most important.
-explain why firms allocate critical resources to achieve key objectives
Priorities are driven by a company’s underlying values, its leaders’ beliefs about what is right and wrong, good and bad, desirable and undesirable.
Assets
Tangible or intangible resources or factors of production that create economic value for the firm when employed. This chapter focuses on physical, financial, human, and intangible assets.
Tangible Assets
resources are those
with physical presence, such as land, factories, machinery, equipment, or cash
Intangible Assets
are economically valuable assets that “do not have physical presence,” and include
brands, licenses patents, knowledge, and reputation
Four categories of resources are important contributors to competitive advantage:
- Physical resources, such as plant or equipment, stores, website
- Financial resources, such as free cash flow, cash or credit to purchase inventory
- Human resources, including employee know-how, management skill, and talents (The right people, at the right time, with the right skill set)
- Intangible resources, such as brands and patents, elite brand and culture
Operating capabilities
Fit best under ‘process’ for balanced scorecard
Procedures, processes, or routines
for delivering value to customers,
employees, suppliers, or investors.
Dynamic capabilities
Fit best under ‘learning and growth’ for balanced scorecard
Procedures, processes, and
routines that continuously expand
existing resources or improve
operating capabilities.
are practiced and refined over time and through repetition
Companies with strong dynamic capabilities have a more secure foundation for competitive advantage than those without them, for two reasons:
First, dynamic capabilities entail
complex connections and coordination among different internal units within the firm.
For example, finding the optimal site for a restaurant requires input from marketing about demographic
information and target customer segments; the corporate counsel about sales contracts and local regulations; and real estate professionals skilled at identifying, negotiating, and closing on properties
Second, dynamic capabilities take time to develop and require significant learning. Processes or routines represent deeply engrained habits of behavior that take years for companies
to perfect
Priorities drive the creation of resources and capabilities in two ways:
Closest linked to 3C Strategy
First, priorities guide resource allocation processes such as capital investment, human capital acquisition and training, and brand development.
Second, priorities maintain those allocations over time when things get tough.
Competitive advantages arise when resources or capabilities possess two attributes:
Value and rarity
Value definition
Worth or utility.
e.g. unique products / services that create direct pleasure / satisfaction for
customers
e.g. offer products / services to customers at a lower price
Rarity Definition
To be uncommon, or not
available to other competitors.
Can also possess of perceived value or rarity when the company does not actually have any
Inimitability Definition
Difficult to imitate
An attribute of a resource that describes the
degree of difficulty a competitor would face in copying, imitating, or mimicking the value of that resource.
VRIO Acronym
Value
Rarity
Inimitability
Organization to exploit profits
Value (As per VRIO)
Value denotes worth for customers
A resource creates value if its contributions allow a company to produce a product or service
that is of worth to end users.
Products or services have value when they create direct pleasure, satisfaction, or happiness for the end user, or when they create indirect opportunities for users to experience pleasure and satisfaction
The higher the value, the higher the price that buyers are willing to pay.
Example Mickey Mouse is valuable as fuck for Disney
Rarity (As per VRIO)
To be rare is to be uncommon, or not available to other competitors
Unique is often used as a synonym for rare
Example: McDonald’s tries to find unique locations for its restaurants, such as being the only restaurant at a freeway exit, or the closest to the on-ramp, or its presence as the sole dining option inside many Walmart stores
Rare or unique resources create competitive advantage
through a basic principle of economics—scarcity
Inimitability (As per VRIO)
Inimitability is the extent to which competitors cannot easily reproduce a product by employing
equal, or equivalent, sources of value in their own products and services
Example: Major League Baseball, NBA, or NFL game - The histories of the teams, the star players,
the amenities of professional stadiums, and the rules adopted by each league to govern play
mean that other leagues simply can’t imitate the experience these leagues provide
Factors that drive inimitability, thereby acting as barriers to imitation:
1) Path Dependence
2) Tacit Knowledge
3) Causal Ambiguity
4) Complexity
5) Time Compression Diseconomies
6) Network Effects and First-Mover Advantages
1) Path Dependence
Means that the process through which a resource
or capability came into being may make it difficult for competitors to imitate
Example: Boeing in WWII
Path dependence helps to block imitation when resources or capabilities follow a sequential
development path—for example, when previous investments enable later ones, or when
significant learning underlies the resource or capability.
2) Tacit Knowledge
For many processes, such as cooking french fries at McDonald’s, the actions needed to imitate the sequence can be codified, or written down, and easily learned by others. Such easy-to-codify-and-learn knowledge is referred to as explicit knowledge. Tacit
knowledge is just the opposite
These skills are difficult, maybe even impossible,
to learn, teach, or coach, because they are based on tacit knowledge. Tacit knowledge is sticky,
or immobile, and difficult to imitate by competitors
3) Causal Ambiguity
Causality refers to the notion that one thing causes another: A leads to B
Sometimes, however, the causal relationship is unclear or ambiguous, and the relationship between variable A and outcome B is difficult to disentangle
Correlation does not equal causation
Example: Ford not being able to imitate GM’s methods to building
4) Complexity
Resources, capabilities, and priorities become difficult for competitors to imitate when they span the organization or contain many interrelated elements and exhibit substantial complexity
5) Time Compression Diseconomies
Diseconomies happen when an action
increases, rather than decreases, cost and inefficiency
Example: If a project requires a $20 million investment per year for the next two years, time compression diseconomies mean that you can’t get the same results by spending $40 million in one year.
6) Network Effects and First-Mover Advantages
Much of the reason eBay is so
successful has to do with network effects, which economists call positive network externalities
The more people to use the site the better it is
Network effects represent a specific form of a first-mover advantage.
For example, eBay has been able to lock up the best sellers and most active buyers for its site because it was the first mover in the market.
First movers establish a number of advantages. In addition to customers, they can lock up other resources such as locations, patents, or scarce raw material inputs
Positive network externalities
When the value of a product
increases with the number of users.
Virtuous circle
When more sellers attract more buyers, who, in turn,
attract more sellers.
Organized to exploit definition
The degree to which the legal, administrative, and operating structure of the firm allows it to capture the rents generated by resources.
Competitive failure definition
When firms can’t create value for their
stakeholders, they don’t survive.
No valuable resource, no rare resource, no inimitable resource, the company is not organized to exploit (no’s across the board)
Competitive parity definition
When a company survives but has no real
competitive advantage over rivals.
Yes to the resource being valuable, but no to rarity, no inimitable, and no organized to exploit
Figure 3.2 Resources and Competitive Advantage
A VRIO Visual with No’s and Yes’s to each Acronym
piece
Sustained competitive advantage definition
When firms combine the legal elements, intellectual property rights, administrative elements, and cultural elements, allowing them to capture high profits
that come from their valuable, rare, and inimitable resources, capabilities, or priorities.
The Competitive Advantage Pyramid: A Tool
for Assessing Competitive Advantage
The competitive advantage pyramid tool will help you in the academic work of this course, but it will prove even more valuable as you decide whether to
invest in or work for a particular company
Data to complete a pyramid come from a number of sources. You can use three main
types of data:
- Archival data: Written or numeric information can be found in the library or on the Internet.
- Interviews: Interviews can range from personal questions to impersonal surveys.
- Observation: Your own experiences, such as visits or use of products or services, are
also valuable.
The layers of the pyramid (See Figure 3.3 The Competitive Advantage Pyramid)
Top - Activities
Middle - Resources, Capabilities, and Organizations
Bottom: Values and Priorities
Questions to ask to build your pyramid
- What is the company good at? What
activities create value for customers?. - What resources and capabilities drive those
activities? How rare are they? How difficult
to imitate? - In what ways is the organization designed
to capture the value created? - What priorities and values support and
sustain resources and capabilities? How
committed is the company to these
priorities and values?
Tips for data collection
1) You should always rely on at least two types of data (e.g., archival records and interviews) and use multiple sources of data within each type (Stated
more elegantly, the more attention you pay to gathering, verifying, and comparing the data, the
richer, more robust, and more insightful your finished product will be)
2) Remember the GIGO principle from computer programming: garbage in, garbage out
3) For each strength, weakness, resource, capability, value, or priority that you identify, include the source from which you drew your data
4) Use multiple sources
Table 3.1 Using the Pyramid Model to Identify Strengths
Walmart vs Nordstrom to identify Pyramid Strengths
Comparing VRIO to the The Company Diamond model
In what ways are you using your resources and capabilities to have sustained competitive advantage
Starts with Activities at the top, then resources, capabilities, a the bottom is priorities
Sandbox
Who you compete with
Who you don’t compete with
Who you sell to
Who you don’t sell to
Which of the following best describes internal factors?
Resources and capabilities that align companies to deliver unique value to its customers
Which of the following statements best reflects why we should care about internal factors?
External analysis is often incomplete and some research suggests internal factors explain more of the variance in company profitability than external factors
What is VRIO used for?
To assess whether a resource or capability is likely to create a competitive advantage
If a resource is the tool, then a capability is
The skill to use the tool that brings unique value to customers
