Week 4 / Chapter 3 (VRIO Model, Comp Adv Pyramid)

Question 1

Chapter 3: Internal Analysis: Strengths,
Weaknesses, and
Competitive Advantage

Answer 1

Chapter 3: Internal Analysis: Strengths,
Weaknesses, and
Competitive Advantage

Question 2

Internal abilities

Answer 2

the resources and capabilities that can create and sustain a competitive advantage.

Question 3

Winning in time

Answer 3

means that a

firm has a competitive advantage

Question 4

Winning over time

Answer 4

requires that advantage to be sustainable

Question 5

Value Chain definition

Answer 5

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.

Question 6

Four administrative elements in the Value Chain

Answer 6

1) firm infrastructure,
2) human resource management,
3) technology
4) development,
5) procurement

Question 7

Figure 3.1 The value chain

Answer 7

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

Question 8

What is the Value Chain helpful for?

Answer 8

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?”

Question 9

The Resource-Based View

Answer 9

Resources, capabilities, and priorities can be thought of as answers to basic questions that
firms face.

Comprises of Resources, Capabilities, Priorities

Question 10

Resources definition (“Tools”)

Provide the answer to the question, “What creates the firm’s strengths?”

Answer 10

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

Question 11

Capabilities

Represent the “how” of competitive advantage

Answer 11

The procedures, processes, and routines firms
employ in their activities.

-represent how firms do things

Question 12

Priorities definition

Best related to the 3 C Strategy

Answer 12

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.

Question 13

Assets

Answer 13

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.

Question 14

Tangible Assets

Answer 14

resources are those

with physical presence, such as land, factories, machinery, equipment, or cash

Question 15

Intangible Assets

Answer 15

are economically valuable assets that “do not have physical presence,” and include
brands, licenses patents, knowledge, and reputation

Question 16

Four categories of resources are important contributors to competitive advantage:

Answer 16

1. Physical resources, such as plant or equipment, stores, website
2. Financial resources, such as free cash flow, cash or credit to purchase inventory
3. Human resources, including employee know-how, management skill, and talents (The right people, at the right time, with the right skill set)
4. Intangible resources, such as brands and patents, elite brand and culture

Question 17

Operating capabilities

Fit best under ‘process’ for balanced scorecard

Answer 17

Procedures, processes, or routines
for delivering value to customers,
employees, suppliers, or investors.

Question 18

Dynamic capabilities

Fit best under ‘learning and growth’ for balanced scorecard

Answer 18

Procedures, processes, and
routines that continuously expand
existing resources or improve
operating capabilities.

are practiced and refined over time and through repetition

Question 19

Companies with strong dynamic capabilities have a more secure foundation for competitive advantage than those without them, for two reasons:

Answer 19

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

Question 20

Priorities drive the creation of resources and capabilities in two ways:

Closest linked to 3C Strategy

Answer 20

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.

Question 21

Competitive advantages arise when resources or capabilities possess two attributes:

Answer 21

Value and rarity

Question 22

Value definition

Answer 22

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

Question 23

Rarity Definition

Answer 23

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

Question 24

Inimitability Definition

Difficult to imitate

Answer 24

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.

Question 25

VRIO Acronym

Answer 25

Value
Rarity
Inimitability
Organization to exploit profits

Question 26

Value (As per VRIO)

Answer 26

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

Question 27

Rarity (As per VRIO)

Answer 27

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

Question 28

Inimitability (As per VRIO)

Answer 28

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

Question 29

Factors that drive inimitability, thereby acting as barriers to imitation:

Answer 29

1) Path Dependence
2) Tacit Knowledge
3) Causal Ambiguity
4) Complexity
5) Time Compression Diseconomies
6) Network Effects and First-Mover Advantages

Question 30

1) Path Dependence

Answer 30

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.

Question 31

2) Tacit Knowledge

Answer 31

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

Question 32

3) Causal Ambiguity

Answer 32

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

Question 33

4) Complexity

Answer 33

Resources, capabilities, and priorities become difficult for competitors to imitate when they span the organization or contain many interrelated elements and exhibit substantial complexity

Question 34

5) Time Compression Diseconomies

Answer 34

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.

Question 35

6) Network Effects and First-Mover Advantages

Answer 35

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

Question 36

Positive network externalities

Answer 36

When the value of a product

increases with the number of users.

Question 37

Virtuous circle

Answer 37

When more sellers attract more buyers, who, in turn,

attract more sellers.

Question 38

Organized to exploit definition

Answer 38

The degree to which the legal, administrative, and operating structure of the firm allows it to capture the rents generated by resources.

Question 39

Competitive failure definition

Answer 39

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)

Question 40

Competitive parity definition

Answer 40

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

Question 41

Figure 3.2 Resources and Competitive Advantage

Answer 41

A VRIO Visual with No’s and Yes’s to each Acronym

piece

Question 42

Sustained competitive advantage definition

Answer 42

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.

Question 43

The Competitive Advantage Pyramid: A Tool

for Assessing Competitive Advantage

Answer 43

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

Question 44

Data to complete a pyramid come from a number of sources. You can use three main
types of data:

Answer 44

1. Archival data: Written or numeric information can be found in the library or on the Internet.
2. Interviews: Interviews can range from personal questions to impersonal surveys.
3. Observation: Your own experiences, such as visits or use of products or services, are
   also valuable.

Question 45

The layers of the pyramid (See Figure 3.3 The Competitive Advantage Pyramid)

Answer 45

Top - Activities
Middle - Resources, Capabilities, and Organizations
Bottom: Values and Priorities

Question 46

Questions to ask to build your pyramid

Answer 46

1. What is the company good at? What
   activities create value for customers?.
2. What resources and capabilities drive those
   activities? How rare are they? How difficult
   to imitate?
3. In what ways is the organization designed
   to capture the value created?
4. What priorities and values support and
   sustain resources and capabilities? How
   committed is the company to these
   priorities and values?

Question 47

Tips for data collection

Answer 47

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

Question 48

Table 3.1 Using the Pyramid Model to Identify Strengths

Answer 48

Walmart vs Nordstrom to identify Pyramid Strengths

Question 49

Comparing VRIO to the The Company Diamond model

Answer 49

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

Question 50

Sandbox

Answer 50

Who you compete with
Who you don’t compete with
Who you sell to
Who you don’t sell to

Question 51

Which of the following best describes internal factors?

Answer 51

Resources and capabilities that align companies to deliver unique value to its customers

Question 52

Which of the following statements best reflects why we should care about internal factors?

Answer 52

External analysis is often incomplete and some research suggests internal factors explain more of the variance in company profitability than external factors

Question 53

What is VRIO used for?

Answer 53

To assess whether a resource or capability is likely to create a competitive advantage

Question 54

If a resource is the tool, then a capability is

Answer 54

The skill to use the tool that brings unique value to customers