Analyzing Internal Environment
Internal environment analysis looks at how the bundles of internal resources and
activities drive firm performance.
External environment accounts for 30% of firm performance. Firm
performance is driven by position in the industry.
Internal environment accounts 50% of firm performance. The resources and
capability drive firm performance.
Residual is up for luck.
The Value Chain
Value is the price buyers are willing to pay for what a firm provides them. This can
be measured by total profit; a firm is profitable to the extent that the value it
receives exceeds to total costs involved.
Increasing value can be either increases revenue, by either increasing sales or
decreasing costs. It can be adding features to charge a premium or decreasing costs
to increase your margin.
You need to look at not only your firm, but only your competitors and what they are
doing to increase their products value.
Effects can extend outside your firm e.g. Magna Car manufacture start-up Resource-Based view of the firm (RBV/VRIO model)
Why do firms in the same industry vary in performance over time?
2 conditions for firms to account for performance differentials
1. Resource heterogeneity: all firms have different resources and capability;
therefore there will be a performance difference
2. Resource immobility: resources and capability cannot move around easily
within an industry, which will crease a performance difference
Types of Firm Resources
1. Tangible resources: easy to identify, measure and value. Seldom provide
competitive advantage because they are easy to identify, describe and imitate
2. Intangible resources: hard to quantify or identify. More difficult to imitate
human resources, innovation resources, reputation resources and firm
3. Organizational capabilities: the competencies and skills that a firm
employees to transform those assets into outputs.
Resources and Capability Sustainable Competitive Advantage Performance
Assess a firm’s SCA through a VRIO analysis
Valuable: Are the resources you possess relevant and useful? Do they contribute to
the fulfillment of customers needs at a price the customers are willing to pay?
Rare: Are your resources unique? Do other firms have this resource, or can they
possess them easily?
Imitation: Your resources cannot be imitated easily by your competitors:
o History dependent: A product with a history is hard to replicate
because you cannot back in time and possess the unique resources
and capabilities that allowed it to be successful
o Casual ambiguity: Difficulty to determine why the product is
o Social complexity: Difficult to imitate the different relationships a firm
has between suppliers, buyers, employees etc.
o Legal condition: Regulations and patents making it difficult for a firm
to imitate a product
Organization: Does the firm have the ability to foster the efficient use of resource
usage? Depends on culture, structure, policy, incentive. Example of a VRIO model
List V R I O SCA
Customer Y Y Y Y SCA
Financial Y N N N ?
The model requires a lot of judgment leading it to be very subjective. Model also
requires information you need to take from the external environment, which may be
Firms allocate resources differently even if they have the same resources. So, the
key factor contributing to differential firm performance is capabilities. Capabilities
take time to develop.
Where do capabilities come from? And how are capabilities developed?
Capabilities come from:
Human capital: knowledge comes from founder team, employee and
Capabilities developed through:
Intra-organizational learning; learning by doing
Learning from other firms and organizations; imitation
Social capital: web of relationships, which allow actors to achieve desired outcome.
Social capital comes from repeated interaction, which leads to mutual
understanding. Mutual understand will hopefully lead to trust. Because you have
trust, you will be willing to share information or resources; joint problem
Relational social capital: strength of ties matters. Strong ties will be more willing to
transfer tacit knowledge in comparison to weak ties.
Structural social capital:
1. Position: in the centre, you have more information access in comparison to if
you were an outlier. It is important not to make friends with everyone to gain
on the information, but to make friends with the important people (centre of
the structure) Structural hole has the most access to all the information, and
the structural hold can also become the broker, and gains a benefit for
2. Network Structure: a network can either be closed vs. open. a. A benefit of the closed network is that information travels very fast,
and the members share a common standing, which increases ease of
governance. If you were a manager you just need to talk to one person
and you will know all the information in the network.
b. Open network benefits you because you will get access to different
information in comparison to the same information travelling around
a closed network.
Human Capital and Social Capital will only lead to performance if you have the right
Value Chain is the building blocks of competitive advantage. Competitive Advantage
derives from the value a firm can create value is the amount buyers are willing to
1. Inbound Logistics: associated with receiving, storing and distributing inputs
to the product.
2. Operations: concern all the activities associated with transforming inputs
into the final product form.
3. Outbound logistics: associated with collecting, storing and distributing the
produce or service to buyers.
4. Marketing and sales: includes the efforts a firm engages in to gather market
intelligence and understand its customers, the activities associated with
purchases by end users and the inducements used to get them to make
5. Service: the range of activities associated with enhancing or maintaining the
value of the product e.g. installation, support, repair etc.
Support Activities: provide for and facilitate primary activities
1. Procurement: purchasing inputs
2. Technology Development: Improves operations within the firms and
supports the entire value chain. E.g. prepare documents, transport goods
3. Human Resource Management: consists of activities involved in the
recruiting, hiring, training, development and compensation of all types of
4. General Administration: management, planning, finance, accounting etc. A firm needs resources to carry out activities of its value chain. The resources a firm
has and its ability to use them allows a firm to gain a competitive advantage.
Resource Based View of the Firm
Look at session summary.
RBV explicitly directs managers to integrate the internal and external perspectives
and helps them develop strategies that build on core competencies and enable the
firm to achieve sustainable competitive advantages.
Firms resources and a sustainable competitive advantage
For a resource or a capability to provide a firm with the potential for a sustainable
competitive advantage, it must meet four criteria
1. Is the resource valuable? Contribute to the fulfillment of customer’s needs
2. Is the resource rare? In relation to its competitors
3. Can the resource be imitated easily?
a. Physical uniqueness (difficult to copy)
b. Path depende