Competitive Advantage

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5.4 Developing Strategy through Internal Analysis
Learning Objectives
1. Learn about internal analysis.
2. Understand resources, capabilities, and core competencies. 3. See how to evaluate resources, capabilities, and core competencies using VRIO analysis. In this section, you will learn about some of the basic internal inputs for strategy formulation—starting with the organization’s strengths and weaknesses. We will focus on three aspects of internal analysis here, though you recognize that these should be complemented by external analysis as well. There is no correct order in which to do internal and external analyses, and the process is likely to be iterative. That is, you might do some internal analysis that suggests the need for other external analysis, or vice versa. For the internal environment, it is best to start with an assessment of resources and capabilities and then work your way into the identification of core competences using VRIO analysis. Internal Analysis

By exploiting internal resources and capabilities and meeting the demanding standards of global competition, firms create value for customers.[1] Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay.[2] Those particular bundles of resources and capabilities that provide unique advantages to the firm are considered core competenciesA particular bundle of resources and capabilities that provides unique competitive advantages to the firm..[3] Core competencies are resources and capabilities that serve as a source of a firm’s competitive advantage over rivals. Core competencies distinguish a company competitively and reflect its personality. Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. As the capacity to take action, core competencies are “crown jewels of a company,” the activities the company performs especially well compared with competitors and through which the firm adds unique value to its goods or services over a long period of time.[4] Sometimes consistency and predictability provide value to customers, such as the type of value Walgreens drugstores provides. As a Fortune magazine writer noted, “Do you realize that from 1975 to today, Walgreens beat Intel? It beat Intel nearly two to one, GE almost five to one. It beat 3M, Coke, Boeing, Motorola.”[5] Walgreens was able to do this by using its core competencies to offer value desired by its target customer group. Instead of responding to the trends of the day, “During the Internet scare of 1998 and 1999, when slogans of ‘Change or Die!’ were all but graffitied on the subway, Walgreens obstinately stuck to its corporate credo of ‘Crawl, walk, run.’ Its refusal to act until it thoroughly understood the implications of e-commerce was deeply unfashionable, but…Walgreens is the epitome of the inner-directed company.”[6] Thus, Walgreens creates value by focusing on the unique capabilities it has built, nurtured, and continues to improve across time. Internal analysis tells the strategist what is inside the organization—helps answer the question, “what strengths can we leverage?” © 2010 Jupiterimages Corporation

During the past several decades, the strategic management process was concerned largely with understanding the characteristics of the industry in which the firm competed and, in light of those characteristics, determining how the firm should position itself relative to competitors. This emphasis on industry characteristics and competitive strategy may have understated the role of the firm’s resources and capabilities in developing competitive advantage. In the current competitive landscape, core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage.[7] The core competencies of a firm, in addition to its analysis of its general, industry, and...
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