3

Evaluating a Firms Internal Capabilities

THE IMPORTANCE OF INTERNAL ANALYSIS
External analysis tells us what a firm should do. On the other hand, internal analysis will suggest what a firm can do. External and internal analysis, considered together, are fundamental building blocks in the strategic management process. The Resource-Based iew !RB " draws upon compelling economic logic to offer a framework for thinking about which, if any, of the firm#s resources and capabilities are likely to lead to competiti$e ad$antage. %t is important to understand this logic. &e should be able to recogni'e why the attributes of resources will or won#t lead to competiti$e ad$antage. RB logic can be applied in two important ways. (irst, this logic can be used to analy'e a firm#s status )uo*to form a reasoned opinion as to whether a firm#s existing resources are likely to result in a competiti$e ad$antage. +econd, and perhaps more importantly, this logic can be used as a planning tool*to help managers see how a firm#s resources should be deployed to gain competiti$e ad$antage. Thus, the logic laid out in this chapter is central to the $ery idea of strategic choice aimed at creating competiti$e ad$antage.

HAT !OES INTERNAL ANALYSIS TELL "S AN!

HY !OES IT MATTER#

What Does Internal Analysis Tell Us? %nternal analysis is a way of looking inside a firm to determine what the firm#s strengths and weaknesses might be. &e want to take this look in a comparati$e sense so that we are clear about strengths and weaknesses as compared to rele$ant competitors. Important Point: External analysis tells us what the threats and opportunities are in the external en$ironment. Thus, it pro$ides direction about what the firm should do. %nternal analysis tells us what the firm can do. %nternal analysis builds on external analysis by pro$iding a framework for managers to think about how a firm#s resources can be deployed to best exploit opportunities and neutrali'e threats in the external en$ironment.

Chapter 3: Evaluating a Firms Internal Capabilities

Why Does Internal Analysis Matter? The ,Big %dea- behind internal analysis is that we are attempting to disco$er potential sources of competiti$e ad$antage. %t#s not .ust that we want to know if the focal firm has better resources than another firm/ rather, it#s that we want to know if the focal firm possesses resources that could be deployed in such a way that competiti$e ad$antage could be achie$ed. %nternal analysis allows a firm to de$elop strategy with a reasonable expectation of competiti$e ad$antage. &ithout an internal analysis, firms would .ust be guessing as to whether a strategy would result in competiti$e ad$antage. The following example illustrates the importance of internal analysis. Example: Softsoap Enters the Market +oftsoap was the brainchild of 0innetonka#s 1EO, Robert Taylor. The idea of putting li)uid hand soap in a pump container for home use was no$el at the time. Taylor knew that the most likely competitors would be large companies like 2rocter 3 4amble who were good at de$eloping and marketing new products for the home and personal care markets. 5ad Taylor forged ahead without any form of internal analysis he would ha$e rightly de$eloped a great product. 5e knew the li)uid soap would be easy to manufacture and that he could buy the pumps from one or both of the two existing pump manufacturers. 2rocter 3 4amble, and probably others, would ha$e )uickly imitated his product and most likely dri$en him out of business. These other manufacturers were many times larger than 0innetonka. 5owe$er, Taylor engaged in a form of internal analysis by recogni'ing that e$en though these larger companies had a resource ad$antage when it came to manufacturing and marketing the li)uid soap, they had no ad$antage when it came to the pump bottles. 5e recogni'ed that if he bought all the pump bottle production of the two manufacturers he would ha$e an ad$antage o$er firms much larger than 0innetonka. Taylor bought all the pumps the two manufacturers could produce in a year. 5e paid more for these orders of pumps than 0innetonka was worth at the time. The strategy worked. 5e had a 67-68 month lead o$er his much larger competitors in which he was able to establish the +oftsoap brand and capture market share. !Brandenburger 3 9alebuff, 6::;, The Right Game: Use Game Theory to Shape Strategy , 5ar$ard Business Re$iew."

THE RESO"RCE$%ASE! &IE

The RB is the theoretical lens through which internal analysis is conducted. < bit of history is in order here. The most popular strategic management theory and thinking before the mid-6:8=s was based on the +tructure-1onduct-2erformance 0odel from industrial organi'ation economics. %n the mid-6:8=s scholars began to argue that the primary dri$ers of firm performance may be found at the firm le$el instead of the

Chapter 3: Evaluating a Firms Internal Capabilities

industry le$el. >ifferences in the resource endowments of firms were $iewed as being the root causes of differences in firm performance. This $ery Ricardian $iew )uickly became known as the Resource-Based iew of the firm. This shift in le$el of analysis from the industry le$el to the firm le$el has important implications for management. &here the +-1-2 message seemed to be ,choose the right industry,- the RB message seems to be ,choose the right resources.+cholars began to think about firm-le$el characteristics to try to answer the )uestion? &hy do some firms do better than other firms@ The resources a firm possesses or controls pro$ided a natural place to begin looking for answers to this )uestion. >efining a firm#s resources and capabilities is an important step about using the RB to conduct internal analysis. Resources & Capabilities es!ribe Four Types o" Resour!es an# Capabilities A resources are the tangible and intangible assets that a firm controls, which it can use to concei$e of and implement its strategies A capabilities are a subset of resources that enable a firm to take full ad$antage of other resources the firm controls Important Point: <ny asset or ability of a firm is a resource. 1apabilities are simply those resources that firms use to combine and deploy other resources. Machinery is a resource. Collective Product Design skill is a capability. This refers to the ability of the firm, working together, to produce new product designs. Recruiting skill is a firm capability. Engineering skills of individuals are firm resources. Mineral deposits are firm resources. Four Types of Resources A financial*the money a$ailable to the firm from whate$er source !debt, e)uity, retained earnings, etc." A physical*machinery, factories, offices, raw materials, geographic location, technology A human*training, experience, indi$idual intelligence, .udgment, work ethic A organi'ational*reporting structures, reward systems, coordinating systems, relationships, etc. The purposes of categori'ing resources are? 6" simply to demonstrate that anything and e$erything may be $iewed as a resource, and 7" to show later on that different types of resources may be combined to form the capabilities of the firm.

Chapter 3: Evaluating a Firms Internal Capabilities

Example: Coca Cola!s Resources and Capa"ilities 1oca-1ola has a distincti$e red can with a trademarked white wa$e image that goes around the can. These are physi!al resources. 1oca-1ola has access to substantial working capital !cash". This is a "inan!ial resource. 1oca-1ola has talented marketing professionals. These are indi$idual human resources. 1oca-1ola also has well established set of reporting structures, reward systems, communications systems, and %T systems. These are organi$ational resources. 1oca-1ola has the ability to put these $arious resources together in an effecti$e marketing campaign. This is a capability. Thus we would correctly refer to 1oca-1ola#s marketing capability as one of its resources right along with its other physical, capital, human, and organi'ational resources. Two Assumptions of the Resource- ase! "iew es!ribe the Criti!al %ssumptions o" the Resour!e&'ase# (iew The RB makes two critical assumptions that set it apart from the industrial organi'ation economics that preceded it. %n the %O economics $iew of the world any firm differences that may arise would be )uickly dissipated through competition. %f one firm had a good idea, others would )uickly copy it. There would be no enduring differences between firms. The RB makes two assumptions that directly oppose this idea. Resource Heterogeneity: different firms may possess different resources and capabilities e$en if they are competing in the same industry. This is an explicit recognition that all firms are not the same. Resource Immobility: some resources may not be mo$ed from firm to firm without substantial cost. %t may be more costly for a firm to ac)uire a desirable resource than that resource is worth to that firm. These two assumptions make the notion of enduring firm differences plausible. The idea of enduring firm differences may not be all that no$el to students*it seems like common sense. But, if we are to explain why one firm does better economically than another we need to ha$e a logical explanation as to why there are causal differences between the firms.

THE &RIO FRAME OR'

%pply the (RI) Framewor* to I#enti"y the Competitive Impli!ations o" a Firms Resour!es an# Capabilities The R%O framework is the analysis Btool# of the RB . This framework is a way of examining resources to determine if a resource is likely to be a source of competiti$e ad$antage. (our criteria must be met if a resource is to lead to competiti$e ad$antage. These four criteria are represented by )uestions in the framework. The framework allows

Chapter 3: Evaluating a Firms Internal Capabilities

us to draw conclusions about competiti$e ad$antage based on answers to the four )uestions. A alue C >oes the resource enable the firm to exploit an opportunity or neutrali'e a threat@ The e$idence of a positi$e response to this )uestion is usually that the resource somehow increases re$enue or decreases cost. A Rarity C %s the resource rare@ %s the resource rare enough that there is still scarcity in the marketplace for this resource@ A %mitability C %s the resource costly to imitate@ +pecifically, is the resource so costly to imitate that no one would try to imitate it@ A Organi'ation C %s the firm organi'ed in such a way that the resource can be exploited@ %f the answer to these four )uestions is affirmati$e, then the firm can reasonably expect to achie$e a competiti$e ad$antage. Of course, there will be many resources that meet some but not all of the criteria. The competiti$e implication of these resources will be explained as we mo$e along.

APPLYIN( THE &RIO FRAME OR'

The R%O (ramework is applied by sub.ecting one or more resources, bundles of resources or a capability to each of the four )uestions. Important Point: Dou must understand that the framework is applied on a resource-byresource basis and not to the firm as a whole. (or example, if a firm sought help in analy'ing its proposed introduction of a new personal digital music de$ice the R%O (ramework might be applied to the firm#s? design capability, marketing capability, distribution capability, proposed product per se, etc. This helps to highlight which of these resources, if any, might be sources of competiti$e ad$antage. The #uestion of "alue This is a straightforward )uestion intended to ascertain whether or not the resource is strategically rele$ant. There is a cost to the firm of carrying any resource and if the firm does not recei$e some benefit that outweighs the cost, then the firm is at a competiti$e disad$antage. %f the firm recei$es a benefit that outweighs the carrying cost of the resource, then we would conclude that the resource is $aluable, and could, therefore, be a potential source of competiti$e ad$antage.
Most resources are valuable. However, the important question here is whether the resource is valuable in this specific context. Make sure that students understand that the resource must be valuable in the firms intended use for that resource.

Chapter 3: Evaluating a Firms Internal Capabilities

The #uestion of Rarity 5a$ing established that a resource is $aluable, we next turn our attention to the )uestion of rarity. &e are interested in whether a resource is rare enough that it creates a difference between the focal firm and its competitors such that the focal firm reali'es some ad$antage from the difference. This )uestion is tied to the assumption of resource heterogeneity. %f there is to be any ad$antage in ha$ing a resource, it must create differences between firms. Important Points: A +ome firm resources that are $aluable but not rare are still $ery important to the firm !e.g., telephone systems". A < resource can still be rare e$en if more than one firm possesses it *the real )uestion is this? %s the resource rare enough that the firm deri$es some ad$antage from ha$ing the resource@ A < resource is considered rare if so few firms possess the resource that nearly perfect competition is not obser$ed. Implications of "alue an! Rarity +ot valuable. < resource that is not $aluable will put the firm at a competiti$e disad$antage if for no other reason than the carrying costs associated with such a resource. %t may also be the case that a resource that is not $aluable may actually dri$e customers andEor employees away. (aluable, but not rare- < resource that is $aluable but not rare will lead to competiti$e parity. This makes sense because it means that the firm is like other firms* no ad$antage, no disad$antage. (aluable an# rare- %f a resource is $aluable and rare, the firm can reasonably expect a competiti$e ad$antage. 5owe$er, at this point we don#t know if the differences between firms will be enduring so the competiti$e ad$antage may only be temporary. The #uestion of Imitability es!ribe the .in#s o" Resour!es an# Capabilities that %re /i*ely to 'e Costly to Imitate 0aintaining the rareness of a resource is the key to ha$ing a sustained competiti$e ad$antage. %f competing firms can ac)uire a $aluable and rare resource, then the ad$antage of possessing that resource will )uickly dissipate. The big issue here is the cost of imitation. < firm can expect to sustain its competiti$e ad$antage if other firms face a cost disad$antage in ac)uiring the $aluable and rare resource. Important Point: < cost disad$antage means that a competing firm would face a cost so high that ac)uiring the resource would not be worth that cost. <ssume a firm faces a cost of F6== to ac)uire a particular resource and that the firm can expect to sell the output of that resource for only F8;. %t would be irrational for the firm to attempt to ac)uire the resource

Chapter 3: Evaluating a Firms Internal Capabilities

< sustained competiti$e ad$antage does not mean that the firm will ha$e the ad$antage indefinitely. %t means the firm will ha$e the ad$antage only until the resource is imitated by enough other firms that nearly perfectly competiti$e competition ensues, at which point the ad$antage will be gone. Costs of Imitation. There are se$eral categories of cost that firms may face as they attempt to imitate $aluable and rare resources. These sources of cost are examined with the aim of helping students understand and exploit these costs. %f a firm is protected by the high costs of imitation that competitors face, then the firm can expect the competiti$e ad$antage to be sustained. Uni$ue %istorical Con!itions (irms attempting to imitate resources that came about because of uni)ue historical conditions may face substantial cost disad$antages. Two types of cost disad$antages faced by would be imitators are? A (irst mo$er ad$antages C brand loyalty and market share are difficult to o$ercome. A 2ath dependency C refers to the fact that the de$elopment of a resource may depend hea$ily on other resources being in place before the desired resource.

CA"SAL AM%I("ITY
< firm may face a cost disad$antage in ac)uiring $aluable and rare resources because it is unclear exactly which resources need to be imitated in order to get the desired effect. +outhwest <irlines pro$ides an example of causal ambiguity. +outhwest does se$eral things that other airlines would lo$e to imitate, but so far, no has been able to imitate them. 1ompetitors know that +outhwest has an ad$antage due to its human resource practices. E$en though competitors know the human resources practices of +outhwest are creating an ad$antage, competitors are so far, unable to imitate +outhwest because they don#t exactly what aspect to imitate. (urthermore, there are probably many resources bundled together that make up +outhwest#s human resource practices. &ocial Comple'ity +ocial complexity may create a cost disad$antage for a firm attempting to imitate a $aluable and rare resource because the desired resource may be the result of a set of complex social relationships. >uplicating these relationships may be extremely costly or e$en impossible. +ome resources and capabilities are generated, in part, from the interaction of two or more indi$iduals. These resources and capabilities are also influenced by organi'ational surroundings within the firm. <ttempting to recreate such a set of social interactions is costly at best, if not strictly impossible.
Important Point:

Chapter 3: Evaluating a Firms Internal Capabilities

(atents 2atents help to create cost disad$antages for imitators, but they are not an ironclad protection for patent holders. One problem for those seeking a patent is that potentially sensiti$e information has to be disclosed to get the patent in the first place. This information could pro$e useful to others attempting to de$elop a similar product or solution. <nother problem for patent holders is that the patent must be enforced if others choose to infringe on the patent. (or these reasons, some firms opt for a trade secret instead of a patent. Trade secrets offer a different le$el of protection, but there is little, if any, a priori disclosure re)uirement. The #uestion of )r*ani+ation es!ribe 0ow a Firm Uses Its Stru!ture, Formal an# In"ormal Control 1ro!esses, an# Compensation 1oli!y to E2ploit Its Resour!es The logic behind the )uestion of organi'ation is simply that a firm must be appropriately organi'ed to be able to exploit the potential competiti$e ad$antage stemming from $aluable, rare, and costly-to-imitate resources and capabilities. 1oncei$ably a firm could ha$e a $aluable, rare, and costly-to-imitate resource and ne$er reali'e a competiti$e ad$antage because of inade)uate organi'ation. G0 is an extremely inno$ati$e firm, ha$ing de$eloped hundreds of new products based on adhesi$e and other chemical technologies. The company seems to ha$e a culture focused on inno$ation. G0#s organi'ation structure and reward systems help reinforce this inno$ati$e culture. R3> engineers are encouraged to spend time tinkering with new ideas*sometimes completely unrelated to current products. 2eople are rewarded for taking risks in creating and marketing new products. 9ot e$ery new product is a success, but people are not punished for the occasional failure. <s a result of these organi'ational characteristics, G0 seems to en.oy a sustained competiti$e ad$antage.
Important Points

A The Borgani'ation# we#re talking about here refers to the firm reporting structures, formal and informal management control systems, hiring and retention policies, compensation policies, etc. of the firm. A These Borgani'ation# characteristics of a firm hea$ily influence the incenti$es and moti$ations of employees. A These Borgani'ation# characteristics of a firm may not be sources of competiti$e ad$antage per se, but they complement other resources and capabilities of the firm. A 2oint out to students that a reporting structure that allows information to flow from salespeople back to product design engineers may be critical to competiti$e ad$antage. (or example, a firm could ha$e a set of resources that allowed the firm to offer a product that was comparable to competitors# products. %f that firm had a more efficient

Chapter 3: Evaluating a Firms Internal Capabilities

reporting structure than competitors, it may be able to alter the resource bundle to offer a superior product. Thus, the reporting structure would complement the other resources of the firm and allow the firm to reali'e a competiti$e ad$antage from its superior product. < resource or capability sub.ected to R%O analysis would fall on one of the four lines. A (irst line? a resource is found not to be $aluable. 1ompetiti$e %mplication? competiti$e disad$antage. A +econd line? a resource is $aluable, but not rare. 1ompetiti$e %mplication? competiti$e parity. A Third line? a resource that is $aluable and rare, but not costly to imitate. 1ompetiti$e %mplication? temporary competiti$e ad$antage. A (ourth line? a resource is $aluable, rare, and costly to imitate. 1ompetiti$e %mplication? sustained competiti$e ad$antage. The )uestion of organi'ation is an ad.ustment factor. %f a firm possessed a resource that was $aluable, rare, and costly to imitate, but the firm had only mediocre organi'ation, then we would conclude that the competiti$e implication would mo$e upward on the chart toward only temporary competiti$e ad$antage or parity.

COMPETITI&E !YNAMICS OF RESO"RCE IMITATION

is!uss 0ow the e!ision to Imitate or +ot Imitate a Firm with a Competitive %#vantage %""e!ts the Competitive ynami!s in an In#ustry 1ompetiti$e dynamics of imitation are important considerations for both the firms trying to imitate and the firms whose resources are being imitated by other firms. (or the firm attempting to imitate, the fundamental )uestion is? &ill the benefits of imitating the resource be worth the costs@ (or the firm who has a resource ad$antage, the )uestion is? >o other firms face a cost disad$antage in imitating our resources@ # $o Change Response% %n the face of another firm#s resource ad$antage, a firm may decide that Bno response# is the best response. There may be se$eral compelling reasons for a Bno response.# A < firm may decide that it wants to ser$e a different market or type of customer. (or example, a used automobile dealer who exclusi$ely offers four-wheel-dri$e pickup trucks would probably not respond to resource ad$antages of the dealer who speciali'es in 5onda 1i$ics. A < firm may recogni'e that a response could damage its own resource ad$antage. (or example, the used auto dealer that exclusi$ely offers late model <udi#s may decide that it doesn#t make sense to try to match the offerings of a nearby dealer who offers lower priced autos. <

Chapter 3: Evaluating a Firms Internal Capabilities

few Toyota 1orollas and 5onda 1i$ics on the lot may send the wrong message. A < firm may simply decide that it doesn#t ha$e the resources necessary to respond to a competitor#s resource ad$antage. < small, relati$ely new used auto dealer may decide that offering the same credit terms as the competition down the street exceeds the financial resources currently a$ailable to the new dealer. A < firm may choose the Bno response# route in an effort to establish tacit collusion in a market. +uppose the four-wheel-dri$e pickup truck dealer and the late model <udi dealer are on the same street near one another. The truck dealer chooses not to offer late model <udi#s e$en though he knows he could take some business from the other dealer. %n return, the used <udi decides not to offer trucks e$en though she could gain a few sales by doing so. The used <udi dealer could signal her intent by offering any truck she took as a trade-in to the truck dealer. Both dealers would benefit by maintaining speciali'ation and appealing to specific car buyers.

Changes in &actics and Strategies% (irms may decide that changes in either tactics or strategies make sense in response to a resource ad$antage held by a competitor. There are important differences between changing tactics and changing strategies. Ta!ti!s Changes: A refer to changes in the way an o$erall strategy is carried out. A Example? changes in product characteristics like si'e, shaper, color, etc. The product is still hand soap, for example, and it#s still sold in the same places to the same people. A are typically easy to imitate. &hen one firm adopts a change in tactics, others can and will )uickly follow. A may create temporary ad$antages until competitors are able to imitate them. A may create an ad$antage if the firm Bleap frogs# the competition like 2rocter 3 4amble did with Tide !pp. 8:-:=". A may be a source of ad$antage for firms that can do them in rapid succession and thereby stay ahead of the competition. Strategy Changes: A refer to fundamental change in the way a firm approaches its business.

Chapter 3: Evaluating a Firms Internal Capabilities

A Example? 0onsanto changed from being a chemical company to being a life sciences company focused on genetic engineering. A mean a firm has altered its theory about how to compete. A usually occur when a firm figures out that its current strategy won#t e$en produce competiti$e parity. A can be expected to produce competiti$e parity if they simply mimic what other firms are doing. A can generate competiti$e ad$antage if the R%O criteria are met.

S"MMARY OF R%& LO(IC

A The RB was de$eloped in an effort to answer the )uestion? &hy do some firms do better economically than other firms@ A The RB assumes that firm-le$el phenomena are the primary determinants of economic performance. A The RB makes two assumptions that distinguished it from pre$ious economic theory? A resource heterogeneity? firms may ha$e different resource endowments A resource immobility? some resources may not be easily transferred or ac)uired A These assumptions allow for the possibility of enduring firm differences. A &ithout firm differences, there would be no ad$antage for any one firm o$er any other firm.

Important Points

A The R%O (ramework is to be applied to a specific resource !or bundle of resources" or capability*not to the resources and capabilities of the firm as a whole. A The framework can be used to assess what a firm is currently doing, or, it can be used to help a firm craft a strategy using the resources and capabilities of the firm. %t can be used to answer the )uestion? %s this resource likely to be a source of competiti$e ad$antage@ A Each of the four )uestions ! R%O" should be asked in the context of the market in which the firm operates. A The most desirable position for a firm is to ha$e a sustained competiti$e ad$antage. A < competiti$e ad$antage depends on a cost disad$antage for others who would imitate a $aluable and rare resource.

Chapter 3: Evaluating a Firms Internal Capabilities

A < competiti$e ad$antage also depends on the focal firm#s organi'ation. %t must be able to exploit its resource ad$antages in order to achie$e competiti$e ad$antage.

CONCL"SION
(inally, it has pro$en useful to conclude the class session with a return to the big picture and a final explanation about why internal analysis matters. %n a nutshell, the RB and the R%O (ramework offer us a way to think about the probable results of our strategic decisions. Important Points: A External analysis only tells half the story. < firm would be hard pressed to formulate an effecti$e strategy using only external analysis. A %nternal analysis and external analysis, taken together, allow us to think about positioning firm resources in a way that is likely to lead to competiti$e ad$antage and abo$e normal returns. A %nternal analysis helps to sharply focus attention on the role of managers. %f we accept that managers are responsible for the economic performance of a firm, then the role of managers must be to Bbundle# the resources of the firm. A The R%O (ramework is a $ery effecti$e tool for managers to use as they attempt to position or Bbundle# the resources of the firm in the pursuit of competiti$e ad$antage. <s a final note, we suggest that you point out to students that the principles co$ered in this session may ha$e $ery real and rele$ant application in their personal and professional li$es. Encourage students to think about the contributions they can make within their families, communities, and professional circles gi$en their personal Bresources# such as talents, abilities, personalities, and interests. %n a utilitarian sense, a little R%O analysis of one#s personal and professional Bresources# may go a long way toward helping the indi$idual achie$e a measure of competiti$e ad$antage on a personal le$el.

Chapter 3: Evaluating a Firms Internal Capabilities

CHALLEN(E )"ESTIONS
6. &hich approach to strategy formulation is more likely to generate economic profits? !a" e$aluating external opportunities and threats and then de$eloping resources and capabilities to exploit these opportunities and neutrali'e these threats or !b" e$aluating internal resources and capabilities and then searching for industries where they can be exploited@ &hy@ <nswer !b" is more likely to generate economic profits because the firm in answer !a" would ha$e to ac)uire resources. These resources would ha$e to be ac)uired in a market where other firms would $ery likely know the $alue of the resources. 2rices would be bid up to the point where economic profits would probably not be possible. The firm in answer !b" already has the resources and capabilities and they would not capitali'e the $alue of the resources and capabilities in the process of ac)uiring them. 7. &hich firm will ha$e a higher le$el of economic performance? !a" a firm with $aluable, rare, and costly-to-imitate resources and capabilities operating in a $ery attracti$e industry or !b" a firm with $aluable, rare, and costly-to-imitate resources and capabilities operating in a $ery unattracti$e industry@ <ssume both these firms are appropriately organi'ed. Explain your answer. The firm in answer !a" will ha$e higher performance because o$erall profits will be higher in the attracti$e industry. There will be less pressure from each of the fi$e forces explained in 2orter#s (i$e (orces 0odel. 5owe$er, this is not to say that a firm in an unattracti$e industry cannot earn high economic performance. %n fact, some firms do earn $ery attracti$e returns in industries that would be considered unattracti$e because they ha$e resources and capabilities that set them apart from competitors. &al-0art is a good example. G. &ill a firm currently experiencing competiti$e parity be able to gain sustained competiti$e ad$antages by studying another firm that is currently experiencing sustained competiti$e ad$antages@ &hy or why not@ The correct answer depends on what the firm does with its analysis. %f the firm studies the firm with a sustained competiti$e ad$antage and then tries to imitate the source of ad$antage, the answer is no. +uch a firm will likely stay at competiti$e parity because that firm#s offering will most likely not be rare. %f, on the other hand, the firm studies the firm with a sustained competiti$e ad$antage and then formulates a strategy that results in resources and capabilities that are $aluable, rare, and costly to imitate, then the answer would likely be yes. +uch a firm#s offering would generate competiti$e ad$antage as predicted by the R%O (ramework.

Chapter 3: Evaluating a Firms Internal Capabilities

Problem Set <pply the R%O (ramework in the following settings. &ill the actions described be a source of competiti$e disad$antage, parity, temporary ad$antage, or sustained competiti$e ad$antage@ a. 2roctor and 4amble introduces new smaller packaging for its laundry detergent, Tide. b. <merican <irlines announces a ;H across-the-board reduction in airfares. c. The Iorean automobile firm 5yundai announces a 6=-year, 6==,=== mile warranty on its cars. d. 0icrosoft makes it easier to transfer data and information from 0icrosoft &ord to 0icrosoft Excel. e. 0erck is able to coordinate the work of its chemists and biologists in the de$elopment of new drugs. f. (ord patents a new kind of brake pad for its cars. g. <shland chemical, a specialty chemical company, patents a new specialty chemical. h. The 9ew Dork Dankees sign all star pitcher Roger 1lemens to a long term contract. i. 0ichael >ell uses the money he has made from >ell 1omputers to purchase the >allas 1owboys football team. .. Ted Turner uses the money he has made from his broadcasting empire to purchase the <tlanta Bra$es baseball team. %dentify three firms you might want to work for. Jsing the R%O framework, e$aluate the extent to which the resources and capabilities of these firms gi$es them the potential to reali'e competiti$e disad$antages, parity, temporary ad$antages, or sustained ad$antages. &hat implications, if any, does this analysis ha$e for who you might want to work for@ Dou ha$e been assigned to estimate the present $alue of a potential construction pro.ect for your company. 5ow would you use the R%O framework to construct the cash flow analysis that is a part of any present $alue calculation@ Answer , 2roctor 3 4amble C temporary ad$antage. This will be imitated by other firms. <merican <irlines C temporary ad$antage. This will be imitated by other airline carriers. 5yundai C sustained competiti$e ad$antage. 6==,=== mile warranty is $aluable, rare, and costly to imitate.

Chapter 3: Evaluating a Firms Internal Capabilities

0icrosoft C sustained competiti$e ad$antage. 1ostly to imitate. 0erck C could be either temporary or sustained competiti$e ad$antage. 0erck is using ,organi'ation- to exploit its resources and capabilities. (ord C temporary ad$antage. >epends on the cost to imitate and percei$ed $alue. <shland 1hemical C Temporary or sustained competiti$e ad$antage. >epending upon the rarity of the chemical, cost to imitate, and its $alue. 9ew Dork Dankees C 2arity. This could be considered parity or temporary ad$antage as this resource is not permanent. 0ichael >ell C 1ompetiti$e disad$antage. The resources could be better utili'ed for research and new product de$elopment. The football team does not directly benefit the firm. Ted Turner C +tudents may argue se$eral different options here. <rguments could be made for competiti$e disad$antage, parity and perhaps, temporary ad$antage. Answer +tudents are asked to identify three firms of their choosing. +tudents need to apply the R%O framework by focusing on the four )uestions? !6" Kuestion of $alue/ !7" )uestion of rarity/ !G" )uestion of imitability/ and !L" the )uestion of organi'ation. +tudents firms will $ary widely. Dou may wish to ha$e students present their selections and defend their choices. Answer . Jsing the R%O framework would allow for the specifying of a $alue chain associated with the potential construction pro.ect for the company. This listing of the $arious business acti$ities must be completed for the construction pro.ect to be completed. %t allows for an analysis of the process in a disaggregated way which can be useful in constructing the cash flow analysis. %n essence, using this approach allows one to think about how each of the acti$ities associated with the construction pro.ect affect the financial, physical, indi$idual and organi'ational resources of the firm. (urther, R%O framework allows one to track the impact of the construction pro.ect on the firm#s re$enues and costs.