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Home arrow Management arrow Strategic Management in the 21st Century. The Operational Environment
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ANALYSIS OF THE INTERNAL ENVIRONMENT-STRENGTHS AND WEAKNESSES

Analysts use the RBV of the firm to assess its strengths and weaknesses. The RBV enables a firm to identify and develop its internal strengths, so it can capitalize on external opportunities. It also enables the firm to identify and reduce its internal weaknesses (e.g., fill resource gaps) and thereby reduce external threats. Much of the information presented here reflects the work of Jay Barney.56

The Underlying Assumptions

The analysis reflects two assumptions: resource heterogeneity and resource immobility.

1. Resource heterogeneity: A firm's resources reflect its evolutionary path of development, so its collection of resources is "path dependent" and unique. As a result, its resources are "heterogeneous" despite surface similarities. Heterogeneity could be a strength and a source of competitive advantage or a weakness and a source of competitive disadvantage. For example, NGC shares similarities with its competitors. However, it and each of its competitors have traveled different development paths, and their resources are unique.

2. Resource immobility: Some resources are costly or impossible to imitate or acquire. Their supply curves are inelastic (vertical), and a potential buyer's willingness to pay higher prices does not increase supply. At the extreme, there are no sellers.

In addition, Michael Porter and the RBV see the business as a chain of cost-incurring and value-creating activities, beginning with some form of "raw materials" and ending with some form of "finished product/ser-vice."57 At one extreme, the fully integrated firm's activities include the complete value chain (e.g., land + oat seeds = Quaker Oats on the grocery shelf). At the other extreme, the firm may have only one activity (e.g., farmers who provide only land). Analysts examine each cost-incurring and value-creating activity to see how and where the firm creates value to ensure the configuration of activities is functioning optimally. In addition, they look for ways of reconfiguring activities to create greater synergies.

The Analysis of Resources and Capabilities

The definition of resources excludes assets readily available in markets. Resources include financial, human, knowledge, physical, organizational, reputational, and technological assets. Knowledge ranges from "information" that is relatively easy to codify and transmit to "know-how" that is tacit. Knowledge creation and management are potential sources of competitive advantage, especially if they enhance valuable tacit "know-how" or provide information enabling a "first-mover" advantage.

The firm's resources are not static and may be emerging along a predetermined path as the firm follows a specific strategy (e.g., growth, stability, or retrenchment)58 or simply drifts because the firm does not have an effective strategy. Moreover, the value of the firm's resources and competitors' resources change over time. Resources are firm-specific assets that to some degree must meet several criteria. Jay Barney called this the "VRIO Framework" with the acronym standing for valuable, rare, inimitable, and organization.59

1. Resources must be valuable, that is, capable of exploiting opportunities, reducing threats, and creating a sustainable competitive advantage (e.g., a sustainable level of excellence in cash-flow generation). For a resource to be truly valuable, the firm must be able to associate the resource with specific value creating opportunities. If a resource is not unequivocally valuable, then its ability to create value is suspect.

2. Resources must be rare, that is, not readily available in markets. Moreover, most if not all competitors do not possess them or have the means to create them, except perhaps at great cost. Resources that are valuable but not rare cannot produce a sustainable competitive advantage because they are readily available to competitors. At best, they can produce "competitive parity."

3. Resources must be difficult to imitate, otherwise, competitors could copy them. At the extreme, the more useful, albeit confusing, word is "inimitability." That is, the resource cannot be imitated. Perhaps the technology is proprietary (e.g., intellectual property) or the technology is physically not available for reverse engineering. Resources must also have few or no substitutes, that is, other resources cannot replace them. "Causal ambiguity" (i.e., ambiguous cause-effect relationships) may preclude imitation. That is, the observable is not necessarily the source of competitive advantage. For example, firms may have socially complex networked resources (e.g., organizational culture, senior management synergies, tacit knowledge, transformational leadership, etc.). 4. The firm must be able to exploit its resources. Firms combine resources to create distinctive capabilities that they use to complete specific activities efficiently and effectively. As firms refine their distinctive capabilities, they develop processes and routines—repetitively used codified and tacit practices—to enhance their distinctive capabilities and ensure optimal execution. These are "complementary resources." They enhance the value, rarity, and difficulty of imitating the firm's primary resources.

Resources are typically evaluated in the preceding order of importance (i.e., how valuable (most important), how rare, how inimitable, and how exploitable). Thus, as a resource's value rises (T), rareness (T), inimitability (T), and exploitability rises (T), the more likely it is that the resource is a major strength, able to form capabilities, exploit opportunities, and diminish threats.

Example: NGC sees its "leading capabilities" in "climate and environment technologies, battle management, cyber-security, defense electronics, homeland security, information technology and networks, naval shipbuilding, public health, systems integration, and space and missile defense."60

Example: In October 2010, NGC opened the first commercial cyber test range in the UK. The cyber range will simulate "large infrastructures and global threats and evaluate how these networks, whether military, civilian or commercial, respond to an attack in order to develop capabilities that will make these networks more secure." The range is linked to NGC's Cyberspace Solutions Center in Maryland (United States).!1 Conclusion: Keeping in mind that NGC spends over $600 million a year on research, it appears many of NGC's resources would variously meet the four resource criteria. Moreover, NGC has combined resources to create capabilities that may produce sustainable competitive advantages.

Example: In February 2009, Wes Bush explained how NGC developed a portfolio approach to managing roughly 100 different business elements. He said, "We fully characterize each of these in terms of its products, technologies, customers, competitors, competitiveness, financial performance, and balance sheet. We also consider impacts resulting from the interdependencies of these business elements."62 Conclusion: This appears to be a "best practices" approach to managing the business. NGC's competitors and suppliers would likely have similar analytical tools, so NGC's portfolio analysis, while valuable, is probably not rare, inimitable, and exploitable.

 
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