Analysis of internal capabilities using different approaches

To identify and evaluate whether its resources have got any strategic value or not firms generally use various approaches. Possessing valuable resources as indicated previously does not guarantee profits unless they are deployed in an effective and efficient manner. The various approaches that follow now aim at achieving this purpose.

VRIO Analysis is an analytical technique briliant for the evaluation of company’s resources and thus the competitive advantage. VRIO is an acronym from the initials of the names of the evaluation dimensions: Value, Rareness, Imitability, Organization.

The VRIO Analysis was developed by Jay B. Barney as a way of evaluating the resources of an organization (company’s micro-environment) which are as follows:

• Financial resources
• Human resources
• Material resources

Non-material resources (information, knowledge) Question of Value. Resources are valuable if they help organizations to increase the value offered to the customers. This is done by increasing differentiation or/and decreasing the costs of the production. The resources that cannot meet this condition, lead to competitive disadvantage.

Question of Rarity. Resources that can only be acquired by one or few companies are considered rare. When more than few companies have the same resource or capability, it results in competitive parity.

Question of Imitability. A company that has valuable and rare resource can achieve at least temporary competitive advantage. However, the resource must also be costly to imitate or to substitute for a rival, if a company wants to achieve sustained competitive advantage.

Question of Organization. The resources itself do not confer any advantage for a company if it’s not organized to capture the value from them. Only the firm that is capable to exploit the valuable, rare and imitable resources can achieve sustained competitive advantage.

SWOT Analysis:

SWOT is an acronym for the internal strengths and weaknesses of a firm and the external opportunities and threats facing that firm. SWOT analysis helps managers to have a quick overview of the firm’s strategic situation and assess whether there is a sound fit between internal resources, values and external environment (E-V-R Congruence).

A good fit maximizes a firm’s strengths and opportunities and minimizes its weakness and threats. The external analysis provides useful information required to identify opportunities and threats in a firm’s environment. Let’s see how internal analysis helps a firm find its feet in a competitive environment focusing attention on its strengths and weaknesses.

Terminology:

The word Strength implies competitive advantage and other distinct competencies which a firm enjoys in the market place. Having an ability to deliver against the placement of an order within 2 hours is strength to a firm if customers require delivery within a day and its major competitors are not able to fulfill these requirements. A strength is only a strength if it is something that is of value to customers and is also something which a firm does better than its competitors. The term weakness refers to an inherent limitation that creates a strategic disadvantage for a firm. It could come from an inappropriate location, uneconomical operation, outdated plants worn out machinery or militant labor class etc.

Opportunities and threats refer to external issues and are identified after environmental and competitive analysis. Generally speaking opportunities result from external market changes or existing needs which are poorly served. It is often difficult to identify relevant opportunities and threats. Academically speaking a firm is faced with limitless opportunities and myriads of threats. These can range from the opportunities in new markets, new products or the likelihood of increased market share, to the threats of nuclear war, earth quakes and competitive battles. What makes an opportunity or a threat relevant is its importance to the firm and its likelihood of occurring. In order to carry out a good SWOT, the firm should look into certain key issues.

Key Issues in SWOT Analysis:

Strengths

1) A distinctive competence?
2) Adequate financial resources?
3) Well thought of by buyers?
4) An acknowledged market leaders?
5) Well conceived functional area strategies?
6) Access to economies of scale?
7) Insulated (at least somewhat) from strong competitive pressures?
8) Proprietary technology
9) Cost advantages?

Weaknesses

1) No clear strategic direction ?
2) Deteriorating competitive positions?
3) Obsolete facilities?
4) Sub par profitability because …?
5) Lack of managerial depth and talent?
6) Missing any key skills or competencies?
7) Poor track record implementing strategy?
8) Plagued with internal operating problems?
9) Vulnerable to competitive pressures?
10) Falling behind in R&D?

Carrying out SWOT

Corporate success is usually linked to certain critical success factors (CSFs). These relate to the factors which suppliers in a market must meet if they are to compete successfully. While carrying out SWOT, the main CSFs in a market segment need to be identified clearly and each factor should be weighted out of 100 according to its importance to customers. Total weighting should add up to 100. It is the possible to score out each major competitor out of 10 on their performance against each CSF. Multi playing each score by its weights will offer a quantitative assessment of the relative strengths of each competitor within a segment.