STRATEGIC MANAGEMENT EXAM SUMMARIES
Textbook – Strategic Management: Developing sustainability
in Southern Africa (3rd edition), Lynette Louw & Peet Venter
CHAPTERS 7, 8, 9, 10, 12, 14
,CHAPTER 7: ANALYSING THE INTERNAL ENVIRONMENT
7.1 INTRODUCTION
• Many organisations use the SWOT method to identify, typically by brainstorming,
opportunities & threats in the external environment, and strengths & weaknesses in the
internal environment
- SWOT is an acronym for strengths, weaknesses, opportunities & threats
• However, just producing a list of strengths & weaknesses has marked shortcomings in
establishing a strategy for the future that is aligned with the internal environment of the
organisation
- It is far more useful to have a framework to conduct internal analysis
- In this regard, the analysis of resources has been widely accepted to conduct internal
analysis
o Resources in this context refer to the assets, skills & capabilities over which the
organisation has control
• The rise of the so-called resource-based view (RBV) of the organisation springs from the
strategic importance of understanding why organisations differ from each other & why
certain organisations are more successful & more profitable than others
• Competitive advantage, or lack thereof, is generally better explained by understanding
the distinctive resources & capabilities of the organisation than by understanding the
external environment only
• The 1st part of the chapter deals with the importance of resources & capabilities in
strategy, while the 2nd part of the chapter deals with the identification of resources &
capabilities. The last part deals with the appraisal of resources & capabilities & the
identification of strengths & weaknesses
7.2 THE STRATEGIC IMPORTANCE OF RESOURCES & CAPABILITIES
• The acceptance of RBV rests on 3 NB premises:
- Resources determine the strategic direction of the organisation.
o An understanding of distinctive resources & capabilities can help the
organisation determine what it is capable of doing, rather than focusing on what
its current business is
- Resources are the primary source of profit for the organisation
o Profitability is determined by 2 factors, namely the attractiveness of the industry
in which the organisation competes & its ability to establish a competitive
advantage over its rivals
o While industry attractiveness is generally the domain of industry analysis, the
RBV can provide significant insights as to why certain organisations are more
successful than others – in other words, why some organisations have a
competitive advantage over others
- Industry positioning alone does not explain differences in profitability among similar
organisations with similar products in the same industry
• The next question to explore is what makes resources valuable & how long this
advantage can be sustained
- Various authors use the terms ‘economic rent’ & ‘rent’ interchangeably to describe
the ability of the resource to attract income
, - The value of a resource is, therefore, ultimately determined by its ability to generate
rent
• There are 3 types of economic rent commonly mentioned in strategy literature:
- Ricardian rents are rents associated with unique resources & capabilities
- Monopoly rents are associated with a unique position in the market place, e.g.
Eskom is South Africa’s only licensed electricity utility.
- Schumpeterian rents are especially prevalent in volatile markets such as certain
high-technology markets
o Schumpeterian rents refer to those returns appropriated by the organisation
because of a new or innovative product that allows it to charge a price much
higher than the cost of production
o These rents are normally unstable & will eventually disappear
• Figure 7.1 provides a summary of the factors that determine the value of resources. In
short, the value of resources is determined by:
- The extent to which resources are a viable source of competitive advantage
- The extent to which such a competitive advantage is sustainable over time
- The extent to which the organisation is in a position to appropriate the returns
generated by the resources and
- The extent to which resources can be exploited for future growths
Figure 7.1: The determinants of resource value
7.2.1 Competitive advantage
• If a resource meets customer needs at a price that customers are willing to pay, there is
a demand for it
• However, the resource is more valuable if it can establish a competitive advantage
- This means that the resource can meet customer needs better than the competition
• Thus, the concept of distinctive capability & its role in creating competitive advantage
become NB in understanding the value of resources
,• A resource is also more valuable if it is scarce, in other words it is not widely available &
it should also be relevant to the key success factors in the market
- Thus, resources can only lead to competitive advantage when they are unique &
hard to come by
• There are also certain thresholds resources that are required simply to be able to
compete in a market
• There are 4 determinants of the scarcity of resources:
- Physical uniqueness: e.g. real estate, government licenses, patents
- Path dependency: Certain resources are built over time in ways that cannot be
replicated. E.g. brand image, organisation culture & company reputation
- Causal ambiguity: In many instances, it may be difficult, even impossible, for
competitors to work out exactly what the truly valuable resource of a rival is, or how
to duplicate it
- Economic deterrence: Occurs when economic realities make it unattractive for rivals
to invest in certain resources
7.2.2 Sustainability
• To create a sustainable competitive advantage, a resource must be in short supply over
a period of time, in other words it must be both scarce & durable
• In addition, the organisation should be able to replicate the resources & capabilities in
other markets or products
• The organisation must also protect the resources from imitation by rivals by ensuring
that they are not too easily transferable
- However, they must be transferable enough to replicate
• There are 4 barriers to transferability that will make it difficult for competitors to
successfully transfer resources for their own benefit:
- Geographic immobility: resources must be geographically immobile
- Imperfect information: this means that competitors may find it difficult to obtain
sufficient information to evaluate resources & capabilities, and may end up not
being sure what the appropriate price is to pay
- Resource complementarity: separating a resource, such as a brand, from its context
can cause a loss in value. Thus, the resource may be dependent on its context &
complementary resources & will be less productive in a different setting
- Resource dependency: This also plays a key role since capabilities are combinations
of resources that work together. Separating one aspect, e.g. a team of people, from
the whole may reduce its efficiency
• To achieve sustainability, organisations have to exploit or leverage resources & at the
same time protect them from imitation by competitors
7.2.3 Appropriatbility
• The 3rd critical determinant of the value of resources centres on the question of who
captures the value generated by resources
- Generally, the owner of the resource captures most of the value created by the
resource
• Appropriatbility explains why internally developed resources are generally more
valuable than resources bought or used under license
, - The more embedded the resources are within an organisation, the greater the ability
of the organisation to appropriate the value flowing to those resources
• However, if the value is seated (e.g. in one or a few individuals), the individual will be
able to attract much of the value created by the resources
• There are 4 aspects that determine the potential of an organisation to capture the rent
generated by its resources & capabilities:
- Protection of intellectual capital: to what extent can the intellectual property &
intellectual capital of the organisation be protected?
- Relative bargaining power: this can play a role when individual members of an
organisation have high bargaining power as they can appropriate more of the rent.
- Embeddedness: in some instances, the individual competences of team members
may be so embedded in the organisation’s processes that they reduce the bargaining
power of the individual – in other words, the organisation is in a position to
appropriate more of the value than individual employees
- Resource exploitation: also NB when considering this aspect is the issue of resource
exploitation. Some organisations are better at leveraging resources & this enables
them to capture more of the value generated
7.2.4 Exploitability
• An organisation’s ability to exploit or leverage its valuable resources & capabilities lies at
the heart of RBV
• Resources can be leveraged by concentrating, accumulating, complementing &
conserving:
7.2.4.1 Concentrating resources
• Concentrating resources refers to the principle of the selective allocation of resources
• This involves 3 elements:
- Converging resources on a few selected strategic goals that will contribute to the
attainment of the organisation’s vision
- Focusing the efforts of each organisational unit on single priorities sequentially
- Targeting those activities first that have the highest impact on the customers’
perception of value
• The lack of concentration can lead to poor performance & resource wastage
7.2.4.2 Accumulating resources
• Accumulating resources refers to the principle of building up resources as quickly as
possible using the following methods:
- Mine experience to learn as quickly as possible
- Borrow from other organisations by means of arrangements such as strategic
alliances, joint ventures & outsourcing activities
7.2.4.3 Complementing resources
• Complementing resources refers to the process of increasing the value of resources by
linking them to complementary resources & capabilities:
, - Blending by linking technical or R&D capabilities to the marketing capabilities
required to get the product to market
- Balancing to ensure that limited resources & capabilities in one area do not limit the
value of resources and capabilities in other areas
7.2.4.4 Conserving resources
• Conserving resources refers to the principle of using resources & capabilities to the
fullest extent:
- Recycling: resources can be recycled through different products, markets & product
generations
- Co-opting: resources can be co-opted by collaborating with other companies
7.2.5 Developing resources & capabilities
• When organisations decide to enter new markets, or introduce new products & services
& they do not have the resources & capabilities to match the required key success
factors, they need to acquire these resources & capabilities in some way
• There are 3 ways in which organisations can do this:
- Acquisition:
o An organisation can acquire a different organisation that does possess the
required resources & capabilities
o This is often a cost-effective way of obtaining resources & capabilities
o However, it can also prove to be a costly mistake if the required resources &
capabilities cannot be successfully integrated into the acquiring organisation
- Internal creation:
o Creating new capabilities internally is a possibility, but also a risky proposition
o Often the capital is raised, new people hired & new processes created are simply
absorbed into existing processes & structures & disappear without a trace
- Creation of a spin-out organisation:
o Capabilities can also be created through a spin-out organisation where a
separate, small start-up organisation is established as a mechanism for
developing the required resources & capabilities
o This type of venture only has a chance of success where the CEO oversees the
start-up closely, ensures that it has the required resources & where it does not
have to compete head-on with the mainstream organisation & projects for
funding
7.3 IDENTIFICATION OF RESOURCES & CAPABILITIES
• Many organisations are good at identifying the physical resources that they own & can
give detailed accounts of their finances, production facilities, information technology &
other physical assets.
• However, they are often unsure of the value of their intangible assets & even more so
about the true value & sustainability of their capabilities
• This section explores the different types of resources & capabilities as a basis for
identifying resources & capabilities
, 7.3.1 Identifying resources
• Any organisation possesses certain strategic resources
• These can generally be categorised into 3 broad classes, namely physical resources,
intangible resources & human resources
7.3.1.1 Physical resources
• Physical resources are typically the tangible assets that appear on the organisation’s
balance sheet
• They include property, raw material, production facilities, etc.
• Organisations can use tangible assets to create value either by using these assets more
economically or by using them more profitably
7.3.1.2 Intangible resources
• Include brand value, culture & intellectual capital
• Intellectual capital is an NB part of intangible resources & includes patents, brands,
business systems & customer databases
• In most successful organisations, the value of the intangible assets such as brand value
far outstrips the value of physical assets
- Thus, intangible assets play an NB role in creating value & establishing competitive
advantage
• In an economy based on knowledge, intangible assets & intellectual property are the
major resources of the organisation
• Intangible assets are often not extensively measured nor reported in organisations’
balance sheets
- The value of the intangible asset lies in the fact that, unlike tangible assets, they
grow in value the more they are used
7.3.1.3 Human resources
• Refer to the individual skills & competencies to which the organisation has access
• Human resources provide the productive services that all organisations require to
survive & prosper
• These resources are unique in the sense that organisations can never own them
• Through their individual skills, knowledge & learning & thinking abilities, human
resources can contribute significantly to value creation in the organisation
7.3.2 Identifying capabilities
• Resources on their own are not particularly productive, but add value when they are
combined to form unique capabilities
• The term “organisational capabilities” refers to the organisation’s capacity to combine
resources into productive activities
- Therefore, organisational capabilities are a higher order resource than mere factor
inputs, such as raw materials, that can be relatively easily required
• Capabilities represent complex combinations of assets, people & processes that
organisations use to transform inputs into outputs
