After evaluating an industry’s attractiveness, we analyze the firm’s internal strengths and weaknesses for competing in that industry. The strengths and weaknesses identified by the internal analysis can also be displayed in a SWOT table.
The internal analysis does not care about the product and the industry itself; it is concerned with the capabilities that are used in producing the product in a meaningful way. In the internal analysis, first list out those resources that are strategically important (e.g. financial resources, knowledge, protocols, employees, skills, equipment) for achieving your strategic objectives. In other words, ask what resources you need to succeed based on your current strategy. Here, let’s assume that the strategic objective is to retain a competitive position in the face of increasing competition in our industry.
For all the strategically important resources you have identified, ask if you are strong enough at that resources for creating and capturing value (relative strength). Your valuable resources are your strategically important resources which you are strong at. In other words, valuable resources meet the VRO criteria. They are:
- valuable: in demand, superior in quality, and durable (does not depreciate quickly)
- rare (scarce): inimitable (cannot be copied)* and unsubstitutable (competitors cannot use something else to make up for it)
- appropriable for the organization: organization can capture the value of the resource it owns
*Examples of inimitability include physical uniqueness of resource, path dependency of brand value, and path dependency of experience for firms with first mover advantage
Another way to make sure you have considered all valuable resources is to first list down all the resources you currently have and then debate whether those resources are valuable.
If you are not strong at a strategically important resource, meaning you do not meet the VRO criteria for that resource, then you must think of ways to improve on that resource in the future. I will introduce the means for strengthening resources and capabilities in a future post on strategy formulation.