Internal Analysis: Resources, Capabilities and SWOT

An auto-parts maker in Pune has lost two large orders in a year. Before blaming the market, its managers need to find what is slipping inside the firm: cost, quality, delivery or people.

Paired with external analysis, it shows how the firm works on its own and within its industry. It looks for:

• strengths: the quality of its people, the resources it has, brand recognition;
• weaknesses, often structural: poor training, outdated technology, weak communication between departments;
• opportunities for growth, and likely threats. Threats usually come from outside; the internal view asks how well placed the firm is to meet them;
• viability: a niche that sets it apart from competitors, often the long-term aim.

Gap analysis, worked. As an illustration, the Pune plant promises its carmaker customers that 98 of every 100 deliveries will arrive on time. Last quarter only 90 did. The gap is 98 − 90 = 8 percentage points. That is the symptom; the value chain helps find the cause.

The value chain (Michael Porter, Competitive Advantage, 1985) divides a firm's activities into primary activities (inbound logistics, operations, outbound logistics, marketing and sales, and service) and support activities (firm infrastructure, human resource management, technology development and procurement). Advantage comes from performing these activities at lower cost, or in a way that creates more value than rivals do. Margin is the difference between what customers pay and what all the activities cost.

Back to the Pune plant. Steel arriving late from suppliers is inbound logistics. Machining is operations, and trucks to the carmakers are outbound logistics. If the delays trace back to a production plan nobody updates, the weakness sits in firm infrastructure, a support activity, not on the shop floor.

Don't confuse internal analysis with external analysis. External analysis (PESTEL, the five forces) studies the environment and the industry, which the firm cannot control. Internal analysis studies what the firm can control. Nor is the value chain the supply chain: the value chain is the activities inside one firm; the supply chain links many firms from raw material to customer.

Where it breaks. Firms rate themselves generously, yet a strength counts only if it beats rivals', so comparison with competitors is essential. The value chain was drawn for manufacturers and fits a bank or an online platform less neatly.

In practice. Use a gap analysis to find the symptom, the value chain to find its source, and VRIO to decide which strengths to build on. For exams, learn the five primary and four support activities.

Two kirana stores on one street pay the same rent and buy from the same wholesaler. A supermarket opens nearby, and one store keeps its customers while the other loses them. The difference lies in what each has built inside.

The resource-based view (RBV) took shape in the 1980s and 1990s in the work of Birger Wernerfelt (“A Resource-Based View of the Firm”, 1984), C. K. Prahalad and Gary Hamel, J.-C. Spender, Robert Grant and Jay Barney.

Back to the kirana stores. The shelves, the stock and the billing machine are tangible; the supermarket can buy better ones. The store that survives has intangibles the supermarket cannot buy: an owner who knows what each family orders, credit given on trust, and delivery to the door within the hour.

Two assumptions. Resources are heterogeneous: they differ from firm to firm, which is why firms facing the same environment can follow different strategies. And they are immobile: they do not move easily between firms, at least in the short run, so rivals cannot quickly copy them. Intangible resources are more immobile than tangible ones.

Core competence (Prahalad and Hamel, 1990) is a bundle of skills and technologies that lets a firm deliver distinctive value across several businesses. Their three tests: it gives access to a wide variety of markets, it contributes significantly to the benefits customers perceive, and it is difficult for competitors to imitate. Their own example was Honda, whose skill with engines serves its cars, motorcycles, lawn mowers and generators.

Don't confuse the RBV with the positioning view. Porter's five forces work outside-in: pick an attractive industry and a defensible position in it. The RBV works inside-out: build on what the firm has that rivals lack. Nor is a resource the same as a capability. A resource is something the firm has; a capability is what it can do by combining resources.

Where it breaks. Critics, notably Richard Priem and John Butler (2001), argued that the view comes close to a circle: valuable resources give advantage, and resources are called valuable because they give advantage. It says little about how to build such resources, and a resource valuable today can lose its value when markets change.

For exams. Match the names: Wernerfelt (1984) named the view; Prahalad and Hamel (1990) gave core competence; Barney (1991) gave the tests that became VRIO.

Go deeper for practitioners

Dynamic capabilities. David Teece, Gary Pisano and Amy Shuen (1997) answered the charge that the RBV is static. They argued that in fast-changing markets what matters most is a firm's ability to build, combine and reshape its resources, not the stock it holds today.

A decision. The surviving kirana owner has ₹5 lakh to spend. A new air-conditioned shopfront is tangible and the supermarket already has a better one. A phone-ordering service for regular customers builds on the knowledge and trust he already has. The RBV points to the second.

Look inside: lasting advantage lies in what rivals cannot buy or copy.

An auto-parts maker owns a testing rig worth ₹5 crore and calls it a strength. If three of its four rivals own one too, it only keeps the firm level with them. VRIO sorts real advantages from expensive equipment.

Owning heterogeneous, immobile resources is not enough to sustain an advantage. Jay Barney (1991) proposed four tests, VRIN: valuable, rare, inimitable and non-substitutable. Barney later recast them as VRIO, replacing non-substitutability with organisation.

Ask the questions in order. Each one matters only if the resource passed the one before, so the first "no" gives the result.

Two resources of the Pune plant, tested.

• The testing rig. Valuable: yes, it cuts testing time. Rare: no, most rivals own one. Result: parity. It is needed to stay in the game, not to win.
• Its engineers' long working ties with carmakers' design teams. Valuable: yes, the firm hears of new models early. Rare: yes. Costly to imitate: yes, such trust takes years to build. Organised: no, because the engineers sit in a back office and are never asked to join bids. Result: unused advantage. The fix is to put them on bid teams.

Using it: identify the firm's potential key resources; test each against the four questions; then develop and nurture those that pass.

Don't confuse VRIO with VRIN. Both start valuable, rare, inimitable. VRIN's fourth test asks whether a substitute exists; VRIO folds substitutes into "costly to imitate" and adds organisation, whether the firm can actually use what it has.

Where it breaks. Each answer is a judgement, and managers tend to rate their own resources highly. The test is a snapshot: a sustained advantage lasts only until technology or customers change. It tells a firm which resources matter, not how to build new ones.

For exams. Expect the result table as a match-the-pairs question. Remember the order and the five outcomes, and that the O was added later in place of the N.

Valuable, Rare, costly to Imitate, Organised.

A public-sector bank decides to lend more to small businesses. Its branch staff are still rewarded only for collecting deposits, and few have been trained to judge a loan. A year later the new strategy has hardly moved.

The framework comes from Robert Waterman, Tom Peters and Julien Phillips (1980), developed with Richard Pascale and Anthony Athos. It put the ‘soft’ human side of organisations alongside the traditional tangibles of capital and equipment as a key to performance.

The hard elements are tangible and easier to define and manage; the soft ones are intangible, shaped by culture, and harder to change. Shared values sit at the centre as the glue. Because the elements are interdependent, a change in one usually needs changes in the others, and misalignment causes friction.

Back to the bank. The strategy changed, but nothing else did:

• Systems: targets and incentives still count only deposits;
• Skills and staff: few officers can appraise a small firm's accounts, and none have been trained;
• Style: branch managers, fearing bad loans, refer every application upward;
• Shared values: "never let a loan go bad" outweighs "help local businesses grow".

Aligning them means new targets, credit training, a clear limit each branch may approve, and leaders who accept some risk.

Don't confuse the 7 S's with the 7 Ps. The 7 Ps (product, price, place, promotion, people, process, physical evidence) are the marketing mix for services. The 7 S's describe a whole organisation. Within the 7 S's, staff is the people; skills is what the organisation as a whole can do.

Where it breaks. The model says what must fit, not how to change it or in what order. It is a still picture of the inside and says little about customers or competitors.

For exams. Sort the seven into hard and soft, and remember shared values at the centre. Strategy implementation (later in this unit) applies the model to putting a strategy into action.

Hard: strategy, structure, systems. Soft: shared values, style, staff, skills.

A chain of 12 chai cafés in Pune hears that a national café chain is coming to town. The owners write down what they have and what they fear. A list alone does not tell them what to do.

The chai chain's SWOT. Strengths: a recipe regulars love and low rents near colleges. Weakness: no online ordering. Opportunities: more people order food through delivery apps, and new office parks are opening. Threat: the national chain.

The TOWS matrix (Heinz Weihrich, 1982) goes one step further: it pairs the internal and external factors to generate strategies.

Don't confuse a strength with an opportunity. Strengths and weaknesses are inside the firm and under its control. Opportunities and threats are outside. Growing use of delivery apps is an opportunity for the chai chain, not a strength; being on those apps would be a strength.

Where it breaks. A SWOT gives no weights, so a minor point sits beside a decisive one. One fact can land in two boxes: a family-run board may be a strength (quick decisions) and a weakness (few outside views). In a 1997 study, Terry Hill and Roy Westbrook found that the SWOT lists firms drew up were often long and general, and rarely used later.

In practice. Keep each box short, back each item with evidence, and judge strengths against rivals. Then use TOWS to turn the list into options, and evaluate those before choosing.

For exams. Know which factors are internal and which external, the four TOWS cells with their maxi–mini names, and Weihrich (1982).

Go deeper for practitioners

Where the inputs come from. A good SWOT is the last step, not the first. Opportunities and threats come from external analysis (PESTEL, the five forces, the industry life cycle). Strengths and weaknesses come from the value chain, VRIO and comparison with rivals. A SWOT written without that work tends to list opinions.

A decision. The chai chain cannot fund all four options at once. The threat is near and the delivery weakness is cheap to fix, so WO and ST come first. SO needs new outlets and capital, so it waits until the chain knows how its regulars respond to the new rival.

SWOT lists the factors; TOWS turns them into strategies.