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Real World Strategy


Dyer, Godfrey, Jensen, Bryce

Chapter 3: Internal Analysis: Strengths, Weaknesses, and Competitive Advantage

Opening Case: Disney: No Mickey Mouse Company
When most of us think of the Disney Company, we think of Mickey Mouse, Disneys
oldest and most important in a long line of memorable characters. As the companys
spokesman, he appears prominently on the Disney home page.
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Everyone knows Mickey,
but few know the story of Mickeys birth; even fewer understand how Mickeys birth in
1928 helped create a set of resources and capabilities that continue to drive profits for
Disney more than 85 years later.
In 1923, Walt Disney and his brother Roy settled in Burbank, California. They
created the Disney Brothers Cartoon Studio to capitalize on a series of Laugh-O-Gram
animations that Walt had produced in their hometown of Kansas City. Later that year,
movie distributor Margaret Winkler contracted with the new studio to produce a series of
single-reel cartoons based on a character from Walts first movie, Alices Wonderland.
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After
56 successful episodes of the Alice Comedies, Winklers husband Charles Mintz contracted
with the Disneys in 1927 to produce a new character, Oswald the Lucky Rabbit.
Oswald quickly gained popularity, due in large part to the Disneys insistence on
quality drawing and animation sequences known as the illusion of life, which enabled
characters to move smoothly, like real humans.
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In 1928, Walt and his wife Lilly headed
east to negotiate with Mintz for more money to expand the successful series. They were
met with a shock when they arrived in New York. Not only would Mintz not pay more, he
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fired Walt! Mintz held the rights to the Oswald character, and he set out to produce Oswald
without the Disney brothers.
Crushed at the loss of their main character and income source, Walt and Lilly
boarded the cross-country train to return to Hollywood. Lilly recalled, Walt showed me
some of his sketches on the train coming home. They were cute little things; they could do
anything. I asked him what he was going to call the character. Mortimer Mouse, he said. I
said, That doesnt sound very good, and then I came up with Mickey Mouse.
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That
mouse, conceived in adversity, would soon lead his creator to prosperity.
Mickeys public debut in Steamboat Willie in late 1928 introduced not only a cute
mouse performing laughable antics, but also a company incorporating the latest technology
to bring its stories to life. Sound was just beginning to make inroads in Hollywood, and
Steamboat Willie represented the first synchronous sound movie. Mickeys motions and
voice were perfectly timed with the music and audio in the cartoon, a major advance in
motion pictures.
The Disneys learned well from Charles Mintz the importance of owning, not just
creating, characters. Ownership of their most important resources allowed the brothers to
control the use of characters by licensing the images to others. Walt entered his first
licensing agreement in 1929 with a stationary company that produced Mickey Mouse
emblazoned notecards. By the time WWII broke out in 1942, Disney earned 10 percent of
its revenue from licensing.
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Mickey Mouses combination of a lovable character and cutting edge technology
became a Disney hallmark. The company pioneered a series of firsts:
Technicolor, used for the first time in a film in 1938s Snow White and the Seven
Dwarfs.
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The use of a multi-plane camera that enhanced the illusion-of-life artistry.
A precursor to modern surround-sound technology. Debuted in the 1940 film
Fantasia, this innovative technology would not spread industry wide for another
two decades!
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Walts capability to innovate continued throughout his career. He realized the
potential of television in its infancy, and on October 27, 1954 the first episode of Disneyland
aired. The show would later become Disneys Wonderful World of Color to capitalize on the
potential of color television. And, it would last. In some version, new Disney programming
has been on weekly network television for more than 60 years.
Walt entered the world of television in order to fund his grandest innovation of all:
The countrys first destination theme park. Disneyland opened in July of 1955 on 270 acres
of land in Orange County, California.
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Disneyland defied all skeptics and proved a huge
success from the day it opened. The park combined the companys skills in engineering and
entertainment. In fact, Walt called his designers imagineers. Walts almost maniacal focus
on creating a clean setting also helped to set Disneyland apart from the myriad local
amusement parks that constituted the competition. Local Ferris wheels and roller coasters
were no substitute for Magic Mountain or the Tea Cups, and the clean, inviting family
atmosphere proved difficult for cash-strapped local parks to imitate.
Overview
Why did the Walt Disney Company become such a great success? The Disney
brothers built a set of unique resources and capabilities that enabled them to carve out a
successful niche in animated shorts and then parlay that success into feature films,
merchandising, television, and theme parks.
External analysis, the focus of Chapter 2, helps managers answer the question,
Where could we compete? Choosing an attractive industry environment certainly helps,
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but competitive advantage requires a match between external opportunities and the
internal characteristics of the firm. Managers sometimes have little control over the
industry structure or environmental opportunities and threats, but they have lots of
control over what goes on inside their firms. The Disney story, from a strategic perspective,
captures the essence and power of a firms internal abilities, the resources and capabilities
that can create and sustain a competitive advantage. The Disneys young studio survived
and eventually flourished in spite of a harsh industry environment. Large integrated
studios such as Metro Goldwyn Mayer (MGM), United Artists, and others competed fiercely,
and the industry produced over 800 films a year throughout the 1920s.
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When micro-economists study markets, they assume that all firms in a market are
homogeneous, or alike. In such a world, internal analysis would be a fruitless exercise
because any differences among firms performance would arise from industry-level factors.
Strategists, however, assume that firms are heterogeneous, or varied. Firms vary in
meaningful ways along significant factors of production, the critical inputs they use and
the activities they engage in to create products and services. Those differences may
translate into abilities to produce products or services at lower cost (Chapter 4), to meet
customer needs in unique ways (see Chapter 5), to cooperate more efficiently with
partners (Chapter 8), or to compete in global markets more effectively (Chapter 10).
The strategists view of firms as heterogeneous has one other, huge, implication: Not
all firms in an industry will not all earn the same level of profits; some firms will earn
better profit returns than their rivals. For example, Figure 3.1 displays the five-year
operating profitability of Disney and its competitors in filmed entertainment
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. As you can
see, these firms earn very different rates of operating profit as a percentage of sales.
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The concepts and tools in this chapter will help you to evaluate a firms internal
abilities in order to answer the question, How can a firm create unique value for all the
firms stakeholders? The first section of the chapter explains how firms create competitive
advantages over rivals, and the second section discusses the sustainability of those
advantages over time. Internal analysis seeks to allow informed and meaningful judgments
about a companys ability to win in its market, both in time (during any year or product
cycle) and over time (as long as a decade or longer)
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. Winning in time means that a firm
has a competitive advantage; winning over time requires that advantage to be sustainable.
We end the chapter by describing how to use a tool called the Company Diamond to
create a meaningful visual model of the internal attributes that underlie a firms
competitive advantages.
As weve mentioned, strategists assume that firms differ. How can we describe those
differences in a clear way that highlight how they contribute to the overall strategy? The
value chain provides a logical way to divide the firm into important strategic activities.
0.0%
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News Corp Disney Time Warner Viacom NBCUniversal
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Company
Figure 3.1: Operating Profit average, 2008 to 2012, Filmed
Entertainment
Source: Company 10 K filings
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The Value Chain
Figure 3.2 displays the value chain. Developed by Michael Porter, the value chain is
a way to depict and evaluate the activities a company performs. The horizontal elements in
Figure 3.2 capture the production process that a firm uses to acquire and import raw
materials, transform them into valuable outputs, and put them in the hands of customers.
The vertical axis represents four administrative elementsfirm infrastructure, human
resource management, technology development, and procurementthat span all of the
firms economic activities. Porters value chain not only gives you a framework to describe
the activities a company performs, it also can help you to identify which activities represent
the firms competitive strengths and weaknesses.
Wal-Marts sophisticated
information system is part of
both firm infrastructure and
technology development
activities. The system gives
Wal-Mart an advantage in
inbound logistics because it
can find low-cost ways to
move products from its
suppliers to warehouses, and in outbound logistics, when it uses the same systems to move
products at low cost to its retail stores. High-end retailer Nordstroms legendary return
policy is part of its core activities in marketing and sales as well as after-sales service. The
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ability to return virtually any Nordstrom item with no receipt and no questions asked
creates unique value for customers.
Apples dominance in its markets can be traced to its strengths in the support
activities of technology development and procurement. It designs easy-to-use products and
procures unique raw materials such Cornings ultra-strong Gorilla Glass.
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Apples iTunes
website and unique and trendy Apple Stores showcase its strengths in operations. The
company is also well-known for its strong marketing and sales, including its sleek logo and
advertising campaigns featuring silhouetted dancers and white ear buds have made Apple
products a must have image product for billions across the globe.
Disneys early strength, as the opening case indicated, came in operations, via its
illusion-of-life cartooning process and innovative film production, both of which were
enabled by the companys technological development. The company later developed a
world-class brand identity that now gives it strength in marketing and sales.
The value chain helps you identify areas in which a firm has an absolute strength,
but provides no guidance about strength relative to competitors. So, you can use the value
chain to answer the important question, What is a firm good at? But, you cant use it to
answer the critical question, What is the firm better at than relevant competitors? Well
help you answer the second question through two processes. First, well define a set of
conceptsresources, capabilities, and prioritiesto help you understand in a deep way
the sources of a firms strengths. Second, well introduce you to VRIO thinking, a way of
measuring the magnitude and durability of a firms strengths versus competitive rivals.


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The Resource-Based View
We can think about resources, capabilities and priorities as answers to basic
questions that firms face. Resources are the specific whats that a firm employs to create
value and competitive advantage. Capabilities represent how firms do things, the processes
they use. Priorities are the whys that determine how firms allocate critical resources to
achieve key objectives.
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Resources
Resources provide the answer to the question, What creates the firms strengths?
An early definition proposes that resources include all assets, capabilities, organizational
processes, firm attributes, information, knowledge, etc. controlled by a firm that enable the
firm to conceive of and implement strategies that improve its efficiency and
effectiveness.
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This definition clearly identifies what could be a resource, but its breadth
makes it difficult to use in practice.
Most resources are, or could be, counted and quantified on a firms balance sheet as
assets. Accountants classify resources as tangible or intangible assets. Tangible resources
are those with physical presence, such as land, factories, machinery, equipment, or cash.
Intangible resources are economically valuable assets which do not have physical
presence, and include brands, licenses patents, knowledge, and reputation.
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Four categories of resources are important contributors to competitive advantage:
Physical resources, such as plant or equipment
Financial resources, such as free cash flow
Human resources, including employee and management skills and talents
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Intangible resources, the intangible assets held by firms, such as brands and
patents
Resources enable the operational and support/administrative activities that you
identified in the value chain. Nordstrom could not have any operations without the physical
resources of stores or a website for customers to visit, or without the financial resources of
cash or credit to purchase inventory. Similarly, without the human resources of salespeople
and the intangible resource of a strong brand, there would be no excellent customer
service, which gives Nordstrom its strength in marketing and sales. Finally, without the
intangible resource of Nordstroms culture contributes to the firms infrastructure, and the
human resource of its training programs, the shopping experience would provide little of
the satisfaction that customers have come to expect.
Resources contribute to a firms strengths because resources are used to create
valuable products or services. The importance of resources was highlighted in the early
1800s by economist David Ricardo. Ricardo noted that the amount of labor farmers needed
to produce one bushel of corn was fairly constant but that the land upon which grain was
raised differed in quality and productivity.
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Farmers who owned the most fertile, well-
watered, and easily accessible land, produced more grain with the same labor than farmers
with poor land. Ricardo referred to the difference in their output as rent. Modern
strategists use the term Ricardian rents to describe the competitive advantages and high
profit returns available to companies because they own or control assets or resources that
are more valuable than those of competitors.
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Those resources may be land, buildings,
patents, machines, or people. The job of strategists is to make sure their firms find and own
the most valuable resources, allowing the firm to capture Ricardian rents.
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Capabilities
Capabilities are processes that the firm has developed to coordinate human activity
in order to achieve specific goals. McDonalds corporation holds a commanding 24 percent
market share in the U. S. fast-food industry, nearly four times as large as rival Wendys.
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McDonalds operates more than 33,000 stores worldwide, many of them in highly
accessible locations, such as freeway off-ramps, or attractive downtown and mall locations.
The stores themselves are resources. But, McDonalds has also developed a set of
operating capabilities, or processes, that it implements in each of these stores. The
companys ability to fill customers orders at industry-leading speed exemplifies a
capability, one at the heart of what makes McDonalds successful. This capability involves
several discrete steps: procuring customer orders, communicating the orders to those who
cook the food, cooking the food, packaging it, and delivering it to the customer. This process
is repeated hundreds of times a day at all 33,000 individual store locations, leading to high
store-level capability for fast-food turnaround.
Competitive advantage relies on a strong set of operating capabilities. A firms
advantage becomes stronger if it develops dynamic capabilities, processes that are
designed to continuously expand existing resources or to improve or modify operating
capabilities.
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Dynamic capabilities are practiced and refined over time and through
repetition. For example, Procter and Gamble has many brand resources, such as Crest and
Tide. But it also has been through the process of creating a new brand many times. Through
repetition, P&G has refined its capability to create new brands to the point that it now has a
dynamic capability that can help it expand its existing brand resources with new additions,
such as the Swiffer.
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Dynamic capabilities can help firms modify and evolve processes to keep pace with
environmental changes or to utilize new technologies. They can also enable firms to
incorporate learning into their processes. For example, P&G used its formidable skill in
brand management to create value in its purchase of Gillette, helping the consumer
products company introduce a string of new brands such as Fusion for men and Venus for
women brands.
Companies with strong dynamic capabilities have a more secure foundation for
competitive advantage than those without them, for two reasons. First, dynamic
capabilities entail complex connections and coordination among different internal units
within the firm. For example, finding the optimal site for a restaurant requires input from
marketing about demographic information and target customer segments; the corporate
counsel about sales contracts and local regulations; and real estate professionals skilled at
identifying, negotiating, and closing on properties. Companies that have developed strong
coordination processes are likely to also gain the competitive advantage of good restaurant
locations.
Second, dynamic capabilities take time to develop and require significant learning.
Processes or routines represent deeply engrained, often tacit, habits of behavior that take
years for companies to perfect. As firms and their managers master the ongoing process of
learning and adjustment in the face of environmental change, they develop a formidable set
of dynamic capabilities.
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Read more about one of Disneys critical dynamic capabilities, the
ability to protect its intellectual property, in the Strategy in the Real World feature.

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Strategy in the Real World: Preserving Disneys Capabilities: Dont Mess
with the Mouse!

Walt learned early about the importance of copyrights to his
characters, and over the years, his company developed a set of dynamic
capabilities to protect those resources.
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Those capabilities paid huge
dividends in 1998.

Steamboat Willie, aka Mickey Mouse, debuted on screen in 1928.
Under existing copyright law, Disneys copyright protection on the fabled
mouse would expire in 2003, 75 years after the characters origination. In
1988, Disney led a group of Hollywood studios, music labels, and other
content owners in the entertainment business to successfully lobby Congress
to extend the copyright protection on Mickey, and other characters created
between 1923 and 1978, for another 20 years.
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With so much riding on the mouse and his friends, Disney makes
every effort to safeguard its property. The rise of YouTube and other user-
generated content (UGC) sites has presented a new front in the copyright
wars. Users can upload content to these sites whether or not they have rights
to the material. Disney recognized this threat early and realized the resulting
legal battle would be global, long-running, and very, very expensive. Rather
than threaten YouTube and other technology providers, Disney General
Counsel Alan Braverman decided on a different strategy: Disney would agree
not to sue UGC sites as long as those sites worked to scrub copyrighted
content on their own.
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The delicate negotiations took over a year, but
industry giants Disney, Microsoft, Viacom, Myspace, NBC, Dailymotion, and
Chinese UGC site Youku.com agreed to a set of rules to protect content
copyrights.

Priorities
Resources and capabilities help firms create and deliver unique value. So what
drives the choices of which resources and capabilities a firm should invest money and time
to try to build? The answer is priorities, which are a firms ranking of the tasks, projects, or
principles that are most important. Priorities answer the question what matters most?
and are driven by a companys underlying values, its leaders beliefs what is right and
wrong, good and bad, desirable and undesirable. 20
th
Century management guru Peter
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Drucker described values as the ultimate test for action.
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Drucker noted that corporate
decisions about hiring from the inside or outside, a companys stance about the importance
of R&D, marketing, or any other function look like technical questions of strategy; however,
they are really questions about what companies, and their leaders, truly value.
Values lead to priorities that help executives make decisions. Priorities drive the
creation of resources and capabilities in two ways. First, priorities guide resource
allocation processes such as capital investment, human capital acquisition and training, and
brand development. Second, priorities maintain those allocations over time when things
get tough. Toyota, the worlds leading automobile maker, operates on the core value of
respect for four constituencies: society (the laws and cultures of the markets where they
operate), customers, employees, and the natural environment. Respect for customers has
led the company to make quality a priority. For example, Toyota hires more engineers than
competitors do, in order to focus specifically on quality. Respect for the natural
environment led to a set of priorities and investments that resulted in the Prius, the worlds
first hybrid fuel vehicle produced at large scale.
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Read in the Strategy in the Real World
feature how priorities influenced the design of a new headquarters building for Pixar
Studios (then a Disney partner, now a Disney subsidiary).
Strategy in the Real World: Priorities at Pixar
When Steve Jobs bought Pixar Animation Studios in 1986, he
refocused the company, away from its founding focus on high-tech hardware,
and further in a direction it had already started, toward creating computer-
generated animations that would sell. The refocus was critically, as well as
financially successful. In the same year of Jobs purchase, Pixars short film
Luxo Jr. (reminiscent of Disney and Steamboat Willie) received an Oscar
nomination. Two years later, the companys Tin Toy won the Oscar for best
animated short film. Thus began a run of Oscar-winning films that included
the feature-length movies Toy Story, A Bugs Life, and others.
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Jobs valued innovation and creativity, and he believed they were the
keys to Pixars success. Jobs also believed that innovation is sparked when
individual creative people can spontaneously get together with one another
and share ideas. As Jobs oversaw the design of the new Pixar Studios building
he made sure that the architecture itself would reinforce his values, by
making interaction among employees a design priority. As Jobs biographer
Walter Isaacson recounts:

The headquarters was to be a place that promoted encounters and
unplanned collaborations. Pixars campus design originally separated
different employee disciplines into different buildings one for computer
scientists, another for animators, and a third building for everybody else. But
because Jobs was fanatic about these unplanned collaborations, he envisioned a
campus where these encounters could take place, and his design included a
great atrium space that acts as a central hub for the campus.

Brad Bird, director of The Incredibles and Ratatouille, said of the space,
The atrium initially might seem like a waste of spaceBut Steve realized that
when people run into each other, when they make eye contact, things happen.

And did it work? Steves theory worked from day one, said John
Lasseter, Pixars chief creative officer Ive never seen a building that
promoted collaboration and creativity as well as this one.
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At Pixar, values favoring creative collaborations led to a design
priority: interaction. Building a workspace that promoted these interactions
maintains and enhances Pixars rich capabilities for innovation in both
technical design and storytelling. These capabilities, in turn, drive the
creation of valuable resources, including Pixars Oscar-winning films.

Creating a Sustainable Competitive Advantage: The VRIO Model of Sustainability
Walt Disneys experiences with Oswald the Rabbit illustrate the difference between
having a competitive advantage and sustaining that advantage through time. Oswald
incorporated many of Walts cartoon illusion-of-life animation techniques. The first
cartoons were both profitable and promising of a strong future. However, Oswald lacked
sustainability. For Walt Disney, the Oswald advantage was unsustainable because he didnt
own the rights to the character. Charles Mintz proved unable to sustain Oswald because
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Mintz lacked the capability to keep Oswald alive the way Disney kept Mickey Mouse alive
through products, TV shows, and theme park. Oswalds life on film ended in 1943, shortly
after Disney gave birth to Bambi, Dumbo, and Pinocchio.
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Walt Disney lost a valuable
competitive asset when Mintz enforced his ownership of the copyright on Walts fateful trip
to New York, but Mintz lacked the capability to sustain the character he had captured.
Competitive advantages arise when resources or capabilities possess two attributes:
Value and rareness. Two other principles determine the durability, or sustainability, of
competitive advantage: Inimitability, the characteristics that make a resource or capability
difficult to imitate, and an organizations ability to exploit profit returns generated by its
unique and valuable resources. Together, these four characteristicsvalue, rareness,
inimitability, and organization to exploit profitsare often abbreviated as VRIO. Well
examine each one in turn.
Value
Mickey Mouse earned returns for Disney and allowed the company to grow because
he created value for film distributors and viewers. Value denotes worth to someone and
for strategists that someone is the firms customer. Customers only find value in the
companys products or services when they create pleasure, satisfaction, or happiness for
them. Users wont pay for products or services without value. In fact, a fundamental
premise of our economic system holds that the price someone will pay for a good depends
on the value that good produces: The higher the value, the higher the price that buyers are
willing to pay.
Although not an absolute rule, resources and capabilities that allow firms to produce
and sell at lower costs than their rivals may produce pleasure for users, but low costs also
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provide indirect benefits to consumers. Purchasing products and services at low cost leaves
users with more money to spend on additional, other things that directly provide them
pleasure or satisfaction. Similarly, products or services that are different in some
significant way from competing ones will create direct pleasure or satisfaction for
customers. Resources that help a firm create such differentiated products and services have
value to the firm. (Chapter 4 discusses how firms can create cost leadership strategies and
Chapter 5 considers differentiation.)
Rarity
To be rare is to be uncommon, or not held by others. Unique is often used as a
synonym for rare. Disneys illusion-of-life animation technology represented a rare
capability throughout much of Disneys history. So did Walts ability to create films that told
good stories and his visionary use of technology. Rare or unique resources create
competitive advantage through a basic principle of economics: Scarcity. When products or
services are scarce, or few, users become willing to pay a higher price for them than they
would be if the same products or services were more commonly available, leading to higher
company profits.
Inimitability
Inimitability is the extent to which competitors cannot reproduce the unique value
created by a product. Mickey Mouse was inimitable for two reasons. First, copyright laws
protected the mouses image. Second, Disneys capabilities in creating the illusion of life
meant that imitators couldnt create a mouse with the same lifelike motions. Several factors
drive inimitability, thereby acting as barriers to imitation. Well describe each one below.
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Path dependence. Path dependence means that the process through which a
resource or capability came into being may make it difficult for competitors to imitate.
During World War II, British aerospace companies focused on building small fighter planes
while Boeing, the American company, built many large bombers and tankers. After the war,
Boeing leveraged its learning and investments in large aircraft to introduce the first truly
successful commercial jetliner, the 707, in late 1957.
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A British company, De Havilland,
actually developed the first commercial jet aircraft, the Comet. However, the Comet failed
because De Havilland simply wasnt as far along the learning curve on designing or building
large aircraft that could safely fly passengers. Path dependence helps to block imitation
when resources or capabilities follow a sequential development path, for example when
previous investments enable later ones, or when significant learning underlies the resource
or capability.
Tacit Knowledge. For many processes, such as cooking French fries at McDonalds,
the actions needed to imitate the sequence can be codified, or written down like a recipe,
and easily learned by others. Such easy to codify and learn knowledge is referred to as
explicit knowledge. Tacit knowledge is just the opposite. Many valuable skills and processes,
such as Walt Disneys ability to choose good stories or Steve Jobs ability to spot great
design in a product, cant be learned easily, if they can be learned at all.
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These skills are
difficult, even impossible, to learn, teach, or coach because they are based upon tacit
knowledge. Tacit knowledge is sticky, or immobile, and difficult to imitate by
competitors.
Causal Ambiguity. Causality refers to the notion that one thing causes another: A
leads to B. Sometimes, however, the causal relationship is unclear, or ambiguous; the
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relationship between Variable A and Outcome B is difficult to disentangle.
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You may have
learned in statistics courses that correlation does not equal causation; just because A and B
appear together does not mean that A causes B. Steve Jobs studied calligraphy at Reed
College and yogic meditation from gurus in India. Jobs credited these two experiences as
highly influential in his aesthetic abilities, but most entrepreneurs will not find that
calligraphy classes or meditation trips to India bestow upon them the same aesthetic
abilities that Jobs possessed.
Complexity. Resources, capabilities, and priorities become difficult for competitors
to imitate when they span the organization or contain many interrelated elements; in a
word, when they exhibit substantial complexity. Creating synchronous sound for Steamboat
Willie proved a complex task in 1927. Walt learned that the key lay in timing the cartoon
framing and motion with the beat of the music (12 frames and beats per minute). Today,
much of Disneys competitive advantage rests on the complex interplay between film
production, distribution in theaters and television, branding, merchandising, and theme
park management. NBC Universal has similar resources, but its profit rate is only about
one-fourth of Disneys. Disney mastered the complex art of managing multiple, interrelated
business over several decades, while NBC Universal combined these resources through a
merger.
Time Compression Dis-economies. Timing is crucial in the development or
deployment of many resources, capabilities, or priorities.
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If a project requires a $20
million investment over two years, time compression diseconomies mean you cant get the
same results by spending $40 million in one year. Resources that are likely to be subject to
time compression diseconomies include those that rely on natural or physical processes,
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such as biological growth limits in biotechnology and pharmaceutical research or forestry;
differences in individual or organizational abilities to learn;
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or feedback, such as
customer responses to new products.
Network effects and first-mover advantages. Recall from Chapter 2 that much of
the reason eBay is so successful has to do with network effects, which economists call
positive network externalities. If you want to sell your old stuff, where do you want to sell?
Some place where there are lots of potential buyers. If you want to buy stuff, where would
you look? In a place with lots of sellers! eBay wins because of its network effect: More
sellers attract more buyers, who in turn attract more sellers. Its a virtuous circle. As eBay
grows, other online auction sites become less valuable because everyone wants to be
where they have the greatest exposure or selection.
Network effects represent a specific form of a first-mover advantage.
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eBay has
been able to lock up the best sellers and most active buyers for its site because it was the
first mover in the market. Being the second to enter is difficult, as eBay learned in Japan,
where it exited the market because Yahoos auction site had captured the first-mover
advantage.
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First movers establish a number of advantages. In addition to customers, they
can lock up other resources, such as locations, patents, or scarce raw material inputs, They
can establish long-term contracts with customers. They can set industry standards that
favor their products. These actions make it difficult for rivals to profitably imitate the first
mover.
Organized to Exploit
A firm may employ valuable, rare, and difficult to imitate resources and yet still lack
a sustainable competitive advantage because the firm may not be organized to exploit the
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Ricardian Rents from these resources.
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Consider National Football League (NFL) players.
Payments from television networks for the rights to broadcast NFL games have grown from
$47 million per year in 1970 to just over $4 billion each year in 2012, a compound annual
growth rate of an impressive 12 percent. Over that same period, the players share of
revenue has jumped from 35 percent in 1970 to 57 percent in 2011.
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How were players
able to increase their share of this huge pie by over 60 percent?
Before 1970, the NFL Players Association (NFLPA) had been a weak collection of
player representatives. During the 1970s, however, the NFLPA emerged as a true, well-
organized union, capable of engaging owners in meaningful contract negotiations backed
up by credible threats of strikes and legal action. The contracts the NFLPA negotiated for its
members have garnered an increasing percentage of a growing revenue pie. The NFLPAs
stronger organization enhanced both its legal standing and administrative abilities,
allowing players to capture the Ricardian Rents from their valuable, rare, and inimitable
resources.
Assessing Competitive Advantage with VRIO
Figure 3.3 shows the relationships between VRIO attributes of resources or
capabilities and competitive advantage. You can assess the strength and durability of a
companys position by answering a yes or no question for each element in the matrix. Both
resources and capabilities should be subjected to the VRIO questions to determine the
strength of a companys competitive advantage.
21


As Figure 3.3 shows, in the real world, firms that cant create value for their
stakeholders dont survive. These businesses experience competitive failure. Many
companies, especially new start-ups, introduce valuable products that are also unique and
rare and enjoy a period of competitive advantage. The combination of value and
uniqueness create a short-run competitive advantage in time for a firm. Over time,
however, competitors imitate these resources and create competitive parity in the
industry.
To create competitive advantage in the long runan advantage that endures over
several yearsa firm must create barriers to imitation. Barriers make it difficult for
competitors to offer similar products or services, drive prices down, and dissipate the
firms superior profits. Barriers to imitation provide a potentially durable advantage
literally, a sustain-able competitive advantage. Moving from sustain-ability to
sustainability requires an organizational structure and design that captures the value from
22

resources and capabilities. Companies that realize sustained competitive advantage
combine the legal elements, such as contracts or intellectual property rights;
administrative elements, including organizational structure; and cultural elements, such as
norms regarding rewards and what constitutes equity that allow them to capture high
profits that come from their valuable, rare and inimitable resources, capabilities, or
priorities.
Managers may work hard to create resources and capabilities that are VRIO, only to
then witness changes in technology, consumer tastes and preferences, government
regulations, or other forces that imperil their source of competitive advantage. The
Strategy in the Real World feature describes how Disney responded when a new
technology for cartooning presented a threat to its sources of competitive advantage.
Strategy in the Real World: Disney Responds to a Competitive Threat
Disneys competitive advantage since the 1920s arose from the
companys ability to combine illusion-of-life animation and the latest
technological advances with classic stories. Steamboat Willie, which
pioneered synchronous sound Fantasia, which debuted Technicolor; and
Snow White, the first full-length animated feature film, all still stand as
classics. Modern classics, including The Little Mermaid, The Lion King, and
Beauty and the Beast, built upon and reinforced Disneys valuable, rare, and
difficult to imitate brand and character resources, as well as its story-telling
capabilities.

Eventually, however, a leapfrog technological innovation threatened
Disneys core source of competitive advantage. In 1986, Pixar Animation
Studios secured its first Oscar nomination for its animated short film, Luxo, Jr.
The wonderful, family-friendly story of a small lamp signaled that computer
generated animation (CGA), coupled with a great story line, could prove a
viable competitor to Disneys illusion-of-life capability.

With the development of its RenderMan software in 1987
36
, Pixar
could produce settings that looked absolutely real, said Pixar director John
Lasseter.
37
Pixar used this new technology to produce a series of blockbuster
hits, including Toy Story, Toy Story 2, Monsters Inc., The Incredibles, and Wall-
23

E. Wired magazine would later peg Lasseter as the next Walt Disney.
38

Disney had used CGA since the production of Tron in 1982, but only as a
complement to, never a substitute for, hand-drawn animation.

Disney lacked the in-house skill or software to compete with Pixar.
The company also found itself boxed in strategically. Mickey Mouse turned
60 in 1987, and the Disney brand evoked images of family entertainment.
Furthermore, the look and feel of its animated character family appealed
more to children than to teenagers or adults. CGA posed a threat to Disneys
brand and character resources and to its illusion-of-life and storytelling
capabilities.

How did Disney respond? At first Disney captured a percentage of
Pixars profits by partnering with Pixar, providing distribution for Pixar
films, as well as financial resources for production and marketing. In return,
Disney received a percentage of the films profits. The partnership prospered
through six movies, including the blockbusters just mentioned.

During the time it partnered with Pixar, Disneys own films, built
around its illusion-of-life animation, such as Treasure Planet, were mostly
unsuccessful. Eventually, Disney decided it needed to own Pixars cutting-
edge CGA capabilities. In 2006, Disney finally bought Pixar for $7.5 billion,
adding Pixars capabilities to its own pool of Disney capabilities.

The Company Diamond: A Tool for Assessing Competitive Advantage
Weve introduced some important concepts to help you understand how a
companys internal resources and capabilities may allow it to deliver unique value and
achieve superior performance. Internal analysis depends on more than concepts, however,
and so now we present an analytical process and tool that allow you to identify and catalog
a firms potential for sustained competitive advantage. The Company Diamond tool will
help you in the academic work of this course, but it will prove even more valuable as you
decide whether to invest in or work for a particular company. You can also use the
diamond after you take a job, when you work on teams assigned to create strategy for your
24

company or to understand the strategic strengths of your competitors. This tool will prove
particularly helpful should you want to start your own company.
The diamond also invokes a powerful metaphor about internal sources of
competitive advantage. Diamonds are valuable, but the creation of that value depends on
the actions of people and organizations. The diamonds you see in a jewelry store have been
taken from their original, raw state and cut, shaped, and graded to increase their value.
Companies create sustainable competitive advantages by taking raw factors or production
and molding them into VRIO resources and capabilities.
Figure 3.4 illustrates the Company Diamond. The diamond shape helps you to
integrate the different internal elements that create layers of competitive advantage.
39
In
the top layer are the activities that create strengths and weaknesses. Resources and
capabilities lie below, in the center layer, because they lay the foundation for and fuel the
activities in the top layer. The bottom of the diamondthe deepest driver of competitive
advantagecaptures the values and priorities that guide the development of resources and
capabilities.
The numbered questions can be answered in order to help you move down the
diamond to discover the different sources of competitive advantage for a company. When
you are finished gathering and analyzing data to answer them, you should be able to draw a
diamond or create a table for the company that provides a robust and detailed picture of
the companys strategic advantages.
25


Gathering Data for Company Diamond Analysis
Data to complete a diamond profile may come from a number of sources. You can
use three main types of data:
Archival data - Written or numeric information that you can find in the library or
on the Internet
Interviews Interviews can range from personal questions to impersonal
surveys.
Observation Your own experiences, such as visits or use of products or
services
If you want to create a Diamond profile for a private company, you may find very
little archival data, but you may find it simpler to locate people willing to grant interviews
or to directly observe the company. For public companies, the reverse often proves true.
26

Abundant archival data exists, but company firewalls make interviews difficult and the size
of the company means that observations provide only a limited view of the company.
Appendix 1 helps you know what to look for as you perform a Diamond analysis, and
Appendix 2 describes in detail different data sources you can use to do the analysis.
As you gather data and use the questions to sort and categorize what you find,
remember the GIGO principle from computer programming: Garbage in; garbage out.
Stated more elegantly, the more attention you pay to gathering, verifying, and comparing
the data, the richer, more robust, and more insightful your finished product will be. You
should always rely on at least two types of data (e.g., archival records and interviews), and
use multiple sources of data within each type. For each strength, weakness, resource,
capability, value, or priority that you identify, include the source from which you drew your
data. If your data all comes from a single source such as a website, Business Week, Fortune,
or Wall Street Journal article, then your diamond will be weaker than if drawn from
multiple sources. Tapping other data sources, such as doing an interview or scheduling a
plant visit, may seem daunting, but doing so will pay great dividends in creating a richer,
more complete profile of the company.
Be very careful to balance your data sources. Dont rely exclusively on data provided
by the company or solely on data that comes from the companys detractors. Both have a
point of view that differs from the real company. If you are thinking about accepting a job
with a company, or one of its competitors, youll want to dedicate significant time and
energy to developing the richest diamond you can.
Using the Company Diamond
27

You can use the diamond to focus on a companys strengths or its weaknesses. It is
often simpler to create a separate analysis for strengths and weaknesses as a first step.
Table 3.1 shows the results of a simple Diamond Analysis to compare the strengths
of two excellent national retailers: Wal-Mart and Nordstrom. As you can see from the table,
both Wal-Mart and Nordstrom have clearly identifiable strengths that customers, suppliers,
and others can readily see.
Company
Questions Wal-Mart Nordstrom
What is company good
at?
Low prices Customer service
What resources and
capabilities create those
strengths?
Stores located in rural
areas
Number of stores
Logistics, planning
Distribution centers
IT systems
Pricing policies

Posh stores
Talented staff
In-store Merchandising
Selection and retention of
staff

How does the company
create value for
customers?
Low prices enable
customers to purchase
more total items,

Pleasure and satisfaction
through the shopping
experience and the goods
purchased
28

What priorities support/
sustain those resources
and capabilities?
Frugality
Striving for excellence
Outstanding service
Empowered employees
Competitive Advantage
Rare? Yes size and scale Yesreputation/brand
Inimitable? Yescomplexity Yescausal ambiguity
Organized to exploit? Yescentralized Yesdecentralized
Sources: Author interviews with selected organizational members, store visits and
tours, various articles in popular press such as The New York Times, Wall Street
Journal, Business Week, Fortune, and Forbes.

What if you wanted to create a Diamond profile to focus on a companys weaknesses?
Consider Sears Holdings, the company created by the 2004 merger of Sears and K-Mart. K-
Mart began operations in the late 19
th
Century and was a competitor of Wal-Mart until Wal-
Mart drove them into bankruptcy. Sears opened its first retail store in 1925 and enjoyed a
run as Americas largest retailer through most of the 20
th
Century.
A visit to a Sears store would allow you to observe both the companys strengths
and weaknesses. Sears boasts a broad line of major national brands and some very famous
house brands, including Kenmore appliances and Craftsman tools. Sears offers its goods at
multiple price points.
40
However, while you would see a broad selection, you would also
likely see a store with outmoded lighting, worn carpeting or tile, and a merchandising and
product mix that lacks excitement. Articles in the popular press indicate that Sears
29

strategy centers on store closings and layoffs, rather than on investing in new
capabilities.
41

A read of Sears Holdings 2011 Annual Report of 10-K filings would reveal a
company with a 2011 loss of over $3 billion and cash resources that declined from $1.3
billion to $754 million over the same period.
42

The mission and values statements at the companys website talk about building
lifetime relationships with customers, quality products, and positive energy. You may
notice, however, that these values dont translate into priorities that connect with the
companys current strategy of selling off its assets, which one commentator sees as the
early stages of liquidation.
If you use the VRIO process described in Figure 3.3, you would see that the rareness
of Sears resources diminishes with each sale of a valuable set of assets, a brand, or a retail
operation. Specialty retailers, such as local appliance stores or dedicated tool shops, not
only imitate Sears broad selection of products, they often exceed it and provide more
knowledgeable service and support. Discount and big-box retailers such as Sams Club,
Costco, or Home Depot match any price advantage Sears offers. Finally, you might notice
that, as of 2012, Sears seems to be organized to sell, rather than grow, any superior profit
returns from its resources and capabilities.
Questions Sears Holdings
What is company good at? Broad Selection of goods
Appliances, tools

30

What are the companys
weaknesses?

Outmoded stores
Poor merchandizing
Unmotivated employees
What resources and capabilities
are lacking and contribute to those
weaknesses?
Lack of financial resources for reinvestment
Lack of strategic consistency to support
training, merchandizing
How does the company create
value?
Better value can be had through specialty
stores or discounters, such as Wal-Mart or
Home Depot
What values support/sustain
those resources and capabilities?
Stated values and goals not consistent with
current actions.
Priority seems to be survival
Competitive Advantage:
Rare? Diminishing through asset sales
Inimitable? No. Specialty retailers offer better products,
services. Low-cost retailers offer better
prices.
Organized to exploit? No. Corporate focus is on creating cash flow
through asset sales.

The diamond profiles for Wal-Mart, Nordstrom, and Sears Holdings help you
understand the variety of strategies available to retailers. Company Diamond analysis also
reveals the level of alignment between strengths, resources, capabilities, and values at
31

winning companies Wal-Mart and Nordstrom, and the misalignments that plague Sears
Holdings. The profiles help you understand why Wal-Mart and Nordstrom generate
superior returns for their shareholders and why Sears loses money.
Chapter Summary
Internal analysis matters! This chapter has introduced you to a powerful set of
strategy tools you can use to understand better how companies create and sustain
competitive advantages through their own efforts, as opposed to merely relying on the
industrys structure.

The value chain provides a broad and comprehensive roadmap for you to identify
the sources of a firms strengths and weaknesses among its different value-creating
functions and infrastructure elements.

The factors of production that a firm uses to create competitive advantages can be
divided into three categories: Resources, capabilities, and priorities. Priorities support
the development of capabilities, and they enable the creation and deployment of unique
and valuable resources.

Valuable and rare resources and capabilities create competitive advantages for
firms. The durability or sustainability of those resources depends on inimitabilityhow
difficult it would be for a competitor to imitate the resource. Finally, the firm must be
organized in legal and administrative ways that capture the rents created by those
resources.

The Company Diamond is a tool to help you identify, categorize, and assess the
overall strategic advantages of a firm. The Company Diamond allows depth of analysis
and understanding about the root causes of a firms competitive advantages.


32

Appendix 1: A Framework for Identifying Resources and Capabilities
Resource

Measures

Physical Resources

Productive capacity Annual revenues Number of Full-time
equivalent (FTE) employees
Annual revenues production square feet
Location Number of locations per relevant market
versus competitors
Ease of access for customers/suppliers versus
competitors

Financial Resources


Data and figures can be calculated from a companys
financial statements and other online or archival
industry sources. Online resources like Investopia,
and even Wikipedia, can help you calculate these
numbers if they are unfamiliar to you.

Borrowing Capacity

Debt ratio versus industry average
Debt-equity ratio versus industry average
Net cash flow to Total Invested Capital

Liquidity Quick Ratio
Current Ratio
Inventory turns versus industry average
Credit rating
Gross cash flow net cash flow to equity
Sustainable growth rate ROE (1- Dividend payout ratio)

Human Resources

Education Sum of employees years of education FTE
Employees

Training Training hours/year FTE Employees

Employee commitment Percent of absentee days versus industry
average
Total amount of sick leave taken Total
amount of sick leave available

Trust Annual number of workplace thefts
Annual number of complaints (such as to the
Equal Employment Opportunity Commission,
33

Occupational Safety and Health
Administration, or Consumer Product Safety
Commission)


Intangible Resources


Organizational Knowledge Average FTE employee tenure
Employee turnover versus industry average

Reputation/Brand Customer satisfaction scores (e.g., Net
Promoter ScoreSee Chapter 5)
Percent of revenue from repeat customers
Average length of customer relationship
Brand equity measures (if available)

Patents and Intellectual Property Total number of patents, trademarks, and
copyrights


Capabilities Indicators

Raw materials and logistics Exclusive control over raw material supplies
(e.g., ownership)
Size and dispersion of distribution network
Distribution costs sales compared to industry
average

Research and development Revenue from products less than 5 years old
Number of new products introduced annually
R&D expenditures revenue versus industry
average

Product design Design awards won (e.g., J. D. Power awards)
Presence of unique design features versus
industry competitors

Manufacturing Average plant size versus industry average
Plant output versus industry average
Manufacturing costs sales, net of input costs
versus industry average
Maintenance expense/ revenues versus
industry average
Unique plant layouts, designs, or workflows
34

versus competitors

Technology Sophistication of website versus close
competitors
Number of personal computers, smart phones,
and handheld devices and upgrade cycles

Financing Cash flow position versus industry average
(Earnings Before Interest, Depreication, and
Amortization (EBIDTA) versus industry
average
Weighted cost of capital versus industry
average

Sales and marketing Advertising expenses sales versus industry
average
Advertising awards won
Breadth and depth of product line versus
competitors

After sales service and warranty Warranty revenue /warranty costs versus
competitors
Customer service awards (e.g., J. D. Power
ratings)

Source: Adapted from Warren D. Miller, Value Maps, 2010. Wiley


35

Appendix 2: Sources for Internal Analysis of a Firm
Data exist for you to use the Company Diamond tool, but finding, filtering, and using
those data can be challenging. Here are some important rules to follow as you look for and
collect data:
Be sure to include multiple types of data. Researchers call this the principle of
triangulation. Each data type offers you a particular view of a firm. Financial
reports give you a picture of the firms financial condition. Interviews with
employees open a window to give you a view of the firms culture and
operating procedures. Observations offer you the chance to see the firm in
action. Triangulation allows you to create a composite view of the firm using
all of the different views youve collected.
Be sure to include data beyond the information provided by the firm itself.
Company information may be biased toward presenting a positive view of
the firm, and if you only rely on information the company provides you will
not have a complete picture. Conversely, dont rely solely on the firms critics,
whether disgruntled employees, customers, regulators, or social activists.
They have their own biases, which can also obscure the true nature of the
firm.
Use multiple sources within each type. Your goal in doing a Diamond analysis
is NOT to get a quick, superficial picture of a company, but rather to uncover
the rich variety of resources, capabilities, and values that underlie the firms
strengths and weaknesses. It will take time, but using multiple sources
within each data type, as described below, will help you create a robust
portrait of the firm.
The goal is to see a motion picture, not just a snapshot. To truly understand
where a firm is today, and where its headed tomorrow, you have to
understand where it came from. Make sure that, whatever type of data you
use, your data provides a view of the firm across a span of time rather than
only at a single moment in time. Search financial results and archival sources
for multiple years of data. Take time to understand the history of the
company, either through written histories or interviews. Looking
dynamically over time helps you see how resources and capabilities have
developed, and how values and priorities have guided the company over
time.
Private companies will require more reliance on interviews and observations.
Private companies have no obligation to disclose their financial results and
many private companies receive little media attention. That means that
archival sources of data for private companies may not exist, or they may be
quite thin. You may need to rely heavily on interviews, surveys, and
observations to gather meaningful data on private companies. However, you
may find it easier to talk with stakeholders of private companies because
many, but not all, have fewer bureaucratic restrictions and firewalls than
their public company counterparts.

36

Sources of Data
Data Type Source of
Data
Where to find the Source Notes
Archival
(written
data that are
stored
somewhere)
Books
(histories,
analyses,
stories,
exposes, etc.)
Your university
library
Amazon.com.
WorldCat global
library search
engine
(www.worldcat.org)
Books are excellent sources
for values and priorities,
path-dependent resources
and capabilities.



Articles
(academic
journals,
magazines,
newspapers,
trade
journals)
ABI/Inform
(www.proquest.com
)
EBSCO
(www.ebscohost.co
m/academic)
Factiva
(www.dowjones.co
m/factiva)
JSTOR
(www.jstor.org)
Excellent source for
current information on
strengths and
weaknesses.
Good source for
capabilities and their
development.
Your university library
may have subscriptions to
these and other sources


Company
financial
reports: 10Q,
10K, 8Q,
Annual
Reports
(Public
companies
only.)
Annual reports are
usually available
through a companys
website. Look for the
Investor Relations tab.
8Q, 10Q, and 10K
reports are available at
www.edgar.sec.gov (a
searchable database).
Excellent source for
understanding the resources
(tangible and intangible
assets) of a firm
Company
and business
databases
Factiva (listed above)
IBIS World
(www.ibisworld.com)
LexisNexis Academic
(http://www.lexisnexis.
com/en-
us/products/lexisnexis-
academic.page)


Websites Company websites
Better Business Bureau
Chambers of Commerce
Google searches for
complaints, problems,

37

success stories,
testimonials
Interview
Data
(stakeholder
groups)

When done properly,
interviews will help you
understand all levels of the
Diamond.
Customers Customers are a rich source
of data on strengths and
weaknesses as they perceive
them.
Employees and Suppliers Employees, suppliers, and
partners can provide some
insight on assets, but deep
insights into a companys
capabilities.
Regulators Regulators and investors
have valuable insights on
resources and capabilities.
Investors Owners will provide their
view of all elements of the
Diamond, but they, along
with community activists, are
excellent sources to
understand underlying
values and priorities.
Investors
Owners
Community Activists

Tips on
creating good
interview/sur
vey questions
Academic sources:
http://owl.english.purdue.
edu/owl/resource/559/06
/
Industry sources:
http://help2.surveymonke
y.com/?l=en_US
http://survey-software-
review.toptenreviews.com/
tips-to-creating-a-good-
survey.html


Observatio
n
Observation allow you to see and evaluate
the outcomes (products or
services) that firms create.
Plant tours You can see resources in
38

capabilities in action during
plant visits.
Office visits and
information interviews
You can get a feel for the
company culture and
operating procedures
through an office visit.
Product placements (in
stores, etc)

Company advertisements
Product trial and/or use


References

1
See http://thewaltdisneycompany.com/, accessed 10 December, 2012. Youll find Mickey displayed in the latest
news section and on the flash video images that dominate the home page.
2
Bob Thomas, Building a Company: Roy O. Disney and the Creation of an Entertainment Empire (New York:
Hyperion, 1998).pp. 46-47.
3
J. P Telotte, The Mouse Machine Disney and Technology (Urbana: University of Illinois Press, 2008). P. 27.
4
Thomas, Building a Company., pp. 57-58.
5
Ron Grover, The Disney Touch (Homewood, Ill: Irwin, 1991). P. 7
6
Telotte, p. 15.
7
Thomas, p. 178-187
8
http://www.1920-30.com/movies/. Accessed 28 November, 2012.
9
NAICS 512110.
10
Warren D Miller, Value Maps Valuation Tools That Unlock Business Wealth (Hoboken, N.J.: Wiley, 2010),
http://site.ebrary.com/id/10388356., pp. 35-36
11
Brian Gardiner, Glass Works: How Corning created the ultrathin, ultrastron gmaterial of the future, Wired, 24
September, 2012. Available at http://www.wired.com/wiredscience/2012/09/ff-corning-gorilla-glass/all/, accessed
03 January 2013.
12
Clayton M Christensen, James Allworth, and Karen Dillon, How Will You Measure Your Life? (New York, NY:
Harper Business: Imprint of HarperCollins Publishers, 2012).
13
Jay Barney, Firm Resources and Sustained Competitive Advantage, Journal of Management 17, no. 1 (March 1,
1991): 99120, doi:10.1177/014920639101700108., quotation from page 101.
14
Stice and Stice, Financial Accounting, 7
th
Edition, p. 537.
15
D. Ricardo, Principles of Political Economy and Taxation, in The Works of David Ricardo, ed. J. R. McCulloch
(Honolulu: University Press of the Pacific, 1817), 584., pp. 35-36.
16
Margaret A. Peteraf, The Cornerstones of Competitive Advantage: A Resource-Based View, Strategic
Management Journal 14, no. 3 (March 1, 1993): 179191.
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Research firm IBIS Worldwide has data on the major competitors in the fast food industry as of 2012. See
http://clients1.ibisworld.com/reports/us/industry/majorcompanies.aspx?entid=1980#MP347824, accessed 05
December 2012.
18
For a discussion and definition of dynamic capabilities, see David J. Teece, Gary Pisano, and Amy Shuen,
Dynamic Capabilities and Strategic Management, Strategic Management Journal 18, no. 7 (August 1, 1997): 509
533, doi:10.2307/3088148.
19
Ibid.

21
Janet Wasko, Understanding Disney: the Manufacture of Fantasy (Cambridge, UK; Malden, MA: Polity;
Blackwell, 2001). pp 85-86. See also Sprigman, C. 2002. The mouse that ate the public domain: Disney, the
39


Copyright Extension Act, and eldred v. Ashcroft. Available at
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22
Mullich, J. 2011. Disneys GC Works His Magic. Super Lawyers Business Edition. September. Available at
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8464-36710c6be140.html, accessed 17 November 2012.
23
Peter F. Drucker, Managing Oneself, Harvard Business Review 83, no. 1 (January 2005): 100109.
24
A statement of Toyotas values can be found at www.toyota-industries.com/corporateinfo/philosophy/, and the
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January, 2013.
25
Walter Isaacson, Steve Jobs (New York: Simon & Schuster, 2011). P. ??
26
A list of Disney movies, by year, can be found at http://d23.disney.go.com/archives/a-complete-list-of-disney-
films/, accessed 06 December 2012.
27
The Boeing 707 was not the first jet aircraft, but the first one to hold the jet-transport formula right. See
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28
Richard R. Nelson and Sidney G. Winter, An Evolutionary Theory of Economic Change (Harvard University Press,
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29
Richard Reed and Robert J. Defillippi, Causal Ambiguity, Barriers to Imitation, and Sustainable Competitive
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30
Ingemar Dierickx and Karel Cool, Asset Stock Accumulation and Sustainability of Competitive Advantage,
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31
Wesley M. Cohen and Daniel A. Levinthal, Absorptive Capacity: A New Perspective on Learning and Innovation,
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32
Marvin B. Lieberman and David B. Montgomery, First-Mover Advantages, Strategic Management Journal 9
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33
Chris Gaither, Internet: eBay exits Japan for Taiwan. New York Times, 27 February, 2002. Available at
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accessed 07 December, 2012.
34
Russell W. Coff, When Competitive Advantage Doesnt Lead to Performance: The Resource-Based View and
Stakeholder Bargaining Power, Organization Science 10, no. 2 (March 1, 1999): 119133, doi:10.2307/2640307.
35
Data compiled from Pankaj Ghemawat, Commitment: the Dynamic of Strategy (New York [N.Y.]: Free Press
[etc.], 1991); Vrooman, John, The Economic Structure of the NFL, in The Economics of the National Football
Leauge: The State of the Art, ed. Quinn, K. G. (New York [N.Y.]: Springer Science + Business, 2012), 335.
36
Information drawn from Pixar Animation Studios History, available at
http://www.fundinguniverse.com/company-histories/pixar-animation-studios-history/, accessed 19 November,
2012.
37
Wasko, Understanding Disney. p. 160.
38
Daly, James, et al. Hollywood 2.0. Wired 5.11 (1997): 200-215. Cited in Wasko, p. 163.
39
Michael E Porter, What Is Strategy? (Boston, Mass.: Harvard Business School Press, 1996). Or the Strategy
Canvas suggested by W. Chan Kim and Rene Mauborgne, Blue Ocean Strategy: How to Create Uncontested
Market Space and Make the Competition Irrelevant (Boston: Harvard Business School Press, 2005).
40
Author visits to local Sears stores, 2011-2012.
41
Dana Mattioli and Karen Talley, Pared-down Sears posts profit on asset sales, Wall Street Journal, 17 May,
2012. Available at http://online.wsj.com/article/SB10001424052702303360504577409722818223112.html,
accessed 04 January, 2013.
42
See Sears Holdings, 10-K filing, pages 24 (profit reporting) and 37 (cash reserves). Available at
http://www.searsholdings.com/invest/docs/SHC_2011_Form_10-
K.pdf#pagemode=thumbs&page=1&zoom=100,0,0, accessed 04 January, 2013.

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