Internal Analysis 1 Why does firm performance differ?
Updated: 30 Aug. 2006 ©Scott Gallagher 2004
Internal Analysis
Earlier we explained differences in firm performance as being a function of their external
environment. However, this is only part of the story. Obviously, each firm has some unique
aspects. Internal analysis is an attempt to explain how and why these internal differences explain
differences in firm performance.
Resources and Capabilities.
Economics generally models firms as generic black boxes that
transform inputs into outputs in an efficient manner. Edith Penrose (1950) is generally credited
with being the first person to model firms as unique bundles of resources. Some individuals like
to make distinctions between resources, what companies have, versus capabilities, things
companies can do. A classic example might be my personal computer. As a resource it is more
powerful than the original computer on the Space Shuttle, however, I could not land the Space
Shuttle with it. So in this case I have a superior resource but an inferior capability.
Resources and capabilities can take many different forms. Literally anything an organization
possesses can be considered a resource. Examples include financial resources, plants,
equipment, technology, reputation, brands, and organizational expertise. In short there is no
potential constraint on what can be considered a firm's resources or capabilities.
VRIO Analysis
Given that almost anything a firm possesses can be considered a resource or capability how
should you attempt to narrow down the ones that explain why firm performance differs? In order
to lead to a sustainable competitive advantage a resource or capability should be Valuabl ...