In addition to evaluating the external environment of a firm and the industry in which it operates, strategic management requires that a firm conduct an internal assessment of its resources and capabilities. This further helps the firm answer the question “Where are we?” before setting strategies for reaching the goals and vision of the organization. Part of this assessment is the organizational performance evaluation discussed in Chapter 2 that deals primarily with financial and other quantitative information. This helps the firm determine where it is in comparison with its competitors. Next, the firm needs to look inside to see how it can achieve a competitive advantage over its rivals, so customers will buy what the firm has to sell instead of buying from competitors.
One method of internal assessment is using the Resource-Based View. This model examines any resources and/or capabilities of the firm that may provide a competitive advantage. The VRIO framework is used to evaluate each resource or capability to determine what type, if any, of competitive advantage it brings. If a resource or capability cannot be imitated by a competitor, then that resource may create a sustained competitive advantage. Patents or isolating mechanisms can reduce or eliminate temporarily the opportunity for a rival to imitate.
Another tool used for internal assessment is Value Chain Analysis. Each element of a firm’s primary and supportive activities are examined to see if it can provide a competitive advantage over its rivals. Weaknesses that are identified can be addressed to improve organizational performance.
Once the external and internal assessments are complete, the firm can use the most relevant information to develop a SWOT analysis and identify the most pressing strategic issue(s) the firm must address, as discussed in Chapter 5.