Strategic Analysis: Internal Environment: formula sheet

Key formulas

Chain of advantage

Resources → Capabilities → Core competencies → Competitive advantage

Use this to link the terms in any answer. It is a concept chain, not a calculation.

Tangible resources

Physical + Financial (e.g. plant, land, cash, inventory)

Visible and usually recorded in the books.

Intangible resources

Brand, patents, reputation, goodwill, culture, knowledge

Often not fully shown in the books and hard to copy.

Core competence test (four criteria)

Valuable, Rare, Costly to imitate, Non-substitutable

A capability qualifying on these criteria gives sustainable advantage. Check the exact wording in your ICAI study material, which also presents the criteria in its own form.

VRIO framework

Valuable? → Rare? → Costly to Imitate? → Organised to exploit?

Ask the questions in order. The first 'No' determines the outcome: not valuable = disadvantage; valuable but not rare = parity; rare but not costly to imitate = temporary advantage; a 'No' at Organised = unrealised advantage; all four 'Yes' = sustained advantage.

VRIO outcomes

Not valuable = competitive disadvantage; Valuable only = competitive parity; Valuable + Rare but easy to imitate = temporary advantage; Valuable + Rare + Costly to imitate but not Organised = unrealised (partly exploited) advantage; Valuable + Rare + Costly to imitate + Organised = sustained advantage

Use these labels exactly when you conclude.

Hamel and Prahalad's criteria

(1) Access to a variety of markets; (2) Significant contribution to perceived customer benefit; (3) Difficult for competitors to imitate

A competence must meet all three to be core.

Primary activities

Inbound logistics + Operations + Outbound logistics + Marketing and sales + Service

Five activities directly involved in creating, selling and supporting the product. Remember the flow: in, make, out, sell, serve.

Support activities

Procurement + Technology development + Human resource management + Firm infrastructure

Four activities that back all primary activities. Infrastructure includes general management, planning, finance, accounting and legal.

Margin

Margin = Total value (what customers pay) − Total cost of performing the value activities

Value chain analysis aims to widen this gap by lowering cost or raising value.

SWOT classification rule

Internal + favourable = Strength; Internal + unfavourable = Weakness; External + favourable = Opportunity; External + unfavourable = Threat

Test every fact on two questions: is it inside or outside the firm, and does it help or hurt?

TOWS strategy pairs

SO = strengths + opportunities; WO = weaknesses + opportunities; ST = strengths + threats; WT = weaknesses + threats

SO is the most aggressive, WT the most defensive. Name each pair with a specific action.

Organisational appraisal areas

Appraise by function: marketing, finance, operations, HR, R&D, information systems

Use these as headings so your answer covers the firm systematically.

Relative market share

Relative market share = Your unit's market share ÷ Market share of the largest competitor

A value above 1 means your unit is the market leader. Below 1 means it trails the leader. The dividing line is usually 1.0, though some texts use a different cut-off such as 1.5. The horizontal axis is often drawn on a log scale from high to low.

Market growth rate

Market growth rate = (Market size this year − Market size last year) ÷ Market size last year × 100

Use industry sales, not your own unit's sales. The high/low cut-off is often shown near 10%, but it is a convention. Use the cut-off given in the question.

Box classification

High growth + High share = Star | Low growth + High share = Cash cow | High growth + Low share = Question mark | Low growth + Low share = Dog

Learn this as growth first, share second.

Cash logic

Cash cow cash → funds Stars and chosen Question marks

This is the core idea behind balancing a portfolio.

Quick revision

• Resources are what the firm owns or controls, tangible or intangible; capabilities are the ability to use them together.
• A competence is a skill or capability the firm performs well; a core competence is one that gives lasting advantage.
• Check core competence against the criteria: valuable, rare, hard to imitate and not easily substituted.
• Competitive advantage means doing something better than rivals in a way customers value and that can be sustained.
• Value chain splits activities into primary and support activities.
• Primary activities cover inbound logistics, operations, outbound logistics, marketing and sales, and service.
• Support activities cover procurement, technology development, human resource management and firm infrastructure.
• Value chain analysis helps find cost advantage or differentiation sources and activities that need improvement.
• SWOT: strengths and weaknesses are internal; opportunities and threats are external.
• Organisational appraisal checks internal factors to find strengths and weaknesses across functions.
• BCG matrix plots business units by market growth and relative market share into Stars, Cash Cows, Question Marks and Dogs.
• In BCG, Cash Cows generate surplus cash, Stars need investment to hold position, and Dogs are often candidates for divestment.

Common mistakes

• Treating resources, capabilities and competencies as the same thing. Fix: Remember the order: resources are inputs, capabilities are the ability to use them, competencies are the special capabilities that beat rivals.
• Calling every capability a core competence. Fix: Apply the test: if rivals can easily match it, or it is not valuable, it is only a basic capability.
• Writing VRIO as 'Valuable, Rare, Imitable, Organised'. Fix: Write it as costly to imitate. A resource is useful only when it is hard to copy.
• Calling every strength a core competence. Fix: Check the three Hamel and Prahalad tests. A core competence spans markets and benefits customers visibly.
• Treating procurement as inbound logistics or as a primary activity. Fix: Inbound logistics means receiving, storing and handling inputs. Procurement means the function of purchasing inputs and is a support activity.
• Listing the activities without linking them to the case or to advantage. Fix: For each activity, add what the firm does and whether it creates cost advantage or differentiation.
• Placing external events, such as a new regulation or a competitor's launch, under strengths or weaknesses. Fix: Always ask first: is it inside the firm? If not, it is an opportunity or a threat.
• Treating SWOT as a list and stopping there. Fix: Add a short conclusion on what strategy the findings support. TOWS questions need explicit pairings.
• Mixing up question marks and dogs. Fix: Check growth first. High growth with low share is a question mark. Low growth with low share is a dog.
• Using the unit's own sales growth instead of the market growth rate. Fix: The vertical axis is industry growth. Use the market figure.

Exam tips

• Case questions usually ask you to identify and classify. Quote the exact words from the case as evidence.
• For difference questions, give a two-column comparison in points: meaning, nature, example, role in advantage.
• Do not claim a competence unless you justify it with the criteria such as valuable, rare, hard to imitate.
• MCQs are one or two marks and have no negative marking, so always attempt them. Eliminate resource-type options when the stem asks for a competence.
• Use the terms in ICAI study material wording where you remember them, but always explain in your own sentences.
• When a question names a framework, use only that framework's headings and add the case fact against each.
• Learn the VRIO outcomes as a ladder: disadvantage, parity, temporary, sustained. Questions often test one rung.
• Hamel and Prahalad's tests are three. Do not add a fourth from memory of other models.