Question

Why is it important to study the internal resources, capabilities, and activities of firms? What insights can be gained?

Answer 1

The internal resources, capabilities, and activities of firms comprise its internal analysis. It is the careful examination of the strengths and weaknesses that an organization has. It analyses how well a business is prepared to gain a competitive advantage over its competitors in the market through these three factors.

Resources are the assets of an organization and are thus considered as the basic building blocks of any organization. Resources can include tangible assets, human assets and intangible assets. Capabilities refer to an organization’s ability to exploit its resources (Rothaermel, 2013). A capability is based on functions and is always present in a particular function. A capability might be a marketing, manufacturing or human resource capability. When an organization constantly changes these capabilities to make them more adaptive to the environment, they are termed dynamic capabilities (Rothaermel, 2013). On the contrary, a core competency for a firm occurs when a collection of competencies crosses divisional boundaries, is present within the organization and is something that the organization has superiority in.

Thus this information can then be utilized by the firm itself to continue to build on these competencies and continue to develop them into higher levels of competitive advantage. Other firms can exploit this information to imitate or perfect this company’s advantages for itself.