Chapter 4

The Internal Organization:

Resources, Capabilities, and
Core Competence

Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland

©2004 by South-Western/Thomson Learning 1

The Strategic Management Process
Chapter 1
Strategic Chapter 2
Introduction to
Thinking Strategic Leadership
Strategic Management

Chapter 3 Chapter 4
Strategic Strategic Intent
The External The Internal
Analysis Strategic Mission
Environment Organization

Chapter 5 Chapter 6
Chapter 7
Business-Level Competitive Rivalry and
Creating Strategy Competitive Dynamics
Corporate-Level Strategy
Competitive
Advantage Chapter 8
Chapter 9 Chapter 10
Acquisition and
International Strategy Cooperative Strategy
Restructuring Strategies

Monitoring
And Creating Chapter 11 Chapter 12
Entrepreneurial Corporate Governance Strategic Entrepreneurship
2
Opportunities
Discussion Questions
Click
Here 1. What different perspectives are
gained from external compared to
internal analyses of the firm?
Click
Here 2. What is the difference between
tangible and intangible resources?
What is the difference between
resources and capabilities?
Click
Here 3. What are the criteria to determine
core competence? What is
sustainable competitive advantage?
Click
Here More discussion questions 3
Discussion Questions (cont.)
Click
Here 4. What is the value chain?
Click
Here 5. What is outsourcing and when
should it be used?
Click
Here 6. Are there risks to a sustainable
competitive advantage?

4
Discussion Question 1

What different perspectives are

gained from external compared to
internal analyses of the firm?

5
 External and Internal Analyses
Environment By studying the external
Sociocultural environment, firms identify
mo eral
c

what they might choose to do

Ge
phi

Ec
Industry

n er c
n

ono
gra
Ge

Environment

al
mi
De

me al
Opportunities and threats
g
nt
/Le
En
Gl

Competitor
vir

cal
ob

Environment
on
al
on

l iti
v ir
me

Po
En

Technological
nt

General

6
External and Internal Analyses
By studying the internal
environment, firms identify
what they can do

Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)

7
Components of Value Creation
Internal Analysis
Competitive
Core Discovering Core Advantage
Competencies Competencies

Capabilities

Four Criteria Value

Resources of Sustainable Chain
• Tangible
• Intangible Advantages Analysis

• Valuable • Outsource
• Rare
• Costly to Imitate
• Nonsubstitutable
8
Challenge of Internal Analysis
 How do we effectively manage current core
competencies while simultaneously
developing new ones?
 How do we assemble bundles of resources,
capabilities and core competencies to
create value for customers?
 How do we learn to change rapidly?

9
 Conditions Affecting Managerial
Decisions About Resources, Capabilities,
and Core Competencies
 Uncertainty regarding characteristics of the
general and the industry environments,
competitors’ actions, and customers’ preferences
 Complexity regarding the interrelated causes
shaping a firm’s environments and perceptions of
the environments
 Intraorganizational Conflicts among
people making managerial decisions and those
affected by them
Click
Here Return to Discussion Questions
10
Discussion Question 2

What is the difference between

tangible and intangible resources?
What is the difference between
resources and capabilities?

11
 Discovering Core
Competencies

Resources
• Tangible
• Intangible

Resources are what a firm has Resources represent inputs into

to work with--its assets-- a firm’s production process...
including its people and the such as capital equipment, skills
value of its brand name of employees, brand names,
finances and talented managers

12
Discovering Core
Competencies

Resources
• Tangible
• Intangible

Tangible Resources Intangible Resources

• Financial • Human
• Organizational • Innovation
• Physical • Reputation
• Technological
13
Discovering Core
Competencies

Capabilities

Capabilities become important when they are combined

in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage

14
 Discovering Core
Competencies

Capabilities

Capabilities are what a firm does, and represent the firm’s

capacity to deploy resources that have been purposely
integrated to achieve a desired end state

Click
Here Return to Discussion Questions
15
Discussion Question 3

What are the criteria to determine

core competence?
What is sustainable competitive
advantage?

16
Discovering Core
Competencies

Core
Competencies

Core competencies are resources and capabilities that serve

as a source of competitive advantage over rivals
Core competencies distinguish a company competitively
and make it distinctive
McKinsey and Co. recommends using three to four
competencies when framing strategic actions 17
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Valuable: Capabilities that help a firm neutralize threats or

exploit opportunities

18
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Rare: Capabilities that are not possessed by many others

19
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Costly to imitate: capabilities that other firms cannot

develop easily, usually due to
• Unique historical conditions
• Causal ambiguity
• Social complexity
20
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Nonsubstitutable: capabilities that do not have strategic

equivalents
• Invisible to competitors
• Firm specific knowledge
• Trust-based working relationships between managers
and nonmanagerial personnel 21
 Core Competence as a Strategic
Capability
Resources Core Competence
• Inputs to a firm’s • A strategic
production process capability

Does it satisfy the Yes

Capability
criteria of sustainable
The source of
• An integration of a competitive
team of resources advantage? No

Capability
• A nonstrategic
team or resource 22
Sustainability of a Competitive
Advantage
 Sustainability of a competitive advantage
is a function of:
– the rate of core-competence obsolescence due
to environmental changes
– the availability of substitutes for the core
competence
– the imitability of the core competence

23
Click
Here Return to Discussion Questions
Performance Implications

ut ?
le
bs it ate
ab
Im
tit
R a le?

N to
ab

Competitive Performance

su
y
?
s tl
lu

re

on
Consequences Implications
Va

Co

Competitive Below Average

No No No No Disadvantage Returns

Yes/ Competitive
Yes No No No Parity Average Returns

Yes/ Temporary Com- Above Average to

Yes Yes No No petitive Advantage Average Returns

Sustainable Com- Above Average

Yes Yes Yes Yes petitive Advantage Returns
24
Discussion Question 4

What is the value chain?

25
The Basic
Value Chain M
gin ar
a r gin
M

Technological Development
Human Resource Mgmt. Service
Firm Infrastructure
Support Activities

Marketing & Sales

Procurement
Outbound Logistics
Operations
Inbound Logistics
Click
Here Return to Discussion
Primary Activities 26
Questions
Discussion Question 5

What is outsourcing and when

should it be used?

27
 Outsourcing
Outsourcing is the M
r gin ar
gin
purchase of some or M
a

Technological Development
all of a value-
creating activity

Human Resource Mgmt.

from an external
Service
Support Activities

Firm Infrastructure
supplier
Marketing & Sales
Usually this is

Procurement
because the specialty Outbound Logistics
supplier can provide Operations
these functions more Inbound Logistics
efficiently
Primary Activities
28
Strategic Rationales for Outsourcing
 Improve Business Focus
– lets company focus on broader business
issues by having outside experts handle
various operational details
 Provide Access to World-Class
Capabilities
– the specialized resources of outsourcing
providers makes world-class capabilities
available to firms in a wide range of
applications

29
Strategic Rationales for Outsourcing
 Accelerate Business Re-Engineering
Benefits
– achieves re-engineering benefits more quickly
by having outsiders--who have already
achieved world-class standards--take over
process
 Share Risks
– reduces investment requirements and makes
firm more flexible, dynamic and better able to
adapt to changing opportunities

30
Strategic Rationales for Outsourcing
 Free Resources for Other Purposes
– permits firm to redirect efforts from non-core
activities toward those that serve customers
more effectively

Click
Here Return to Discussion Questions

31
Outsourcing Issues
 Greatest Value
– outsource only to firms possessing a core competence in
terms of performing the primary or support activity being
outsourced
 Evaluating Resources and Capabilities
– don’t outsource activities in which the firm itself can create
and capture value
 Environmental Threats and Ongoing Tasks
– do not outsource primary and support activities that are
used to neutralize environmental threats or complete
necessary ongoing organizational tasks

32
Outsourcing Issues
 Nonstrategic Team of Resources
– do not outsource capabilities that are critical to
their success, even though the capabilities are
not actual sources of competitive advantage
 Firm’s Knowledge Base
– do not outsource activities that stimulate the
development of new capabilities and
competencies

33
Discussion Question 6

Are there risks to a sustainable

competitive advantage?

34
Core Competencies: Cautions
and Reminders
 Never take for granted that core
competencies will continue to provide a
source of competitive advantage
 All core competencies have the potential
to become core rigidities
 Core rigidities are former core
competencies that now generate inertia
and stifle innovation

35