Chapter 2a

The Internal Environment:

Resources, Capabilities and
Core Competencies

Asres Abitie (PhD)

Ch 4-1
 Internal Environmental Analysis

“Notable Quote” :

“If you are not faster than your competitor,

you are in a tenuous position, and you are
only half as fast , you are terminal.”

---George Salk

Ch 4-2
External Environment
What the Firm Might Do

Sustainable
Competitive
Advantage

Internal Environment
What the Firm Can Do

Ch 4-3
 What is Internal Analysis?

• The process of identifying and evaluating

an organization’s specific characteristics
– Resources, capabilities, and core
competencies
– Looks at organization’s
• Current vision
• Mission (s)
• Strategic & financial objectives
• Strategies

Ch 4-4
 Why Do an Internal Analysis?

• Enables a firm to identify its strengths and

weaknesses.

• Enables a firm to make good strategic

decisions.

• Information from internal environment

provides basis for developing strategic
alternatives.

Ch 4-5
 SWOT Analysis

• Strengths
• Weaknesses
• Opportunities
• Threats

Ch 4-6
The purpose of SWOT Analysis
• It is an easy-to-use tool for developing
an overview of a company’s strategic
situation
– It forms a basis for matching your
company’s strategy to its situation

Ch 4-7
 Strengths
• A STRENGTH is something a company
is good at doing or a characteristic that
gives it an important capability.
• Possible Strengths:
– Name recognition
– Proprietary technology
– Cost advantages
– Skilled employees
– Loyal Customers

Ch 4-8
 Weaknesses
• A WEAKNESS is something a company
lacks or does poorly (in comparison to
others) or a condition that places it at a
disadvantage
• Possible Weaknesses:
– Poor market image
– Obsolete facilities
– Internal operating problems
– Poor marketing skills
Ch 4-9
Strengths and Weakness form a
basis for INTERNAL analysis
• By examining strengths, you can
discover untapped potential or identify
distinct competencies that helped you
succeed in the past.
• By examining weaknesses, you can
identify gaps in performance,
vulnerabilities, and erroneous
assumptions about existing strategies.
Ch 4-10
 Internal Analysis – A three step
process
• Understand the process by which companies
create value for customers and profit for
themselves
- Resources
- Capabilities
- Distinctive Competencies
• Understand the importance of superiority in
creating value and generating higher profitability
- Efficiency
- Quality

Ch 4-11
 Internal Analysis – A three step
process

• Analyze the sources of the company’s

competitive advantage
- Strengths : that are driving profitability
- Weaknesses : opportunities for
improvement

Ch 4-12
 Competitive
Discovering Core Advantage
Gained through
Competencies Core Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns

Core
Competencies
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Tangible
* Valuable * Outsource
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable Ch 4-13
 Key Questions for Managers
in Internal Analysis
How do we assemble bundles of Resources,
Capabilities and Core Competencies to create
VALUE for customers?
And...
Will environmental changes make our core
competencies obsolete?

Are substitutes available for our core

competencies?
Are our core competencies easily imitated?
Ch 4-14
Discovering Core
Competencies

Resources
* Tangible
* Intangible

Ch 4-15
Resources What a firm Has...

What a firm has to work with:

its assets, including its people and
the value of its brand name

Ch 4-16
Resources What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name

Resources represent inputs into a

firm’s production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers

Ch 4-17
Resources What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name

Resources represent inputs into a

firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers

“Some genius invented the Oreo. We’re just

living off the inheritance.” F. Ross Johnson,
Former President & CEO,
RJR Nabisco
Ch 4-18
Resources What a firm Has...
What a firm has to work with:
its assets, including its people
Tangible Resources
and the value of its brand name
* Financial
* Physical Resources represent inputs into a
* Human Resources firm’s production process...
* Organizational
such as capital equipment, skills
of employees, brand names,
finances and talented managers
Intangible Resources
* Technological
“Some genius invented the Oreo.
* Innovation We’re just living off the inheritance.”
* Reputation F. Ross Johnson,
Former President & CEO, RJR Nabisco
Ch 4-19
Discovering Core
Competencies

Capabilities
Teams of
Resources

Resources
* Tangible
* Intangible

Ch 4-20
Capabilities What a firm Does...

Capabilities represent:
the firm’s capacity or ability to integrate
individual firm resources to achieve a desired
objective.

Ch 4-21
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.

Capabilities develop over time as a result of complex

interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that
are based on the development, transmission and
exchange or sharing of information and knowledge as
carried out by the firm's employees.

Ch 4-22
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex
interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that are
based on the development, transmission and exchange or
sharing of information and knowledge as carried out by the
firm's employees.
Capabilities become important when they are combined
in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage.
Ch 4-23
Discovering Core
Competencies

Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage

Capabilities
Teams of
Resources

Resources
* Tangible
* Intangible

Ch 4-24
Core Competencies What a firm Does...
that is Strategically
Valuable

“…are the essence of what makes an organization

unique in its ability to provide value to
customers.”
Leonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to four

competencies to use in framing strategic actions.

Ch 4-25
Firm’s Core-Competencies
Team Work

Com. skills Prof.Pdt Dev’t

Innovativeness CC Client Focus

Adp.Mkt Sup.C.C. skills

Unique Mkg skills

Ch 4-26
Discovering Core
Competencies

Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of
Teams of Sustainable
Resources Advantages
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource
Ch 4-27
Core Competencies What a firm Does...
that is Strategically
For a strategic capability to be a
Valuable
Core Competency, it must be:

Valuable

Rare

Costly to Imitate

Non-substitutable

Ch 4-28
Core Competencies What a firm Does...
Core Competencies must be: that is Strategically
Valuable
Valuable
Capabilities that either help a firm to exploit opportunities to create
value for customers or to neutralize threats in the environment

Rare
Capabilities that are possessed by few, if any, current or potential
competitors

Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to
unique historical conditions, causal ambiguity or social complexity

Non-substitutable
Capabilities that do not have strategic equivalents, such as firm-
specific knowledge or trust-based relationships Ch 4-29
Discovering Core
Competencies

Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource Ch 4-30
 How to Do an Internal Analysis

Approaches to internal analysis

(1) Value Chain Analysis
(2) Competitive Strength Assessment
(3) An Internal Audit
(4) Internal Environmental Analysis Process
(5) Capabilities Assessment Profile

Ch 4-31
 (1) Value Chain Analysis
• Value Chain Analysis
– Customers want (demand) some type of value
from the goods and services they purchase or
obtain
– Customer value arises from
(1) Uniqueness of product or service
(2) Low-priced product/service
(3) Quick response to specific or distinctive customer
needs
– Allow assessment of cost competitiveness of
organization with those of its rivals

Ch 4-32
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Primary Activities Ch 4-33

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities
Logistics
Inbound

Primary Activities Ch 4-34

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Operations
Logistics
Inbound

Primary Activities Ch 4-35

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Operations

Outbound
Logistics
Logistics
Inbound

Primary Activities Ch 4-36

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-37

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-38

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-39

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-40

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-41

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-42

 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-43

 Value Chain Analysis

Upstream Firm’s Own

Value Chain Value Chain Downstream Value Chains

Internally
Activities,
Performed Costs, &
Activities, Activities, Margins of
Costs, & Buyer/User
Costs, & Forward
Margins of Value
Margins Channel
Suppliers Chains
Allies &
Strategic
Partners
Ch 4-44
Examples of Key Value Chain Activities
• Soft Drinks Industry
Processing of basic ingredients
Syrup manufacture
Bottling & can filling
Wholesale distribution
Retailing
• Computer Software Industry
Programming
Disk Loading
Marketing
Distribution

Ch 4-45
 The Value Chain System

• A company’s cost competitiveness

depends on how well it manages its
value chain relative to competitors
• Three areas contribute to cost
differences
1. Suppliers’ activities
2. The company’s own internal activities
3. Forward channel activities

Ch 4-46
 The Value Chain System
• Assessing a company’s cost competitiveness
involves comparing costs along the industry’s
value chain
• Suppliers’ value chains are relevant because
– Costs, quality, and performance of inputs provided by
suppliers influence a firm’s own costs and product
performance
• Forward channel allies’ value chains are
relevant because
– Forward channel allies’ costs and margins are part of
price paid by ultimate end-user
– Activities performed affect end-user satisfaction
Ch 4-47
 (2) Assessing Organization’s
Competitive Strength
• How does the firm rank relative to key rivals on
each industry and relevant measure of competitive
strength (capabilities or core competencies)?
• Does the firm have a sustainable competitive
advantage or disadvantage?
• What is the ability of the firm to defend its
position in light of
– Industry driving forces
– Competitive pressures
– Anticipated moves of rivals

Ch 4-48
 Assessing Organization’s Competitive
Strength
1. List industry key success factors and other
relevant measures of competitive strength
2. Rate firm and key rivals on each factor using
rating scale of 1 - 10 (1 = weak; 10 = strong)
3. Decide whether to use a weighted or unweighted
rating system
4. Sum individual ratings to get overall measure of
competitive strength for each rival
5. Determine whether the firm enjoys a competitive
advantage or suffers from competitive
disadvantage

Ch 4-49
 Cont’d
• A weighted competitive strength analysis is
conceptually stronger than an unweighted
competitive strength analysis because
– All the strength measures are not equally
important.
– E.g., in an industry with strong product
differentiation, the significant strength measures
may be
• Brand awareness
• Reputation for quality
• Amount of advertising
• Distribution capability, etc.

Ch 4-50
 Some Strength Measures
• Quality/product performance
• Reputation/image
• Manufacturing capability
• Technological skills
• Dealer network/Distribution channels
• New product innovation
• Financial resources
• Relative cost position
• Customer service capability

Ch 4-51
 Assessing Organization’s Competitive
Strength
• What does a high competitive strength rating
relative to rivals mean?
– Strong competitive position & possession of competitive
advantages
– Opportunity for company to improve its long-term market
position
• Good strategy entails
– Looking for opportunities to leverage company
strengths into competitive advantage
– Using company strengths to attack the competitive
weaknesses of rivals

Ch 4-52
 Why Do a Competitive Strength
Assessment?
• Reveals strength of firm’s competitive position
• Shows how firm stacks up against rivals,
measure-by-measure -- pinpoints the company’s
competitive strengths and competitive
weaknesses
• Indicates whether firm is at a competitive
advantage / disadvantage against each rival
• Identifies possible offensive attacks (pit
company strengths against rivals’ weaknesses)
• Identifies possible defensive actions (a need to
correct competitive weaknesses)

Ch 4-53
 (3) Using an Internal Audit
Internal Audit
– A thorough assessment of an
organization’s various internal functional
areas
– Strategic decision makers use the internal
audit to assess the organization’s
resources and capabilities from the
perspectives of its different functions

Ch 4-54
 Using an Internal Audit
• Six primary functional areas:
– Production-operations
– Marketing
– Research & development
– Financial and accounting
– Management, including HRM
– Information System
• Depending on products, markets, and industries,
individual organizational structures may vary and,
therefore, may emphasize different sets of functional
areas
Ch 4-55
 (4) Using an Internal Environmental
Analysis Process
• Assesses an organization’s internal activities
– Step 1: Survey strengths and weaknesses
– Step 2: Categorize these strengths &
weaknesses (S&W) in terms of resources &
capabilities
– Step 3: Investigate the potential of strengths to
lead to competitive advantage
– Step 4: Evaluate the ability of these
competitively resources & capabilities to serve as
the basis for an appropriate competitive strategy
Ch 4-56
 (5) Capabilities Assessment Profile

• Resembles the internal environmental

analysis
– Similarity: Focuses on deeper evaluation of S&W
– Difference: Focuses only on an firm’s capabilities
• Analysis of capabilities is complex
– Not as easily identified as organization’s function
or even the value creating primary & support
activities
– Complex nature of capabilities makes it hard for
competitors to imitate
Ch 4-57
 Capabilities Assessment Profile
• Analysis Consists of two phases:
– Phase I: Identify distinctive capabilities
– Phase II: Develop and leverage distinctive
capabilities
• Identifying Distinctive Organizational
Capabilities
– Step 1: Prepare current product-market profile
• Emphasize organization-customer interactions
• What is the organization selling?
• Who are the organization selling to?
• Is the organization providing superior customer value
& desirable benefits?
Ch 4-58
 Capabilities Assessment Profile
– Step 2: Identify sources of competitive advantage &
disadvantage in the main product-market segment
• Determine why customers choose the
organization’s products vs. those of competitors
• Involves information on cost, product, and
service attributes
–When customers purchase
–What they’re actually purchasing
–What bundle of attributes satisfies their needs

Ch 4-59
Capabilities Assessment Profile
– Step 3: Describe all organizational capabilities &
competencies
• Examine resources, skills, & abilities of the various
divisions
• Determine which resources, skills, & abilities lead to a
competitive advantage
– Step 4: Sort the core capabilities/competencies
according to strategic importance
• Can capability provide wide access to a number of
different markets?
• Does the capability provide tangible customer
benefits?
• Is the capability difficult for competitors to imitate?

Ch 4-60
 Capabilities Assessment Profile

– Step 5: Identify and agree on the key capabilities or

competencies
• Provide basis for resource allocation
• Classifying an Organization’s S&W
– Past performance trends
• Measures such as financial ratios, operations efficiency, etc,
– Specific goal or targets
• Organization’s goals are statements of desired outcomes
– Comparison against competitors
• How are competitors doing?
– Personal opinions of decision makers & consultants

Ch 4-61
 Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities Ch 4-62

 Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Human Resource Management

Support
Human Resource Management
Firms often purchase a portion
Technological Development
Activities of their value-creating activities
Technological
Procurement
Development
from specialty external suppliers
who can perform these functions
Procurement more efficiently

Service
Operations

Outbound

Marketing
Service
Logistics
Inbound

& Sales
Logistics
Outbound
Inbound Operations Logistics Marketing
Logistics & Sales

Primary Activities Ch 4-63

 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
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

Free Resources for Other Purposes

Permits firm to redirect efforts from non-core activities toward those
that serve customers more effectively Ch 4-64
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 sow
the seeds of organizational inertia and prevent the firm
from responding appropriately to changes in the
external environment
Strategic myopia and inflexibility can strangle the firm’s
ability to grow and adapt to environmental change or
competitive threats
Ch 4-65
 Why Core Competencies Might
Become Core Rigidities?
1. A firm might continue to employ a previously
successful strategy eventually & inevitably falls victim
to a competitor – William Cohen

2. “Success doesn’t beget Success. Success begets

failure because the more that you know a thing works,
the less likely you are to think that it will not work.
When you have had a long string of victories, it is
harder to foresee your own vulnerabilities” --- Leslie
Wexner

Ch 4-66
 Examples of Core Rigidities
• Core rigidity that may be centered on existing
routines
- Traditional way of receiving payments for telephone
calls via post offices that have been successful.
- Think of ETC, EEPCO

• core rigidity that may be related to old technology

- Type writer works well, but it is outdated/obsolete.
So, computers are now used in preference to type
writer

Ch 4-67
 Examples of Core Rigidities

Online ordering may be used instead of

paper based ordering

Using credit cards in preference to cash

purchasing

Ch 4-68
 Preventing Core Competencies from
becoming Core Rigidities

• Realizing that a previous successful strategy

might not lead to success
• Realizing that success might not lead to
success indefinitely
• Continually evaluating whether the current core-
competencies fit/match with the firm’s
environment

Ch 4-69
 Two Conceptual Tools for Building
Core Competencies
1. Value Chain Analysis

• Determining which value creating

competencies should be maintained,
upgraded and developed & which should be
outsourced.

• Determining which of the firm’s resources &

capabilities are core competencies

Ch 4-70
 Two Conceptual Tools for Building
Core Competencies
2. Avoiding Failure : Sustaining Competitive
Advantage
• Focus on the building blocks of competitive
advantage

Efficiency
Quality
Innovation
Responsiveness to customers

Ch 4-71
 Two Conceptual Tools for Building
Core Competencies
• Institute continuous improvement & learning
recognize the importance of continuous learning
within the organization
• Track best practices & use benchmarking
 measure against the products & practices of
the most efficient global competitors
• Overcome Inertia
defeat the internal forces that are barriers to
change
Ch 4-72
 Competitive
Discovering Core Advantage
Gained through
Competencies Core Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns

Core
Competencies
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate * Outsource
* Non-substitutable Ch 4-73
 Summary

Key Formula

SC

R + C CC
= CA
AAR

Ch 4-74
 End Remark

Think inside the box before

coming out of it!

Ch 4-75