Chapter 3

The Internal Environment:
Resources, Capabilities and Core Competencies
Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
©2000 South-Western College Publishing
Ch3-1

Chapter 2

External Environment
What the Firm Might Do

Sustainable Competitive Advantage
Chapter 3

Internal Environment
What the Firm Can Do

Ch3-2

SWOT Analysis
• • • • Strengths Weaknesses Opportunities Threats

Ch3-3

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

Ch3-4

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 Ch3-5 .

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 Ch3-6 .

Ch3-7 . vulnerabilities. and erroneous assumptions about existing strategies.Strengths and Weakness form a basis for INTERNAL analysis • By examining strengths. • By examining weaknesses. you can identify gaps in performance. you can discover untapped potential or identify distinct competencies that helped you succeed in the past.

Discovering Core Competencies Discovering Core Competencies Competitive Advantage Gained through Core Competencies Strategic Competitiveness Above-Average Returns Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable Value Chain Analysis * Outsource Resources * Tangible * Intangible Ch3-8 .

..Key Questions for Managers in Internal Analysis How do we assemble bundles of Resources. Will environmental changes make our core competencies obsolete? Are substitutes available for our core competencies? Are our core competencies easily imitated? Ch3-9 . Capabilities and Core Competencies to create VALUE for customers? And.

Discovering Core Competencies Resources * Tangible * Intangible Ch3-10 .

.Resources What a firm Has. including its people and the value of its brand name Ch3-11 . What a firm has to work with: its assets..

finances and talented managers Ch3-12 ... skills of employees.. including its people and the value of its brand name Resources represent inputs into a firm’s production process. brand names.Resources What a firm Has.. such as capital equipment. What a firm has to work with: its assets.

finances and talented managers “Some genius invented the Oreo... RJR Nabisco Ch3-13 . skills of employees.. Former President & CEO.. including its people and the value of its brand name Resources represent inputs into a firm’s production process.” F. What a firm has to work with: its assets. We’re just living off the inheritance. brand names. such as capital equipment.Resources What a firm Has. Ross Johnson.

finances and talented managers “Some genius invented the Oreo. Ross Johnson. We’re just living off the inheritance. skills of employees. such as capital equipment. including its people and the value of its brand name Resources represent inputs into a firm’s production process. What a firm has to work with: its assets.Resources Tangible Resources * * * * Financial Physical Human Resources Organizational What a firm Has.... Former President & CEO. brand names. RJR Nabisco Ch3-14 Intangible Resources * Technological * Innovation * Reputation ..” F.

Discovering Core Competencies Capabilities Teams of Resources Resources * Tangible * Intangible Ch3-15 .

Ch3-16 .. Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.Capabilities What a firm Does..

Ch3-17 ..Capabilities What a firm Does. transmission and exchange or sharing of information and knowledge as carried out by the firm's employees. 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..

Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.Capabilities What a firm Does... Ch3-18 . 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. Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage. transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Resources * Tangible * Intangible Ch3-19 .

Clark. recommends identifying three to four competencies to use in framing strategic actions. Bowen. that is Strategically Valuable “…are the essence of what makes an organization unique in its ability to provide value to customers. Holloway & Wheelwright McKinsey & Co.Core Competencies What a firm Does.” Leonard-Barton. Ch3-20 ...

Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable Resources * Tangible * Intangible * Outsource Ch3-21 .

.. that is Strategically Valuable Valuable Rare Costly to Imitate Nonsubstitutable Ch3-22 . it must be: What a firm Does.Core Competencies For a strategic capability to be a Core Competency.

. that is Strategically Valuable Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment Capabilities that are possessed by few. if any. causal ambiguity or social complexity Capabilities that do not have strategic equivalents.Core Competencies Core Competencies must be: Valuable What a firm Does. usually due to unique historical conditions. current or potential competitors Rare Costly to Imitate Capabilities that other firms cannot develop easily.. such as firmspecific knowledge or trust-based relationships Nonsubstitutable Ch3-23 .

Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable Value Chain Analysis Resources * Tangible * Intangible * Outsource Ch3-24 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Primary Activities Ch3-25 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Inbound Logistics Primary Activities Ch3-26 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Primary Activities Operations Inbound Logistics Ch3-27 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Operations Primary Activities Outbound Logistics Inbound Logistics Ch3-28 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Operations Outbound Logistics Primary Activities Marketing & Sales Inbound Logistics Ch3-29 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Operations Outbound Logistics Primary Activities Marketing & Sales Inbound Logistics Service Ch3-30 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Procurement Operations Outbound Logistics Marketing & Sales Inbound Logistics Service Primary Activities Ch3-31 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Technological Development Procurement Operations Outbound Logistics Marketing & Sales Inbound Logistics Service Primary Activities Ch3-32 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Human Resource Management Technological Development Procurement Operations Outbound Logistics Marketing & Sales Inbound Logistics Service Primary Activities Ch3-33 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Firm Infrastructure Support Activities Human Resource Management Technological Development Procurement Operations Outbound Logistics Marketing & Sales Inbound Logistics Service Primary Activities Ch3-34 .

Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Firm Infrastructure Support Activities Human Resource Management Technological Development Procurement Operations Outbound Logistics Marketing & Sales Inbound Logistics Service Primary Activities Ch3-35 .

Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Support Activities Human Resource Management Technological Development Procurement Operations Outbound Logistics Marketing & Sales Inbound Logistics Service Primary Activities Ch3-36 .

Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Support Activities Human Resource Management purchase a portion Firms often Technological Development Procurement Technological Procurement Operations Inbound Logistics of their value-creating activities from Development specialty external suppliers who can perform these functions more efficiently Outbound Logistics Marketing & Sales Service Service Inbound Logistics Operations Outbound Logistics Marketing & Sales Primary Activities Ch3-37 .

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 worldclass 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 Ch3-38 .

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 Ch3-39 .

Discovering Core Competencies Discovering Core Competencies Competitive Advantage Gained through Core Competencies Strategic Competitiveness Above-Average Returns Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable Value Chain Analysis Resources * Tangible * Intangible * Outsource Ch3-40 .

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