Chapter 3

The Internal Organization: Resources, Capabilities, Core

Competencies, and Competitive Advantages
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 1–1
 Learning Objectives

Studying this chapter should provide you with the strategic management
knowledge needed to:

1. Explain why firms need to study and understand their internal organization.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss their development.
5. Describe four criteria used to determine whether resources and capabilities are core
competencies.
6. Explain how firms analyze their value chain for the purpose of determining where they
are able to create value when using their resources, capabilities, and core
competencies.
7. Define outsourcing and discuss reasons for its use.
8. Discuss the importance of identifying internal strengths and weaknesses.
9. Discuss the importance of avoiding core rigidities.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–2
 Competitive Advantage

• Firms achieve strategic competitiveness and

earn above-average returns when their core
competencies are effectively:
– acquired
– bundled
– leveraged
• Over time, the benefits of any value-creating
strategy can be duplicated by competitors.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–3
 Competitive Advantage (cont’d)

• Sustainability of a competitive advantage is a

function of the:
– rate of core competence obsolescence because of
environmental changes.
– availability of substitutes for the core competence.
– imitability of the core competence.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–4
 Analyzing the External Environment

Opportunities
and threats

By studying the external environment, firms identify what

they might choose to do.
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–5
 Analyzing the Internal Organization

Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

By studying the internal environment, firms identify what

they can do.
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–6
 The Context of Internal Analysis

• Global Economy
– Traditional sources of advantages can be overcome
by competitors’ international strategies and by the
flow of resources throughout the global economy.
• Global Mind-Set
– The ability to study an internal environment in ways
that are not dependent on the assumptions of a single
country, culture, or context.
• Analysis Outcome
– Understanding how to leverage the firm’s bundle of
heterogeneous resources and capabilities.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–7
 Components of an Internal Analysis

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–8
 Creating Value

• By exploiting their core competencies or

competitive advantages, firms create value.
• Value is measured by:
– product performance characteristics.
– product attributes for which customers will pay.

• Firms create value by innovatively bundling and

leveraging their resources and capabilities.
• Superior value leads to above-average returns.
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–9
 Creating Competitive Advantage

• Core competencies, in combination with

product-market positions, are the firm’s most
important sources of competitive advantage.
• Core competencies of a firm, in addition to the
analysis of its general, industry, and competitor
environments, should drive its selection of
strategies.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–10
 The Challenge of Analyzing
the Internal Organization

• Strategic decisions in terms of the firm’s

resources, capabilities, and core competencies:
– are non-routine.
– have ethical implications.
– significantly influence the firm’s ability to earn above-
average returns.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–11
 The Challenge of Analyzing
the Internal Organization (cont’d)

• When making strategic decisions, managers as

strategic leaders must:
– know when a capability is not a competence.
– learn quickly from failures and mistakes.
– have the maturity of judgment to deal effectively with
uncertainty, complexity, and intra-organizational
conflicts in an unbiased manner.
– be willing to take intelligent risks.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–12
Conditions Affecting Managerial Decisions

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–13
 Resources, Capabilities, and Core
Competencies
• Resources:
Competitive – are the source of a
Advantage firm’s capabilities.
– are broad in scope.
Core – cover a spectrum of
Competencies individual, social and
organizational
Capabilities phenomena.
– alone, do not yield a
Resources competitive
• Tangible
• Intangible
advantage.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–14
 Resources

• Resources • Types of Resources

– A firm’s assets, – Tangible resources:
including people and • financial
the value of its brand • physical
name, that represent • technological
inputs into a firm’s • organizational
production process: – Intangible resources:
• capital equipment • human
• skills of employees • innovation
• brand names • reputation
• financial resources
• talented managers

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–15
 Tangible Resources

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–16
 Intangible Resources

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–17
 Resources, Capabilities and Core
Competencies
Capabilities:
Competitive • represent the capacity to
Advantage deploy resources that have
been purposely integrated
to achieve a desired end
Core state.
Competencies
• emerge over time through
complex interactions among
Capabilities
tangible and intangible
resources.
Resources
• Tangible
• Intangible

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–18
 Resources, Capabilities and Core
Competencies
Capabilities (cont’d):
• often are based on
Competitive developing, carrying and
Advantage exchanging information and
knowledge through the
firm’s human capital.
Core • composed of the unique
Competencies skills and knowledge of a
firm’s employees.
Capabilities • include functional expertise
of employees.
Resources • often developed in specific
• Tangible functional areas or as part
• Intangible of a functional area.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–19
 Example of Firms’ Capabilities

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–20
 Resources, Capabilities and Core
Competencies
The four criteria for
determining strategic
Competitive
capabilities:
Advantage
• value
• rarity
Core • costly-to-imitate
Competencies
• non-substitutability
Capabilities

Resources
• Tangible
• Intangible

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–21
 Resources, Capabilities and Core
Competencies
Core Competencies

Competitive • Resources and capabilities

Advantage that are the sources of a
firm’s competitive advantage
that:
Core – distinguish a firm
Competencies competitively and reflect
its personality.
Capabilities
– emerge over time through
an organizational process
Resources of accumulating and
• Tangible
learning how to deploy
• Intangible
different resources and
capabilities.
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–22
 Resources, Capabilities and Core
Competencies
Core Competencies (cont’d):
Competitive • activities that a firm
Advantage performs especially well
compared to competitors.
• activities through which the
Core firm adds unique value to its
Competencies goods or services over a
long period of time.
Capabilities

Resources
• Tangible
• Intangible

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–23
 Building Core Competencies
The four criteria of sustainable
Sustainable competitive advantages:
Competitive • valuable capabilities
Advantage
• rare capabilities
• costly to imitate
Four Criteria of • non-substitutable
Sustainable
Advantages

• Valuable
• Rare
• Costly to imitate
• Nonsubstitutable

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–24
The Four Criteria of Sustainable Advantage

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–25
Building Sustainable Competitive Advantage

• Valuable capabilities:
Sustainable – help a firm neutralize
Competitive threats or exploit
Advantage opportunities.
• Rare capabilities
Four Criteria of – are not possessed by
Sustainable many others.
Advantages

• Valuable
• Rare
• Costly to imitate
• Non-substitutable

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–26
Building Sustainable Competitive Advantage

• Costly-to-Imitate
Sustainable Capabilities
Competitive – Historical
Advantage • A unique and a valuable
organizational culture or
brand name
Four Criteria of
Sustainable – Ambiguous cause
Advantages • The causes and uses of a
competence are unclear
– Social complexity
• Valuable • Interpersonal
• Rare relationships, trust, and
• Costly to imitate friendship among
• Non-substitutable managers, suppliers, and
customers
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–27
Building Sustainable Competitive Advantage

• Non-substitutable
Sustainable Capabilities
Competitive – No strategic equivalent
Advantage
• firm-specific
knowledge
Four Criteria of • organizational culture
Sustainable
Advantages
• superior execution of
the chosen business
model
• Valuable
• Rare
• Costly to imitate
• Non-substitutable

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–28
 Outcomes from Combinations
of the Four Criteria

Competitive Performance
Consequences Implications
No No No No Competitive Below Average
Disadvantage Returns

Yes No No Yes/ Competitive Average Returns

No Parity

Yes Yes No Yes/ Temporary Com- Above Average to

No petitive Advantage Average Returns

Yes Yes Yes Yes Sustainable Com- Above Average

petitive Advantage Returns

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–29
 Criteria for Sustainable Advantage

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–30
 Value Chain Analysis

• Value Chain Analysis:

– allows a firm to understand the parts of its operations
that create value and those that do not.
– is a template that firms use to:
• understand their cost position.
• identify multiple means that might be used to facilitate
implementation of a chosen business-level strategy.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–31
 Value Chain Analysis (cont’d)

• Primary Activities:
– are involved with:
• a product’s physical creation.
• a product’s sale and distribution to buyers.
• the product’s service after the sale.

• Support Activities:
– provide the assistance necessary for the primary
activities to take place.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–32
 Value Chain Analysis (cont’d)

• Value Chain shows how a product moves from

the raw-material stage to the final customer.
• To be a source of competitive advantage, a
resource or capability must allow the firm to
perform:
– an activity in a manner that is superior to the way
competitors perform it, or
– a value-creating activity that competitors cannot
complete

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–33
 A Model of the Value Chain

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–34
Creating Value through Value Chain Activities

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–35
 Creating Value through Support
Functions

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–36
 The Value-Creating Potential
of Primary Activities

• Inbound Logistics
– Activities used to receive, store, and disseminate
inputs to a product.
• Operations
– Activities necessary to convert the inputs provided by
inbound logistics into final product form.
• Outbound Logistics
– Activities involved with collecting, storing, and
physically distributing the product to customers.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–37
 The Value-Creating Potential
of Primary Activities (cont’d)

• Marketing and Sales

– Activities completed to provide the means through
which customers can purchase products and to
induce them to do so.
• Service
– Activities designed to enhance or maintain a product’s
value.
• Each activity should be examined relative to
competitor’s abilities and rated as superior,
equivalent or inferior.
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–38
 The Value-Creating Potential
of Primary Activities: Support

• Procurement
– Activities completed to purchase the inputs needed to
produce a firm’s products.
• Technological Development
– Activities completed to improve a firm’s product and
the processes used to manufacture it.
• Human Resource Management
– Activities involved with recruiting, hiring, training,
developing, and compensating all personnel.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–39
 The Value-Creating Potential of
Primary Activities: Support (cont’d)

• Firm Infrastructure
– Activities that support the work of the entire value
chain (general management, planning, finance,
accounting, legal, government relations, etc.).
• Effectively and consistently identify external opportunities
and threats
• Identify resources and capabilities
• Support core competencies
• Each activity should be examined relative to
competitor’s abilities and rated as superior,
equivalent or inferior.
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–40
 Outsourcing

• Outsourcing is the purchase of a value-creating

activity from an external supplier.
• Few organizations possess the resources and
capabilities required to achieve competitive
superiority in all primary and support activities.
• By performing fewer capabilities:
– a firm can concentrate on those areas in which it can
create value.
– specialty suppliers can perform outsourced
capabilities more efficiently.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–41
 Outsourcing Decisions
A firm may outsource all
or only part of one or
more primary and/or
support activities.

Technological Development
Human Resource Mgmt.
Service
Support Activities

Firm Infrastructure
Marketing and Sales

Procurement
Outbound Logistics

Operations

Inbound Logistics

Primary Activities
© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–42
Strategic Rationales for Outsourcing

• Improving business focus helps a firm focus on

broader business issues by having outside
experts handle various operational details.
– Provides access to world-class capabilities
– Makes world-class capabilities available to firms in a
wide range of applications

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–43
Strategic Rationales for Outsourcing (cont’d)

• Accelerating re-engineering benefits

– achieves re-engineering benefits more quickly by
having outsiders - who have already achieved world-
class standards - take over processes.
• Sharing risks
– reduces investment requirements and makes firm
more flexible, dynamic and better able to adapt to
changing opportunities.
• Freeing resources for other purposes
– redirects efforts from non-core activities toward those
that serve customers more effectively.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–44
 Outsourcing Issues

• Seeking greatest value

– Outsource only to firms possessing a core
competence in terms of performing the primary or
supporting the outsourced activity.
• Evaluating resources and capabilities
– Do not 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 to
complete necessary ongoing organizational tasks.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–45
 Outsourcing Issues (cont’d)

• Nonstrategic team resources

– Do not outsource capabilities critical to the firm’s
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.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–46
Competencies, Strengths, Weaknesses, and
Strategic Decisions

• 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 – former core competencies that now
generate inertia and stifle innovation.
– Determining what the firm can do through continuous
and effective analyses of its internal environment will
increase the likelihood of long-term competitive
success.

© 2017 Cengage Learning. All rights reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3–47