Chapter 4

The Internal Environment:

Resources, Capabilities and
Core Competencies
Internal Environment:
By studying the internal
environment, firms identify
what they can do

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

2
 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
3
Resources
Resources What a firm Has...
Resources

Resources represent inputs into a

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

Resources
• Tangible
• Intangible

Resources are what an Resources represent inputs into an

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

5
Discovering Core
Competencies

Resources
• Tangible
• Intangible

Tangible Resources Intangible Resources

• Financial • Human
• Organizational • Innovation
• Physical • Reputation
• Technological

6
 Capabilities What a firm Does...

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

8
Discovering Core
Competencies

Capabilities

Capabilities are what an organization does, and

represent the organization’s capacity to deploy
resources that have been purposely integrated to
achieve a desired end state

9
 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

10
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Valuable: Capabilities that help an organization

neutralize threats or exploit opportunities
 Capabilities that either help a firm to exploit
opportunities to create value for customers or to
neutralize threats in the environment 11
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Rare: Capabilities that are not possessed by many

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

12
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable
Costly to imitate: capabilities that other organizations cannot
develop easily, usually due to
• Unique historical conditions
• Causal ambiguity
• Social complexity
 Capabilities that other firms cannot develop easily, usually due to unique
13
historical conditions, causal ambiguity or social complexity
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Nonsubstitutable: Capabilities that do not have strategic

equivalents, such as firm-specific knowledge or trust-based
relationships
• Invisible to competitors
• Firm specific knowledge
• Trust-based working relationships between 14

managers and nonmanagerial personnel

 VALUE CHAIN ANALYSIS
• Allows the firm to understand the parts
of its operations that create value and •

those that do not

• A template that firms use to:
• Understand their cost position
• Facilitate the implementation of a
chosen business-level strategy
©2013 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.
 VALUE CHAIN ANALYSIS
– Both value chain (primary) and
support activities should be analyzed
– Competitive landscape demands that
•

value chains and supply chains be

examined in a global context
– Each activity should be examined
relative to competitor’s abilities and
rated as superior, equivalent, or
inferior
 VALUE CHAIN ANALYSIS
To become a core competence and a
source of competitive advantage, a
capability must allow the firm:
•

1. to perform an activity in a manner that

provides superior value relative to
competitors, or
2. to perform a value-creating activity that
competitors cannot perform
 VALUE CHAIN ANALYSIS
VALUE CHAIN ACTIVITIES: activities the
firm completes in order to produce
•

products and then sell, distribute, and

service those products in ways that create
value for customers
SUPPORT FUNCTIONS: activities the firm
completes in order to support the work
being done to produce, sell, distribute, and
service the products the firm is producing
 Value Chain Analysis
To identify which resources and capabilities can add value

Support
Activities

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Activities
Logistics
Inbound

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Activities

Operations
Logistics
Inbound

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Activities

Operations

Outbound
Logistics

Logistics
Inbound

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Activities

Operations

Outbound

Marketing
Logistics

& Sales
Logistics
Inbound

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Activities

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Activities

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

Logistics

& Sales
Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Marketing
Outbound
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Firm Infrastructure

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Marketing
Outbound
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
helps to identify which resources and capabilities can add value

Firm Infrastructure
Human Resource Management M
Support A
R
Activities G
Technological Development IN
Procurement

Service
Operations

Marketing
Outbound
Logistics
Inbound

& Sales
Logistics

IN
G
R
A
M
Primary Activities
 OUTSOURCING
• Definition: purchase of a value-
creating activity or support function
from an external supplier
• Effective execution includes an increase in •

flexibility and risk mitigation, and a

reduction in capital investment
• Firms must outsource activities where they
cannot create value or are at a substantial
disadvantage compared to competitors

©2013 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.
 Outsourcing
- strategic choice to purchase some activities from outside suppliers

Firm Infrastructure
Human Resource Management

Human Resource Management M

Support Firms often purchase aAportion
Technological Development R
Activities G
of their value-creating activities
Technological Development IN
from specialty external suppliers
Procurement
who can perform these functions
Procurement more efficiently

Service
Operations

Outbound

Marketing
Service
Logistics
Inbound

& Sales
Logistics

IN
G
Outbound

R
Inbound Operations Logistics Marketing

A
& Sales

M
Logistics

Primary Activities
To capitalize on the usefulness of the
Value Chain concept...

it is important to recognize that...

 Value Chains are part of a Total Value System
Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain
 Value Chains are part of a Total Value System
Firm Value Chain Channel Value Chain Buyer Value Chain

Supplier Value Chain

Upstream Value
Perform valuable activities
that complement the firm’s
activities
 Value Chains are part of a Total Value System
Supplier Value Chain Firm Value Chain Buyer Value Chain

Channel Value Chain

Downstream Value
Each firm must eventually find
a way to become a part of some
buyer’s value chain
 Value Chains are part of a Total Value System
Supplier Value Chain Firm Value Chain Channel Value Chain

Buyer Value Chain

Ultimate basis for differentiation is

the ability to play a role in a buyer’s
value chain
This creates VALUE!!