Unit :

Internal Competences & Resources Core, Distinctive, Strategic & Threshold Competence, Competence vs
Capability, Resource Analysis , Value Chain Analysis, Strategic Outsourcing Core competence and synergy,
Distinctive competencies, VRIO analysis
 Capabilities and Competences
• Capability-based strategies are based on the notion
that internal resources and core competencies derived
from distinctive capabilities provide the strategy
platform that underlies a firm's long-term profitability
• Evaluation of these capabilities begins with a
company capability profile, which examines a
company's strengths and weaknesses in key areas:
– Managerial
– Marketing
– Financial
• Capability-based strategies, sometimes referred to as
the resource-based view of the firm, are determined by
– those internal resources and capabilities that provide the
platform for the firm's strategy and
– those resources and capabilities that are the primary source
of profit for the firm
• A key management function is to identify what
resource gaps need to be filled in order to maintain a
competitive edge where these capabilities are required
• Several levels can be established in defining the
firm's overall strategy platform
• At the bottom of the pyramid are the basic
resources a firm has compiled over time
• They can be categorized as
– technical factors,
– competitive factors,
– managerial factors, and
– financial factors
• Competence can be defined as “a firm’s
capacity to deploy its resources using
processes to affect a desired end.”
• Core competencies are the bundle of skills and resources
that allow a company to
– compete successfully,
– achieve profitability and be the foundation of competitive
advantage
• Business in the past would have considered core
competencies something that was to be held in house and
closely guarded
• The increasing complexity of businesses means that what a
core competency is and how it should be controlled has
become less obvious
• Core competencies are the main strengths or
strategic advantages of a business,
– including the combination of pooled knowledge and
– technical capacities that allow a business to be
competitive in the marketplace
• A core competency should allow a company to
expand into new end markets as well as provide a
significant benefit to customers
• It should also be hard for competitors to replicate
• Core competencies can be defined as the unique combination
of the resources and experiences of a particular firm
– It takes time to build these core competencies and they are difficult to
imitate
• Critical to sustaining these core competencies are their:
– Durability - their life span is longer than individual product or
technology life-cycles, as are the life spans of resources used to
generate them, including people
– In transparency - it is difficult for competitors to imitate these
competencies quickly
– Immobility - these capabilities and resources are difficult to transfer
• ‘Core competence’ introduced by Pralhad and Hamel
[1990]
• They conceptualized core competence as the
collective learning in the organization, especially how
to coordinate diverse production skills and integrate
multiple streams of technologies
• Subsequently the term core competence has been
used by many authors, and most of them have related
the term in the context of gaining competitive
advantage
• The core competency theory is the theory of
strategy that prescribes actions to be taken by
firms to achieve competitive advantage in the
marketplace
• The concept of core competency states that
firms must play to their strengths or those
areas or functions in which they have
competencies
• By providing a basis for firms to compete and
achieve sustainable competitive advantage,
Pralhad and Hamel pioneered the concept and
laid the foundation for companies to follow in
practice.
• Some core competencies that firms might have include
– Technical superiority,
– Its customer relationship management, and
– Processes that are vastly efficient.
• The implications for real world practice are that core
competencies must be nurtured and the business model built
around them instead of focusing too much on areas where the firm
does not have competency
• This is not to say that other competencies must be neglected or
ignored
• The idea behind the concept is that firms must leverage upon their
core strengths and play to their advantages
• Core Competency Criteria:
– Valuable
– Rare
– Costly to imitate
– Non-substitutable
Capability vs. Competency
• “Competency” and “capability” are two terms
that pertain to human ability. 
• “Capability” is the term that describes the
quality of being capable
• It is the condition that permits an individual to
acquire the power and ability to learn and do
something within their capacity
• “Capability” is also known as implied abilities,
or abilities that are not yet developed
• A person with a capability has the potential to acquire
a specific ability or skill that will be helpful in a task
• The learned skill or ability adds to a person’s
knowledge bank or skill set
• Capabilities also improve the functions of a person,
which can lead to more productivity
• New skills and abilities make a person more capable
to complete a certain task, which in turn makes them
a more suitable candidate for certain job positions
• With time and practice, capabilities can
develop into competence
• Capabilities serve as the starting point of being
able to do something and gradually becoming
more adept in performing the task
• “Competence” is the state or quality of an individual’s
work
• A person and their work can be evaluated as competent
if the performance is considered “satisfactory” but not
“outstanding.”
• Competence can also be applied to the improvement or
development of one’s abilities and skills for the benefit
of the person and the group or institution they represent
• The improved skills and abilities are applied to tasks or
jobs
• Competence can also result in an increased quality of work
or performance
• In return, the work and performance will produce more
satisfying and favorable results from other parties like
clients, bosses, and other relevant individuals
• Competence starts as a person’s capabilities. In a sense,
competence is the proven abilities and improved
capabilities
• Competence can include a combination of knowledge, basic
requirements (capabilities), skills, abilities, behavior, and
attitude
 Resources
• “The tangible and intangible assets of a firm which can
be drawn upon by the firm when required to achieve its
objectives”.
• Unique Resources :
– A unique or strategic resource is one that allows ongoing
competitive advantage and enhanced outcomes
– They are product or project dependent and can be tangible or
intangible
– A unique tangible resource by itself is unlikely to give an
ongoing competitive advantage, it is normally the combination
of the resource and its deployment that gives it value
 The VRIN model 
• Value: This is the unique resources that can
unlock value and competitive advantage.
• Rarity: These are the resources that possessed
by few other organizations.
• Imitability: The resources that a difficult to
copy.
• Non substitutability: These are the ‘pinch
points’, the resources that can’t be replaced.
• Rolls Royce cars are an example of using
reputation as a unique resource
– There are many car manufacturers that produce high
quality vehicles but Roll Royce is still the best known
aspirational car in the market place
• This reputation is important because a Rolls
Royce is still a large expensive chunk of metal to
which the same laws of physics apply as other
cars, and for which there is no need only desire
 Critical Success Factors
• Critical success factors (CSFs) can be
considered the critical “pinch” points, which
are the areas, products, costs, quality etc. that
must be achieved for the project to work and
compete in the market place successfully
• Identifying CSFs allows planners to recognize
if the company has the capacity to move from
analysis to exploitation of the potential
strategic gap. 
 Strategic capability
• Strategic capability as the capability of an
enterprise to successfully undertake action that
is intended to affect its long-term growth and
development
 Organizational capability
• Ulrich and Lake [1990] define ‘organizational
capability’ as a business’s ability to establish
internal structures and processes that influence
its members to create organization-specific
competencies and thus enable the business to
adapt to changing customer and strategic
needs
 Threshold competencies
• Threshold competencies include
– basic knowledge,
– skills,
– traits,
– motives,
– self-image and
– social role and are essential for performing a job
• Without these, some areas of performance will be
substandard
• To move beyond minimal performance,
additional competencies are required
 Strategic competence
• Strategic competence as the ability of
organizations (or more precisely their
members) to acquire, store, recall, interpret
and act upon information of relevance to the
longer-term survival and well-being of the
organization
VRIO Analysis
• VRIO Analysis is an analytical technique brilliant
for the evaluation of company’s resources and
thus the competitive advantage
• VRIO is an acronym from the initials of the
names of the evaluation dimensions: 
– Value, 
– Rareness,
– Imitability,
– Organization
• The VRIO Analysis was developed by Jay B.
Barney as a way of evaluating the resources of
an organization (company’s micro-
environment) which are as follows:
– Financial resources
– Human resources
– Material resources
– Non-material resources (information, knowledge)
• The dimensions of VRIO are:
– Value - How expensive is the resource and how easy is
it to obtain on the market (purchase, lease, rent..)?
– Rareness - How rare or limited is the resource?
– Imitability - How difficult is it to imitate the resource?
– Organization, respectively arrangement
– Is the resource supported by any existing arrangements
and can the organization use it properly?
 What is the VRIO good for?

• Is perfect for evaluation of the company’s

resources. One you know your resources you
can better understand your competitive
advantages or weaknesses
• The VRIO considers for each type of
the resource the following questions (called
evaluation dimension) both for your company
and for your competitors
• VRIO is used to assess the situation inside
the organization (enterprise) - its resources, their
competitive implication and possible potential for
improvement in the given area or for a given
resource
• Such an assessment is then used for example in
the strategic management of development in various
areas or for decision making about the advantage of
an external or internal process and the securing
service (e.g. outsourcing decision)
• If the resource is not valuable it should be outsourced
because it brings no value to us
• If the resource is valuable but not rare the company is in
competitive conformity
• It means we are not worse than our competition,
• If the resource is valuable and rare but it is not
expensive to imitate it, we have a temporary competitive
advantage
• Other companies will try to imitate it in the near future,
then we lost our competitive advantage
• If the resource is valuable, rare and is
expensive to imitate it but we are not able
to organize our company, the resource
become expensive for us (unused incurred
costs)
• If we can manage the advantage and we are
able to organize our company and temporary
competitive advantage, it becomes
as permanent competitive advantage
• In practice, the VRIO analysis is also used in combination with
other analytical techniques to help organizational management
evaluate business resources in a more detailed view
• For financial resources, there are many detailed financial
indicators that evaluate the financial condition or performance
of the business from different perspectives
• Likewise, human resources, property or information are other
detailed indicators of their performance, efficiency or quality
• The advantage of a VRIO analysis is its simplicity and clarity
 Value of Resources
• If resources can be used as an advantage, it’s possible they will provide
beneficial opportunities.
• They can also eliminate or reduce the impact of a threat 
• Stakeholders determine value by whether or not resources are beneficial to
the company
• The resource may help the company in various areas, internally and
externally 
– Consider political, economic, social and technological advances. If the resource
helps in one or many of these regions, it may be crucial for the firm’s development
• You must consider buyers, suppliers, and rivalry too
• The resource may be a threat to consumers, an issue with vendors, or
increased competition from others
• If it can be substituted, that’s also a weakness.
 The Rarity of Resources

• How rare is the resource?

• If it’s rare, this can be a strength. It means the competition will have a
difficult time using it for themselves.
• Consider if the resource is in short supply.
– Do you have repeatable access to it?
– While you have a hard-to-find item at your disposal, the competition is forced
to find substitutes.
• But this can be reversed.
• When you have access to the rare resource, but not repeatedly, it’s not
a permanent advantage.
– This may be OK if you’re looking for a short period solution. But when the
brand is built around this resource and it can’t be obtained? The business
suffers.
 The Imitability of Resources
• A rare and difficult to acquire resource ensures
difficulty to imitate. This gives you a competitive
advantage.
• It’s up to you whether to use the power and create
opportunities. Or to nullify the effects of threats.
• Keep in mind competitors will notice the resource. 
– Especially if they’ve conducted competitor analysis.
• They may ignore it.
• When companies determine it’s not worth their funds or time to
obtain the resource, they’ll move on. But they may decide to
duplicate it.
• If it’s easily obtainable, it’s likely competitors will imitate or
take the support for themselves.
• If it’s rare, they will try to substitute it.
– They’re after the competitive advantage the resource provides, just as
you are. 
– If it’s cost-effective and makes logical business sense, the competition
will do it.
• Resources need to be more than rare or difficult to get. It must
not be imitable.
 The Value of Organization
• This is the final step of VRIO analysis. It requires determining
the value, rarity, and imitability first.
– If the resource has passed all three of these requirements, the
company has to be organized. Otherwise, the benefits may slip away.
• The company can exploit the competitive advantage.
– At this point, departments within the company will be analyzed to
ensure it’s ready to use this resource to full advantage.
• Are there marketing campaigns dedicated to it? 
• Are the salespeople pushing the resource?
• Are invoices ready to be sent out?
• Are suppliers readily available to provide 
 What is Human Capital?
• Human Capital “ A treasure that a company or
institution has available with respect to the
qualifications of the personnel that works
there.
• Human capital represents the value that each
employee brings to the table, according to
his/her studies, knowledge, capabilities and
skills.” (Deloitte)
 Organizational Psychology Issue
• Human capital
• Is not viewed as important
• Not a variable to an organization’s competitive
advantage
• Organization’s financial budgets/cutting cost
• Assess HR department first: training, wages, benefits
and headcounts
• Often employees’ training and development is cut as a
way for reducing operating costs (Min’s paper citation).
 Core Issues
• Misconception:
– Organizations perceive human capital as disposable
• Ultimately, this misconception can lead to
detrimental effects of an organization’s growth
and success
• HR executives incapability of:
– Emphasizing the value of human capital
– Explaining economically how an organization's
people can provide sustainable competitive advantage
 The VRIO Model
– a tool that assist HR executives in specifying which
characteristics of human resources are a source of sustainable
competitive advantage.
– examines the role of employees within the organization
– employees’ contribute in developing a competitive advantage
organization
– can provide the organization with optimal performance.
• GOAL of this framework:
– to ensure optimal performance and efficient structure of human
resources that contributes to organization’s success and growth
that other companies do not have and cannot be easily imitated.
 Components of VRIO
• Value
• Is the resource valuable in terms of
neutralizing the threats and exploiting the
opportunities from the environment?
• FedEx Example: Managers’ rewards and
Employees’ satisfaction
 Components of VRIO
• Rare
• Is the resource rarely present among existing
and potential competitors?
• Nordstroms Example: Retail salespeople,
wage, and customer values
 Components of VRIO
• Imitability
• Is the resource expensive or impossible to
imitate?
• Disneyland Example: Associates and their
positive attitudes and spirits
• BEWARE: Imitation makes you number two
 Components of VRIO
• Organization
• Is the resource used by the organization in a
way that allows efficient usage of the
resource?
• GM and Ford Example: Utilization of
employees
Value chain analysis (VCA)
• Value chain analysis (VCA) is a process where
a firm identifies its primary and support
activities that add value to its final product and
then analyze these activities to reduce costs or
increase differentiation
• Value chain represents the internal activities a
firm engages in when transforming inputs into
outputs
• Value chain analysis is a strategy tool used to analyze internal
firm activities 
• Its goal is to recognize, which activities are the most valuable
(i.e. are the source of cost or differentiation advantage) to the
firm and which ones could be improved to
provide competitive advantage
• In other words, by looking into internal activities, the
analysis reveals where a firm’s competitive advantages or
disadvantages are
• The firm that competes through differentiation advantage will
try to perform its activities better than competitors would do
• If it competes through cost advantage, it will try to perform
internal activities at lower costs than competitors would do.
• When a company is capable of producing goods at lower
costs than the market price or to provide superior products, it
earns profits.
• M. Porter introduced the generic value chain model in 1985
• Value chain represents all the internal activities a firm
engages in to produce goods and services.
• VC is formed of primary activities that add value to the final
product directly and support activities that add value
indirectly
• Although, primary activities add value directly to the
production process, they are not necessarily more important
than support activities.
• Competitive advantage mainly derives from technological
improvements or innovations in business models or processes.
• Such support activities as ‘information systems’, ‘R&D’ or
‘general management’ are usually the most important source
of differentiation advantage.
• On the other hand, primary activities are usually the source of
cost advantage, where costs can be easily identified for each
activity and properly managed.
• Value Chain is categorized into types based on
the type of organizations.
• Manufacturing based.
• Service based.
• Both manufacturing and service based.
• The value chain is concentrating on the
activities starting with raw materials till the
conversion into final goods or services.
• Porter said a business's activities could be split
into two categories:
– Primary activities and
– Support activities.
Primary activities include the following

• Inbound logistics: This refers to everything

involved in receiving, storing and distributing
the raw materials used in the production
process.
• Operations: This is the stage where raw
products are turned into the final product.
• Outbound logistics: This is the distribution of
the final product to consumers.
• Marketing and sales: This stage involves activities
like advertising, promotions, sales-force organization,
selecting distribution channels, pricing, and managing
customer relationships of the final product to ensure it
is targeted to the correct consumer groups.
• Service: This refers to the activities that are needed to
maintain the product's performance after it has been
produced.
– This stage includes things like installation, training,
maintenance, repair, warranty and after-sales services.
 The support activities help the primary
functions and comprise the following
• Procurement: This is how the raw materials for the product are
obtained.
• Technology development: Technology can be used across the
board in the development of a product, including in the research
and development stage, in how new products are developed and
designed, and process automation.
• Human resource management: These are the activities involved
in hiring and retaining the proper employees to help design, build
and market the product.
• Firm infrastructure: This refers to an organization's structure
and its management, planning, accounting, finance and quality-
control mechanisms.
• There are two different approaches on how to
perform the analysis, which depend on what
type of competitive advantage a company
wants to create
– Cost or
– Differentiation advantage
 Cost advantage
• Step 1. Identify the firm’s primary and support
activities.
• Step 2. Establish the relative importance of
each activity in the total cost of the product.
• Step 3. Identify cost drivers for each activity.
• Step 4. Identify links between activities.
• Step 5. Identify opportunities for reducing
costs.
 Differentiation advantage
• Step 1. Identify the customers’ value-creating
activities.
• Step 2. Evaluate the differentiation strategies
for improving customer value.
• Step 3. Identify the best sustainable
differentiation.
 Outsourcing
• Defined as the complete transfer of a business
process that has been traditionally operated and
managed internally to an independently-owned
external service provider
– A complete transfer of all associated internal
business process activities
– Once outsourced, the people, facilities,
equipment, technology and other assets are no
longer maintained internally
• Onshore outsourcing (also called
domestic outsourcing) is the obtaining of
services from someone outside a company but
within the same country.
• Offshore outsourcing, the obtaining of services
from people or companies outside the country.
 Strategic Outsourcing
• Strategic outsourcing is the process of
engaging the services of a provider to manage
essential tasks that would otherwise be
managed by in-house personnel
• This is often done to allow a business to
arrange the use of its assets to best advantage,
and allow the company to move closer to the
achievement of its goals
• An outsourcing strategy of this type may be
employed by businesses and other
organizations of any size, and normally helps
to reduce the cost of operations as well as
allow available resources to be allocated to the
other necessary functions that are still
managed within the organization proper
• A business may choose not to maintain an in-
house sales force, but contract out the sales
effort to others who generate sales on behalf of
the company
• With this model, the business does not have to
be concerned with the expense of salaries and
benefit packages for salespeople 
• The core idea behind strategic outsourcing is
to benefit in some manner from allowing
outside entities to take over the operation and
management of a given function
• Those benefits can take many different forms
• Often, the idea is to increase the bottom line of
a company by reducing various operating
expenses
• The benefit may be a matter of convenience,
allowing the business owner to not have to deal with
necessary functions that he or she does not wish to
deal with, or feels unable to manage with any degree
of efficiency.
• As long as the benefits that are generated by the
arrangement is considered sufficient by the client,
then the process of strategic outsourcing can be
considered a success.
Reasons for Outsourcing Business Processes

• The generic strategic benefits of outsourcing

are:
– Cost Minimization
– Refocus Organization to Core
– Improvement in Operating
– Increased Market Share and Revenue
Specific Purposes & Benefits of Outsourcing

• To reduce and control operating costs

• To improve quality
• To change company focus
• To acquire external capabilities
• To refocus scarce resources for alternative uses
• To reduce cycle time
• To obtain cash infusion
• To reduce risks
• To gain flexibility
• To turn fixed costs into variable costs 
• The Hidden Cost of Outsourcing
• Supplier or Vendor Relationship Management
– The most effective external sourcing relationships
involve considerable management time and
coordination
• External Sourcing which involve:
– Commodity products or services may not require
extensive relationship building and coordination
– Strategic products and services require extensive
relationship building and coordination activities
• Relationship Management Costs
– Labor expense of purchasing personnel
– Travel
– IT infrastructure and management – Supplier development programs
(e.g. training and performance evaluation systems)
• Internal Coordination
• Contrasted against the internal coordination and overhead costs
associated with internally sourcing (Vertically integrate or Make)
• The costs of bureaucracy
– Payroll, benefits management
– Utility expenses, IT expenses, etc. 
• Keys to Outsourcing Success in Today's
Economy
• Understanding and avoiding the pitfalls of
cost-focused outsourcing and apply a total
business-outcome-focus
• Continuously re-evaluate contracts to improve
efficiency and costs.
 The drivers of efficiency and costs are:

• Provider selection and retention,

• Services delivery policies, contract pricing and
etc.
• Ensure a certain level of flexibility in contract
terms in order to be response to corporate
changes 
 Risk
• Outsourcing risks include:
• Breaches in intellectual property
• Provider shirking
• Opportunistic renegotiation
• The combination of contractual
incompleteness, asset specificity, and
uncertainty gives rise to these risks when firms
pursue external sourcing