Chapter 3

The Internal Organization:

Resources, Capabilities,
Core Competencies, and
Competitive Advantages

PART 1 STRATEGIC MANAGEMENT INPUTS

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 Strategic Management Process and SM Course Flow

Strategic Actions Strategic inputs

External
Environment Vision
Mission

Internal
Environment

StrategyFormulation Strategy Implementation

Non-
Business competitiv Corporate Corporate Structures
Strategy e Strategy Governanc &
strategies e Controls

Strategic
M&A Cooperativ Strategic
Internationa Entrepreneurshi
Strategie e Leadership
Strategic Outcome

l strategies p
s Strategies

Strategic
Competitiveness

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 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.

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 Competitive Advantage (cont’d)

• Sustainability of a competitive advantage

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

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 Analyzing the External Environment

Opportunities
and threats

By studying the external environment, firms

identify what they might choose to do.
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 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
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Figure 3.1 Components of an Internal Analysis

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 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  Above-average returns

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 Creating Competitive Advantage

• Core competencies (Internal), in combination

with product-market positions(External), are the
firm’s most important sources of competitive
advantage (CA). CA = f( Competence *positions)
• Core competencies of a firm, in addition to its
analysis of its general, industry, and competitor
environments, should drive its selection of
strategies.

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 Resources, Capabilities
and Core Competencies

• Resources
Competitive
Advantage – Are the source of a firm’s
capabilities.
– Are broad in scope.
Core
Competencies
– Cover a spectrum of
individual, social and
Capabilities organizational
phenomena.
Resources
– Alone, do not yield a
• Tangible competitive advantage.
• Intangible

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Table 3.1 Tangible Resources: 4 types

Financial • The firm’s borrowing capacity

Resources • The firm’s ability to generate internal funds

Organizational • The firm’s formal reporting structure

Resources

Physical • The sophistication and location of a firm’s

Resources plant and equipment and the attractiveness of
its location
• Distribution facilities
• Product inventory

Technological • Availability of technology-related resources

Resources such as copyrights, patents, trademarks, and
trade secrets

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Table 3.2 Intangible Resources(3 types)

Human • Knowledge
Resources • Trust
• Skills
• Abilities to collaborate with others

Innovation • Ideas
Resources • Scientific capabilities
• Capacity to innovate

Reputational • Brand name

Resources • Perceptions of product quality, durability, and
reliability
• Positive reputation with stakeholders such as
suppliers and customers

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 Resources, Capabilities
and Core Competencies

• Capabilities
Competitive
– Represent the capacity to deploy
Advantage
resources that have been
purposely integrated to achieve a
desired end state
Core
Competencies – Emerge over time through complex
interactions among tangible and
intangible resources
Capabilities
– Often are based on developing,
carrying and exchanging
Resources information and knowledge through
• Tangible
• Intangible
the firm’s human capital

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 Resources, Capabilities
and Core Competencies

• Capabilities (cont’d)
Competitive – The foundation of many
Advantage capabilities lies in:
• The unique skills and
knowledge of a firm’s
Core employees
Competencies
• The functional expertise of
those employees
Capabilities
– Capabilities are often
developed in specific
Resources functional areas or as part
• Tangible
• Intangible of a functional area (e.g.
distribution).
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Table 3.3 Examples of Firms’ Capabilities

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 Resources, Capabilities
and Core Competencies

• Core Competencies
Competitive – Resources and capabilities that
Advantage
are the sources of a firm’s
competitive advantage:
Core • Distinguish a firm competitively
Competencies
and reflect its personality.
Capabilities
• Emerge over time through an
organizational process of
accumulating and learning how
Resources
• Tangible to deploy different resources
• Intangible and capabilities.
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 Resources, Capabilities
and Core Competencies

Core Competencies
Competitive
Advantage
– Activities that a firm performs
especially well compared to
competitors.
Core – Activities through which the firm
Competencies
adds unique value to its goods
or services over a long period of
Capabilities
time.
Resources
• Tangible
• Intangible

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 Building Core Competencies

Sustainable The Four Criteria of

Competitive Sustainable Competitive
Advantage
Advantage
Four Criteria of
– Valuable capabilities
Sustainable – Rare capabilities
Advantages
– Costly to imitate

•
– Nonsubstituable
Valuable
• Rare
• Costly to imitate
• Nonsubstitutable

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 Table 3.4 The Four Criteria of Sustainable Advantage

Valuable • Help a firm neutralize threats or exploit

Capabilities opportunities

Rare • Are not possessed by many others

Capabilities

Costly-to-Imitate • Historical: A unique and a valuable organizational

Capabilities culture or brand name
• Ambiguous cause: The causes and uses of a
competence are unclear
• Social complexity: Interpersonal relationships,
trust, and friendship among managers, suppliers,
and customers

Nonsubstitutable • No strategic equivalent: Abbot drugs

Capabilities

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 Outcomes from Combinations
of the Four Criteria

?
?

le
te

ab
ita

ut
Im

tit
?

to

bs
le

tly Competitive Performance

ab

su
e?
os
lu

on
Consequences Implications
ar
Va

N
R

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

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 Value Chain Analysis

• Allows a firm to understand the parts of its

operations that create value and those that
do not.(upstream to downstream)
• 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.

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 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.

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 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,(differently) or
– To perform a value-creating activity that competitors
cannot complete (different activities)

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Figure 3.3 A Model of the Value Chain

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Figure 3.4 Creating Value through Value Chain Activities

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Figure 3.5 Creating Value through Support Functions

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 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

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 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.

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 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.

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 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.

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 Outsourcing

• 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.

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 Outsourcing Decisions

A firm may outsource all

or only part of one or M
n ar
more primary and/or rgi gi
a n
M
support activities.

Technological Development
Human Resource Mgmt.
Service
Support Activities

Firm Infrastructure
Marketing and Sales

Procurement
Outbound Logistics

Operations

Inbound Logistics

Primary Activities
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Strategic Rationales for Outsourcing

• Improving business focus

– Helps a firm focus on broader business issues by
having outside experts handle various operational
details.
• Providing access to world-class capabilities
– The specialized resources of outsourcing providers
makes world-class capabilities available to firms in a
wide range of applications.

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 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 process.
• 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.(e.g. Airtel)
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 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.
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 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.

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 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.

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