MAN4001 –

S T R AT E G I C
MANAGEMENT

Competitiveness & Globalization

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 UNIT 3 :
THE INTERNAL
O R G A N I Z AT I O N

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Analyzing the Internal Organization
In the global economy, traditional factors such as labor costs, access to financial resources and
raw materials, and protected or regulated markets remain sources of competitive advantage, but
to a lesser degree.
Firms are now using their core competencies as a means of competitive advantage.
Increasingly, those who analyze their firm’s internal organization should use a global mind-set to
do so. A global mind-set is the ability to analyze, understand, and manage (if in a managerial
position) an internal organization in ways that are not dependent on the assumptions of a single
country, culture, or context.

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Creating Value
Value is measured by a product’s performance characteristics and by its attributes for which
customers are willing to pay.
Firms with a competitive advantage offer value to customers that is superior to the value
competitors provide. Firms create value by innovatively bundling and leveraging their resources
and capabilities.
Firms unable to creatively bundle and leverage their resources and capabilities in ways that
create value for customers suffer performance declines.
Ultimately, creating value for customers is the source of above-average returns for a firm.

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Components of Internal Analysis Leading to Competitive Advantage and Strategic
Competitiveness

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Resources, Capabilities, and Core Competencies
Broad in scope, resources cover a spectrum of individual, social, and organizational phenomena.
Typically, resources alone do not yield a competitive advantage. A competitive advantage is
generally based on the unique bundling of several resources – tangible and intangible.

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Tangible Resources
Tangible resources are assets that can be observed and quantified. Production equipment,
manufacturing facilities, distribution centers, and formal reporting structures are examples of
tangible resources.

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Intangible Resources
Intangible resources are assets that are rooted deeply in the firm’s history and have accumulated
over time. Because they are embedded in unique patterns of routines, intangible resources are
relatively difficult for competitors to analyze and imitate.

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Capabilities
Capabilities exist when resources have been purposely integrated to achieve a specific task or set
of tasks. These tasks range from human resource selection to product marketing and research and
development activities.
Critical to the building of competitive advantages, capabilities are often based on developing,
carrying, and exchanging information and knowledge through the firm’s human capital.
Capabilities often evolve and develop over time. The foundation of many capabilities lies in the
unique skills and knowledge of a firm’s employees and, often, their functional expertise.

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Core Competencies

Core competencies are capabilities that serve as a source of competitive advantage for a firm
over its rivals. Core competencies distinguish a company competitively and reflect its
personality.
A core competency refers to a company's set of skills or experience in some activity, rather than
physical or financial assets. An organizational core competency is an organization's strategic
strength.

Innovation is a core competence of Apple: They combine their tangible (financial and
research labs) and intangible (scientists, engineers) resources to complete research and
development tasks.

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Capabilities that are valuable, rare, costly to imitate, and non-substitutable are core
competencies.
Capabilities failing to satisfy the four criteria of sustainable competitive advantage are
not core competencies, meaning that although every core competence is a capability,
not every capability is a core competence.

Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

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 Four Criteria
of Sustainable
Advantages

Four Criteria of Sustainable Competitive Advantage

• Valuable
Valuable: Capabilities that help a firm neutralize threats or exploit • Rare
• Costly to Imitate
opportunities. • Nonsubstitutable

Valuable means that these capabilities must be a source of greater value,

in terms of relative costs and benefits, than similar resources in
competing firms.
For e.g. Being a first-mover (Ability to bring a product or service to
market first)

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 Four Criteria
of Sustainable
Advantages

Four Criteria of Sustainable Competitive Advantage

• Valuable
• Rare
Rare: Capabilities that are not possessed by many others. • Costly to Imitate
• Nonsubstitutable
o Rareness implies that the resource must be rare in the sense that it is
scarce relative to demand for its use or what it produces.
o Not many rivals possess this rare capability.
o Capabilities possessed by many rivals are unlikely to become core
competencies.

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 Four Criteria
of Sustainable
Advantages
Four Criteria of Sustainable Competitive Advantage
• Valuable
Costly to imitate capabilities are those that other firms cannot • Rare
• Costly to Imitate
develop easily, usually due to • Nonsubstitutable
o Unique historical conditions
o Causal ambiguity (hard or even impossible to relate the
consequences or effects of a phenomenon)
o Social complexity

E.g. Factors deeply rooted in the firm such as its

organizational culture.

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 Four Criteria
of Sustainable
Advantages

Four Criteria of Sustainable Competitive Advantage

• Valuable
Non-substitutable capabilities are those that do not have strategic • Rare
• Costly to Imitate
equivalents. Other different types of resources cannot be functional • Nonsubstitutable

substitutes
o Invisible to competitors
o Firm specific knowledge
o Trust-based working relationships between managers and non-
managerial personnel

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Value Chain Analysis
Value chain analysis allows the firm to understand the parts of its operations that
create value and those that do not. Understanding these issues is important
because the firm earns above-average returns only when the value it creates is
greater than the costs incurred to create that value.
A firm’s value chain is segmented into primary and support activities.
o Primary activities are involved with a product’s physical creation, its sale
and distribution to buyers, and its service after the sale.
o Support activities provide the assistance necessary for the primary activities
to take place.

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Outsourcing

o Outsourcing is the purchase of a value-creating activity from

an external supplier.
o Not-for-profit agencies as well as for-profit organizations
actively engage in outsourcing.
o Firms engaging in effective outsourcing increase their
flexibility, mitigate risks, and reduce their capital investments.
o In multiple global industries, the trend toward outsourcing
continues at a rapid pace

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Competencies, Strengths, Weaknesses, and Strategic Decisions
o At the conclusion of the internal analysis, firms must identify their strengths and weaknesses
in resources, capabilities, and core competencies. For example, if they have weak capabilities or
do not have core competencies in areas required to achieve a competitive advantage, they must acquire
those resources and build the capabilities and competencies needed. Alternatively, they could decide to
outsource a function or activity where they are weak in order to improve the value that they provide to
customers.
o A core competence is usually a strength because it is a source of competitive advantage. If
emphasized when it is no longer competitively relevant, it can become a weakness, a seed of
organizational inertia.
o Events occurring in the firm’s external environment create conditions through which core
competencies can become core rigidities, generate inertia, and stifle innovation.

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 THE END!

Next class: Unit 4 – Business Level

Strategies

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