Chapter Three

Internal Organisation: Resources,

Capabilities, Core Competencies,
and Competitive Advantage
Department of Management
Hang Seng University
 Last Week Review
What are the segments of general environment?
 Demographic, economic, political-legal, sociocultural, technological,
global/international, and physical
What is an attractive (unattractive) industry?
 Low (high) threat of new entrants, low (high) bargaining power of
suppliers, low (high) bargaining power of buyers, low (high) threat of
substitutes, and weak-to-moderate (strong) intensity of rivalry

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 Learning Objectives
 Explain why firms need to study and understand their internal organisation.
 Define value and discuss its importance.
 Describe the differences between tangible and intangible resources.
 Define capabilities and discuss their development.
 Describe four criteria used to determine whether resources and capabilities are
core competencies.
 Explain how firms analyse their value chain for the purpose of determining where
they are able to create value when using their resources, capabilities, and core
competencies.
 Define outsourcing and discuss reasons for its use.
 Discuss the importance of identifying internal strengths and weaknesses.
 Discuss the importance of avoiding core rigidities.

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 Resource-based View (RBV)
 Some firms achieve better performance than other
competitors.
 A firm's unique resources and capabilities are the basis for
competitive advantage.
 Critical assumptions
 Resource heterogeneity and immobility

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 Internal Organisation
 Firms earn above-average returns by effectively bundling and
leveraging their resources for the purpose of taking advantage
of opportunities in the external environment in ways that
create value for customers.
 Bundling – heterogeneous combinations of several resources and
capabilities ‘bundling’ together to achieve competitive advantage
 Leveraging – effective usage of resources and capabilities

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 Internal Organisation
 The limit of competitive advantage: Over time, the benefits of
any value-creating strategy can be duplicated by competitors.
 Sustainability of a competitive advantage is a function of:
 The rate of core competence obsolescence
 The availability of substitutes for the core competence
 The imitability of the core competence

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 Resource-based View (RBV)

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What are resources, capabilities,
and core competencies?

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 Resources
Competitive
Advantages
 Source of a firm’s value
 Broad in scope, covering a spectrum of
individual, social, and organisational
Core
competencies phenomena
 Resource alone not yielding competitive
advantage
Capabilities

Resources
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 Tangible and Intangible Resources
 Tangible resources: Assets that can be observed and
quantified
 Financial resources (cash, funding capacity)
 Organisational resources (organisational structure and systems)
 Physical resources (plants and equipment, location advantages)
 Technological resources (copyrights, patents, trademarks, and trade
secrets)

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 Tangible and Intangible Resources
 Intangible resources: Assets rooted deeply in the firm’s history,
accumulated over time
 Human resources (knowledge, trusts, skills)
 Innovation resources (ideas, innovative capacity)
 Reputational resources (brands, perception to product quality)

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 Capabilities
Competitive
Advantages
 Capacity to deploy resources that have been
purposely integrated to achieve core
competencies
Core
competencies  The foundation of many capabilities lies in the
unique skills and knowledge of employees.
 Capabilities are often developed in specific
Capabilities functional areas or as part of a functional area.

Resources
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 Core Competencies
Competitive
Advantages
 Resources and capabilities that are the sources
of a firm’s competitive advantage over time
 Distinguishing a firm’s “personality”
Core
competencies  Activities that a firm performs especially well (that
is, adds unique values) compared to competitors
 Generally the major business operation and able to
Capabilities generate new products and/or services

Resources
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 Examples of Core Competencies

 Brand and marketing

 Distribution and information systems
 Innovations
 Manufacturing

What are the core competencies of a firm?

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Photo source: Wikipedia
How do we know what are the core
competencies?

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Criteria of Sustainable Advantage

Valuable Rare

Costly-to- Non-
imitate substitutable

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 Criteria of Sustainable Advantage
 Valuable capabilities
 Able to exploit opportunities and/or neutralise threats
 Rare capabilities
 Not possessed by many other competitors
 Non-substitutable capabilities
 No strategic equivalent – firm-specific knowledge, organisational
culture, and superior execution of the business model

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 Criteria of Sustainable Advantage
 Costly-to-imitate capabilities
 Historical: A unique and valuable organisational culture or brand
 Causally ambiguous: Unclear causes and uses of a competence
 Socially complex: Interpersonal relationships, trust, and friendship
among managers, suppliers, and
customers

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Photo source: mirror.co.uk
 VRIN Framework
Valuable? Rare? Costly-to- Non- Competitive Performance
imitate? substitutable? implications

No No No No Disadvantage Below-
average
Yes No No Yes/no Parity Average
Yes Yes No Yes/no Temporary Above-
advantage average

Yes Yes Yes Yes Sustained Above-

advantage average

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 Value Chain Analysis
 Value chain analysis allows a firm
to understand the parts of its
operations that create value and
those that do not.
 Cost position
 Implementation of a chosen
business-level strategy
 Competitive advantage through
a system of activity

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 Value Chain Analysis
 Primary activities (value chain)
 Activities that produce products from
raw-materials and sell, distribute, and
service that create values for customers
 Support functions
 Activities that provide the assistance
necessary for the primary activities
to take place

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 Value Chain Analysis
 To be a source of competitive advantage,
a resource or capabilities must allow
the firm:
 To perform an activity in a manner
that is superior to the way
competitors perform it; or
 To perform a value-creating activity
that competitors cannot complete.

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 Value Chain Analysis

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Photo source: slideshare.net
Then what’s next?

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 Outsourcing
 Outsourcing: the purchase of a value-creating activity from an
external supplier
 Few organisations possess the resources and capabilities required
to achieve competitive superiority in all primary and support
activities.
 A firm can concentrate on those areas in which it can create value
and outsource those cannot create value or are at a substantial
disadvantage compared to competitors.
 Specialty suppliers can perform outsourced capabilities more
efficiently.
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 Outsourcing and Value Chain

 A firm may outsource all or only part

of one or more primary and/or
support activities.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Rationales for Outsourcing
 Improving business focus and freeing resources – redirecting
efforts from non-core activities toward key business
 Accessing to world-class capabilities – outsourcing providers’
world-class capabilities available to firms
 Accelerating re-engineering benefits – Achieving re-
engineering benefits more quickly
 Sharing risks – reducing investment requirements and makes
firm more flexible, dynamic and better able to adapt to
changing opportunities.
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 Outsourcing Issues
 Outsource only to firms possessing a core competence in
terms of performing the primary or supporting the outsourced
activity.
 Evaluation: do not outsource activities and/or capabilities –
 the firm itself can create and capture values;
 critical to firm’s success, even though which are not actual sources
of competitive advantages;
 stimulating the development of new capabilities and competencies.

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 Challenges of Internal Analysis

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 Challenges of Internal Analysis
 All core competencies have the potential to become core
rigidities — 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.
 Global focus – international resource and strategies
 Global mind-set – multiple country considerations.

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