The Internal Environment: Resources, Capabilities and Core Competencies

1. The Internal Environment: Resources, Capabilities and Core Competencies

2. Chapter 2 External Environment What the Firm Might Do Sustainable Competitive Advantage Chapter 3 Internal Environment What the Firm Can Do

3. Discovering Core Competencies Competitive Advantage Gained through Core Competencies Strategic Competitiveness Discovering Above-Average Returns Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Value Criteria of Chain Sustainable Teams of Resources Analysis Advantages Resources Outsource * Valuable * * Tangible * Rare * Intangible Costly to Imitate * * Nonsubstitutable

4. Key Questions for Managers in Internal Analysis How do we assemble bundles of Resources, Capabilities and Core Competencies to create VALUE for customers? And... Will environmental changes make our core competencies obsolete? Are substitutes available for our core competencies? Are our core competencies easily imitated?

5. Conditions Affecting Managerial Decisions About Resources, Capabilities and Core Competencies Uncertainty regarding characteristics of the general and the industry environments, competitor’s actions, and customer’s preferences. Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Intraorganizational Conflicts among people making managerial decisions and those affected by them

6. Discovering Core Competencies Resources * Tangible * Intangible

7. Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name

8. Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers

9. Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco

10. Financial * Physical * Human Resources * Organizational * Technological * Innovation * Reputation * Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Tangible Resources Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers Intangible Resources “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco

11. Discovering Core Competencies Capabilities Teams of Resources Resources * Tangible * Intangible

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

13. Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities What a firm Does... Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

14. Capabilities What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees. Capabilities become important when they are combined in unique combinations which create core competencies which havestrategic value and can lead tocompetitive advantage.

15. Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Resources * Tangible * Intangible

16. Core Competencies What a firm Does... that is Strategically Valuable “…are the essence of what makes an organization unique in its ability to provide value to customers.” Leonard-Barton, Bowen, Clark, Holloway & Wheelwright McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.

17. Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Criteria of Sustainable Teams of Resources Advantages Resources * Valuable * Tangible * Rare * Intangible Costly to Imitate * * Nonsubstitutable * Outsource

18. Core Competencies What a firm Does... Valuable Rare Costly to Imitate Nonsubstitutable that is Strategically Valuable For a strategic capability to be a Core Competency, it must be:

19. Core Competencies What a firm Does... that is Strategically Valuable Valuable Capabilities that help a firm neutralize threats or exploit opportunities Rare Capabilities that are not possessed by many others Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

20. What Criteria Make Core Competencies Costly to Imitate? Unique Historical Conditions An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances Example: Disney created Mickey Mouse at a time when animated motion pictures were new Causal Ambiguity This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage Social Complexity Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers

21. Core Competencies What a firm Does... that is Strategically Valuable Core Competencies must be: Valuable Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment Rare Capabilities that are possessed by few, if any, current or potential competitors Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

22. Resources • Inputs to a firm’s production process • Core Competence • A strategic capability Does the capability satisfy the criteria of sustainable competitive advantage? YES • Capability • Integration of a team of resources The source of NO • Capability • A nonstrategic team of resources Core Competencies

23. Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Costly to Imitate Nonsub-stitutable Competitive Consequences Performance Implications Valuable Rare Below Average Returns Competitive Disadvantage NO NO NO NO Competitive Parity Average Returns YES NO NO YES/NO Temporary Competitive Advantage Aver./Above Average Returns YES YES NO YES/NO Sustainable Competitive Advantage Above Average Returns YES YES YES YES

24. Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Value Criteria of Chain Sustainable Teams of Resources Analysis Advantages Resources * Valuable * Tangible * Rare * Intangible Costly to Imitate * * Nonsubstitutable * Outsource

25. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics MARGIN Operations Primary Activities

26. Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Human Resource Management Firms often purchase a portionof their value-creating activities from specialty external suppliers who can perform these functionsmore efficiently Support Activities Technological Development MARGIN Technological Development Procurement Procurement Service Service Marketing & Sales Inbound Logistics Outbound Logistics MARGIN Operations Outbound Logistics Marketing & Sales Operations Inbound Logistics Primary Activities

27. Strategic Rationales for Outsourcing Improve Business Focus Lets company focus on broader business issues by having outside experts handle various operational details Provide Access to World-Class Capabilities The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications Accelerate Business Re-Engineering Benefits Achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process Share Risks Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Free Resources for Other Purposes Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

28. To capitalize on the usefulness of the Value Chainconcept... it is important to recognize that...

29. Value Chains are part of aTotal Value System Firm Value Chain Supplier Value Chain Channel Value Chain Buyer Value Chain

30. Value Chains are part of aTotal 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

31. Value Chains are part of aTotal Value System Supplier Value Chain Firm Value Chain Buyer Value Chain Upstream Value Channel Value Chain Perform valuable activities that complement the firm’s activities Each firm must eventually find a way to become a part of some buyer’s value chain

32. Value Chains are part of aTotal Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Upstream Value Each firm must eventually find a way to become a part of some buyer’s value chain Perform valuable activities that complement the firm’s activities Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!!

33. Value Chains are part of aTotal Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Each firm must eventually find a way to become a part of some buyer’s value chain Upstream Value Perform valuable activities that complement the firm’s activities Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! Value chains vary for firms in an industry, reflecting each firm’s unique qualities: • History • Strategy • Success at Implementation

34. 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 Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats Core Competencies--Cautions and Reminders

35. Discovering Core Competencies Strategic Competitiveness Discovering Above-Average Returns Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Value Criteria of Chain Sustainable Teams of Resources Analysis Advantages Resources * Valuable * Tangible * Rare * Intangible Costly to Imitate * * Nonsubstitutable * Outsource