The Internal Organization: Resources, Capabilities, and Core Competence

1. Chapter 4 The Internal Organization: Resources, Capabilities, andCore Competence Robert E. Hoskisson Michael A. Hitt R. Duane Ireland ©2004 by South-Western/Thomson Learning

2. The Strategic Management Process Chapter 1 Introduction to Strategic Management Chapter 2 Strategic Leadership Strategic Thinking Chapter 3 The External Environment Chapter 4 The Internal Organization Strategic Intent Strategic Mission Strategic Analysis Chapter 5 Business-Level Strategy Chapter 6 Competitive Rivalry and Competitive Dynamics Chapter 7 Corporate-Level Strategy Creating Competitive Advantage Chapter 8 Acquisition and Restructuring Strategies Chapter 9 International Strategy Chapter 10 Cooperative Strategy Monitoring And Creating Entrepreneurial Opportunities Chapter 11 Corporate Governance Chapter 12 Strategic Entrepreneurship

3. Discussion Questions • What different perspectives are gained from external compared to internal analyses of the firm? • What is the difference between tangible and intangible resources? What is the difference between resources and capabilities? • What are the criteria to determine core competence? What is sustainable competitive advantage? Click Here Click Here Click Here Click Here More discussion questions

4. Discussion Questions (cont.) • What is the value chain? • What is outsourcing and when should it be used? • Are there risks to a sustainable competitive advantage? Click Here Click Here Click Here

5. Discussion Question 1 What different perspectives are gained from external compared to internal analyses of the firm?

6. Economic Sociocultural Environment Demographic General Industry Environment General Global Competitor Environment Environment Environment Political/Legal General Technological External and Internal Analyses By studying the external environment, firms identify what they might choose to do Opportunities and threats

7. The Firm External and Internal Analyses Externaland Internal Analyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage)

8. Discovering Core Competencies Value Creation Value Chain Analysis Four Criteria of Sustainable Advantages Core Competencies Competitive Advantage Capabilities • Valuable • Rare • Costly to Imitate • Nonsubstitutable • Resources • Tangible • Intangible • Outsource Components ofInternal Analysis

9. Challenge of Internal Analysis • How do we effectively manage current core competencies while simultaneously developing new ones? • How do we assemble bundles of resources, capabilities and core competencies to create value for customers? • How do we learn to change rapidly?

10. Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies • Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences • Complexityregarding 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 Return to Discussion Questions Click Here

11. Discussion Question 2 What is the difference between tangible and intangible resources? What is the difference between resources and capabilities?

12. Discovering Core Competencies • Resources • Tangible • Intangible Resources are 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

13. Discovering Core Competencies • Resources • Tangible • Intangible • Tangible Resources • Financial • Organizational • Physical • Technological • Intangible Resources • Human • Innovation • Reputation

14. Discovering Core Competencies Capabilities Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage

15. Discovering Core Competencies Capabilities Capabilities are what a firm does, and represent the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state Return to Discussion Questions Click Here

16. Discussion Question 3 What are the criteria to determine core competence? What is sustainable competitive advantage?

17. Discovering Core Competencies Core Competencies Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive McKinsey and Co. recommends using three to four competencies when framing strategic actions

18. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable Valuable: Capabilities that help a firm neutralize threats or exploit opportunities

19. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable Rare: Capabilities that are not possessed by many others

20. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable • Costly to imitate: capabilities that other firms cannot develop easily, usually due to • Unique historical conditions • Causal ambiguity • Social complexity

21. Discovering Core Competencies Four Criteria of Sustainable Advantages • Valuable • Rare • Costly to Imitate • Nonsubstitutable • Nonsubstitutable: capabilities that do not have strategic equivalents • Invisible to competitors • Firm specific knowledge • Trust-based working relationships between managers and nonmanagerial personnel

22. Core Competence • A strategic • capability • Resources • Inputs to a firm’s • production process • Capability • An integration of a • team of resources • Capability • A nonstrategic • team or resource Core Competence as a Strategic Capability Yes Does it satisfy the criteria of sustainable competitive advantage? The source of No

23. Sustainability of a Competitive Advantage • Sustainability of a competitive advantage is a function of: • the rate of core-competence obsolescence due to environmental changes • the availability of substitutes for the core competence • the imitability of the core competence

24. Return to Discussion Questions Click Here Performance Implications Costly to Imitate? Nonsubstitutable Valuable? Competitive Consequences Performance Implications Rare? Competitive Disadvantage Below Average Returns No No No No Yes/ No Competitive Parity Yes No No Average Returns Yes/ No Temporary Com- petitive Advantage Above Average to Average Returns Yes Yes No Sustainable Com- petitive Advantage Above Average Returns Yes Yes Yes Yes

25. Discussion Question 4 What is the value chain?

26. The Basic Value Chain Margin Margin Service Marketing & Sales Technological Development Human Resource Mgmt. Outbound Logistics Support Activities Firm Infrastructure Procurement Operations Inbound Logistics Return to Discussion Questions Click Here Primary Activities

27. Discussion Question 5 What is outsourcing and when should it be used?

28. Margin Margin Service Technological Development Marketing & Sales Human Resource Mgmt. Support Activities Outbound Logistics Firm Infrastructure Procurement Operations Inbound Logistics Primary Activities Outsourcing Outsourcing is the purchase of some or all of a value-creating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently

29. 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

30. Strategic Rationales for Outsourcing • 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

31. Strategic Rationales for Outsourcing • Free Resources for Other Purposes • permits firm to redirect efforts from non-core activities toward those that serve customers more effectively Return to Discussion Questions Click Here

32. Outsourcing Issues • Greatest Value • outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced • Evaluating Resources and Capabilities • don’t 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 complete necessary ongoing organizational tasks

33. Outsourcing Issues • Nonstrategic Team of Resources • do not outsource capabilities that are critical to their 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

34. Discussion Question 6 Are there risks to a sustainable competitive advantage?

35. Core Competencies: 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 • Core rigidities are former core competencies that now generate inertia and stifle innovation