Chapter 3 The Internal Environment: Resources, Capabilities and Core Competencies

Chapter 3The Internal Environment: Resources, Capabilities and Core CompetenciesMichael A. HittR. Duane IrelandRobert E. Hoskisson©2000 South-Western College PublishingChapter 3InternalEnvironmentChapter 2ExternalEnvironmentThe StrategicManagementProcessStrategic IntentStrategic MissionStrategicCompetitivenessAbove AverageReturnsFeedbackStrategy FormulationChapter 4Business-LevelStrategyChapter 5CompetitiveDynamicsChapter 6Corporate-LevelStrategyChapter 8InternationalStrategyChapter 9CooperativeStrategiesChapter 7Acquisitions &RestructuringStrategy ImplementationChapter 10CorporateGovernanceChapter 11Structure& ControlChapter 12StrategicLeadershipChapter 13Entrepreneurship & InnovationStrategicInputsStrategicActionsStrategic OutcomesChapter 2External EnvironmentWhat the Firm Might DoChapter 3Internal EnvironmentWhat the Firm Can DoSustainableCompetitiveAdvantageResources*Tangible*IntangibleCapabilitiesTeams of ResourcesSources ofCoreCompetenciesCompetitiveAdvantageStrategicCompetitivenessAbove-AverageReturnsCompetitiveAdvantageGained throughCore CompetenciesDiscoveringCoreCompetenciesDiscovering Core CompetenciesCriteria ofSustainableAdvantagesValueChainAnalysisValuableRareCostly to ImitateNonsubstitutable*****OutsourceHow do we assemble bundles of Resources, Capabilities and Core Competencies to create VALUE for customers?Will environmental changes make our core competencies obsolete?And...Are substitutes available for our core competencies?Are our core competencies easily imitated?Key Questions for Managersin Internal AnalysisConditions Affecting Managerial Decisions About Resources, Capabilities and Core CompetenciesUncertaintyregarding characteristics of the general and the industry environments, competitor’s actions, and customer’s preferences. Complexityregarding the interrelated causes shaping a firm’s environments and perceptions of the environmentsIntraorganizational Conflictsamong people making managerial decisions and those affected by themResources*Tangible*IntangibleDiscovering Core CompetenciesWhat a firm has to work with:its assets, including its people and the value of its brand nameWhat a firm Has...ResourcesResources represent inputs into a firm’s production process...such as capital equipment, skills of employees, brand names, finances and talented managersWhat a firm Has...What a firm has to work with:its assets, including its people and the value of its brand nameResourcesWhat a firm has to work with:its assets, including its people and the value of its brand nameResources 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 NabiscoWhat a firm Has...ResourcesTangible ResourcesFinancial*Physical*Human Resources*Organizational*What a firm Has...What a firm has to work with:its assets, including its people and the value of its brand nameResources represent inputs into a firm’s production process...such as capital equipment, skills of employees, brand names, finances and talented managersIntangible ResourcesTechnological*Innovation*Reputation*“Some genius invented the Oreo. We’re just living off the inheritance.”F. Ross Johnson,Former President & CEO, RJR NabiscoResourcesResources*Tangible*IntangibleCapabilitiesTeams of ResourcesDiscovering Core CompetenciesWhat a firm Does...Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.CapabilitiesWhat 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.Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.CapabilitiesWhat 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 have strategic value and can lead to competitive advantage.CapabilitiesResources*Tangible*IntangibleCapabilitiesTeams of ResourcesDiscovering Core CompetenciesSources ofCoreCompetenciesCompetitiveAdvantageDiscoveringCoreCompetenciesWhat 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 & WheelwrightMcKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.Core CompetenciesResources*Tangible*IntangibleCapabilitiesTeams of ResourcesSources ofCoreCompetenciesCompetitiveAdvantageDiscoveringCoreCompetenciesCriteria ofSustainableAdvantagesValuableRareCostly to ImitateNonsubstitutable****Discovering Core Competencies* OutsourceFor a strategic capability to be a Core Competency, it must be:Core CompetenciesValuableRareCostly to ImitateNonsubstitutableWhat a firm Does...that is Strategically ValuableValuableRareCostly to ImitateCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexityCapabilities that are not possessed by many othersCapabilities that help a firm neutralize threats or exploit opportunitiesCore CompetenciesWhat a firm Does...that is Strategically ValuableWhat Criteria Make CoreCompetencies Costly to Imitate?Unique Historical ConditionsCausal AmbiguitySocial ComplexityThis occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantageOccurs 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 customersExample:Disney created Mickey Mouse at a time when animated motion pictures were newAn unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstancesCore Competencies must be:NonsubstitutableCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationshipsWhat a firm Does...that is Strategically ValuableCore CompetenciesValuableRareCostly to ImitateCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexityCapabilities that are possessed by few, if any, current or potential competitorsCapabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environmentCore CompetenciesResourcesInputs to a firm’s production processCore CompetenceA strategic capabilityThe source ofCapabilityIntegration of a team of resourcesDoes the capability satisfy the criteria of sustainable competitive advantage?YESNOCapabilityA nonstrategic team of resourcesValuableRareCostly to ImitateNonsub-stitutableCompetitive ConsequencesPerformance ImplicationsNONONONOCompetitiveDisadvantageBelow AverageReturnsYESNONOYES/NOCompetitiveParityAverageReturnsYESNOYES/NOYESTemporaryCompetitiveAdvantageAver./Above AverageReturnsAboveAverageReturnsYESYESYESYESSustainableCompetitiveAdvantageOutcomes from Combinations of the Criteria for Sustainable Competitive AdvantageResources*Tangible*IntangibleCapabilitiesTeams of ResourcesSources ofCoreCompetenciesCompetitiveAdvantageDiscoveringCoreCompetenciesValueChainAnalysis* OutsourceValuableRareCostly to ImitateNonsubstitutable****Criteria ofSustainableAdvantagesDiscovering Core CompetenciesSupportActivitiesPrimary ActivitiesValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesInbound LogisticsValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesInbound LogisticsOperationsValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesInbound LogisticsOperationsOutboundLogisticsValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesInbound LogisticsOperationsOutboundLogisticsMarketing & SalesValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceProcurementValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceProcurementTechnological DevelopmentValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesTechnological DevelopmentProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceHuman Resource ManagementValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINValue Chain AnalysisIdentifying Resources and Capabilities That Can Add ValueSupportActivitiesPrimary ActivitiesOutsourcingTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINMARGINStrategic Choice to Purchase Some Activities From Outside SuppliersSupportActivitiesPrimary ActivitiesTechnological DevelopmentHuman Resource ManagementFirm InfrastructureProcurementInbound LogisticsOperationsOutboundLogisticsMarketing & SalesServiceMARGINInbound LogisticsOperationsOutboundLogisticsServiceMarketing & SalesTechnological DevelopmentHuman Resource ManagementProcurementMARGINFirms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlyOutsourcingStrategic Choice to Purchase Some Activities From Outside SuppliersLets company focus on broader business issues by having outside experts handle various operational detailsStrategic Rationales for OutsourcingImprove Business FocusPermits firm to redirect efforts from non-core activities toward those that serve customers more effectivelyFree Resources for Other PurposesProvide Access to World-Class CapabilitiesAccelerate Business Re-Engineering BenefitsShare RisksThe specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications Achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over processReduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities To capitalize on the usefulness of the Value Chain concept...it is important to recognize that...Value Chains are part of a Total Value SystemSupplier Value ChainFirm Value ChainChannel Value ChainBuyer Value ChainFirm Value ChainChannel Value ChainBuyer Value ChainSupplier Value ChainUpstream ValuePerform valuable activities that complement the firm’s activitiesValue Chains are part of a Total Value SystemSupplier Value ChainFirm Value ChainBuyer Value ChainUpstream ValuePerform valuable activities that complement the firm’s activitiesChannel Value ChainEach firm must eventually find a way to become a part of some buyer’s value chainValue Chains are part of a Total Value SystemSupplier Value ChainFirm Value ChainChannel Value ChainUpstream ValuePerform valuable activities that complement the firm’s activitiesBuyer Value ChainUltimate basis for differentiation is the ability to play a role in a buyer’s value chainThis creates VALUE!!Each firm must eventually find a way to become a part of some buyer’s value chainValue Chains are part of a Total Value SystemSupplier Value ChainFirm Value ChainChannel Value ChainUpstream ValuePerform valuable activities that complement the firm’s activitiesBuyer Value ChainEach firm must eventually find a way to become a part of some buyer’s value chainUltimate basis for differentiation is the ability to play a role in a buyer’s value chainThis creates VALUE!!Value chains vary for firms in an industry, reflecting each firm’s unique qualities:HistoryStrategySuccess at ImplementationValue Chains are part of a Total Value SystemCore Competencies--Cautions and RemindersNever take for granted that core competencies will continue to provide a source of competitive advantageAll core competencies have the potential to become Core RigiditiesCore Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environmentStrategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threatsResources*Tangible*IntangibleCapabilitiesTeams of ResourcesSources ofCoreCompetenciesCompetitiveAdvantageStrategicCompetitivenessAbove-AverageReturnsDiscoveringCoreCompetenciesValueChainAnalysis* OutsourceValuableRareCostly to ImitateNonsubstitutable****Criteria ofSustainableAdvantagesDiscovering Core CompetenciesChapter 2ExternalEnvironmentChapter 3InternalEnvironmentStrategic IntentStrategic MissionThe StrategicManagementProcessChapter 2ExternalEnvironmentChapter 3InternalEnvironmentStrategic IntentStrategic MissionStrategic IntentThe StrategicManagementProcessChapter 2ExternalEnvironmentChapter 3InternalEnvironmentThe StrategicManagementProcessStrategic MissionA statement of the firm’s unique purpose and the scope of its operations in product market termsStrategic IntentStrategic MissionStrategic IntentLeveraging of a firm’s resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the compe- titive environmentResources*Tangible*IntangibleCapabilitiesTeams of ResourcesSources ofCoreCompetenciesCompetitiveAdvantageStrategicCompetitivenessAbove-AverageReturnsCompetitiveAdvantageGained throughCore CompetenciesDiscoveringCoreCompetenciesValueChainAnalysisValuableRareCostly to ImitateNonsubstitutable***** OutsourceCriteria ofSustainableAdvantagesDiscovering Core Competencies