Copyright 2001 Houghton Mifflin Company. All rights reserved.

Chapter 4
Internal Analysis: Resources,
Capabilities, Competencies, and
Competitive Advantage
Strategic Charles W. L. Hill
Management Gareth R. Jones
Fifth Edition
PowerPoint Presentation
by Charlie Cook
An Integrated Approach
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Chapter 3
External Environment
What the Firm Might Do
Chapter 4
Internal Environment
What the Firm
Can Do
Sustainable
Competitive
Advantage
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Competitive Advantage: Value Creation,
Low Cost, and Differentiation
Competitive advantage is a firms ability to
outperform its competitors (earn higher
profits).
The source of competitive advantage is value
creation for customers.
Sustained competitive advantage comes from
maintaining higher profits than competitors
over long periods of time.
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FIGURE 4.3
Generic Building Blocks of Competitive
Advantage
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Generic Building Blocks of Competitive
Advantage
In other words, firms can build a sustainable
competitive advantage by having capabilities
in at least one of the following areas:

Superior Quality
Superior Efficiency
Superior Service (customer responsiveness
Superior Innovation

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Business-Level Strategies
We will talk in further detail about business-level strategies
after Exam I.

However, your generic choices are to offer
products/services that are different/unique from your
competitors or less expensive than those of your
competitors.

To achieve differentiation you will need superior
innovation, superior quality, and/or superior service.

To achieve low-cost you will need superior efficiency,
superior quality, and/or superior process innovation.
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FIGURE 4.6
The Value Chain The means through which
firms create value to either differentiate or
provide lower cost products/services
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What a firm has to work with:
its assets, including its people and
the value of its brand name
What a firm Has... Resources
Resources represent inputs into a
firms production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers
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Strategic Resources and Capabilities which
can be found in every link along the value
chain
Tangible
Human Resources
Financial
Physical
Land
Buildings
Plant
Equipment
Organizational
Intangible
Brand names
Reputation
Patents
Technological or
marketing know-how
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What a firm Does...
Capabilities represent:
the firms capacity or ability to integrate
individual firm resources to achieve a
desired objective.
Capabilities
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Valuable
Rare
Capabilities that are not possessed by many others
Capabilities that help a firm neutralize threats or
exploit opportunities
Core Competencies
What a firm Does...
that is Strategically
Valuable
Copyright 2001 Houghton Mifflin Company. All rights reserved. 4-12
Rare
Core Competencies
What a firm Does...
that is Strategically
Valuable
Valuable
Capabilities that are not possessed by many others
Capabilities that help a firm neutralize threats or
exploit opportunities
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Costly to Imitate
Capabilities that other firms cannot develop
easily, usually due to unique historical
conditions, causal ambiguity or social
complexity
Core Competencies
What a firm Does...
that is Strategically
Valuable
Nonsubstitutable
Capabilities that do not have strategic equivalents,
such as firm-specific knowledge or trust-based
relationships
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Resources Leading to Sustainable
Competitive Advantage
Organizational
Resources and
Capabilities

Financial

Physical

Human

Organizational
VALUABLE?
RARE?
Competitive
Advantage
DIFFICULT
OR COSTLY
TO IMITATE?
NONSUBSTITUTABLE
Sustainable
Competitive
Advantage
APPLIED
TO MULTIPLE
BUSINESSES?
Core
Competency
or Capability
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What Criteria Make Core
Competencies Costly to Imitate?
Unique Historical Conditions
Causal Ambiguity
This occurs when competitors are unable to detect how a
firm uses its competencies as a foundation for competitive
advantage
Example:
Disney created Mickey Mouse at a time
when animated motion pictures were new
An unusual evolutionary pattern of growth may contribute
to the development of competencies in a manner that is
unique to those particular circumstances
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What Criteria Make Core
Competencies Costly to Imitate?
Social Complexity
Occurs when the firms capabilities are the result of
complex social phenomena, such as interpersonal
relationships, trust and friendships among
managers or a firms reputation with suppliers and
customers
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Valuable Rare
Costly to
Imitate
Nonsub-
stitutable
Competitive
Consequences
Performance
Implications
NO NO NO NO
Competitive
Disadvantage
Below
Average
Returns
YES NO NO YES/NO
Competitive
Parity
Average
Returns
YES NO YES/NO YES
Temporary
Competitive
Advantage
Aver./Above
Average
Returns
Above
Average
Returns
YE
S
YE
S
YE
S
YE
S
Sustainable
Competitive
Advantage
Outcomes from Combinations of the Criteria for
Sustainable Competitive Advantage
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FIGURE 4.7
Distinctive Competencies, Resources, and
Capabilities
The roots of competitive advantage:
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Why Do Companies Fail?
What went wrong?
Inertia
Prior strategic commitments
The Icarus paradox

Avoiding failure and
sustaining competitive
advantage:
Focus on the building
blocks of competitive
advantage.
Institute continuous
improvement and learning.
Track best industrial
practice and use
benchmarking.
Overcome inertia.