Chapter 3

The Internal Organization: Resources, Capabilities, Core

Competencies, and Competitive Advantages
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 Learning Objectives

Studying this chapter should provide you with the strategic management
knowledge needed to:

1. Explain why firms need to study and understand their internal organization.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss their development.
5. Describe four criteria used to determine whether resources and capabilities are core
competencies.
6. Explain how firms analyze their value chain for the purpose of determining where they
are able to create value when using their resources, capabilities, and core
competencies.
7. Define outsourcing and discuss reasons for its use.
8. Discuss the importance of identifying internal strengths and weaknesses.
9. Discuss the importance of avoiding core rigidities.

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 Competitive Advantage

Firms achieve strategic competitiveness and

earn above-average returns when their core
competencies are effectively:
acquired
bundled
leveraged
Over time, the benefits of any value-creating
strategy can be duplicated by competitors.

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 Competitive Advantage (contd)

Sustainability of a competitive advantage is a

function of the:
rate of core competence obsolescence because of
environmental changes.
availability of substitutes for the core competence.
imitability of the core competence.

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 Analyzing the External Environment

Opportunities
and threats

By studying the external environment, firms identify what

they might choose to do.
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 Analyzing the Internal Organization

Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

By studying the internal environment, firms identify what

they can do.
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 The Context of Internal Analysis

Global Economy
Traditional sources of advantages can be overcome
by competitors international strategies and by the
flow of resources throughout the global economy.
Global Mind-Set
The ability to study an internal environment in ways
that are not dependent on the assumptions of a single
country, culture, or context.
Analysis Outcome
Understanding how to leverage the firms bundle of
heterogeneous resources and capabilities.

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 Components of an Internal Analysis

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 Creating Value

By exploiting their core competencies or

competitive advantages, firms create value.
Value is measured by:
product performance characteristics.
product attributes for which customers will pay.

Firms create value by innovatively bundling and

leveraging their resources and capabilities.
Superior value leads to above-average returns.
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 Creating Competitive Advantage

Core competencies, in combination with

product-market positions, are the firms most
important sources of competitive advantage.
Core competencies of a firm, in addition to the
analysis of its general, industry, and competitor
environments, should drive its selection of
strategies.

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 The Challenge of Analyzing
the Internal Organization

Strategic decisions in terms of the firms

resources, capabilities, and core competencies:
are non-routine.
have ethical implications.
significantly influence the firms ability to earn above-
average returns.

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 The Challenge of Analyzing
the Internal Organization (contd)

When making strategic decisions, managers as

strategic leaders must:
know when a capability is not a competence.
learn quickly from failures and mistakes.
have the maturity of judgment to deal effectively with
uncertainty, complexity, and intra-organizational
conflicts in an unbiased manner.
be willing to take intelligent risks.

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Conditions Affecting Managerial Decisions

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 Resources, Capabilities, and Core
Competencies
Resources:
Competitive are the source of a
Advantage firms capabilities.
are broad in scope.
Core cover a spectrum of
Competencies individual, social and
organizational
Capabilities phenomena.
alone, do not yield a
Resources competitive
Tangible
Intangible
advantage.

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 Resources

Resources Types of Resources

A firms assets, Tangible resources:
including people and financial
the value of its brand physical
name, that represent technological
inputs into a firms organizational
production process: Intangible resources:
capital equipment human
skills of employees innovation
brand names reputation
financial resources
talented managers

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 Tangible Resources

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 Intangible Resources

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 Resources, Capabilities and Core
Competencies
Capabilities:
Competitive represent the capacity to
Advantage deploy resources that have
been purposely integrated
to achieve a desired end
Core state.
Competencies
emerge over time through
complex interactions among
Capabilities
tangible and intangible
resources.
Resources
Tangible
Intangible

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 Resources, Capabilities and Core
Competencies
Capabilities (contd):
often are based on
Competitive developing, carrying and
Advantage exchanging information and
knowledge through the
firms human capital.
Core composed of the unique
Competencies skills and knowledge of a
firms employees.
Capabilities include functional expertise
of employees.
Resources often developed in specific
Tangible functional areas or as part
Intangible of a functional area.

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 Example of Firms Capabilities

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 Resources, Capabilities and Core
Competencies
The four criteria for
determining strategic
Competitive
capabilities:
Advantage
value
rarity
Core costly-to-imitate
Competencies
non-substitutability
Capabilities

Resources
Tangible
Intangible

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 Resources, Capabilities and Core
Competencies
Core Competencies

Competitive Resources and capabilities

Advantage that are the sources of a
firms competitive advantage
that:
Core distinguish a firm
Competencies competitively and reflect
its personality.
Capabilities
emerge over time through
an organizational process
Resources of accumulating and
Tangible
learning how to deploy
Intangible
different resources and
capabilities.
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 Resources, Capabilities and Core
Competencies
Core Competencies (contd):
Competitive activities that a firm
Advantage performs especially well
compared to competitors.
activities through which the
Core firm adds unique value to its
Competencies goods or services over a
long period of time.
Capabilities

Resources
Tangible
Intangible

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 Building Core Competencies
The four criteria of sustainable
Sustainable competitive advantages:
Competitive valuable capabilities
Advantage
rare capabilities
costly to imitate
Four Criteria of non-substitutable
Sustainable
Advantages

Valuable
Rare
Costly to imitate
Nonsubstitutable

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The Four Criteria of Sustainable Advantage

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Building Sustainable Competitive Advantage

Valuable capabilities:
Sustainable help a firm neutralize
Competitive threats or exploit
Advantage opportunities.
Rare capabilities
Four Criteria of are not possessed by
Sustainable many others.
Advantages

Valuable
Rare
Costly to imitate
Non-substitutable

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Building Sustainable Competitive Advantage

Costly-to-Imitate
Sustainable Capabilities
Competitive Historical
Advantage A unique and a valuable
organizational culture or
brand name
Four Criteria of
Sustainable Ambiguous cause
Advantages The causes and uses of a
competence are unclear
Social complexity
Valuable Interpersonal
Rare relationships, trust, and
Costly to imitate friendship among
Non-substitutable managers, suppliers, and
customers
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Building Sustainable Competitive Advantage

Non-substitutable
Sustainable Capabilities
Competitive No strategic equivalent
Advantage
firm-specific
knowledge
Four Criteria of organizational culture
Sustainable
Advantages
superior execution of
the chosen business
model
Valuable
Rare
Costly to imitate
Non-substitutable

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 Outcomes from Combinations
of the Four Criteria

Competitive Performance
Consequences Implications
No No No No Competitive Below Average
Disadvantage Returns

Yes No No Yes/ Competitive Average Returns

No Parity

Yes Yes No Yes/ Temporary Com- Above Average to

No petitive Advantage Average Returns

Yes Yes Yes Yes Sustainable Com- Above Average

petitive Advantage Returns

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 Criteria for Sustainable Advantage

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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.
is a template that firms use to:
understand their cost position.
identify multiple means that might be used to facilitate
implementation of a chosen business-level strategy.

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 Value Chain Analysis (contd)

Primary Activities:
are involved with:
a products physical creation.
a products sale and distribution to buyers.
the products service after the sale.

Support Activities:
provide the assistance necessary for the primary
activities to take place.

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 Value Chain Analysis (contd)

Value Chain shows how a product moves from

the raw-material stage to the final customer.
To be a source of competitive advantage, a
resource or capability must allow the firm to
perform:
an activity in a manner that is superior to the way
competitors perform it, or
a value-creating activity that competitors cannot
complete

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 A Model of the Value Chain

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Creating Value through Value Chain Activities

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 Creating Value through Support
Functions

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 The Value-Creating Potential
of Primary Activities

Inbound Logistics
Activities used to receive, store, and disseminate
inputs to a product.
Operations
Activities necessary to convert the inputs provided by
inbound logistics into final product form.
Outbound Logistics
Activities involved with collecting, storing, and
physically distributing the product to customers.

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 The Value-Creating Potential
of Primary Activities (contd)

Marketing and Sales

Activities completed to provide the means through
which customers can purchase products and to
induce them to do so.
Service
Activities designed to enhance or maintain a products
value.
Each activity should be examined relative to
competitors abilities and rated as superior,
equivalent or inferior.
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 The Value-Creating Potential
of Primary Activities: Support

Procurement
Activities completed to purchase the inputs needed to
produce a firms products.
Technological Development
Activities completed to improve a firms product and
the processes used to manufacture it.
Human Resource Management
Activities involved with recruiting, hiring, training,
developing, and compensating all personnel.

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 The Value-Creating Potential of
Primary Activities: Support (contd)

Firm Infrastructure
Activities that support the work of the entire value
chain (general management, planning, finance,
accounting, legal, government relations, etc.).
Effectively and consistently identify external opportunities
and threats
Identify resources and capabilities
Support core competencies
Each activity should be examined relative to
competitors abilities and rated as superior,
equivalent or inferior.
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 Outsourcing

Outsourcing is the purchase of a value-creating

activity from an external supplier.
Few organizations possess the resources and
capabilities required to achieve competitive
superiority in all primary and support activities.
By performing fewer capabilities:
a firm can concentrate on those areas in which it can
create value.
specialty suppliers can perform outsourced
capabilities more efficiently.

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 Outsourcing Decisions
A firm may outsource all
or only part of one or
more primary and/or
support activities.

Technological Development
Human Resource Mgmt.
Service
Support Activities

Firm Infrastructure
Marketing and Sales

Procurement
Outbound Logistics

Operations

Inbound Logistics

Primary Activities
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Strategic Rationales for Outsourcing

Improving business focus helps a firm focus on

broader business issues by having outside
experts handle various operational details.
Provides access to world-class capabilities
Makes world-class capabilities available to firms in a
wide range of applications

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Strategic Rationales for Outsourcing (contd)

Accelerating re-engineering benefits

achieves re-engineering benefits more quickly by
having outsiders - who have already achieved world-
class standards - take over processes.
Sharing risks
reduces investment requirements and makes firm
more flexible, dynamic and better able to adapt to
changing opportunities.
Freeing resources for other purposes
redirects efforts from non-core activities toward those
that serve customers more effectively.

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 Outsourcing Issues

Seeking greatest value

Outsource only to firms possessing a core
competence in terms of performing the primary or
supporting the outsourced activity.
Evaluating resources and capabilities
Do not 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 to
complete necessary ongoing organizational tasks.

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 Outsourcing Issues (contd)

Nonstrategic team resources

Do not outsource capabilities critical to the firms
success, even though the capabilities are not actual
sources of competitive advantage.
Firms knowledge base
Do not outsource activities that stimulate the
development of new capabilities and competencies.

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Competencies, Strengths, Weaknesses, and
Strategic Decisions

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 former core competencies that now
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.

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