Module 2 (3) Interanl Analysis

Chapter 3
The Internal Environment:

Resources, Capabilities and
Core Competencies
Michael
Michael A.
A. Hitt
Hitt
R.
R. Duane
Duane Ireland
Ireland
Robert
Robert E.
E. Hoskisson
Hoskisson
©2000 South-Western College Publishing
Ch3
Chapter 2
External Environment
What the Firm Might Do
Sustainable
Competitive
Advantage
Chapter 3
Internal Environment
What the Firm Can Do
Ch3
SWOT Analysis
• Strengths
• Weaknesses
• Opportunities
• Threats
Ch3
The purpose of SWOT Analysis
• It is an easy-to-use tool for developing
an overview of a company’s strategic
situation
– It forms a basis for matching your
company’s strategy to its situation
Ch3
Strengths
• A STRENGTH is something a company
is good at doing or a characteristic that
gives it an important capability.
• Possible Strengths:
– Name recognition
– Proprietary technology
– Cost advantages
– Skilled employees
– Loyal Customers
Ch3
Weaknesses
• A WEAKNESS is something a company lacks
or does poorly (in comparison to others) or a
condition that places it at a disadvantage
• Possible Weaknesses:
– Poor market image
– Obsolete facilities
– Internal operating problems
– Poor marketing skills
Ch3
Strengths and Weakness form a
basis for INTERNAL analysis
• By examining strengths, you can
discover untapped potential or identify
distinct competencies that helped you
succeed in the past.
• By examining weaknesses, you can
identify gaps in performance,
vulnerabilities, and erroneous
assumptions about existing strategies.
Ch3
Competitive
Discovering Core Advantage
Gained through
Competencies Core Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns
Core
Competencies
Competencies
Sources of
Competitive
Advantage
Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Tangible
* Valuable * Outsource
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable Ch3
Discovering Core
Competencies
Resources
* Tangible
* Intangible
Ch3
Resources What a firm Has...
What a firm has to work with:

its assets, including its people and
the value of its brand name
Ch3-
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
Ch3-
its assets, including its people
Tangible Resources
and the value of its brand name
* Financial
* Physical Resources represent inputs into a
* Human Resources firm’s production process...
* Organizational
such as capital equipment, skills
of employees, brand names,
finances and talented managers
Intangible Resources
* Technological
* Innovation
* Reputation
Ch3-
Discovering Core
Competencies
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Ch3-
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate
individual firm resources to achieve a desired
objective.
Ch3-
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.
Ch3-
Capabilities become important when they are combined

in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage.
Ch3-
Discovering Core
Competencies
Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Ch3-
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.”
McKinsey & Co. recommends identifying three to four

competencies to use in framing strategic actions.
Ch3-
Discovering Core
Competencies
Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage
Capabilities Criteria of
Teams of Sustainable
Resources Advantages
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource
Ch3-
that is Strategically
For a strategic capability to be a
Valuable
Core Competency, it must be:
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Ch3-
Core Competencies must be: that is Strategically
Valuable
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 Ch3-
Discovering Core
Competencies
Discovering
Core
Core
Competencies
Competencies
Sources of
Competitive
Advantage
Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource Ch3-
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities Ch3-

Support
Activities
Logistics
Inbound

Support
Activities
Operations
Logistics
Inbound

Support
Activities
Operations
Outbound
Logistics
Logistics
Inbound

Support
Activities
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics

Support
Activities
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics

Support
Activities
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics

Support
Activities
Technological Development
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics

Support
Human Resource Management
Activities
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics

Firm Infrastructure
Support
Human Resource Management
Activities
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics

Firm Infrastructure
Human Resource Management M
Support A
RG
Activities
Technological Development IN
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
IN
RG
A
M
• Value-creating Potential of Primary Activities
• Inbounded Logistics
• Activities, such as materials handling, warehousing and
inventory control, 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. Machining,
packaging, assembly, and equipment maintenance are
examples of operations activities.
• Outbound Logistics
• Activities involved with collecting, storing and physically
distributing the final product to customers. Examples of these
activities include finished-goods warehousing, material
handling and order processing.
Ch3-
• Marketing and Sales
• Activities completed to provide means through which
customers can purchase products and to induce them to do
so. To effectively market and sell products, firm develop
advertising and promotional campaigns, select appropriate
distribution channels and select develop and support their
sales force.
• Service
• Activities designed to enhance or maintain a product’s value.
Firms engaged in a range of service-related activities,
including installation, repair, training and adjustment.
Ch3-
• Value-Creating Potential of Support Activities
• Procurement
• Activities completed to purchase the inputs needed to
produce a firm’s products. Purchase inputs include items
fully consumed during the manufacture of products (e.g. raw
materials and supplies as well as fixed assets– machinery,
laboratory equipment, office equipment and buildings).
• Technological Development
• Activities complete to improve a firm’s product and the
processes used to manufacture it. Technological
development takes many forms, such as process equipment,
basic research and product design and servicing procedures.
Ch3-
• Human Resource Management
• Activities involved with recruiting, hiring, training, developing,
and compensating all personnel.
• Firm Infrastructure
• Firm infrastructure includes activities such as general
management, planning, finance, accounting, legal support
and governmental relations that are required to support the
work of the entire value chain. Through its infrastructure, the
firm strives to effectively and consistently identify external
opportunities and threats, identify resources and capabilities
and support core competencies.
Ch3-
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 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
Ch3-

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Chapter 3

The Internal Environment:

Capabilities Criteria of Value

What a firm has to work with:

Resources represent inputs into a

Capabilities develop over time as a result of complex

Capabilities become important when they are combined

“…are the essence of what makes an organization

McKinsey & Co. recommends identifying three to four

Capabilities Criteria of Value

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

Primary Activities Ch3-

All core competencies have the potential to become

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