Chapter 3

The Internal Environment:

Resources, Capabilities and Core Competencies
Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2000 South-Western College Publishing
Ch3-1

Chapter 2

External Environment
What the Firm Might Do

Sustainable Competitive Advantage

Chapter 3

Internal Environment
What the Firm Can Do

Ch3-2

SWOT Analysis
Strengths Weaknesses Opportunities Threats

Ch3-3

The purpose of SWOT Analysis

It is an easy-to-use tool for developing an overview of a companys strategic situation
It forms a basis for matching your companys strategy to its situation

Ch3-4

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
Ch3-5

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
Ch3-6

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.
Ch3-7

Discovering Core Competencies

Discovering Core Competencies

Competitive Advantage
Gained through Core Competencies

Strategic Competitiveness
Above-Average Returns

Core Competencies
Sources of Competitive Advantage

Capabilities
Teams of Resources

Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable

Value Chain Analysis

* Outsource

Resources
* Tangible * Intangible

Ch3-8

Key Questions for Managers in Internal Analysis

How do we assemble bundles of Resources, Capabilities and Core Competencies to create VALUE for customers? And... Will environmental changes make our core competencies obsolete? Are substitutes available for our core competencies? Are our core competencies easily imitated?
Ch3-9

Discovering Core Competencies

Resources
* Tangible * Intangible
Ch3-10

Resources

What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name

Ch3-11

Resources

What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name

Resources represent inputs into a firms production process... such as capital equipment, skills of employees, brand names, finances and talented managers

Ch3-12

Resources

What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name

Resources represent inputs into a firms production process...

such as capital equipment, skills of employees, brand names, finances and talented managers

Some genius invented the Oreo. Were just living off the inheritance. F. Ross Johnson,
Former President & CEO, RJR Nabisco
Ch3-13

Resources
Tangible Resources
* * * * Financial 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 name

Resources represent inputs into a firms production process...

such as capital equipment, skills of employees, brand names, finances and talented managers Some genius invented the Oreo. Were just living off the inheritance. F. Ross Johnson,
Former President & CEO, RJR Nabisco
Ch3-14

Intangible Resources
* Technological * Innovation

* Reputation

Discovering Core Competencies

Capabilities
Teams of Resources

Resources
* Tangible * Intangible
Ch3-15

Capabilities

What a firm Does...

Capabilities represent: the firms capacity or ability to integrate individual firm resources to achieve a desired objective.

Ch3-16

Capabilities

What a firm Does...

Capabilities represent: the firms 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 firms 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.

Ch3-17

Capabilities

What a firm Does...

Capabilities represent: the firms 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 firms 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.
Ch3-18

Discovering Core Competencies

Discovering Core Competencies

Core Competencies
Sources of Competitive Advantage

Capabilities
Teams of Resources

Resources
* Tangible * Intangible
Ch3-19

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.
Leonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.

Ch3-20

Discovering Core Competencies

Discovering Core Competencies

Core Competencies
Sources of Competitive Advantage

Capabilities
Teams of Resources

Criteria of Sustainable Advantages

* * * * Valuable Rare Costly to Imitate Nonsubstitutable

Resources
* Tangible * Intangible

* Outsource

Ch3-21

Core Competencies
For a strategic capability to be a Core Competency, it must be:

What a firm Does... that is Strategically Valuable

Valuable
Rare Costly to Imitate Nonsubstitutable
Ch3-22

Core Competencies
Core Competencies must be:
Valuable

What a firm Does... that is Strategically Valuable

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

Capabilities that are possessed by few, if any, current or potential competitors

Rare

Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

Capabilities that do not have strategic equivalents, such as firmspecific knowledge or trust-based relationships

Nonsubstitutable

Ch3-23

Discovering Core Competencies

Discovering Core Competencies

Core Competencies
Sources of Competitive Advantage

Capabilities
Teams of Resources

Criteria of Sustainable Advantages

* * * * Valuable Rare Costly to Imitate Nonsubstitutable

Value Chain Analysis

Resources
* Tangible * Intangible

* Outsource

Ch3-24

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Primary Activities

Ch3-25

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Inbound Logistics
Primary Activities

Ch3-26

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Primary Activities

Operations

Inbound Logistics

Ch3-27

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Operations

Primary Activities

Outbound Logistics

Inbound Logistics

Ch3-28

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Operations

Outbound Logistics

Primary Activities

Marketing & Sales

Inbound Logistics

Ch3-29

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Operations

Outbound Logistics

Primary Activities

Marketing & Sales

Inbound Logistics

Service

Ch3-30

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch3-31

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch3-32

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Support Activities

Human Resource Management

Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch3-33

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure
Support Activities

Human Resource Management

Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch3-34

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure
Support Activities

Human Resource Management

Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch3-35

Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Support Activities

Human Resource Management

Technological Development

Procurement
Operations Outbound Logistics Marketing & Sales Inbound Logistics Service

Primary Activities

Ch3-36

Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Human Resource Management

Support Activities

Human Resource Management purchase a portion Firms often

Technological Development Procurement

Technological

Procurement
Operations Inbound Logistics

of their value-creating activities from Development specialty external suppliers who can perform these functions more efficiently

Outbound Logistics

Marketing & Sales

Service

Service

Inbound Logistics

Operations

Outbound Logistics

Marketing & Sales

Primary Activities

Ch3-37

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 worldclass capabilities available to firms in a wide range of applications

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

Free Resources for Other Purposes

Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively Ch3-38

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 firms ability to grow and adapt to environmental change or competitive threats
Ch3-39

Discovering Core Competencies

Discovering Core Competencies

Competitive Advantage
Gained through Core Competencies

Strategic Competitiveness
Above-Average Returns

Core Competencies
Sources of Competitive Advantage

Capabilities
Teams of Resources

Criteria of Sustainable Advantages

* * * * Valuable Rare Costly to Imitate Nonsubstitutable

Value Chain Analysis

Resources
* Tangible * Intangible

* Outsource
Ch3-40