Chapter 3

The Internal Environment: Resources, Capabilities and Core Competence

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson
2003 Southwestern Publishing Company
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Strategic Inputs

Chapter 2 The External Environment Strategic Intent Strategic Mission Chapter 3 The Internal Environment

The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance Chapter 11 Organizational Structure and Controls Chapter 13 Strategic Entrepreneurship

Strategy Formulation
Strategic Actions Chapter 5 Chapter 4 Competitive Rivalry BusinessBusiness-Level and Competitive Strategy Dynamics Chapter 7 Acquisition and Restructuring Strategies Chapter 8 International Strategy Chapter 6 CorporateCorporateLevel Strategy

Chapter 9 Cooperative Strategy

Chapter 12 Strategic Leadership

Strategic Outcomes

Strategic Competitiveness AboveAbove-Average Returns

Feedback

Sustainability of a Competitive Advantage



Sustainability of a competitive advantage is a function of:

the rate of core-competence obsolescence due coreto environmental changes the availability of substitutes for the core competence the imitability of the core competence

External and Internal Analyses

Environment Sociocultural Industry Environment

By studying the external environment, firms identify what they might choose to do

Opportunities and threats

Competitor Environment Technological General
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External and Internal Analyses

By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage)
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Challenge of Internal Analysis



How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly?

Three Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies


Uncertainty regarding characteristics of the

general and the industry environments, competitors actions, and customers preferences

Complexity regarding the interrelated causes

shaping a firms environments and perceptions of the environments

Intraorganizational Conflicts among

people making managerial decisions and those affected by them
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Components of Internal Analysis

Core Competencies Capabilities Resources Tangible Intangible Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable Discovering Core Competencies

Strategic Competitiveness Competitive Advantage

Value Chain Analysis

Outsource

Discovering Core Competencies

Resources Tangible Intangible

Resources are what a firm has to work with--its assets-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
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Discovering Core Competencies

Resources Tangible Intangible

Tangible Resources Financial Physical Technological Organizational

Intangible Resources Human Resources Innovation Reputation

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Discovering Core Competencies

Capabilities

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage

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Discovering Core Competencies

Capabilities

Capabilities are what a firm does, and represent the firms capacity or ability to integrate individual firm resources to achieve a desired objective

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Discovering Core Competencies

Core Competencies

Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive McKinsey and Co. recommends using three to four competencies when framing strategic actions
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Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Valuable: Capabilities that help a firm neutralize threats or exploit opportunities

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Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Rare: Capabilities that are not possessed by many others

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Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Costly to imitate: capabilities that other firms cannot develop easily, usually due to Unique historical conditions Causal ambiguity Social complexity
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Discovering Core Competencies Four Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable

Nonsubstitutable: capabilities that do not have strategic equivalents Invisible to competitors Firm specific knowledge Trust-based working relationships between managers Trustand nonmanagerial personnel

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Core Competence as a Strategic Capability

Resources Inputs to a firms production process Core Competence A strategic capability
Does it satisfy the criteria of sustainable competitive advantage?

The source of

Capability An integration of a team of resources

Yes

No

Capability A nonstrategic team or resource 18

Performance Implications
Competitive Consequences
No Yes No No No No Competitive Disadvantage Competitive Parity Temporary ComCompetitive Advantage Sustainable ComCompetitive Advantage

Performance Implications
Below Average Returns Average Returns Above Average to Average Returns Above Average Returns

Yes/ No No Yes/ No

Yes

Yes No

Yes

Yes Yes

Yes

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The Basic Value Chain

Technological Development Human Resource Mgmt.

Firm Infrastructure

Support Activities

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

Human Resource Mgmt.

Support Activities

Firm Infrastructure

Outsourcing is the purchase of some or all of a valuevaluecreating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently

Service Procurement Marketing & Sales Outbound Logistics Operations Inbound Logistics
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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 WorldCapabilities

the specialized resources of outsourcing providers makes world-class capabilities worldavailable to firms in a wide range of applications
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Strategic Rationales for Outsourcing



Accelerate Business Re-Engineering ReBenefits

achieves re-engineering benefits more quickly reby having outsiders--who have already outsiders--who achieved world-class standards--take over worldstandards--take process

Share Risks
reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities
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Strategic Rationales for Outsourcing



Free Resources for Other Purposes

permits firm to redirect efforts from non-core nonactivities toward those that serve customers more effectively

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Outsourcing Issues


Greatest Value
outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced

Evaluating Resources and Capabilities

dont 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 complete necessary ongoing 25 organizational tasks

Outsourcing Issues


Nonstrategic Team of Resources

do not outsource capabilities that are critical to their 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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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 now generate inertia and stifle innovation

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