1 The Internal Organization: Resources, Capabilities, and Core Competence Chapter 4

2 External and Internal Analyses General Environment GeneralEnvironmentGeneral Environment Sociocultural Global Technological Political/Legal Demographic Economic IndustryEnvironment CompetitorEnvironment By studying the external environment, firms identify what they might choose to do Opportunities and threats

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

4 Value Creation V P C C P-C V-P V=Value to Consumer P=Price C=Costs of Production V-P=Consumer Surplus P-C=Profit Margin

5 Components of Internal Analysis Discovering Core Competencies Resources TangibleTangible IntangibleIntangible Capabilities CoreCompetencies CompetitiveAdvantage Value Creation Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable ValueChainAnalysis OutsourceOutsource

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

7 Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments among people making managerial decisions and those affected by them Intraorganizational Conflicts among people making managerial decisions and those affected by them

8 Discovering Core Competencies Resources TangibleTangible IntangibleIntangible Resources are what a firm has to work with--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

9 Discovering Core Competencies Resources TangibleTangible IntangibleIntangible Tangible Resources FinancialFinancial OrganizationalOrganizational PhysicalPhysical TechnologicalTechnological Intangible Resources HumanHuman InnovationInnovation ReputationReputation

10 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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13 Discovering Core Competencies Capabilities Capabilities are what a firm does, and represent the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state

14 Discovering Core Competencies CoreCompetencies 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

15 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Valuable: Capabilities that help a firm neutralize threats or exploit opportunities

16 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Rare: Capabilities that are not possessed by many others

17 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Costly to imitate: capabilities that other firms cannot develop easily, usually due to Unique historical conditions Causal ambiguity Social complexity

18 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Nonsubstitutable: capabilities that do not have strategic equivalents Invisible to competitors Firm specific knowledge Trust-based working relationships between managers and nonmanagerial personnel

19 Distinctive Competencies, Resources, and Capabilities The Role of Luck

20 Sustainability of a Competitive Advantage Sustainability of a competitive advantage is a function of: Sustainability of a competitive advantage is a function of:  the rate of core-competence obsolescence due to environmental changes  the availability of substitutes for the core competence  the imitability of the core competence

21 Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement Margin Primary Activities Support Activities The Basic Value Chain

22 Margin Margin Primary Activities Support Activities Outsourcing Outsourcing is the purchase of some or all of a value- creating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement

23 Strategic Rationales for Outsourcing Improve Business Focus Improve Business Focus  lets company focus on broader business issues by having outside experts handle various operational details Provide Access to World-Class Capabilities Provide Access to World-Class Capabilities  the specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

24 Strategic Rationales for Outsourcing Accelerate Business Re-Engineering Benefits 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 Share Risks  reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

25 Strategic Rationales for Outsourcing Free Resources for Other Purposes Free Resources for Other Purposes  permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

26 Outsourcing Issues Greatest Value 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 Evaluating Resources and Capabilities  don’t outsource activities in which the firm itself can create and capture value Environmental Threats and Ongoing Tasks Environmental Threats and Ongoing Tasks  do not outsource primary and support activities that are used to neutralize environmental threats or complete necessary ongoing organizational tasks

27 Outsourcing Issues Nonstrategic Team of Resources 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 Firm’s Knowledge Base Firm’s Knowledge Base  do not outsource activities that stimulate the development of new capabilities and competencies

28 Core Competencies: Cautions and Reminders Never take for granted that core competencies will continue to provide a source of competitive advantage 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 All core competencies have the potential to become core rigidities Core rigidities are former core competencies that now generate inertia and stifle innovation Core rigidities are former core competencies that now generate inertia and stifle innovation

29 Why Do Companies Fail? Inertia

30 Why Do Companies Fail? Inertia Prior Strategic Commitments

31 Why Do Companies Fail? The Icarus Paradox