The Internal Environment: Resources, Capabilities and Core Competencies 1

The Strategic Management Process Strategy Formulation External Environment The Strategic Management Process Strategic Outcomes Actions Strategic Inputs Strategic Intent Strategic Mission Internal Environment Strategy Formulation Strategy Implementation Business-level Strategy Competitive Dynamics Corporate-Level Strategy International Strategy Corporate Governance Structure & Control Strategic Competitiveness Above Average Returns Feedback 10

Discovering Core Competencies Resources * Tangible Intangible Capabilities Teams of Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Gained through Core Competencies Discovering Discovering Core Competencies Criteria of Sustainable Advantages Value Chain Analysis Valuable Rare Costly to Imitate Nonsubstitutable * Outsource 7

Discovering Core Competencies Resources * Tangible Intangible 16

Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name 17

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 firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers 18

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 firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco 19

Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Tangible Resources Financial * Physical Technological Organizational Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers Intangible Resources Human * Innovation Reputation “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco 21

Discovering Core Competencies Capabilities Teams of Resources Resources * Tangible Intangible 23

Capabilities What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. 24

Capabilities What a firm Does... Capabilities represent: the firm’s 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 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. 25

Capabilities What a firm Does... Capabilities represent: the firm’s 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 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. Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage. 26

Discovering Core Competencies Sources of Core Competencies Competitive Advantage Capabilities Teams of Resources Resources * Tangible Intangible 27

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. 31

Discovering Core Competencies Sources of Core Competencies Competitive Advantage Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable * Capabilities Teams of Resources Resources * Tangible Intangible * Outsource 33

Core Competencies What a firm Does... that is Strategically Valuable For a strategic capability to be a Core Competency, it must be: Valuable Rare Costly to Imitate Nonsubstitutable 34

Core Competencies What a firm Does... that is Strategically Valuable Capabilities that help a firm neutralize threats or exploit opportunities Rare Capabilities that are not possessed by many others Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity 37

What Criteria Make Core Competencies Costly to Imitate? Unique Historical Conditions An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances Example: Disney created Mickey Mouse at a time when animated motion pictures were new Causal Ambiguity This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage Social Complexity Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers 41

Core Competencies What a firm Does... that is Strategically Valuable Core Competencies must be: 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 42

Core Competencies Resources Core Competence Capability Capability Inputs to a firm’s production process Core Competence A strategic capability YES Does the capability satisfy the criteria of sustainable competitive advantage? Capability Integration of a team of resources The source of NO Capability A nonstrategic team of resources 42

Competitive Consequences Performance Implications Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Valuable Rare Costly to Imitate Nonsub-stitutable Competitive Consequences Performance Implications NO Competitive Disadvantage Below Average Returns YES NO YES/NO Competitive Parity Average Returns YES NO YES/NO Temporary Competitive Advantage Aver./Above Average Returns Above Average Returns YES Sustainable Competitive Advantage 46

Discovering Core Competencies Sources of Core Competencies Competitive Advantage Value Chain Analysis Capabilities Teams of Resources Criteria of Sustainable Advantages Resources * Tangible Intangible Valuable Rare Costly to Imitate Nonsubstitutable * * Outsource 48

Identifying Resources and Capabilities That Can Add Value Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Primary Activities

Value Chain Analysis Firm Infrastructure Human Resource Management Identifying Resources and Capabilities That Can Add Value Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales MARGIN Operations Primary Activities

Outsourcing Firm Infrastructure Human Resource Management MARGIN Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales MARGIN Operations Primary Activities

Outsourcing Firm Infrastructure Human Resource Management MARGIN Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Human Resource Management Firms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficiently Support Activities Technological Development MARGIN Technological Development Procurement Procurement Service Service Inbound Logistics Outbound Logistics Marketing & Sales MARGIN Operations Outbound Logistics Marketing & Sales Inbound Logistics Operations Primary Activities

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 world-class 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 67

To capitalize on the usefulness of the Value Chain concept... it is important to recognize that... 68

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain 69

Value Chains are part of a Total Value System Firm Value Chain Channel Value Chain Buyer Value Chain Supplier Value Chain Upstream Value Perform valuable activities that complement the firm’s activities 70

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Buyer Value Chain Upstream Value Channel Value Chain Perform valuable activities that complement the firm’s activities Each firm must eventually find a way to become a part of some buyer’s value chain 71

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Upstream Value Each firm must eventually find a way to become a part of some buyer’s value chain Perform valuable activities that complement the firm’s activities Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! 72

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Upstream Value Each firm must eventually find a way to become a part of some buyer’s value chain Perform valuable activities that complement the firm’s activities Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! Value chains vary for firms in an industry, reflecting each firm’s unique qualities: History Strategy Success at Implementation 73

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 78

Discovering Core Competencies Strategic Competitiveness Above-Average Returns Discovering Core Competencies Sources of Core Competencies Competitive Advantage Capabilities Teams of Resources Criteria of Sustainable Advantages Value Chain Analysis Resources * Tangible Intangible Valuable Rare Costly to Imitate Nonsubstitutable * * Outsource 79

Discovering Core Competencies Competitive Advantage Gained through Core Competencies Strategic Competitiveness Above-Average Returns Discovering Core Competencies Sources of Core Competencies Competitive Advantage Capabilities Teams of Resources Criteria of Sustainable Advantages Value Chain Analysis Resources * Tangible Intangible Valuable Rare Costly to Imitate Nonsubstitutable * * Outsource 85

The Strategic Management Process External Environment Internal 80

The Strategic Management Process Strategic Intent Strategic Mission External Environment The Strategic Management Process Strategic Intent Strategic Mission Internal Environment Leveraging of a firm’s resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the compe- titive environment Strategic Intent A statement of the firm’s unique purpose and the scope of its operations in product market terms Strategic Mission 83