Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies and Competitive Advantages Diane M. Sullivan, Ph.D., 2013 Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage

Step 1 in the Strategic Management Process Continued Collect information/ knowledge to help you determine what type of strategy would be effective and how it could best be implemented Next, examine the strategic inputs important in the Resource-based model (R-B model) Insert figure 1.1 graphic

Context for Analyzing the Internal Organization Context of Internal Analysis ‘Global mind-set’ Study internal environment in ways that do not depend on the assumptions of a single country, culture, or context Important because of increasing global competition Analyze firm’s portfolio of resources and bundles of heterogeneous resources and capabilities Understand how to leverage these bundles to create the most value An organization's core competencies creates and sustains its competitive advantage

Pets.com misread what customers valued and failed Analyzing the Internal Organization: Using Resources to Create Value for Customers Creating Value By exploiting core competencies or competitive advantages, firms create value Value is created by innovatively bundling and leveraging firm resources and capabilities Key: to effectively bundle and leverage resources  firms must understand what customers value A competitive advantage occurs when firms offer value to customers that is greater than the value competitors provide Pets.com misread what customers valued and failed The Lieutenant Commander Geordi La Forge got sad because Pets.com didn’t deliver his food expeditiously. As a result, he’s decided to shop exclusively at PetSmart for all of his dietary needs.

Analyzing the Internal Organization: Resources, Capabilities and Core Competencies The Foundation of a Competitive Advantage Resources Capabilities Core Competencies Resource 1 Resource 2 Capability Core Competency Competitive Advantage Capability

Tangible Resources: Assets that can be seen and quantified Resources: Two Types Tangible Resources: Assets that can be seen and quantified Financial Cash; capacity to raise equity; borrowing capacity Physical Modern plant and facilities; favorable manufacturing locations; access to raw materials Technological Stock of technology like trade secrets; innovative production processes; patents, copyrights, trademarks Organizational The firm’s formal reporting structure, formal planning, controlling, and coordinating systems Intangible Resources: Assets rooted in the firm’s history and that have accumulated over time Human Knowledge, trust, employee experience and skills; organizational routines Innovation & Creativity Ideas, scientific skills; innovation capacities Reputation Brand name; quality and reliability reputation; supplier relations

Combining Resources to Create Capabilities Capability Capabilities exist when resources are purposely integrated to achieve a specific task or set of tasks. Example 1: Wal-Mart uses tangible resources from its distribution centers + its MIS infrastructure to create capabilities in distribution and inventory management Example 2: Southwest uses it intangible resources of HR’s organizational routines + physical resources of planes and landing gates to create a logistics management

When Capabilities become Core Competencies Capability Core Competency Competitive Advantage Core competencies are capabilities that serve as a source of a competitive advantage for a firm over its rivals Firms should have no more than 3-4 core competencies around which strategic actions can be framed Two tools to help firms identify and build core competencies 1. Barney’s Four Criteria of a Sustainable Competitive Advantage (VRIO) 2. Porter’s Value Chain

Tool 1: Barney’s Four Criteria of a Sustainable Competitive Advantage Capabilities that meet the four criteria are core competencies that can generate a sustainable competitive advantage The four criteria are Valuable: Does the capability enable a firm to exploit an environmental opportunity, and/or neutralize an environmental threat thereby creating value for customers? Rarity: Is a capability currently possessed by only a small number of competing firms? Inimitability: Do firms without the capability face a cost disadvantage in obtaining or developing it? [is what the firm doing difficult to imitate?] Nonsubstitutable: Does the capability lack a strategic equivalent?

Competitive Implications Performance Implications Using Barney’s Four Criteria to Assess the Potential for a Sustainable Competitive Advantage According to Barney, a supportive answer to each question would indicate the firm can sustain a competitive advantage Below is how to apply the criteria and the associated outcomes Using the Four Criteria , Competitive Implications, and Performance Implications Valuable? Rare? Costly to Imitate? Non-substitutable? Competitive Implications Performance Implications No Disadvantage Below-average returns Yes Parity Average returns Temporary Advantage Above-average returns (at least for some amount of time) Sustained Advantage Above-average returns Firms should NOT emphasize these capabilities in strategy development and implementation Firms should emphasize these capabilities and implement strategies that rely on these capabilities

Tool 2: Porter’s Value Chain Analysis Allows a firm to understand the parts of its operations that create value and those that do not Used to understand a firm’s cost position and identify the how to implement a business-level strategy Analysis is broken down into two types of activities: Primary activities: deal with the physical creation, sale, distribution, and servicing of a product/service Support activities: provide assistance for the primary activates to take place Key: Create additional value without incurring significant costs while doing so and to capture value that has been created

How Business Models Emerge: Porter’s Value Chain (Firm Infrastructure) (Production) The Value Chain: proposes that each activity can either add or subtract value for the firm. Activities supported by capabilities that are core competencies should be value adding and completed internally. Activities that require capabilities that are not core competencies of the firm generally subtract value and should be outsourced.

Select a Business-level Strategy External environment  provides information on what a firm might choose to do Internal environment  provides information on what the firm can do The cumulative results of these analyses provide the firm with the information required to select a business-level strategy that will help it reach its vision and mission Business-level strategies will be discussed next in Chapter 4