The Internal Environment: Resources, Capabilities and Core Competencies Dr. S. Perot

Sustainable Competitive Advantage What the Firm Might Do External Environment Five Forces Analysis Sustainable Competitive Advantage Internal Environment Resources, Capabilities and Core Competencies What the Firm Can Do

Discovering Core Competencies Competitive Advantage Gained through Core Competencies 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 * Outsource * Rare * Costly to Imitate * Nonsubstitutable

Create VALUE for Customers Key Questions for Managers in Internal Analysis include... 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?

Intraorganizational Conflicts Key Questions for Managers in Internal Analysis include... Difficult managerial decisions regarding resources, capabilities and core competencies are characterized by three conditions: Uncertainty Complexity Intraorganizational Conflicts

Discovering Core Competencies Resources * Tangible Intangible

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

Discovering Core Competencies Capabilities Teams of Resources Resources * Tangible Intangible

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.

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

What a firm Does... Core Competencies 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.

Valuable Rare Costly to Imitate Nonsubstitutable Core Competencies For a strategic capability to be a Core Competency, it must be: Valuable Rare Costly to Imitate Nonsubstitutable

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

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

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

Human Resource Management MARGIN Technological Development Value Chain Analysis helps to identify which resources and capabilities 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

Human Resource Management Technological Development Outsourcing - 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 Outsourcing - strategic choice to purchase some activities from outside suppliers - 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

What are the Strategic Rationales for Outsourcing?

What are the 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

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

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

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

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

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 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

Core Competencies--Cautions and Reminders It should never be taken 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

The Strategic Management Process Strategic Intent Strategic Mission Chapter 2 External Environment The Strategic Management Process Strategic Intent Strategic Mission Chapter 3 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

Discovering Core Competencies Competitive Advantage Gained through Core Competencies 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