The Internal Environment: Chapter 3 The Internal Environment: Resources, Capabilities and Core Competencies Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing 1

Sustainable Competitive Advantage Chapter 2 External Environment What the Firm Might Do Sustainable Competitive Advantage Chapter 3 Internal Environment What the Firm Can Do 5

SWOT Analysis Strengths Weaknesses Opportunities Threats

The purpose of SWOT Analysis It is an easy-to-use tool for developing an overview of a company’s strategic situation It forms a basis for matching your company’s strategy to its situation

Strengths A STRENGTH is something a company is good at doing or a characteristic that gives it an important capability. Possible Strengths: Name recognition Proprietary technology Cost advantages Skilled employees Loyal Customers

Weaknesses A WEAKNESS is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage Possible Weaknesses: Poor market image Obsolete facilities Internal operating problems Poor marketing skills

Strengths and Weakness form a basis for INTERNAL analysis By examining strengths, you can discover untapped potential or identify distinct competencies that helped you succeed in the past. By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies.

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

Key Questions for Managers in Internal Analysis 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? 14

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 Human Resources 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 Technological * 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 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

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

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

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

Identifying Resources and Capabilities That Can Add Value Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Inbound Logistics Outbound Logistics Operations Primary Activities

Identifying Resources and Capabilities That Can Add Value Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities

Identifying Resources and Capabilities That Can Add Value Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Service Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities

Identifying Resources and Capabilities That Can Add Value Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities

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

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

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 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