Strategic Management Concepts and Cases

Examining the Internal Organization: Activities, Resources, and Capabilities

Chapter 2 External Environment What the Firm Might Do Chapter 3 Internal Environment What the Firm Can Do SustainableCompetitiveAdvantage

The Challenge of Internal Analysis The strategic decisions managers make in terms of the firm’s resources, capabilities, and core competencies are nonroutine,31 have ethical implications,32 and significantly influence the firm’s ability to earn above-average returns.33 Making these decisions—identifying, developing, deploying, and protecting resources, capabilities, and core competencies— may appear to be relatively easy.

When exercising judgment, decision makers often take intelligent risks. In the current competitive landscape, executive judgment can be a particularly important source of competitive advantage.

Resources, Capabilities, and Core Competencies Resources Tangible resources are assets that can be seen and quantified. Intangible resources include assets that typically are rooted deeply in the firm’s history and have accumulated over time.

Resources * * Tangible * * Intangible Discovering Core Competencies

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

Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources

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 What a firm Has... Resources

Tangible Resources Financial * * Physical * * Human Resources * * Organizational * * 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 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 Resources

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

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

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

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

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

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

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

What Criteria Make Core Competencies Costly to Imitate? What Criteria Make Core Competencies Costly to Imitate? Unique Historical Conditions Causal Ambiguity Social Complexity This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage 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 Example: Disney created Mickey Mouse at a time when animated motion pictures were new An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances

Core Competencies must be: Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm- specific knowledge or trust-based relationships What a firm Does... that is Strategically Valuable Core Competencies Valuable Rare Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Capabilities that are possessed by few, if any, current or potential competitors Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

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

ValuableRare Costly to Imitate Nonsub- stitutable Competitive Consequences Performance Implications NONONONO CompetitiveDisadvantage Below Average Returns YESNONOYES/NOCompetitiveParityAverageReturns YESNOYES/NOYESTemporaryCompetitiveAdvantage Aver./Above Average Returns AboveAverageReturnsAboveAverageReturns YE S SustainableCompetitiveAdvantageSustainableCompetitiveAdvantage Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

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

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

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

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

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

Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Service Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Service Procurement Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

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

Support Activities Primary Activities Technological Development Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service Human Resource Management Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

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

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

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

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

Lets company focus on broader business issues by having outside experts handle various operational details Strategic Rationales for Outsourcing Improve Business Focus Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively Free Resources for Other Purposes Provide Access to World-Class Capabilities Accelerate Business Re-Engineering Benefits Share Risks The specialized resources of outsourcing providers makes world- class capabilities available to firms in a wide range of applications Achieves re-engineering benefits more quickly by having outsiders-- who have already achieved world-class standards--take over process Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

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