Competing For Advantage Part II – Strategic Analysis Chapter 4 – The Internal Organization: Resources, Capabilities, and Core Competencies

The Strategic Management Process

Outcomes from Organizational Analyses

Factors that Determine Sustainability of Competitive Advantage Rate of core competence obsolescence Availability of substitutes Imitability of core competence

Conditions Influencing Internal Analysis Key Terms Global Mind-Set – ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context

Global Considerations and the Pace of Change Environmental context beyond national/cultural boundaries Diversity to prevent inertia, resistance to change, and denial Experimentation and learning to promote responsiveness New breed of managers to handle uncertainty, make complex decisions, and hold employees accountable Strategy defined in terms of a unique and viable competitive position

Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies.

Creating Value Key Terms Value – measured by a product's performance characteristics and by its attributes for which customers are willing to pay

Resources, Capabilities, and Core Competencies Resources – the source of a firm's capabilities Capabilities – the source of a firm's core competencies Core competencies – the basis for a firm’s competitive advantages in the marketplace

Components of Internal Analysis Leading to Competitive Advantage and Value Creation

Resources Key Terms Tangible Resources – assets that can be observed and quantified Intangible Resources – assets that are typically rooted deeply in the firm's history and have accumulated over time

Resources Key Terms (cont.) Reputation – level of awareness a firm has been able to develop among stakeholders Social Capital – relationships with other organizations that contribute to the creation of value

Resources Key Terms (cont.) Strategic Value of Resources – degree to which resources can contribute to the development of capabilities, core competencies, and ultimately, competitive advantage

Tangible Resources

Intangible Resources

Increasing Value of Intangible Resources Less visibility and less imitable More sustainability More leverage within network of users

Capabilities Key Terms Capabilities – firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state

Examples of Firm’s Capabilities

Core Competencies Key Terms Core Competencies – resources and capabilities that serve as sources of competitive advantage for a firm over its rivals

Core Competencies – Features Resources that emerge within a firm over time The capacity of an organization to take action The activities that a firm performs well relative to its competitors A representation of a firm's resources and capabilities—including only those with strategic value

Core Competencies – Features (cont.) Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace

Tools for Building Core Competencies Four Criteria of Sustainable Competitive Advantage Value Chain Analysis

Four Criteria of Sustainable Competitive Advantage Valuable Capabilities Rare Capabilities Costly-to-Imitate Capabilities Nonsubstitutable Capabilities

Four Criteria of Sustainable Competitive Advantage Key Terms Valuable Capabilities – allow the firm to exploit opportunities or neutralize threats in its external environment Rare Capabilities – possessed by few, if any, current or potential competitors Costly-to-Imitate Capabilities – cost for other firms to develop is prohibitive, cannot easily be developed by other firms Nonsubstitutable Capabilities – do not have strategic equivalents

Four Criteria for Determining Core Competencies

Core Competencies as a Strategic Capability

Costly-to-Imitate Capabilities Unique historical conditions Causal ambiguity Social complexity

Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Value Chain Analysis Key Terms Primary Activities – involved with a product's physical creation, its sale and distribution to buyers, and its service after sale Support Activities – provide the support needed by the primary activities to be implemented

The Basic Value Chain

The Value-Creating Potential of Support Activities

Source of Competitive Advantage The resource or capability must allow the firm to perform an activity in a manner superior to the way competitors perform it The resource or capability must allow the firm to perform a value-creating activity that competitors cannot perform

Outsourcing Key Terms Outsourcing – purchase of a value- creating activity from an external supplier

Outsourcing Viability When a firm does not have the capabilities in the areas needed to succeed When a firm lacks a resource or possesses inadequate skills needed to implement a strategy When few organizations possess the resources and capabilities needed for competitive superiority in all primary and support activities necessary to compete When extensive internal capabilities exist for effectively coordinating external sourcing and internal core competencies

Benefits of Outsourcing Increased flexibility Mitigation of risks Reduced capital investments

Essential Skills for Outsourcing Strategic thinking Deal making Partnership governance Managing change

Core Competencies – Cautions Never assume that core competencies will continue to provide a source of competitive advantage All core competencies have the potential to become core rigidities Core rigidities – former core competencies that now generate inertia and stifle innovation

Stakeholder Objectives and Power Key Terms Economic Power – comes from the ability to withhold economic support from the firm Political Power – results from the ability to influence others to withhold economic support or to change the rules of the game Formal Power – refers to laws or regulations that specify the legal relationship between a firm and a particular stakeholder group

Returns and Stakeholders High economic returns – firm can more easily satisfy multiple stakeholders simultaneously Average economic returns – firm is unable to maximize interests of all stakeholders Below-average returns – firm must minimize the amount of support withdrawn by stakeholders

Measures of Firm Performance Capital market performance Product market performance Organizational stakeholder performance

Measures of Firm Performance Key Terms Risk – investor uncertainty about the economic gains or losses that will result from a particular investment

Firm Performance from a Capital Market Perspective

Other Measures of Firm Performance

Sustainable Development Key Terms Sustainable Development – business growth that does not deplete the natural environment or damage society

Ethical Questions Can efforts to develop sustainable competitive advantages result in employees using unethical practices? If so, what unethical practices might be used to compare a firm’s core competencies to those held by rivals?

Ethical Questions Do ethical practices affect a firm’s ability to develop a brand name as a source of competitive advantage? If so, how does this happen? Identify some brands that are a source of competitive advantage in part because of the firm’s ethical practices.

Ethical Questions What is the difference between exploiting a firm’s human capital and using that capital as a source of competitive advantage? Are there situations in which the exploitation of human capital can be a source of advantage? If so, name such a situation, and explain whether it is a sustainable advantage. Why or why not?

Ethical Questions Are any particular ethical dilemmas associated with outsourcing? If so, what are they? How would you deal with such ethical dilemmas?

Ethical Questions What ethical responsibilities do managers have if they determine that certain employees have skills that are valuable only to core competencies that are becoming core rigidities?

Ethical Questions Through the Internet, firms sometimes make a vast array of data, information, and knowledge available to competitors as well as to customers and suppliers. What ethical issues, if any, are involved when the firm finds competitively relevant information on a competitor’s website?

Ethical Questions To what extent does a firm have a moral obligation to distribute value back to stakeholders based on their relative contributions to its creation? Does a firm have any legal obligations to do so?