©1999 South-Western College Publishing Chapter 3 The Internal Environment: Resources, Capabilities and Core Competencies Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©1999 South-Western College Publishing 1

What the Firm Might Do What the Firm Can Do External Environment Chapter 2 External Environment Five Forces Analysis Chapter 3 Internal Environment Resources, Capabilities and Core Competencies What the Firm Can Do 4

Sustainable Competitive Advantage What the Firm Might Do Chapter 2 External Environment Five Forces Analysis Sustainable Competitive Advantage Chapter 3 Internal Environment Resources, Capabilities and Core Competencies What the Firm Can Do 5

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 Resources * Tangible Intangible 7

Resources represent inputs into a firm’s production process... What a firm Has... Resources Resources Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers 18

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 8

Capabilities represent... What a firm Does... Capabilities represent... the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. 24

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 35

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 36

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 37

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

To identify which resources and capabilities can add value Value Chain Analysis To identify which resources and capabilities can add value Support Activities Primary Activities 49

helps to identify which resources and capabilities can add value Value Chain Analysis helps to identify which resources and capabilities can add value Support Activities Inbound Logistics Primary Activities 50

helps to identify which resources and capabilities can add value Value Chain Analysis helps to identify which resources and capabilities can add value Support Activities Inbound Logistics Operations Primary Activities 51

helps to identify which resources and capabilities can add value Value Chain Analysis helps to identify which resources and capabilities can add value Support Activities Inbound Logistics Outbound Logistics Operations Primary Activities 52

helps to identify which resources and capabilities can add value Value Chain Analysis helps to identify which resources and capabilities can add value Support Activities Outbound Logistics Marketing & Sales Inbound Logistics Operations Primary Activities 53

helps to identify which resources and capabilities can add value Value Chain Analysis helps to identify which resources and capabilities can add value Support Activities Service Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities 54

helps to identify which resources and capabilities can add value Value Chain Analysis helps to identify which resources and capabilities can add value Support Activities Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities 55

Technological Development Value Chain Analysis helps to identify which resources and capabilities can add value Support Activities Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities 56

Human Resource Management Value Chain Analysis helps to identify which resources and capabilities can add value Human Resource Management Support Activities Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities 57

Human Resource Management Value Chain Analysis helps to identify which resources and capabilities can add value Firm Infrastructure Human Resource Management Support Activities Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales Operations Primary Activities 58

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 59

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 61

To capitalize on the usefulness of the Value Chain concept... it is important to recognize that... 68

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain 69

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 70

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Buyer Value Chain Channel Value Chain Downstream Value Each firm must eventually find a way to become a part of some buyer’s value chain 71

Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! 72

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 79

Comparative Market Share (%) by Installed Units

Industry Growth (in $billions)

Cost of Processing (MIPS)

Comparative Profitability

5-Forces Model of Computer Industry Potential Entrants Low Entry Barriers Suppliers O/S Processors Application Software Memory Devices Buyers Price Sensitive Mass Merchandisers Mail Order Rivalry New Products More Marketing Price Cutting Outsourcing Windows Substitutes Workstations Palm-tops/ PDA’s

Strategic Group Map Pre-Windows Premium Sun Apple Price Compaq IBM Clones Low Broad Narrow Strategic Focus - Differentiation

Strategic Group Map Post-Windows Weakness Strategic Group Map Post-Windows Premium Sun Apple Price Compaq IBM Clones Low Broad Narrow Strategic Focus - Differentiation

Human Resource Management MARGIN Technological Development Value Chain Analysis How to Create Value in the PC Industry? Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Inbound Logistics Outbound Logistics Marketing & Sales MARGIN Operations Primary Activities 59