1. The Internal Environment: Resources, Capabilities and Core Competencies1

2. The Strategic Management Process Strategy Formulation
External
Environment
The Strategic
Management
Process
Strategic
Outcomes
Actions
Strategic
Inputs
Strategic Intent
Strategic Mission
Internal Environment
Strategy Formulation
Strategy Implementation
Business-level Strategy
Competitive Dynamics
Corporate-Level Strategy
International Strategy
Corporate Governance
Structure & Control
Strategic
Competitiveness
Above Average
Returns
Feedback 10

3. 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

4. Discovering Core Competencies
Resources *
Tangible
Intangible 16

5. 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

6. 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

7. 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

8. 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
Technological
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
Human *
Innovation
Reputation
“Some genius invented the Oreo. We’re just living off the inheritance.”
F. Ross Johnson,
Former President & CEO, RJR Nabisco 21

9. Discovering Core Competencies
Capabilities
Teams of
Resources
Resources *
Tangible
Intangible 23

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

11. 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

12. 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

13. Discovering Core Competencies
Sources of
Core
Competencies
Competitive
Advantage
Capabilities
Teams of
Resources
Resources *
Tangible
Intangible 27

14. 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

15. 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

16. 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

17. Core Competencies What a firm Does... that is Strategically Valuable
Capabilities that help a firm neutralize threats or exploit opportunities
Rare
Capabilities that are not possessed by many others
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity 37

18. What Criteria Make Core Competencies Costly to Imitate?
Unique Historical Conditions
An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances
Example:
Disney created Mickey Mouse at a time when animated motion pictures were new
Causal Ambiguity
This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage
Social Complexity
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 41

19. 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

20. Core Competencies Resources Core Competence Capability Capability
Inputs to a firm’s production process
Core Competence
A strategic capability
YES
Does the capability satisfy the criteria of sustainable competitive advantage?
Capability
Integration of a team of resources
The source of NO
Capability
A nonstrategic team of resources 42

21. Competitive Consequences Performance Implications
Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage
Valuable
Rare
Costly to Imitate
Nonsub-stitutable
Competitive Consequences
Performance Implications NO
Competitive
Disadvantage
Below Average
Returns
YES NO
YES/NO
Competitive
Parity
Average
Returns
YES NO
YES/NO
Temporary
Competitive
Advantage
Aver./Above Average
Returns
Above
Average
Returns
YES
Sustainable
Competitive
Advantage 46

22. 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

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

24. 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

25. 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

26. 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

28. 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

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

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

31. 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

32. 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 71

33. 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!! 72

34. 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 73

35. 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

36. 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

37. 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

38. The Strategic Management Process External Environment Internal80

39. The Strategic Management Process Strategic Intent Strategic Mission
External
Environment
The Strategic
Management
Process
Strategic Intent
Strategic Mission
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 83