1. Chapter 3:
The Internal Organization: Resources, Capabilities, Core Competencies and Competitive Advantages
Diane M. Sullivan, Ph.D., 2011
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage

2. Step 1 in the Strategic Management Process Continued
Collect information/ knowledge to help you determine what type of strategy would be effective and how it could best be implemented
Next, examine the strategic inputs important in the Resource-based model (R-B model)
Insert figure 1.1 graphic

3. Context for Analyzing the Internal Organization
Context of Internal Analysis
‘Global mind-set’
Study internal environment in ways that do not depend on the assumptions of a single country, culture, or context
Important because of increasing global competition
Analyze firm’s portfolio of resources and bundles of heterogeneous resources and capabilities
Understand how to leverage these bundles to create the most value
An organization's core competencies creates and sustains its competitive advantage

4. Pets.com misread what customers valued and failed
Analyzing the Internal Organization: Using Resources to Create Value for Customers
Creating Value
By exploiting core competencies or competitive advantages, firms create value
Value is created by innovatively bundling and leveraging firm resources and capabilities
Key: to effectively bundle and leverage resources  firms must understand what customers value
A competitive advantage occurs when firms offer value to customers that is greater than the value competitors provide
Pets.com misread what customers valued and failed
The Lieutenant Commander Geordi La Forge got sad because Pets.com didn’t deliver his food expeditiously. As a result, he’s decided to shop exclusively at PetSmart for all of his dietary needs.

5. Analyzing the Internal Organization: Resources, Capabilities and Core Competencies
The Foundation of a Competitive Advantage
Resources
Capabilities
Core Competencies
Resource 1
Resource 2
Capability
Core Competency
Competitive Advantage
Capability

6. Tangible Resources: Assets that can be seen and quantified
Resources: Two Types
Tangible Resources: Assets that can be seen and quantified
Financial
Cash; capacity to raise equity; borrowing capacity
Physical
Modern plant and facilities; favorable manufacturing locations; access to raw materials
Technological
Stock of technology like trade secrets; innovative production processes; patents, copyrights, trademarks
Organizational
The firm’s formal reporting structure, formal planning, controlling, and coordinating systems
Intangible Resources: Assets rooted in the firm’s history and that have accumulated over time
Human
Knowledge, trust, employee experience and skills; organizational routines
Innovation & Creativity
Ideas, scientific skills; innovation capacities
Reputation
Brand name; quality and reliability reputation; supplier relations

7. Combining Resources to Create Capabilities
Capability
Capabilities exist when resources are purposely integrated to achieve a specific task or set of tasks.
Example 1: Wal-Mart uses tangible resources from its distribution centers + its MIS infrastructure to create capabilities in distribution and inventory management
Example 2: Southwest uses it intangible resources of HR’s organizational routines + physical resources of planes and landing gates to create a logistics management

8. When Capabilities become Core Competencies
Capability
Core Competency
Competitive Advantage
Core competencies are capabilities that serve as a source of a competitive advantage for a firm over its rivals
Firms should have no more than 3-4 core competencies around which strategic actions can be framed
Two tools to help firms identify and build core competencies
1. Barney’s Four Criteria of a Sustainable Competitive Advantage (VRIO)
2. Porter’s Value Chain

9. Tool 1: Barney’s Four Criteria of a Sustainable Competitive Advantage
Capabilities that meet the four criteria are core competencies that can generate a sustainable competitive advantage
The four criteria are
Valuable: Does the capability enable a firm to exploit an environmental opportunity, and/or neutralize an environmental threat thereby creating value for customers?
Rarity: Is a capability currently possessed by only a small number of competing firms?
Inimitability: Do firms without the capability face a cost disadvantage in obtaining or developing it? [is what the firm doing difficult to imitate?]
Nonsubstitutable: Does the capability lack a strategic equivalent?

10. Competitive Implications Performance Implications
Using Barney’s Four Criteria to Assess the Potential for a Sustainable Competitive Advantage
According to Barney, a supportive answer to each question would indicate the firm can sustain a competitive advantage
Below is how to apply the criteria and the associated outcomes
Using the Four Criteria , Competitive Implications, and Performance Implications
Valuable?
Rare?
Costly to Imitate?
Non-substitutable?
Competitive Implications
Performance Implications No
Disadvantage
Below-average returns
Yes
Parity
Average returns
Temporary Advantage
Above-average returns (at least for some amount of time)
Sustained Advantage
Above-average returns
Firms should NOT emphasize these capabilities in strategy development and implementation
Firms should emphasize these capabilities and implement strategies that rely on these capabilities

11. Tool 2: Porter’s Value Chain Analysis
Allows a firm to understand the parts of its operations that create value and those that do not
Used to understand a firm’s cost position and identify the how to implement a business-level strategy
Analysis is broken down into two types of activities:
Primary activities: deal with the physical creation, sale, distribution, and servicing of a product/service
Support activities: provide assistance for the primary activates to take place
Key: Create additional value without incurring significant costs while doing so and to capture value that has been created

12. How Business Models Emerge: Porter’s Value Chain
(Firm Infrastructure)
(Production)
The Value Chain: proposes that each activity can either add or subtract value for the firm. Activities supported by capabilities that are core competencies should be value adding and completed internally. Activities that require capabilities that are not core competencies of the firm generally subtract value and should be outsourced.

13. Select a Business-level Strategy
External environment  provides information on what a firm might choose to do
Internal environment  provides information on what the firm can do
The cumulative results of these analyses provide the firm with the information required to select a business-level strategy that will help it reach its vision and mission
Business-level strategies will be discussed next week in Chapter 4
Reminders:
CapSim Practice Round 3 processes Thursday at 7:00pm