1. Chapter 3 – The Internal Environment

2. Knowledge Objectives
Studying this chapter should provide you with the strategic management knowledge needed to:
Explain the need for firms to study and understand their internal environment.
Define value and discuss its importance.
Describe the differences between tangible and intangible resources.
Define capabilities and discuss how they are developed.

3. Knowledge Objectives – cont’d
Studying this chapter should provide you with the strategic management knowledge needed to:
Describe four criteria used to determine whether resources and capabilities are core competencies.
Explain how value chain analysis is used to identify and evaluate resources and capabilities.
Define outsourcing and discuss the reasons for its use.
Discuss the importance of preventing core competencies from becoming core rigidities.

4. The Strategic Management Process
Strategy Implementation
Chapter 10 Corporate Governance
Chapter 11 Organizational Structure and Controls
Chapter 13 Strategic Entrepreneurship

5. Agenda Creating Competitive Advantage
Resources, Capabilities, & Core Competencies
Value Chain Analysis
Outsourcing

6. Creating Competitive Advantage
Core competencies, in combination with product-market positions, are the firm’s most important sources of competitive advantage
The identification of core competencies, in addition to an analysis of the general, industry, and competitor environments, should drive a firm’s selection of strategies

7. Analysis Outcomes Examine opportunities and threats
Examine unique resources, capabilities, and competencies (sustainable competitive advantage)

8. Creating Value
By exploiting their competitive advantages, firms create value
Value is measured by
A product’s performance characteristics
The product’s attributes for which customers are willing to pay

9. Creating Competitive Advantage
Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively
Acquired
Bundled
Leveraged
Over time, the benefits of any value-creating strategy can be duplicated by competitors

10. Creating Competitive Advantage
Sustainability of a competitive advantage is a function of
The rate of core competence obsolescence due to environmental changes
The availability of substitutes for the core competence
The difficulty competitors have in duplicating or imitating the core competence

11. Agenda Creating Competitive Advantage
Resources, Capabilities, & Core Competencies
Value Chain Analysis
Outsourcing

12. RBV Logic
Resources
Are a firm’s assets, including people and the value of its brand name
Are the source of a firm’s capabilities
Alone, do not yield a competitive advantage

13. Tangible Resources Assets that can be seen and quantified
Financial Resources
Financial Resources • The firm’s borrowing capacity • The firm’s ability to generate internal funds
• The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems
Physical Resources • Sophistication and location of a firm’s plant and equipment • Access to raw materials
Technological Resources • Stock of technology, such as patents, trade-marks, copyrights, and trade secrets
Organizational Resources
Physical Resources
Technological Resources
Sources: Adapted from Barney, J. B. (1991). “Firm resources and sustained competitive advantage”. Journal of Management, 17: 101; Grant, R. M. (1991). “Contemporary Strategy Analysis”, Cambridge, UK: Blackwell Business:

14. Intangible Resources Assets that are embedded in routines
Human Resources
Human Resources • Knowledge
• Trust
• Managerial capabilities
• Organizational routines
Innovation Resources • Ideas
• Scientific capabilities
• Capacity to innovate
Reputational Resources • Reputation with customers
• Brand name
• Perceptions of product quality, durability, and reliability
• Reputation with suppliers
Innovative Resources
Reputational Resources
Sources: Adapted from Hall, R. (1992).”The strategic analysis of intangible resources”, Strategic Management Journal: ; Grant, R. M. (1991). “Contemporary Strategy Analysis”, Cambridge, UK: Blackwell Business:

15. Value of Knowledge Assets
Annual Market Book Ratio of sales value value market to
Company ($ bn) ($ bn) ($ bn) book value
Google
Genentech
Yahoo!
eBay
Southwest Airlines
Union Pacific (Railroad)
Ford Motor Company
Note: The data on market valuations are as of May 1, All other financial data is based on the most recently available balance sheets and income statements.

16. RBV Logic Capabilities Are the firm’s capacity to deploy resources
Emerge over time through complex interactions among tangible and intangible resources
Often are based on developing, carrying, and exchanging information and knowledge through the firm’s human capital
The foundation of many capabilities lies in:
The unique skills and knowledge of a firm’s employees
The functional expertise of those employees

17. Examples of Firms’ Capabilities
Functional areas
Capabilities
Examples of firms
Distribution
Effective use of logistics management techniques
Wal-Mart
Human resources
Motivating, empowering, and retaining employees
Microsoft
Management information systems
Effective and efficient control of inventories through point-of-purchase data collection methods
Gillette
Marketing
Effective promotion of brand-name products
Polo Ralph Lauren
Effective customer service
Nordstrom
Innovative merchandising
Crate & Barrel
Management
Ability to envision the future of clothing
Gap
Effective organizational structure
PepsiCo
Manufacturing
Design and production skills yielding reliable products
Komatsu
Product and design quality
Miniaturization of components and products
Sony
Research & development
Innovative technology
Caterpillar
Development of sophisticated elevator control solutions
Otis Elevator
Rapid transformation of technology into new products and processes
Chaparral Steel
Digital technology
Thomson Computer Electronics

18. RBV Logic Core Competencies
Activities that a firm performs especially well compared to competitors
Resources and capabilities that serve as a source of a firm’s competitive advantage:
Distinguish a company competitively and reflect its personality
Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

19. Building Competitive Advantage

20. Building Competitive Advantage
Valuable Capabilities
Help a firm neutralize threats or exploit opportunities
Rare Capabilities
Are not possessed by many others
Costly-to-Imitate Capabilities
Historical: A unique and a valuable organizational culture or brand name
Ambiguous cause: The causes and uses of a competence are unclear
Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers
Nonsubstitutable Capabilities
No strategic equivalent

21. Limitations of the RBV Radical environmental changes
RBV helps managers to select strategies and gain sustainable competitive advantage only as industry environment remains fixed
Managerial influence
Imitability paradox: The less costly to develop or acquire resources, the less likely that these resources will result in sustainable competitive advantage
Not all firms able to gain sustainable advantage

22. Core Rigidities
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 now generate inertia and stifle innovation
Determining what the firm can do through continuous and effective analyses of its internal environment increases the likelihood of long-term competitive success

23. Agenda Creating Competitive Advantage
Resources, Capabilities, & Core Competencies
Value Chain Analysis
Outsourcing

24. Value Chain Analysis
Allows the firm to understand the parts of its operations that create value and those that do not
A template that firms use to:
Understand their cost position
Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy
Reminder: To be a source of competitive advantage, a resource or capability must allow the firm:
To perform an activity in a manner that is superior to the way competitors perform it, or
To perform a value-creating activity that competitors cannot complete

25. Value Chain Analysis – cont’d
Primary activities involved with:
A product’s physical creation
A product’s sale and distribution to buyers
The product’s service after the sale
Support activities
Provide the support necessary for the primary activities to take place

26. The Basic Value Chain
Shows how a product moves from raw-material stage to the final customer
Service
Marketing and Sales
Human Resource Management
Technological Development
Outbound Logistics
Firm Infrastructure
Procurement
Operations
Inbound Logistics

27. Primary Activities Inbound logistics
Activities used to receive, store, and disseminate inputs to a product (materials handling, warehousing, inventory control, etc.)
Operations
Activities necessary to convert the inputs provided by inbound logistics into final product form (machining, packaging, assembly, etc.)
Outbound logistics
Activities involved with collecting, storing, and physically distributing the product to customers (finished goods warehousing, order processing, etc.)

28. Primary Activities – cont’d
Marketing and sales
Activities completed to provide means through which customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.)
Service
Activities designed to enhance or maintain a product’s value (repair, training, adjustment, etc.)
→ Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent, or inferior.

29. Support Activities Procurement
Activities completed to purchase the inputs needed to produce a firm’s products (raw materials and supplies, machines, laboratory equipment, etc.)
Technological development
Activities completed to improve a firm’s product and the processes used to manufacture it (process equipment, basic research, product design, etc)
Human resource management
Activities involved with recruiting, hiring, training, developing, and compensating all personnel

30. Support Activities – cont’d
Firm infrastructure
Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.)
Effectively and consistently identify external opportunities and threats
Identify resources and capabilities
Support core competencies
→ Each activity should be examined relative to competitors’ abilities and rated as superior, equivalent, or inferior.

31. Agenda Creating Competitive Advantage
Resources, Capabilities, & Core Competencies
Value Chain Analysis
Outsourcing

32. Outsourcing
The purchase of a value-creating activity from an external supplier
Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities

33. Outsourcing Decisions
A firm may outsource all or only part of one or more primary and/or support activities.
Service
Marketing and Sales
Human Resource Management
Outsourced activity
Technological Development
Outbound Logistics
Firm Infrastructure
Procurement
Operations
Inbound Logistics

34. Rationales for Outsourcing

35. Rationales for Outsourcing
Improve business focus
Lets a 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

36. Rationales for Outsourcing – cont’d
Sharing risks
Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities
Freeing resources for other purposes
Redirects efforts from non-core activities toward those that serve customers more effectively

37. Outsourcing Issues Greatest value
Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity
Evaluating resources and capabilities
Do not outsource activities in which the firm itself can create and capture value
Environmental threats and ongoing tasks
Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary organizational tasks

38. Outsourcing Issues – cont’d
Nonstrategic team of resources
Do not outsource capabilities that are critical to the firm’s success, even though the capabilities are not actual sources of competitive advantage
Firm’s knowledge base
Do not outsource activities that stimulate the development of new capabilities and competencies