1. 4-1© 2006 by Nelson, a division of Thomson Canada Limited. The Internal Environment: Resources, Capabilities, and Core Competencies Chapter Four

2. 4-2© 2006 by Nelson, a division of Thomson Canada Limited. Chapter 5 Bus. - Level Strategy Chapter 6 Competitive Dynamics Chapter 7 Corp. - Level Strategy Chapter 9 International Strategy Chapter 10 Cooperative Strategies Chapter 8 Acquisitions & Restructuring Chapter 11 Corporate Governance Chapter 12 Structure & Control Chapter 13 Strategic Leadership Chapter 14 Entrepreneurship & Innovation Strategic Inputs Strategic Actions Strategic Outcomes Chapter 4 Internal Environment Chapter 3 External Environment Strat. Intent Strat. Mission The Strategic. Management. Process Strategy Formulation Strategy Implementation Strategic Competitiveness Chapter 1 Feedback Above Average Returns Chapter 2 Above Average Returns Chapter 2 Chapter 3 External Environment Chapter 4 Internal Environment

3. 4-3© 2006 by Nelson, a division of Thomson Canada Limited. The Internal Environment: Resources, Capabilities and Core Competencies Knowledge Objectives: 1.Explain the need for firms to study & understand their internal environment. 2.Define value & discuss its importance. 3.Describe the differences between tangible & intangible resources. 4.Define capabilities & discuss how they are developed.

4. 4-4© 2006 by Nelson, a division of Thomson Canada Limited. The Internal Environment: Resources, Capabilities and Core Competencies Knowledge objectives – continued… 5. Describe four criteria used to determine whether resources & capabilities are core competencies. 6.Explain how value chain analysis is used to identify and evaluate resources and capabilities. 7.Define outsourcing & discuss the reasons for its use. 8.Discuss the importance of preventing core competencies from becoming core rigidities.

5. 4-5© 2006 by Nelson, a division of Thomson Canada Limited. Canada’s most admired companies

6. 4-6© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based model of Above Average Returns Capabilities evolve and must be managed dynamically in pursuit of above-average returns. Firms acquire different resources and develop unique capabilities. These resources may not be mobile across firms and that the differences in resources are the basis of competitive advantage.

7. 4-7© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based model of Above Average Returns The resource based view suggests that a firm’s unique resources and capabilities provide the basis for a strategy.

8. 4-8© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based Model of Superior Returns Action required: Identify firm resources. Study strengths & weaknesses relative to rivals. Resources Inputs to a firm’s production process. an *

9. 4-9© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based Model of Superior Returns Action required: Determine what firm capabilities allow it to do better than rivals. Resources Inputs to a firm’s production process. Capability Capacity for integrated set of resources to integratively perform a task or activity. an *

10. 4-10© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based Model of Superior Returns Action required: Determine how firm’s resources & capabilities may create competitive advantage. Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Ability of a firm to outperform its rivals an *

11. 4-11© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based Model of Superior Returns Action required: Locate an attractive industry. Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Ability of a firm to outperform its rivals An Attractive Industry Location of an industry with opportunities that can be exploited by firm’s resources & capabilities an *

12. 4-12© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based Model of Superior Returns Action required: Select strategy that best exploits res.& capabilities relative to opportunities in environments. Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Ability of a firm to outperform its rivals An Attractive Industry Location of an ind. with opportunities that can be exploited by firm’s resources & capabilities Strategy Formulation and Implementation Strategic actions taken to earn above-average returns an *

13. 4-13© 2006 by Nelson, a division of Thomson Canada Limited. The Resource-Based Model of Superior Returns Resources Inputs to a firm’s production process. Capability Capacity for an integrated set of resources to integratively perform a task or activity. Competitive Advantage Ability of a firm to outperform its rivals An Attractive Industry Location of an ind. with opportunities that can be exploited by firm’s resources & capabilities Action required: Maintain selected strat. in order to outperform industry rivals. Strategy Formulation and Implementation Strategic actions taken to earn above-average returns Superior Returns Earning of above- average returns an *

14. 4-14© 2006 by Nelson, a division of Thomson Canada Limited. Resources **Tangible **Intangible Capabilities Teams of Resources Teams of Resources Competitive Advantage Gained through Core Competencies Criteria of Sustainable Advantages Value Chain Analysis Valuable Rare Costly to Imitate Organized to be exploited * * * * Outsource* Discovering Core Competencies Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Discovering Core Competencies

15. 4-15© 2006 by Nelson, a division of Thomson Canada Limited. The Components of Internal Analysis

16. 4-16© 2006 by Nelson, a division of Thomson Canada Limited. Value Value is measured by a product’s performance characteristics and it’s attributes for which clients are willing to pay. Core competencies in combination with product- market positions are the firms most important sources of competitive advantage and should drive it’s selection of strategies.

17. 4-17© 2006 by Nelson, a division of Thomson Canada Limited. Resources, Capabilities & Core Competencies

18. 4-18© 2006 by Nelson, a division of Thomson Canada Limited. Resources, Capabilities & Core Competencies

19. 4-19© 2006 by Nelson, a division of Thomson Canada Limited. Discovering Core Competencies Resources **Tangible **Intangible Capabilities Teams of Resources Teams of Resources

20. 4-20© 2006 by Nelson, a division of Thomson Canada Limited. Discovering Core Competencies Sources of Core Competencies Competitive Advantage Discovering Core Competencies Resources **Tangible **Intangible Capabilities Teams of Resources Teams of Resources

21. 4-21© 2006 by Nelson, a division of Thomson Canada Limited. Resources, Capabilities & Core Competencies

22. 4-22© 2006 by Nelson, a division of Thomson Canada Limited. Resources, Capabilities & Core Competencies

23. 4-23© 2006 by Nelson, a division of Thomson Canada Limited. Discovering Core Competencies Sources of Core Competencies Competitive Advantage Discovering Core Competencies Resources **Tangible **Intangible Capabilities Teams of Resources Teams of Resources Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Organized to be exploited * * * * Outsource *

24. 4-24© 2006 by Nelson, a division of Thomson Canada Limited. Core Competencies For a strategic capability to be a Core Competency, it must be: O rganized to be Exploited The firm must be organized appropriately to obtain full benefits of the resources in order to realize a competitive advantage. R are R are Possessed by few, if any, current and potential competitors. V aluable V aluable Allow a firm to neutralize threats or exploit opportunities in its external environment. Costly to I mitate When other firms either cannot obtain them or must obtain them at a much higher cost. $ *

25. 4-25© 2006 by Nelson, a division of Thomson Canada Limited. Core Competencies Resources Inputs to a firm’s production process Core Competence A strategic capability The source of Does the capability satisfy the criteria of sustainable competitive advantage? YES NO Capability A non-strategic team of resources Capability Integration of a team of resources

26. 4-26© 2006 by Nelson, a division of Thomson Canada Limited. YESNOYES Temporary Competitive Advantage Avg./Above Average Returns YESNO YES Competitive Parity Average Returns NO Below Average Returns Competitive Disadvantage Above Average Returns YES Sustainable Competitive Advantage YES ValuableRare Costly to Imitate Org. to be Exploited Competitive Consequences Performance Implications Valuable The VRIO Framework

27. 4-27© 2006 by Nelson, a division of Thomson Canada Limited. Value Chain Analysis Discovering Core Competencies Sources of Core Competencies Competitive Advantage Discovering Core Competencies Resources **Tangible **Intangible Capabilities Teams of Resources Teams of Resources Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Organized to be exploited * * * * Outsource *

28. 4-28© 2006 by Nelson, a division of Thomson Canada Limited. Support Activities Primary Activities Inbound Logistics Operations Outbound Logistics Marketing & Sales Procurement Technological Development Human Resource Management Firm Infrastructure Service MARGIN Value Chain Analysis

29. 4-29© 2006 by Nelson, a division of Thomson Canada Limited. Primary Activities Outsourcing Strategic choice to purchase some activities from outside suppliers Support Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Procurement Technological Development Human Resource Management Firm Infrastructure Service MARGIN MARGIN Firms often buy a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficiently.

30. 4-30© 2006 by Nelson, a division of Thomson Canada Limited. Outsourcing Strategic choice to purchase some activities from outside suppliers Support Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Procurement Technological Development Human Resource Management Firm Infrastructure Service MARGIN MARGIN Inbound Logistics Operations Outbound Logistics Service Marketing & Sales Technological Development Human Resource Management Procurement Firms often buy a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficiently.

31. 4-31© 2006 by Nelson, a division of Thomson Canada Limited. Outsourcing Strategic choice to purchase some activities from outside suppliers Support Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Procurement Technological Development Human Resource Management Firm Infrastructure Service MARGIN MARGIN Inbound Logistics Operations Outbound Logistics Service Marketing & Sales Technological Development Human Resource Management Procurement Firms often buy a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficiently.

32. 4-32© 2006 by Nelson, a division of Thomson Canada Limited. 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 They are former core competencies that sow the seeds of organizational inertia. Prevent the firm from responding appropriately to changes in the external environment. Core Competencies--Cautions and Reminders

33. 4-33© 2006 by Nelson, a division of Thomson Canada Limited. Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Discovering Core Competencies Resources **Tangible **Intangible Capabilities Teams of Resources Teams of Resources Criteria of Sustainable Advantages Value Chain Analysis Valuable Rare Costly to Imitate Organized to be exploited * * * * Outsource* Discovering Core Competencies