1. The Internal Environment: Resources, Capabilities and
Core Competencies
Dr. S. Perot

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

3. 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

4. Create VALUE for Customers
Key Questions for Managers in Internal Analysis include...
How do we assemble bundles of Resources, Capabilities and Core Competencies to...
Create VALUE for Customers
And...
Will environmental changes make our core competencies obsolete?
Are substitutes available for our core competencies?
Are our core competencies easily imitated?

5. Intraorganizational Conflicts
Key Questions for Managers in Internal Analysis include...
Difficult managerial decisions regarding resources, capabilities and core competencies are characterized by three conditions:
Uncertainty
Complexity
Intraorganizational Conflicts

6. Discovering Core Competencies
Resources *
Tangible
Intangible

7. What a firm Has... Resources Resources What a firm has to work with:
its assets, including its people and the value of its brand name
Tangible Resources *
Financial
Resources represent inputs into a firm’s production process... *
Physical *
Human Resources
such as capital equipment, skills of employees, brand names, finances and talented managers *
Organizational
Intangible Resources
“Some genius invented the Oreo. We’re just living off the inheritance.” *
Technological *
Innovation
F. Ross Johnson,
Former President & CEO, RJR Nabisco *
Reputation

8. Discovering Core Competencies
Capabilities
Teams of
Resources
Resources *
Tangible
Intangible

9. 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.

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

11. What a firm Does...
Core Competencies
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.

12. Valuable Rare Costly to Imitate Nonsubstitutable Core Competencies
For a strategic capability to be a Core Competency, it must be:
Valuable
Rare
Costly to Imitate
Nonsubstitutable

13. 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

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

15. 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

16. 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

17. Human Resource Management Technological Development
Outsourcing
- 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

18. 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

19. What are the Strategic Rationales for Outsourcing?

20. What are the 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

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

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

23. 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

24. 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

25. 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!!

26. 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

27. Core Competencies--Cautions and Reminders
It should never be taken 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

28. The Strategic Management Process Strategic Intent Strategic Mission
Chapter 2
External
Environment
The Strategic
Management
Process
Strategic Intent
Strategic Mission
Chapter 3
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

29. 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
Rare
Costly to Imitate
Nonsubstitutable * *
Outsource