1. Ch3-1 Chapter 3 The Internal Environment: Resources, Capabilities and Core Competencies Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing

2. Ch3-2 Chapter 3 Internal Environment Chapter 2 External Environment The Strategic ManagementProcess ManagementProcess Strategic Intent Strategic Mission Strategic Competitiveness Above Average Returns Feedback Strategy Formulation Chapter 4 Business-Level Strategy Chapter 5 Competitive Dynamics Chapter 6 Corporate-Level Strategy Chapter 8 International Strategy Chapter 9 Cooperative Strategies Chapter 7 Acquisitions & Restructuring Strategy Implementation Chapter 10 Corporate Governance Chapter 11 Structure & Control Chapter 12 Strategic Leadership Chapter 13 Entrepreneurship & Innovation Entrepreneurship & Innovation Strategic Inputs Strategic Actions Strategic Outcomes

3. Ch3-3 Chapter 2 External Environment What the Firm Might Do Chapter 3 Internal Environment What the Firm Can Do SustainableCompetitiveAdvantage

4. Ch3-4 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Competitive Advantage Gained through Core Competencies Discovering Core Competencies Discovering Core Competencies Criteria of Sustainable Advantages Value Chain Analysis Valuable Rare Costly to Imitate Nonsubstitutable * * * * * Outsource

5. Ch3-5 How do we assemble bundles of Resources, Capabilities and Core Competencies to create VALUE for customers? Will environmental changes make our core competencies obsolete? And... Are substitutes available for our core competencies? Are our core competencies easily imitated? Key Questions for Managers in Internal Analysis Key Questions for Managers in Internal Analysis

6. Ch3-6 Conditions Affecting Managerial Decisions About Resources, Capabilities and Core Competencies Uncertainty regarding characteristics of the general and the industry environments, competitor’s actions, and customer’s preferences. Uncertainty regarding characteristics of the general and the industry environments, competitor’s actions, and customer’s preferences. Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Intraorganizational Conflicts among people making managerial decisions and those affected by them Intraorganizational Conflicts among people making managerial decisions and those affected by them

7. Ch3-7 Resources * * Tangible * * Intangible Discovering Core Competencies

8. Ch3-8 What a firm has to work with: its assets, including its people and the value of its brand name What a firm Has... Resources

9. Ch3-9 Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name Resources

10. Ch3-10 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 What a firm Has... Resources

11. Ch3-11 Tangible Resources Financial * * Physical * * Human Resources * * Organizational * * 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 Intangible Resources Technological * * Innovation * * Reputation * * “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco Resources

12. Ch3-12 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Discovering Core Competencies

13. Ch3-13 What a firm Does... Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities

14. Ch3-14 What a firm Does... 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 represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities

15. Ch3-15 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. Capabilities

16. Ch3-16 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Discovering Core Competencies Sources of Core Competencies Competitive Advantage Discovering Core Competencies

17. Ch3-17 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. Core Competencies

18. Ch3-18 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Discovering Core Competencies Criteria of Sustainable Advantages Valuable Rare Costly to Imitate Nonsubstitutable * * * * Discovering Core Competencies * Outsource

19. Ch3-19 For a strategic capability to be a Core Competency, it must be: Core Competencies Valuable Rare Costly to Imitate Nonsubstitutable What a firm Does... that is Strategically Valuable

20. Ch3-20 Valuable Rare Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Capabilities that are not possessed by many others Capabilities that help a firm neutralize threats or exploit opportunities Core Competencies What a firm Does... that is Strategically Valuable

21. Ch3-21 What Criteria Make Core Competencies Costly to Imitate? What Criteria Make Core Competencies Costly to Imitate? Unique Historical Conditions Causal Ambiguity Social Complexity This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage 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 Example: Disney created Mickey Mouse at a time when animated motion pictures were new An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances

22. Ch3-22 Core Competencies must be: Nonsubstitutable Capabilities that do not have strategic equivalents, such as firm- specific knowledge or trust-based relationships What a firm Does... that is Strategically Valuable Core Competencies Valuable Rare Costly to Imitate Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity Capabilities that are possessed by few, if any, current or potential competitors Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

23. Ch3-23 Core Competencies Resources Inputs to a firm’s production processInputs to a firm’s production process Core Competence A strategic capabilityA strategic capability The source of Capability Integration of a team of resourcesIntegration of a team of resources Does the capability satisfy the criteria of sustainable competitive advantage? YES NO Capability A nonstrategic team of resourcesA nonstrategic team of resources

24. Ch3-24 ValuableRare Costly to Imitate Nonsub- stitutable Competitive Consequences Performance Implications NONONONO CompetitiveDisadvantage Below Average Returns YESNONOYES/NOCompetitiveParityAverageReturns YESNOYES/NOYESTemporaryCompetitiveAdvantage Aver./Above Average Returns AboveAverageReturnsAboveAverageReturns YE S SustainableCompetitiveAdvantageSustainableCompetitiveAdvantage Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

25. Ch3-25 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Discovering Core Competencies Value Chain Analysis * Outsource Valuable Rare Costly to Imitate Nonsubstitutable * * * * Criteria of Sustainable Advantages Discovering Core Competencies

26. Ch3-26 Support Activities Primary Activities Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

27. Ch3-27 Support Activities Primary Activities InboundLogistics Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

28. Ch3-28 Support Activities Primary Activities InboundLogistics Operations Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

29. Ch3-29 Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

30. Ch3-30 Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

31. Ch3-31 Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Service Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

32. Ch3-32 Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Service Procurement Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

33. Ch3-33 Support Activities Primary Activities InboundLogistics Operations OutboundLogistics Marketing & Sales Service Procurement Technological Development Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

34. Ch3-34 Support Activities Primary Activities Technological Development Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service Human Resource Management Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

35. Ch3-35 Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

36. Ch3-36 Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN MARGIN Value Chain Analysis Identifying Resources and Capabilities That Can Add Value

37. Ch3-37 Support Activities Primary Activities Outsourcing Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN MARGIN Strategic Choice to Purchase Some Activities From Outside Suppliers

38. Ch3-38 Support Activities Primary Activities Technological Development Human Resource Management Firm Infrastructure Procurement InboundLogistics Operations OutboundLogistics Marketing & Sales Service MARGIN InboundLogistics Operations OutboundLogistics Service Marketing Technological Development Human Resource Management Procurement MARGIN portion more efficiently Firms often purchase a portion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlyOutsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers

39. Ch3-39 Lets company focus on broader business issues by having outside experts handle various operational details Strategic Rationales for Outsourcing Improve Business Focus Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively Free Resources for Other Purposes Provide Access to World-Class Capabilities Accelerate Business Re-Engineering Benefits Share Risks The specialized resources of outsourcing providers makes world- class capabilities available to firms in a wide range of applications Achieves re-engineering benefits more quickly by having outsiders-- who have already achieved world-class standards--take over process Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

40. Ch3-40 To capitalize on the usefulness of the Value Chain concept... it is important to recognize that...

41. Ch3-41 Value Chains are part of a Total Value System Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain

42. Ch3-42 Firm Value Chain Channel Value Chain Buyer Value Chain Supplier Value Chain Upstream Value complement Perform valuable activities that complement the firm’s activities Value Chains are part of a Total Value System

43. Ch3-43 Supplier Value Chain Firm Value Chain Buyer Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Channel Value Chain Each firm must eventually find a way to become a part of some buyer’s value chain Value Chains are part of a Total Value System

44. Ch3-44 Supplier Value Chain Firm Value Chain Channel Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Buyer Value Chain Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain This creates VALUE!! Each firm must eventually find a way to become a part of some buyer’s value chain Value Chains are part of a Total Value System

45. Ch3-45 Supplier Value ChainFirm Value ChainChannel Value Chain Upstream Value Perform valuable activities that complement the firm’s activities Buyer Value Chain Each firm must eventually find a way to become a part of some buyer’s value chain 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 Value Chains are part of a Total Value System

46. Ch3-46 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

47. Ch3-47 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Discovering Core Competencies Value Chain Analysis * Outsource Valuable Rare Costly to Imitate Nonsubstitutable * * * * Criteria of Sustainable Advantages Discovering Core Competencies

48. Ch3-48 Chapter 2 External Environment Chapter 3 Internal Environment Strategic Intent Strategic Mission The Strategic ManagementProcess

49. Ch3-49 Chapter 2 External Environment Chapter 3 Internal Environment Strategic Intent Strategic Mission Strategic Intent The Strategic ManagementProcess

50. Ch3-50 Chapter 2 External Environment Chapter 3 Internal Environment The Strategic ManagementProcess Strategic Mission A statement of the firm’s unique purpose and the scope of its operations in product market terms Strategic Intent Strategic Mission Strategic Intent Leveraging of a firm’s resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the compe- titive environment

51. Ch3-51 Resources * * Tangible * * Intangible Capabilities Teams of Resources Teams of Resources Sources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Competitive Advantage Gained through Core Competencies Discovering Core Competencies Value Chain Analysis Valuable Rare Costly to Imitate Nonsubstitutable * * * * * Outsource Criteria of Sustainable Advantages Discovering Core Competencies