Ch03 HIH [Street07]

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    STRATEGIC

    MANAGEMENT

    INPUTS

    CHAPTER 3

    The Internal Environment:Resources, Capabilities,

    and Core Competencies

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    External Analyses Outcomes

    By studying the external environment, firms

    identify what they might choose to do.

    Opportunitiesand threats

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    Internal Analyses Outcomes

    By studying the internal environment,

    firms identify what they can do

    Unique resources,

    capabilities, andcompetencies(required forsustainablecompetitive advantage)

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    FIGURE3.1 Components of Internal Analysis Leading toCompetitive Advantage and Strategic Competitiveness

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    Competitive Advantage

    Firms achieve strategic competitiveness andearn 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.

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    Competitive Advantage (contd)

    Sustainability of a competitive advantage is afunction 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.

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    The Challenge of Internal Analysis

    Strategic decisions in terms of the firmsresources, capabilities, and core competencies:

    Are non-routine

    Significantly influence the firms ability to earnabove-average returns.

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    The Challenge of Internal Analysis (contd)

    To develop and use core competencies,managers must have:

    Self-confidence

    The capacity to deal with uncertainty andcomplexity

    A willingness to hold people (and themselves)

    accountable for their work

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    Resources, Capabilities and Core Competencies

    ResourcesAre the source of a firms

    capabilities.

    Are broad in scope.

    Cover a spectrum ofindividual, social and

    organizational

    phenomena.

    Alone, do not yield acompetitive advantage.

    Discovering CoreCompetencies

    ResourcesTangibleIntangible

    Capabilities

    CoreCompetencies

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    Resources

    ResourcesAre a firms assets,

    including people and

    the value of its brand

    name.

    Represent inputs into

    a firms production

    process, such as:

    Capital equipment

    Skills of employees

    Brand names

    Financial resources

    Talented managers

    Types of ResourcesTangible resources

    Financial resources

    Physical resources

    Technologicalresources

    Organizational

    resources

    Intangible resources Human resources

    Innovation resources

    Reputation resources

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    Resources, Capabilities and Core Competencies

    Capabilities Represent the capacity to deploy

    resources that have been

    purposely integrated to achieve a

    desired end state

    Emerge over time through complex

    interactions among tangible and

    intangible resources

    Often are based on developing,

    carrying and exchanginginformation and knowledge through

    the firms human capital

    Discovering CoreCompetencies

    ResourcesTangibleIntangible

    Capabilities

    CoreCompetencies

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    Resources, Capabilities and Core Competencies

    Capabilities (contd)The foundation of many

    capabilities lies in:

    The unique skills and

    knowledge of a firms

    employees

    The functional expertise of

    those employees

    Capabilities are often

    developed in specificfunctional areas or as part

    of a functional area.

    Discovering CoreCompetencies

    ResourcesTangibleIntangible

    Capabilities

    CoreCompetencies

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    Resources, Capabilities and Core Competencies

    Four criteria fordetermining strategic

    capabilities:

    Value

    Rarity

    Costly-to-imitate

    Nonsubstitutability

    Discovering CoreCompetencies

    ResourcesTangibleIntangible

    Capabilities

    CoreCompetencies

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    Resources, Capabilities and Core Competencies

    Core CompetenciesResources and capabilities that

    are the sources of a firms

    competitive advantage:

    Distinguish a companycompetitively and reflect its

    personality.

    Emerge over time through an

    organizational process ofaccumulating and learning

    how to deploy different

    resources and capabilities.

    Discovering CoreCompetencies

    ResourcesTangibleIntangible

    Capabilities

    CoreCompetencies

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    Resources, Capabilities and Core Competencies

    Core CompetenciesActivities that a firm performs

    especially well compared to

    competitors.

    Activities through which the firmadds unique value to its goods

    or services over a long period of

    time.

    Discovering CoreCompetencies

    ResourcesTangibleIntangible

    Capabilities

    CoreCompetencies

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    Building Sustainable Competitive Advantage

    Valuable capabilitiesHelp a firm neutralize

    threats or exploit

    opportunities.

    Rare capabilitiesAre not possessed by

    many others.

    Discovering CoreCompetencies

    Valuable Rare Costly to imitate Nonsubstitutable

    Four Criteria ofSustainableAdvantages

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    Building Sustainable Competitive Advantage

    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

    Discovering CoreCompetencies

    Valuable Rare Costly to Imitate Nonsubstitutable

    Four Criteria ofSustainableAdvantages

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    Building Sustainable Competitive Advantage

    NonsubstitutableCapabilities

    No strategic equivalent

    Firm-specific knowledge

    Organizational culture

    Superior execution of the

    chosen business model

    Discovering CoreCompetencies

    Valuable Rare Costly to imitate Nonsubstitutable

    Four Criteria ofSustainableAdvantages

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    Outcomes from Combinationsof the Four Criteria

    CompetitiveConsequences

    PerformanceImplications

    No No No No CompetitiveDisadvantage

    Below AverageReturns

    Yes No No Yes/No

    CompetitiveParity

    Average Returns

    Yes Yes No Yes/No Temporary Com-petitive Advantage Above Average toAverage Returns

    Yes Yes Yes Yes Sustainable Com-petitive Advantage

    Above AverageReturns

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    Value Chain Analysis

    Allows the firm to understand the parts of itsoperations 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.

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    Value Chain Analysis (contd)

    Primary activities involved with:A products physical creation

    A products sale and distribution to buyers

    The products service after the sale

    Support Activities

    Provide the assistance necessary for the primary

    activities to take place.

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    FIGURE3.3

    The Basic ValueChain

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    Value Chain Analysis (contd)

    Value ChainShows how a product moves from the raw-material

    stage to the final customer.

    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 competitorscannot complete

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    Strategic Rationales for Outsourcing

    Improving business focusHelps a company focus on broader business issues

    by having outside experts handle various operational

    details.

    Providing access to world-class capabilitiesThe specialized resources of outsourcing providers

    makes world-class capabilities available to firms in a

    wide range of applications.

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    Strategic Rationales for Outsourcing (contd)

    Accelerating re-engineering benefitsAchieves re-engineering benefits more quickly by

    having outsiderswho have already achieved world-

    class standardstake over process.

    Sharing risksReduces investment requirements and makes firm

    more flexible, dynamic and better able to adapt to

    changing opportunities.

    Freeing resources for other purposesRedirects efforts from non-core activities toward those

    that serve customers more effectively.

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    Outsourcing Issues

    Seeking greatest valueOutsource only to firms possessing a core

    competence in terms of performing the primary orsupporting the outsourced activity.

    Evaluating resources and capabilities

    Do not outsource activities in which the firm itselfcan create and capture value.

    Environmental threats and ongoing tasks

    Do not outsource primary and support activities thatare used to neutralize environmental threats or tocomplete necessary ongoing organizational tasks.

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    Outsourcing Issues (contd)

    Nonstrategic team resourcesDo notoutsource capabilities critical to the firms

    success, even though the capabilities are not actual

    sources of competitive advantage.

    Firms knowledge base

    Do not outsource activities that stimulate thedevelopment of new capabilities and competencies.

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    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

    rigiditiesformer core competencies that now generate

    inertia and stifle innovation. Determining what the firm can do through continuous and

    effective analyses of its internal environment will increase

    the likelihood of long-term competitive success.