Chapter 3: The Internal Organization:

Resources, Capabilities, Core Competencies and Competitive Advantages

Diane M. Sullivan, Ph.D., 2011

Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage

Step 1 in the Strategic Management Process Continued

Insert figure 1.1 graphic

• Collect information/ knowledge to help you determine what type of strategy would be effective and how it could best be implemented

• Next, examine the strategic inputs important in the Resource-based model (R-B model)

Context for Analyzing the Internal Organization

• Context of Internal Analysis– ‘Global mind-set’

• Study internal environment in ways that do not depend on the assumptions of a single country, culture, or context

• Important because of increasing global competition

– Analyze firm’s portfolio of resources and bundles of heterogeneous resources and capabilities

• Understand how to leverage these bundles to create the most value

– An organization's core competencies creates and sustains its competitive advantage

Analyzing the Internal Organization: Using Resources to Create Value for Customers

• Creating Value

– By exploiting core competencies or competitive advantages, firms create value

– Value is created by innovatively bundling and leveraging firm resources and capabilities

– Key: to effectively bundle and leverage resources firms must understand what customers value

– A competitive advantage occurs when firms offer value to customers that is greater than the value competitors provide

The Lieutenant Commander Geordi La Forge got sad because Pets.com didn’t deliver his food expeditiously. As a result, he’s decided to shop exclusively at PetSmart for all of his dietary needs .

Pets.com misread what

customers valued and

failed

Analyzing the Internal Organization: Resources, Capabilities and Core Competencies

The Foundation of a Competitive Advantage

• Resources

• Capabilities

• Core Competencies

Resource 1 Resource 2 Capability

Capability Core Competency

Competitive Advantage

Resources: Two Types

Tangible Resources: Assets that can be seen and quantified

Financial • Cash; capacity to raise equity; borrowing capacity

Physical• Modern plant and facilities; favorable manufacturing locations; access

to raw materials

Technological• Stock of technology like trade secrets; innovative production processes;

patents, copyrights, trademarks

Organizational• The firm’s formal reporting structure, formal planning, controlling, and

coordinating systems

Intangible Resources: Assets rooted in the firm’s history and that have accumulated over time

Human• Knowledge, trust, employee experience and skills; organizational

routines

Innovation & Creativity • Ideas, scientific skills; innovation capacities

Reputation • Brand name; quality and reliability reputation; supplier relations

Combining Resources to Create Capabilities

• Capabilities exist when resources are purposely integrated to achieve a specific task or set of tasks.

• Example 1: Wal-Mart uses tangible resources from its distribution centers + its MIS infrastructure to create capabilities in distribution and inventory management

• Example 2: Southwest uses it intangible resources of HR’s organizational routines + physical resources of planes and landing gates to create a logistics management

Resource 1 Resource 2 Capability

When Capabilities become Core Competencies

• Core competencies are capabilities that serve as a source of a competitive advantage for a firm over its rivals

• Firms should have no more than 3-4 core competencies around which strategic actions can be framed

• Two tools to help firms identify and build core competencies

1. Barney’s Four Criteria of a Sustainable Competitive Advantage (VRIO)

2. Porter’s Value Chain

Capability Core Competency

Competitive Advantage

Tool 1: Barney’s Four Criteria of a Sustainable Competitive Advantage

• Capabilities that meet the four criteria are core competencies that can generate a sustainable competitive advantage

– The four criteria are

1. Valuable: Does the capability enable a firm to exploit an environmental opportunity, and/or neutralize an environmental threat thereby creating value for customers?

2. Rarity: Is a capability currently possessed by only a small number of competing firms?

3. Inimitability: Do firms without the capability face a cost disadvantage in obtaining or developing it? [is what the firm doing difficult to imitate?]

4. Nonsubstitutable: Does the capability lack a strategic equivalent?

Firms should emphasize these capabilities and

implement strategies that rely on these capabilities

Using Barney’s Four Criteria to Assess the Potential for a Sustainable Competitive Advantage

• According to Barney, a supportive answer to each question would indicate the firm can sustain a competitive advantage

• Below is how to apply the criteria and the associated outcomes

Using the Four Criteria , Competitive Implications, and Performance Implications

Valuable? Rare?Costly to Imitate?

Non-substitutable?

Competitive Implications

Performance Implications

No DisadvantageBelow-average

returns

Yes No Parity Average returns

Yes Yes NoTemporary Advantage

Above-average returns (at least for

some amount of time)

Yes Yes Yes YesSustained Advantage

Above-average returns

Firms should NOT emphasize these capabilities

in strategy development and implementation

Tool 2: Porter’s Value Chain Analysis

• Allows a firm to understand the parts of its operations that create value and those that do not

• Used to understand a firm’s cost position and identify the how to implement a business-level strategy

• Analysis is broken down into two types of activities:

1. Primary activities: deal with the physical creation, sale, distribution, and servicing of a product/service

2. Support activities: provide assistance for the primary activates to take place

• Key: Create additional value without incurring significant costs while doing so and to capture value that has been created

How Business Models Emerge: Porter’s Value Chain

• The Value Chain: proposes that each activity can either add or subtract value for the firm. Activities supported by capabilities that are core competencies should be value adding and completed internally. Activities that require capabilities that are not core competencies of the firm generally subtract value and should be outsourced.

(Production)

(Firm Infrastructure)

Select a Business-level Strategy

• External environment provides information on what a firm might choose to do

• Internal environment provides information on what the firm can do

– The cumulative results of these analyses provide the firm with the information required to select a business-level strategy that will help it reach its vision and mission

• Business-level strategies will be discussed next week in Chapter 4