Competing for ADVANTAGE

1

Chapter 4The Internal Organization: Resources, Capabilities, and Core Competencies

PART IISTRATEGIC ANALYSIS

The Strategic Management Process

The Internal Organization

Firms rely on a unique bundle of resources to create a sustainable competitive advantage.

Factors that Determine Sustainability Rate of core competence obsolescence Availability of substitutes Imitability of core competence

Outcomes from Internal Organizational Analysis

Resource Decision Pitfalls

Neglecting international considerations

Pursuing only short-term earnings goals

Failing to recognize core competencies

Emphasizing resources and capabilities that do not form a competitive advantage

Conditions That InfluenceInternal Analysis

Key Terms Global mind-set

Ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context

Conditions That InfluenceInternal Analysis

Global interconnectedness Pace of environmental

change Economic volatility

Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core

Competencies

Resource Perspective

“The perspective that a firm is a bundle of heterogeneous resources, capabilities, and core competencies that can be used to create a unique market position is a critical characteristic of effective resource analysis.”

Resources, Capabilities, and Core Competencies

Resources are the source of a firm's capabilities.

Capabilities, in turn, are the source of a firm's core competencies.

A firm's core competencies are the basis for its competitive advantages in the marketplace.

Components of Internal Analysis Leading to Competitive Advantage and Value Creation

Creating Value

Key Terms Value

Measured by a product's performance characteristics and by its attributes for which customers are willing to pay

Resources Key Terms

Tangible resources Assets that can be observed and quantified

Intangible resources Assets that typically are rooted deeply in the firm's history and have accumulated over time

Organizational routines Complex patterns of social interactions that allow firms to accomplish much of what they do

Tangible Resources

Intangible Resources

Resources

Key Terms Social capital

Relationships with other organizations that contribute to the creation of value

Strategic value of resources Degree to which resources can contribute to the development of capabilities, core competencies, and ultimately, competitive advantage

Capabilities

Key Terms Capabilities

Firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state

Examples of Firm’s Capabilities

Core Competencies

Key Terms Core competencies

Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals

How Many?

Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace.

Tools for Building Core Competencies

Four Criteria of Sustainable Competitive Advantage

Value Chain Analysis

Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities Rare Capabilities Costly-to-Imitate

Capabilities Nonsubstitutable

Capabilities

Four Criteria of Sustainable Competitive Advantage

Key Terms Valuable capabilities

Allow the firm to exploit opportunities or neutralize threats in its external environment

Rare capabilities Possessed by few, if any, current or potential competitors

Costly-to-imitate capabilities Cost for other firms to develop is prohibitive, cannot easily be developed by other firms

Nonsubstitutable capabilities Do not have strategic equivalents

Four Criteria for Determining Core Competencies

Costly-to-Imitate Capabilities

Unique historical conditions

Causal ambiguity Socially complexity

Core Competencies as a Strategic Capability

Outcomes from Combinations of the Criteria for Sustainable

Competitive Advantage

Value Chain Analysis Key Terms

Value chain activities Activities or tasks involved with the production of a firm’s product, the sale and distribution of products to buyers, and after-sales services in ways that create value for the customer

Support functions Activities or tasks which support the firm’s work required to make, sell, distribute, and service its products

Value Chain Model

Creating Value Through Value Chain Activities

Creating Value Through Support Functions

Sources of Competitive Advantage

The resource or capability must allow the firm to perform a value chain activity or a support function in a manner superior to the way competitors perform it.

The resource or capability must allow the firm to perform a value-creating value chain activity or a support function that competitors cannot perform.

Outsourcing

Key Terms Outsourcing

The purchase of a value-creating activity from an external supplier

Benefits of Outsourcing

Increased flexibility Risk mitigation Reduced capital

investments

Outsourcing Viability When a firm does not have the

capabilities in the areas needed to succeed

When a firm lacks a resource or possesses inadequate skills essential to successfully implement a strategy

When few organizations possess the resources and capabilities required to achieve competitive superiority in all value chain activities and support functions

When extensive internal capabilities exist to effectively coordinate external sourcing and internal core competencies

Essential Skills for Outsourcing

Strategic thinking Deal making Partnership

governance Managing change

Core Competencies: Cautions

Never take for granted that core competencies will continue to provide a permanent source of competitive advantage.

All core competencies have the potential to become core rigidities – core rigidities are former core competencies that now generate inertia and stifle innovation.

Manager inflexibility stemming from the strength of shared beliefs (strategic myopia) is the primary reason core rigidities develop.

Stakeholder Objectives and Power Key Terms

Economic power Comes from the ability to withhold economic support from the firm

Political power Results from the ability to influence others to withhold economic support or to change the rules of the game

Formal power Involves laws or regulations that specify the legal relationship existing between a firm and a particular stakeholder group

Returns and Stakeholders High economic returns – firm has the

capability and flexibility to satisfy multiple stakeholders simultaneously

Average economic returns – firm is unable to maximize the interests of all stakeholders

Below-average returns – firm does not have the capacity to satisfy all stakeholders

Measures of Firm Performance

Capital market performance

Product market performance

Organizational stakeholder performance

Firm Performance from a Capital Market Perspective

Measures of Firm Performance

Key Terms Risk

Investor uncertainty about the economic gains or losses that will result from a particular investment

Other Measures of Firm Performance

Sustainable Development

Key Terms Sustainable development

Business growth that does not deplete the natural environment or damage society

ETHICAL QUESTION Could efforts to develop sustainable

competitive advantages result in employees using unethical practices? If so, what unethical practices might be

used to compare a firm’s core competencies with those held by rivals?

ETHICAL QUESTION Do ethical practices affect a firm’s ability to

develop a brand name as a source of competitive advantage? If so, how does

this happen? Identify some brands that are a source of competitive advantage in part

because of the firm’s ethical practices.

ETHICAL QUESTION What is the difference between

exploiting a firm’s human capital and using that capital as a source of

competitive advantage? Are there situations in which the exploitation of

human capital can be a source of advantage? If so, can you name such a situation? If the exploitation of human capital can be a source of competitive

advantage, is this a sustainable advantage? Why or why not?

ETHICAL QUESTION

Are there any ethical dilemmas associated with outsourcing? If so, what are they? How would you deal

with those dilemmas?

ETHICAL QUESTION What ethical responsibilities do

managers have if they determine that a set of employees has skills that are valuable only to a core competence

that is becoming a core rigidity for the firm?

ETHICAL QUESTION Through postings to the Internet, firms

sometimes make a vast array of data, information, and knowledge available to competitors as well as to customers and suppliers. What ethical issues, if any, are involved when the firm finds

competitively relevant information on a competitor’s Website?

ETHICAL QUESTION

To what extent does a firm have a moral obligation to distribute value back to stakeholders based on their relative

contributions to its creation? Does a firm have any legal obligations to do so?