The Internal Organization: Resources, Capabilities, and Core Competence
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The Internal Organization: Resources, Capabilities, andCore Competence
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
Chapter 4Chapter 4
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External and Internal Analyses
General
General
Env
iron
men
t
Env
iron
men
t
GeneralGeneral
EnvironmentEnvironment
Gen
eral
Gen
eral
Environm
ent
Environm
ent
SocioculturalSociocultural
Global
Global
TechnologicalTechnological
Polit
ical
/Leg
al
Polit
ical
/Leg
al
Dem
ogra
phic
Dem
ogra
phic Econom
ic
Economic
IndustryIndustryEnvironmentEnvironment
CompetitorCompetitorEnvironmentEnvironment
By studying the external environment, firms identify what they might choose to do
Opportunities and threats
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External and Internal Analyses
By studying the internal environment, firms identify what they can do
Unique resources, capabilities, and core competencies
(sustainable competitive advantage)
External and Internal Analyses
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Components ofInternal Analysis
Discovering CoreDiscovering CoreCompetenciesCompetencies
ResourcesResources• TangibleTangible• IntangibleIntangible
CapabilitiesCapabilities
CoreCoreCompetenciesCompetencies
CompetitiveCompetitiveAdvantageAdvantage
Value CreationValue Creation
Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
ValueValueChainChain
AnalysisAnalysis
• OutsourceOutsource
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Discovering CoreDiscovering CoreCompetenciesCompetencies
ResourcesResources• TangibleTangible• IntangibleIntangible
Resources are what a firm has Resources are what a firm has to work with--its assets--to work with--its assets--including its people and the including its people and the value of its brand namevalue of its brand name
Resources represent inputs into Resources represent inputs into a firm’s production process... a firm’s production process... such as capital equipment, skills such as capital equipment, skills of employees, brand names, of employees, brand names, finances and talented managersfinances and talented managers
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Discovering CoreDiscovering CoreCompetenciesCompetencies
ResourcesResources• TangibleTangible• IntangibleIntangible
Tangible ResourcesTangible Resources• FinancialFinancial• OrganizationalOrganizational• PhysicalPhysical• TechnologicalTechnological
Intangible ResourcesIntangible Resources• HumanHuman• InnovationInnovation• ReputationReputation
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Discovering CoreDiscovering CoreCompetenciesCompetencies
CapabilitiesCapabilities
Capabilities become important when they are combined Capabilities become important when they are combined in unique combinations which create core competencies in unique combinations which create core competencies which have strategic value and can lead to competitive which have strategic value and can lead to competitive advantageadvantage
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Discovering CoreDiscovering CoreCompetenciesCompetencies
CapabilitiesCapabilities
Capabilities are what a firm does, and represent the firm’s Capabilities are what a firm does, and represent the firm’s capacity to deploy resources that have been purposely capacity to deploy resources that have been purposely integrated to achieve a desired end stateintegrated to achieve a desired end state
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Discovering CoreDiscovering CoreCompetenciesCompetencies
CoreCoreCompetenciesCompetencies
Core competencies are resources and capabilities that serve Core competencies are resources and capabilities that serve as a source of competitive advantage over rivalsas a source of competitive advantage over rivals
Core competencies distinguish a company competitively Core competencies distinguish a company competitively and make it distinctiveand make it distinctive
McKinsey and Co. recommends using three to four McKinsey and Co. recommends using three to four competencies when framing strategic actionscompetencies when framing strategic actions
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Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
Valuable:Valuable: Capabilities that help a firm neutralize threats or Capabilities that help a firm neutralize threats or exploit opportunitiesexploit opportunities
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Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
RareRare: Capabilities that are not possessed by many others: Capabilities that are not possessed by many others
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Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
Costly to imitate: capabilities that other firms cannot develop easily, usually due to
• Unique historical conditions• Causal ambiguity• Social complexity
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Four CriteriaFour Criteriaof Sustainableof SustainableAdvantagesAdvantages
• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable
Discovering CoreDiscovering CoreCompetenciesCompetencies
Nonsubstitutable: capabilities that do not have strategic equivalents
• Invisible to competitors• Firm specific knowledge• Trust-based working relationships between managers
and nonmanagerial personnel
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ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFirm
Inf
rast
ruct
ure
Firm
Inf
rast
ruct
ure
Hum
an R
esou
rce
Mgm
t.H
uman
Res
ourc
e M
gmt.
Tec
hnol
ogic
al D
evel
opm
ent
Tec
hnol
ogic
al D
evel
opm
ent
Pro
cure
men
tP
rocu
rem
ent
Margin Margin
Primary ActivitiesPrimary Activities
Sup
port
Act
ivit
ies
Sup
port
Act
ivit
ies
The BasicThe BasicValue ChainValue Chain
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Margin
Margin Margin
Margin
Primary ActivitiesPrimary Activities
Su
ppo
rt A
ctiv
ities
Su
ppo
rt A
ctiv
ities
Outsourcing
Outsourcing is the Outsourcing is the purchase of some purchase of some or all of a value-or all of a value-creating activity creating activity from an external from an external suppliersupplier
Usually this is Usually this is because the because the specialty supplier specialty supplier can provide these can provide these functions more functions more efficientlyefficiently
ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFir
m In
fra
stru
ctu
reF
irm
Infr
ast
ruct
ure
Hu
ma
n R
eso
urce
Mg
mt.
Hu
ma
n R
eso
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Mg
mt.
Te
chn
olo
gica
l Dev
elo
pm
en
tT
ech
nol
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cal D
eve
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nt
Pro
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me
nt
Pro
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me
nt
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Strategic Rationales for Outsourcing
Improve Business FocusImprove Business Focus lets company focus on broader business issues lets company focus on broader business issues
by having outside experts handle various by having outside experts handle various operational detailsoperational details
Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities the specialized resources of outsourcing providers makes the specialized resources of outsourcing providers makes
world-class capabilities available to firms in a wide range world-class capabilities available to firms in a wide range of applicationsof applications
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Strategic Rationales for Outsourcing
Accelerate Business Re-Engineering BenefitsAccelerate Business Re-Engineering Benefits achieves re-engineering benefits more quickly by having achieves re-engineering benefits more quickly by having
outsiders--who have already achieved world-class standards--outsiders--who have already achieved world-class standards--take over processtake over process
Share RisksShare Risks reduces investment requirements and makes firm more reduces investment requirements and makes firm more
flexible, dynamic and better able to adapt to changing flexible, dynamic and better able to adapt to changing opportunitiesopportunities
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Strategic Rationales for Outsourcing
Free Resources for Other PurposesFree Resources for Other Purposes permits firm to redirect efforts from non-core activities permits firm to redirect efforts from non-core activities
toward those that serve customers more effectivelytoward those that serve customers more effectively
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Outsourcing Issues
Greatest ValueGreatest Value outsource only to firms possessing a core outsource only to firms possessing a core
competence in terms of performing the primary or competence in terms of performing the primary or support activity being outsourcedsupport activity being outsourced
Evaluating Resources and CapabilitiesEvaluating Resources and Capabilities don’t outsource activities in which the firm itself can don’t outsource activities in which the firm itself can
create and capture valuecreate and capture value Environmental Threats and Ongoing TasksEnvironmental Threats and Ongoing Tasks
do not outsource primary and support activities that do not outsource primary and support activities that are used to neutralize environmental threats or are used to neutralize environmental threats or complete necessary ongoing organizational taskscomplete necessary ongoing organizational tasks
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Outsourcing Issues
Nonstrategic Team of ResourcesNonstrategic Team of Resources do not outsource capabilities that are critical to their success, do not outsource capabilities that are critical to their success,
even though the capabilities are not actual sources of even though the capabilities are not actual sources of competitive advantagecompetitive advantage
Firm’s Knowledge BaseFirm’s Knowledge Base do not outsource activities that stimulate the development of do not outsource activities that stimulate the development of
new capabilities and competenciesnew capabilities and competencies
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Core Competencies: Cautions and Reminders Never take for granted that core competencies will Never take for granted that core competencies will
continue to provide a source of competitive advantagecontinue to provide a source of competitive advantage All core competencies have the potential to become All core competencies have the potential to become
core rigiditiescore rigidities Core rigidities are former core competencies that now Core rigidities are former core competencies that now
generate inertia and stifle innovationgenerate inertia and stifle innovation
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Why Do Companies Fail?
Inertia
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Why Do Companies Fail?
Inertia
Prior Strategic Commitments
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Why Do Companies Fail?
The Icarus Paradox