strategic management
Strategic Management
MGT 450
MGT 450: Strategic Management
Chapter 3
The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantage
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Studying this chapter should provide you with
the strategic management knowledge needed to:
Learning Objectives
1. Explain why firms need to study and understand their internal organization.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss their development.
5. Describe four criteria used to determine whether resources and capabilities are core competencies.
6. Explain how firms analyze their value chain for the purpose of determining where they are able
to create value when using their resources, capabilities, and core competencies.
7. Define outsourcing and discuss reasons for its use.
8. Discuss the importance of identifying internal strengths and weaknesses.
9. Discuss the importance of avoiding core rigidities.
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Competitive Advantage
Firms achieve strategic competitiveness and earn 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.
Reminder Above Average Return:
Returns in excess of what investor expects in
comparison to other investments with similar
risk.
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Analyzing the External Environment
By studying the external environment, firms identify what they might choose to do.
Opportunities and threats
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Analyzing the Internal Organization
By studying the internal environment, firms identify what they can do
Unique resources,
capabilities, and
competencies (required for sustainable competitive advantage)
Internal Environment Analysis
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For a strategy to succeed, it should be based on: - A realistic assessment of the firm’s
internal resources - Capabilities - Core competencies
https://www.icmrindia.org/courseware/Business %20Strategy/Internal%20Environment%20Analys is.htm
An internal analysis examines your organization’s internal environment in order to assess: 1. its resources 2. competencies 3. competitive advantages.
https://www.executestrategy.net/blog/internal -analysis
An internal analysis provides the means to identify the strengths to build on and the weaknesses to overcome when formulating strategies.
This knowledge aids the strategic decision making of management while they carry out the strategy formulation and execution process.
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Figure 3.1 Components of an Internal Analysis
There are five main components of
an Internal Analysis, including:
1. Resources
2. Capabilities
3. core competencies 4. competitive advantage
5. strategic competitiveness.
Each component is the basis of next one in turn.
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Creating Value
By exploiting their core competencies or competitive advantages, firms create value.
Value is measured by:
• Product performance characteristics
• Product attributes for which customers will pay
Firms create value by innovatively bundling and leveraging their resources and capabilities.
• Superior value → Above-average returns
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Creating Competitive Advantage
Core competencies, in combination with product- market positions, are the firm’s most important sources of competitive advantage.
Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.
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Creating Competitive Advantage In such a competitive marketplace today, if you don’t have one clear advantage, you probably don’t have a viable business.
Jack Welch says “If you don’t have a competitive advantage, don’t compete.” https://www.forbes.com/sites/alejandrocremades/2018/09/19 /how-to-develop-your-competitive-advantage/#35b1c02e2104
A competitive advantage is what makes an entity's goods or services superior to all of a customer's other choices. In other words competitive advantage is an attribute that allows a company to outperform its competitors.
https://www.thebalance.com/what-is-competitive-advantage- 3-strategies-that-work-3305828
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Resources, Capabilities and Core Competencies
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Resources • Are the source of a firm’s capabilities.
• Are broad in scope.
• Cover a spectrum of individual, social and organizational phenomena.
• Alone, do not yield a competitive advantage.
Competitive Advantage
Resources •Tangible
•Intangible
Capabilities
Core Competencies
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Are a firm’s assets, including people and the value of its brand name that represent inputs into a firm’s production process:
• Capital equipment
• Skills of employees
• Brand names
• Financial resources
• Talented managers
TWO TYPES OF RESOURCES
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Resources
Competitive Advantage
Resources •Tangible
•Intangible
Capabilities
Core Competencies
Tangible resources Intangible resources
Financial resources Physical resources Technological resources Organizational resources
Human resources Innovation resources Reputation resources
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Table 3.1 Tangible Resources
Financial Resources • The firm’s borrowing capacity • The firm’s ability to generate internal funds
Organizational Resources • The firm’s formal reporting structure
Physical Resources • The sophistication and location of a firm’s plant and equipment and the attractiveness of its location
• Distribution facilities • Product inventory
Technological Resources • Availability of technology-related resources such as copyrights, patents, trademarks, and trade secrets
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Table 3.2 Intangible Resources
Human Resources • Knowledge • Trust • Skills • Abilities to collaborate with others
Innovation Resources • Ideas • Scientific capabilities • Capacity to innovate
Reputational Resources • Brand name • Perceptions of product quality, durability, and reliability • Positive reputation with stakeholders such as suppliers and
customers
Resources, Capabilities and Core Competencies
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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 exchanging information and knowledge through the firm’s human capital
Competitive Advantage
Resources •Tangible
•Intangible
Capabilities
Core Competencies
Resources, Capabilities and Core Competencies
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Competitive Advantage
Resources •Tangible
•Intangible
Capabilities
Core Competencies
Capabilities (cont’d)
The foundation of many capabilities lies in: • The unique skills and knowledge of a firm’s
employees
• The functional expertise of those employees
Capabilities are often developed in specific functional areas or as part of a functional area.
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Table 3.3 Examples of Firms’ Capabilities
Resources, Capabilities and Core Competencies
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Competitive Advantage
Resources •Tangible
•Intangible
Capabilities
Core Competencies
The four criteria for determining strategic capabilities:
1. Value
2. Rarity
3. Costly-to-imitate
4. Nonsubstitutability
Resources, Capabilities and Core Competencies
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Core Competencies
Resources and capabilities that are the sources of a firm’s competitive advantage:
• Distinguish a firm competitively and reflect its personality.
• Emerge (develop) over time through an organizational process of accumulating and learning how to deploy different resources and capabilities.
Competitive Advantage
Resources •Tangible
•Intangible
Capabilities
Core Competencies
Resources, Capabilities and Core Competencies
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Competitive Advantage
Resources •Tangible
•Intangible
Capabilities
Core Competencies
Core Competencies
• Activities that a firm performs especially well compared to competitors.
• Activities through which the firm adds unique value to its goods or services over a long period of time.
Building Core Competencies
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The Four Criteria of Sustainable Competitive Advantage
1. Valuable capabilities
2. Rare capabilities
3. Costly to imitate
4. Nonsubstituable
Sustainable Competitive Advantage
• Valuable
• Rare
• Costly to imitate
• Nonsubstitutable
Four Criteria of Sustainable Advantages
• Valuable - A capability must be valuable, specifically, it must contribute to value for customers. It must also help an organization capitalize on opportunities while mitigating threats in the external environment.
• Rare - A capability must be rare. If every organization in an industry possessed identical capabilities, there would be no way to earn returns greater than those of competitors. Competitive advantage comes from doing things other organizations cannot.
• Inimitable - Organizations that enjoy high profit levels will quickly be imitated by other organizations wanting to enjoy the same. When capabilities can be easily imitated then they are not unique and will provide little in the way of competitive advantage.
• Non-Substitutable - Important capabilities cannot be substituted with other like capabilities. Stated another way, a different capability cannot be used instead of the capability being considered for purposes of this criteria. If substitution were possible the key capability would be limited in its contribution to competitive advantage.
Core Competencies
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Value Chain Analysis
Allows a firm to understand the parts of its operations 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 (cont’d)
Primary activities are involved with:
• A product’s physical creation
• A product’s sale and distribution to buyers
• The product’s service after the sale
Support Activities:
• Provide the assistance necessary for the primary activities to take place.
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Value Chain Analysis (cont’d)
Value Chain
Shows 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 competitors cannot complete.
Figure 3.3 A Model of the Value Chain
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Figure 3.4 Creating Value through Value Chain Activities
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Figure 3.5 Creating Value through Support Functions
The Value-Creating Potential of Primary Activities Inbound Logistics
• Activities used to receive, store,
and disseminate inputs to a product.
Operations • Activities necessary to convert the
inputs provided by inbound logistics into final product form.
Outbound Logistics • Activities involved with collecting, storing, and physically distributing the
product to customers.
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The Value-Creating Potential of Primary Activities (cont’d) Marketing and Sales
• Activities completed to provide the means through which customers can purchase products and to induce them to do so.
Service • Activities designed to enhance or maintain a product’s value
Each activity should be examined relative to competitor’s abilities and rated as superior, equivalent or inferior.
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The Value-Creating Potential of Primary Activities: Support Procurement
• Activities completed to purchase the inputs needed to produce a firm’s products.
Technological Development • Activities completed to improve a firm’s product and the processes used to
manufacture it.
Human Resource Management • Activities involved with recruiting, hiring, training, developing, and
compensating all personnel.
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The Value-Creating Potential of Primary Activities: Support (cont’d) Firm Infrastructure
Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.)
• Effectively and consistently identify external opportunities and threats
• Identify resources and capabilities
• Support core competencies
Each activity should be examined relative to competitor’s abilities and rated as superior, equivalent or inferior.
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Outsourcing
The purchase of a value-creating activity from an external supplier • Few organizations possess the resources and capabilities required to
achieve competitive superiority in all primary and support activities.
By performing fewer capabilities: • A firm can concentrate on those areas in
which it can create value.
• Specialty suppliers can perform outsourced
capabilities more efficiently.
Competencies, Strengths, Weaknesses, and Strategic Decisions
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— former 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.
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Chapter completed!