business management

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Dr. Andrew G. Ross

Lecture

Internal Analysis: Resources, Capabilities & Core Competencies

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One of the UK’s top 20 universities (Guardian University Guide 2021)

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Learning Outcomes

 Understand the difference between resources, capabilities, and core competencies

 Assess the different types of resources available to organisations  Introduce the resource based view and use the VRIN framework to analyse a

firm’s core competencies  Introduce the value chain as an intermediary step in the identification of core

competencies  Assess the value chain linkages that help organisations sustain competitive

advantage  Carry out a SWOT analysis as the culmination of an organisation’s strategic

position analysis.

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Strategic Position Analysis

 Strategic position considers the current position of the firm in the light of future changes in the external global environment and its internal resource capabilities.

 How to analyse an organisation’s position in the external, global environment (Last week’s lecture)

 How to analyse a firm’s internal resources, capabilities and core competencies (This week).

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Key Questions for Managers

 How do we build and improve our resources, capabilities and core competencies to create superior value for our customers?

 Success in creating superior customer value means:

- customers are willing to pay more for our product/service than it costs us to deliver (the profit margin);

- and that this value created is better than that of our rivals because we are exploiting our unique capabilities

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Components of Internal Analysis

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RESOURCES Audit

COMPETENCES/CAPABILITIES Value Chain Analysis

CORE COMPETENCES VRIN test

Value Chain Linkages

COMPETITIVE ADVANTAGE

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Resources: what a firm has…

Tangible

– Assets that can be seen, touched and quantified – Examples include equipment, facilities, distribution

centres, formal reporting structures Intangible

– Assets rooted deeply in the firm’s history, accumulated over time

– In comparison to ‘tangible’ resources, usually can’t be seen or touched

– Examples include knowledge, trusts, organisational routines, capabilities, innovation, brand name, reputation

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Capabilities: What a firm Does with its resources...

 When two or more resources are combined they create capabilities.

 When capabilities are combined in unique combinations they create core competencies.

 Analyse capabilities using Porter’s Value Chain (VC)

 Use linkages between VC activities to help identify processes which are the basis for core competencies

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Core Competencies: What a firm does…that is Strategically Valuable

Core Competencies…

• are the essence of what makes a firm unique in its ability to

provide value to customers

• distinguish a company competitively and reflects its personality

• are the source of sustainable competitive advantage for a firm

over its rivals

• Are the ‘crown jewels of a company’ (Hitt et al, 2011)

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McKinsey & Co. recommend its clients should concentrate on three to four core competencies

when implementing a strategy .

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CCs as Sources of Competitive Advantage

Johnson et al. distinguish between:

 Threshold resources and capabilities which are the minimum required to operate in an industry

 Unique resources and capabilities are core competencies which are difficult to copy and are the sources of sustainable competitive advantage

Core competencies are sources of competitive advantage because:

 The process or resource represents a significant proportion of the value in the product as perceived by customers

 They are difficult or too costly for competitors to imitate  They ultimately enable the firm to significantly outperform their rivals

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Criteria to identify Core Competencies

The Resource Based View (RBV)

Barney (1991) states a resource or capability must meet the VRIN test if it is to sustain competitive advantage:

• Valuable – exploit opportunities / neutralise threats? • Rare – unique and possessed by few competitors? • Inimitable – costly to imitate? • Non-Substitutability – are there product/service/competence

substitutes?

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Outcomes from Combinations of Criteria for Sustainable Competitive Advantage

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Ireland et al (2017, pg. 93)

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The Value Chain

The value chain notes the centricity of creating customer value

and is a tool for:

 describing the activities/capabilities of the organisation and

 identifying the linkages that bring the activities together in a way

that adds value to the customer and increases the margin to the

organisation.

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Capabilities assessed in the Value Chain

 A framework for analysing the activities of an organisation which help to create value to the customer.

 Activities are divided into:-

 Primary Activities  Support Activities

 Organisations can assess their capabilities within each value chain activity

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Operations: The Firm as a Value Chain

S U P P O R T

Margin

PRIMARY

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Value Chain Analysis

Primary activities

 Involved with product’s physical creation, sales and distribution to buyers, and service after the sale

 Service, marketing/sales, outbound/inbound logistics and operations

Support activities

 Provide assistance necessary for the primary activities to take place

 Includes firm infrastructure, HRM, technologies development and procurement

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Primary Activities

 Inbound Logistics - receiving, storing, and distributing inputs to the product or service

 Operations - transforming inputs into the final product or service  Outbound Logistics - storing and distributing the product to the

customer  Marketing and Sales - the means by which customers are made

aware of the product/service and are able to purchase it.  Service - additional aspects of service to the customer which

enhance the value of the product/service

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Support Activities

 Procurement - the process of acquiring the various inputs to the primary activities

 Technology Development - either product technology such as product design or process technology to do with the means of producing it.

 Human Resource Management - all those activities concerning recruitment, training, and rewarding people within the organisation

 Infrastructure - the system of planning, finance, and control which are crucial to the organisation’s strategic capability

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Value Chain Analysis

 Identify critical activities which sustain competitive advantage

 Determine whether value is added by means of lower cost or higher value

 Identify the key linkages between the value activities which enhances

competitive advantage. A linkage exists where the performance or cost of one

activity affects that of another.

 Understanding linkages can lead to better make-or-buy decisions

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VC as intermediary stage to identify CCs

1. Analyse Cost drivers delivering cost efficiency Examples:

Economies of scale Experience curve learning effects Process innovation

2. Analyse value drivers delivering effectiveness/higher perceived value Examples:

Value adding features and benefits as a result of: product innovation customer service and quality brand and reputational management

3. Examine how cost drivers and value drivers are result of linkages in the VC: Primary to Primary Support to Primary Value Chain to Value Network – managing relationships

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Core Competencies - Key Points

 Tend to be cross-functional and cross company and few in number

 Development is a lengthy process

 Supporting rationale for outsourcing and alliances - skills in managing relationships

 Competencies provide a logic for diversification

 Can be lost! Need to be nurtured and new ones built in response to change.

 Have the potential to become core rigidities.

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Summary - Identifying Strengths and Weaknesses

 Resource Audit

 Value Chain Analysis

 Identify processes – linkages in the Value Chain

 Which value chain linkages are the basis for identifying core

competencies

 Evaluate CCs against Barney’s criteria (i.e. VRIN analysis)

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Strategic Position Analysis

Strengths Weaknesses

Opportunities Threats

External Environment

Internal Resources & Capabilities

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SWOT Analysis

A means of integrating the overall strategic position analysis

 Opportunities and Threats derive from the main conclusions of external environmental analysis.

 Strengths and Weaknesses derive from the main conclusions of internal resource and capability analysis.

The outcome of a SWOT analysis should provide strong guidance for future strategy choices.

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Reading

• Fundamentals of Strategy (Chapter 4)

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