Case Study Assignment

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Page 100 4.1 Looking Inside the Firm for Core Competencies

LO 4-1 Differentiate among a firm's resources, capabilities, core competencies, and activities.1.

Let's begin by taking a closer look at core competencies. These are unique strengths, embedded deep within a firm. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer or offering products and services of comparable value at lower cost. The important point here is that competitive advantage can be driven by core competencies.5

Company examples of core competencies abound: Honda's life began with a small two-cycle motorbike engine. Through continuous learning over several decades, and often from lessons learned from failure, Honda built the core competency to design and manufacture small but powerful and highly reliable engines for which it now is famous. This core competency results from superior engineering know-how and skills carefully nurtured and honed over several decades. Today, Honda engines can be found everywhere: in cars, SUVs, vans, trucks, motorcycles, ATVs, boats, airplanes, generators, snow blowers, lawn mowers and other yard equipment, and so on. Due to their superior performance, Honda engines have been the only ones used in the Indy Racing League (IRL) since 2006. Not coincidentally, this was also the first year in its long history that the Indy 500 was run without a single engine problem. One way to look at Honda is to view it as a company with a distinct competency in engines and a business model of finding places to put its engines. That is, underneath the products and services that make up the visible side of competition lies a diverse set of invisible competencies that make this happen. These invisible core competencies reside deep within the firm. Companies, therefore, compete as much in the product and service markets as they do in developing and leveraging core competencies. Although invisible by themselves, core competencies find their expression in superior products and services. Exhibit 4.3 identifies the core competencies of a number of companies, with application examples.

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EXHIBIT 4.3 EXHIBIT 4.3 Company Examples of Core Competencies and Applications

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Since core competencies are critical to gaining and sustaining competitive advantage, it is important to understand how they are created. Core competencies are built through the interplay of resources and capabilities. Exhibit 4.4 shows this relationship. Resources are any assets such as cash, buildings, machinery,

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or intellectual property that a company can draw on when crafting and executing a strategy. Resources can be either tangible or intangible. Capabilities are the organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically. Capabilities are by nature intangible. They find their expression in a company's structure, routines, and culture. Activities are distinct and fine-grained business processes such as order taking, the physical delivery of products, or invoicing customers. Each distinct activity enables firms to add incremental value by transforming inputs into goods and services. In the interplay of resources and capabilities, resources reinforce core competencies, while capabilities allow managers to orchestrate their core competencies. Strategic choices find their expression in a set of specific firm activities, which leverage core competencies for competitive advantage. The arrows leading back from performance to resources and capabilities indicate that superior performance in the marketplace generates profits that can be reinvested into the firm (retained earnings) to further hone and upgrade a firm's resources and capabilities in its pursuit of achieving and maintaining a strategic fit within a dynamic environment.

EXHIBIT 4.4 EXHIBIT 4.4 Linking Resources, Capabilities, Core Competencies, and Activities to Competitive Advantage and Superior Firm Performance

Core competencies that are not continuously nourished will eventually lose their ability to yield a competitive advantage. In the consumer electronics industry, Best Buy outperformed Circuit City based on its strengths in customer-centricity (segmenting customers based on demographic, attitudinal, and value tiers, and configuring stores to serve the needs of the customer segments in that region), employee development, and exclusive branding. Although Best Buy outperformed Circuit City (which filed for bankruptcy in 2009), more recently Best Buy did not hone and upgrade its core competencies sufficiently to compete effectively against Amazon.com, the world's largest online retailer. As such, Amazon does not have the overhead expenses associated with maintaining buildings or human sales forces, and can therefore undercut in-store retailers on price. When a firm does not invest in continual upgrading or improving core competencies, its competitors are more likely to develop equivalent or superior skills, as did Amazon. This insight will allow us to explain differences between firms in the same industry, as well as competitive dynamics, over time. It also will help us identify strategies with which firms gain and sustain a competitive advantage and weather an adverse