internal environ strategy textbook

8/2/2019 Internal Environ Strategy TextBook

1/48

1

The Internal Environment: Resources, Capabilities,

and Core Competencies


2/48

2

Knowledge Objectives Studying this topic should provide you with the

strategic management knowledge needed to: Explain the need for firms to study and understand their internal

environment.

Define value and discuss its importance.

Describe the differences between tangible and intangible resources.

Define capabilities and discuss how they are developed.

Describe four criteria used to determine whether resources and capabilities are core competencies.


3/48

3

Knowledge Objectives (contd)

Studying this topic should provide you with the strategic management knowledge needed to:

Explain how value chain analysis is used to identify and evaluate resources and capabilities.

Define outsourcing and discuss the reasons for its use.

Discuss the importance of preventing core competencies from

becoming core rigidities.


4/48

4

The StrategicManagement

Process


5/48

5

Competitive Advantage

Firms achieve strategic competitivenessand earn above-average returns whentheir core competencies are effectively Acquired Bundled Leveraged

Over time, the benefits of any value-creating strategy can be duplicated bycompetitors

Case : RLS mfg


6/48

6

Competitive Advantage (contd)

Sustainability of a competitive advantageis a function of The rate of core competence obsolescence

due to environmental changes The availability of substitutes for the core

competence

The difficulty competitors have in duplicatingor imitating the core competence


7/48

Generic Building Blocks ofCompetitive Advantage


8/48

8

Outcomes from External and InternalEnvironmental Analyses

Examine opportunitiesand threats Examine uniqueresources, capabilities,and competencies(sustainable competitiveadvantage)


9/48

9

The Context of Internal Analysis

Effective analysis of a firms internalenvironment (learning what the firm can do )requires : Fostering an organizational setting in which

experimentation and learning are expected andpromoted

Using a global mind-set

Thinking of the firm as a bundle of heterogeneousresources and capabilities that can be used to createan exclusive market position


10/48

10

Components of Internal Analysis


11/48

11

Creating Value

By exploiting their core competencies orcompetitive advantages, firms create value

Value is measured by

A products performance characteristics

The products attributes for which customers arewilling to pay

Firms create value by innovatively bundling andleveraging their resources and capabilities


12/48


13/48


14/48

14

The Challenge of Internal Analysis(contd)

To develop and use core competencies,managers must have Courage [guts!]

Street Smarts Self-confidence Integrity The capacity to deal with uncertainty and complexity A willingness to hold people (and themselves)

accountable for their work


15/48

15

Conditions Affecting Managerial Decisions about Resources, Capabilities and Core Competencies

SOURCE: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategicassets and organizational rent, Strategic Management Journal, 14: 33.


16/48

16

Resources, Capabilities andCore Competencies

Resources Are the source of a firms

capabilities

Are broad in scope Cover a spectrum of

individual, social andorganizational

phenomena Alone, do not yield a

competitive advantage


17/48

17


Resources Are a firms assets,

including people and thevalue of its brand name

Represent inputs into afirms production process,such as:

Capital equipment

Skills of employees Brand names Financial resources Talented managers


18/48

18


Resources Tangible resources

Financial resources

Physical resources Technological resources Organizational resources

Intangible resources Human resources innovation resources Reputation resources


19/48

19

Tangible Resources

Financial Resources The firms borrowing capacity The firms ability to generate internal

funds

Organizational Resources The firms formal reporting structureand its formal planning, controlling,and coordinating systems

Physical Resources Sophistication and location of a firmsplant and equipment

Access to raw materials

Technological Resources Stock of technology, such as patents,trade-marks, copyrights, and tradesecrets

SOURCES: Adapted from J. B. Barney, 1991, Firm resourcesand sustained competitive advantage, Journal of Management,17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis,Cambridge, U.K.: Blackwell Business, 100 102.


20/48

20

Intangible ResourcesHuman Resources Knowledge

Trust Managerial capabilities Organizational routines

Innovation Resources Ideas Scientific capabilities Capacity to innovate

Reputational Resources Reputation with customers Brand name Perceptions of product quality,

durability, and reliability Reputation with suppliers For efficient, effective, supportive, and

mutually beneficial interactions andrelationshipsSOURCES: Adapted from R. Hall, 1992, The strategic analysis

of intangible resources, Strategic Management Journal, 13:136 139; R. M. Grant, 1991, Contemporary Strategy Analysis,Cambridge, U.K.: Blackwell Business, 101 104.


21/48

21


Capabilities Are the firms capacity to deploy

resources that have beenpurposely integrated to achieve adesired end state

Emerge over time through complexinteractions among tangible andintangible resources

Often are based on developing,carrying and exchanginginformation and knowledge throughthe firms human capital


22/48

22


Capabilities The foundation of many

capabilities lies in: The unique skills and

knowledge of a firmsemployees

The functional expertise ofthose employees

Capabilities are oftendeveloped in specificfunctional areas or as

part of a functional area


23/48

23

Examples ofFirms

Capabilities


24/48

24


Core Competencies Resources and capabilities

that serve as a source of afirms competitiveadvantage:

Distinguish a companycompetitively and reflect itspersonality

Emerge over time through anorganizational process ofaccumulating and learning how todeploy different resources andcapabilities


25/48

25


Core Competencies Activities that a firm performs

especially well compared to

competitors Activities through which the firm

adds unique value to its goodsor services over a long period of

time


26/48

26

Building SustainableCompetitive Advantage

Four Criteria ofSustainable CompetitiveAdvantage

Valuable Rare Costly to imitate Nonsubstituable


27/48

27

The Four Criteria of SustainableCompetitive Advantage

Valuable Capabilities Help a firm neutralize threats orexploit opportunities

Rare Capabilities Are not possessed by many others

Costly-to-Imitate Capabilities Historical: A unique and a valuableorganizational culture or brand name

Ambiguous cause: The causes anduses of a competence are unclear

Social complexity: Interpersonalrelationships, trust, and friendship

among managers, suppliers, andcustomers

Nonsubstitutable Capabilities No strategic equivalent


28/48

28

Building Sustainable Competitive Advantage

Valuable capabilities Help a firm neutralize

threats or exploitopportunities

Rare capabilities Are not possessed by

many others


29/48

29


Costly-to-ImitateCapabilities Historical

A unique and a valuable

organizational culture or brandname

Ambiguous cause The causes and uses of a

competence are unclear Social complexity

Interpersonal relationships,trust, and friendship amongmanagers, suppliers, andcustomers


30/48

30


NonsubstitutableCapabilities

No strategic equivalent


31/48

Performance implicationTest Competitive implicationValuable? Does the resource or capability allow

the firm to meet a market demand orprotect the firm from marketuncertainties?

If so, it satisfies the value require-ment. Valuable resources areneeded just to compete in the indus-try, but value by itself does notconvey an advantage

Valuable resources and capabilitiesconvey the potential to achievenormal profits (i.e., profits whichcover the cost of all inputs includingthe cost of capital)

Rare ? Assuming the resource or capability isvaluable, is it scarce relative todemand? Or, is it widely possessed bymost competitors?

Valuable resources which are alsorare convey a competitive advant-age, but its relative permanenceis not assured. The advantage islikely only temporary

A temporary competitive advantageconveys the potential to achieve abovenormal profits, at least until thecompetitive advantage is nullified byother firms

Imitatableand non-substitut-able?

Assuming a valuable and rareresource, how difficult is it for com-petitors to either imitate the resourceor capability or substitute for it withother resources and capabilities thataccomplish similar benefits?

Valuable resources and capabilitieswhich are difficult to imitate orsubstitute provide the potential forsustained competitive advantage

A sustained competitive advantageconveys the potential to achieve abovenormal profits for extended periods oftime (until competitors eventually findways to imitate or substitute or theenvironment changes in ways thatnullify the value of the resources)

Exploit-able?

For each step of the preceding stepsof the VRINE test, can the firm actuallyexploit the resources and capabilitiesthat it owns or controls?

Resources and capabilities thatsatisfy the VRINE requirements butwhich the firm is unable to exploitactually result in significant opportu-nity costs (other firms would likelypay large sums to purchase theVRINE resources and capabilities).Alternatively, exploitability unlocksthe potential competitive and perfor-mance implications of the resourceor capability

Firms which control unexploitedVRINE resources and capabilitiesgenerally suffer from lower levels offinancial performance and depressedmarket valuations relative to what theywould otherwise enjoy (though not asdepressed as firms lacking resourcesand capabilities which do satisfyVRINE)

THE VRINE MODEL


32/48

32

Outcomes from Combinations of the Criteria forSustainable Competitive Advantage


33/48

33

Value Chain Analysis

Allows the firm to understand the parts of itsoperations that create value and those that donot

A template that firms use to: Understand their cost position

Identify multiple means that might be used to facilitateimplementation of a chosen business-level strategy


34/48

34

Value Chain Analysis (contd)

Primary activities involved with: A products physical creation

A products sale and distribution to buyers

The products service after the sale

Support activities

Provide the support necessary for the primaryactivities to take place


35/48

35

Value Chain Analysis (contd)

Value chain Shows how a product moves from raw-material stage

to the final customer

To be a source of competitive advantage,a resource or capability must allow thefirm: 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


36/48

36

The Basic ValueChain

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

F i r m

I n f r a s

t r u c

t u r e

H u m a n

R e s o u r c e

M a n a g e m e n

t

T e c

h n o

l o g

i c a

l D e v e

l o p m e n

t

P r o c u r e m e n

t


37/48

37

The Value-Creating Potential ofPrimary Activities

Inbound logistics Activities used to receive, store, and disseminate inputs to a

product (materials handling, warehousing, inventory control, etc.)

Operations Activities necessary to convert the inputs provided by inbound

logistics into final product form (machining, packaging,assembly, etc.)

Outbound logistics Activities involved with collecting, storing, and physicallydistributing the product to customers (finished goodswarehousing, order processing, etc.)


38/48

38

The Value-Creating Potential ofPrimary Activities (contd)

Marketing and sales Activities completed to provide means through which

customers can purchase products and to induce themto do so (advertising, promotion, distributionchannels, etc.)

Service Activities designed to enhance or maintain a products

value (repair, training, adjustment, etc.)Each activity should be examined relative to competitors

abilities and rated as superior, equivalent or inferior


39/48

39

The Value-Creating Potential ofPrimary Activities: Support

Procurement Activities completed to purchase the inputs needed to produce a

firms products (raw materials and supplies, machines,laboratory equipment, etc.)

Technological development Activities completed to improve a firms product and the

processes used to manufacture it (process equipment, basicresearch, product design, etc)

Human resource management Activities involved with recruiting, hiring, training, developing,

and compensating all personnel


40/48

40

The Value-Creating Potential ofPrimary Activities: Support (contd)

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 opportunitiesand threats

Identify resources and capabilities Support core competencies

Each activity should be examined relative tocompetitors abilities and rated as superior,

equivalent or inferior


41/48

41

Outsourcing

The purchase of a value-creating activityfrom an external supplier Few organizations possess the resources and

capabilities required to achieve competitive

superiority in all primary and support activities By forming and emphasizing fewer

capabilities A firm can concentrate on those areas in which it

can create value Specialty suppliers can perform outsourced

capabilities more efficiently


42/48

42

Operations

Marketing and Sales

F i r m

I n

f r a s

t r u c

t u r e

Outsourcing Decisions

A firm mayoutsource all or onlypart of one or moreprimary and/orsupport activities.

Outsourcedactivity

Inbound Logistics

Service

Outbound Logistics

H u m a n

R e s o u r c e

M a n a g e m e n

t

T e c

h n o

l o g

i c a

l D e v e

l o p m e n

t

P r o c u r e m e n

t


43/48

43

Strategic Rationales for Outsourcing

Improve business focus Lets a company focus on broader business

issues by having outside experts handle

various operational details Provide access to world-class capabilities

The specialized resources of outsourcing

providers makes world-class capabilitiesavailable to firms in a wide range ofapplications


44/48

44

Strategic Rationales for Outsourcing(contd)

Accelerate business re-engineering benefits Achieves re-engineering benefits more quickly by

having outsiders who have already achieved world-class standards take over process

Sharing risks Reduces investment requirements and makes firm

more flexible, dynamic and better able to adapt tochanging opportunities

Frees resources for other purposes Redirects efforts from non-core activities toward those

that serve customers more effectively


45/48

45

Outsourcing Issues

Greatest value Outsource only to firms possessing a corecompetence in terms of performing the primary orsupporting the outsourced activity

Evaluating resources and capabilities Do not outsource activities in which the firm itself cancreate and capture value

Environmental threats and ongoing tasks Do not outsource primary and support activities that

are used to neutralize environmental threats or tocomplete necessary ongoing organizational tasks


46/48

46

Outsourcing Issues (contd)

Nonstrategic team of resources Do not outsource capabilities that are critical to the

firms success, even though the capabilities are not

actual sources of competitive advantage Firms knowledge base

Do not outsource activities that stimulate thedevelopment of new capabilities and competencies


47/48

47

Cautions and Reminders

Never take for granted that core competencieswill continue to provide a source of competitiveadvantage

All core competencies have the potential tobecome core rigidities

Core rigidities are former core competenciesthat now generate inertia and stifle innovation


48/48

Cautions and Reminders (contd)

Determining what the firm can do throughcontinuous and effective analyses of itsinternal environment increase thelikelihood of long-term competitivesuccess

internal environ strategy textbook

Documents