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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By studying the internal environment, firms identify what they can do

Unique resources, capabilities, and core competencies

(sustainable competitive advantage)


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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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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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Tangible ResourcesTangible Resources• FinancialFinancial• OrganizationalOrganizational• PhysicalPhysical• TechnologicalTechnological

Intangible ResourcesIntangible Resources• HumanHuman• InnovationInnovation• ReputationReputation

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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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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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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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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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RareRare: Capabilities that are not possessed by many others: Capabilities that are not possessed by many others

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Costly to imitate: capabilities that other firms cannot develop easily, usually due to

• Unique historical conditions• Causal ambiguity• Social complexity

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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

urce

Mg

mt.

Te

chn

olo

gica

l Dev

elo

pm

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tT

ech

nol

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cal D

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Pro

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me

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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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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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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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Inertia

Prior Strategic Commitments

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The Icarus Paradox

the internal organization: resources, capabilities, and core competence

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