The Internal Environment: Resources, Capabilities and

Core Competencies

The Internal Environment: Resources, Capabilities and

Core Competencies

Dr. S. PerotDr. S. PerotDr. S. PerotDr. S. Perot

What the Firm Might Do

What the Firm Can Do

External EnvironmentExternal Environment

Five Forces AnalysisFive Forces Analysis

Internal EnvironmentInternal EnvironmentResources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies

SustainableSustainableCompetitiveCompetitiveAdvantageAdvantage

ResourcesResources

** TangibleTangible** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Sources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Above-AverageAbove-AverageReturnsReturns

CompetitiveCompetitiveAdvantageAdvantage

Gained throughGained throughCore CompetenciesCore Competencies

DiscoveringDiscoveringCoreCore

CompetenciesCompetencies

Criteria ofSustainableAdvantages

ValueChain

Analysis

Discovering Core CompetenciesDiscovering Core Competencies

ValuableRareCostly to ImitateNonsubstitutable

****

Outsource*

How do we assemble bundles of Resources, Capabilities and Core Competencies to...How do we assemble bundles of Resources, Capabilities and Core Competencies to...

Create VALUE for Customers

Create VALUE for Customers

Will environmental changes make our core competencies obsolete?Will environmental changes make our core competencies obsolete?

And...And...

Are substitutes available for our core competencies?Are substitutes available for our core competencies?

Are our core competencies easily imitated?Are our core competencies easily imitated?

Key Questions for Managers in Internal Analysis include...Key Questions for Managers in Internal Analysis include...

Key Questions for Managers in Internal Analysis include...Key Questions for Managers in Internal Analysis include...

Difficult managerial decisions regarding resources, capabilities and core competencies are characterized by three conditions:

Difficult managerial decisions regarding resources, capabilities and core competencies are characterized by three conditions:

UncertaintyUncertainty

ComplexityComplexity

Intraorganizational ConflictsIntraorganizational Conflicts

ResourcesResources

** TangibleTangible** IntangibleIntangible

Discovering Core CompetenciesDiscovering Core Competencies

Tangible ResourcesTangible ResourcesFinancialFinancial**

PhysicalPhysical**

Human ResourcesHuman Resources**

OrganizationalOrganizational**

ResourcesResources What a firm Has...

What a firm has to work with:

its assets, including its people and the value of its brand name

Resources represent inputs into a firm’s production process...

such as capital equipment, skills of employees, brand names, finances and talented managers

ResourcesResources

Intangible ResourcesIntangible Resources

TechnologicalTechnological**

InnovationInnovation**

ReputationReputation**

“Some genius invented the Oreo. We’re just living off the inheritance.”

F. Ross Johnson,Former President & CEO, RJR Nabisco

ResourcesResources

** TangibleTangible** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Discovering Core CompetenciesDiscovering Core Competencies

CapabilitiesCapabilities What a firm Does...

Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.

Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.

Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

ResourcesResources

** TangibleTangible** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Sources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

DiscoveringDiscoveringCoreCore

CompetenciesCompetencies

Discovering Core CompetenciesDiscovering Core Competencies

Core CompetenciesCore CompetenciesWhat a firm Does...that is Strategically

Valuable

“…“…are the essence of what makes an are the essence of what makes an organization unique in its ability to provide organization unique in its ability to provide value to customers.”value to customers.”

Leonard-Barton, Bowen, Clark, Holloway & WheelwrightLeonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to four McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.competencies to use in framing strategic actions.

Core CompetenciesCore Competencies

For a strategic capability to be a Core Competency, it must be:ValuableValuable

Costly to ImitateCostly to Imitate

NonsubstitutableNonsubstitutable

RareRare

Core CompetenciesCore Competencies

Core Competencies must be:ValuableValuable

RareRare

NonsubstitutableNonsubstitutableCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationshipsCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships

Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexityCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

Capabilities that are possessed by few, if any, current or potential competitorsCapabilities that are possessed by few, if any, current or potential competitors

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment

What a firm Does...that is Strategically

Valuable

Costly to ImitateCostly to Imitate

Outcomes from Combinations of the Criteria Outcomes from Combinations of the Criteria for Sustainable Competitive Advantagefor Sustainable Competitive Advantage

Outcomes from Combinations of the Criteria Outcomes from Combinations of the Criteria for Sustainable Competitive Advantagefor Sustainable Competitive Advantage

ValuableValuable RareRareCostly to Costly to ImitateImitate

Nonsub-Nonsub-stitutablestitutable

Competitive Competitive ConsequencesConsequences

Performance Performance ImplicationsImplications

AboveAverageReturns

AboveAverageReturns

NONO NONO NONO NONO

YESYES NONO NONO YES/NOYES/NO

YESYES NONO YES/NOYES/NOYESYES

YESYESYESYES YESYESYESYES

CompetitiveCompetitiveDisadvantageDisadvantage

Below Below AverageAverageReturnsReturns

CompetitiveCompetitiveParityParity

AverageAverageReturnsReturns

TemporaryTemporaryCompetitiveCompetitiveAdvantageAdvantage

Aver./Above Aver./Above AverageAverageReturnsReturns

SustainableCompetitiveAdvantage

SustainableCompetitiveAdvantage

ResourcesResources

** TangibleTangible** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Sources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

DiscoveringDiscoveringCoreCore

CompetenciesCompetencies

ValueChain

Analysis

Discovering Core CompetenciesDiscovering Core Competencies

Outsource*ValuableRareCostly to ImitateNonsubstitutable

****

Criteria ofSustainableAdvantages

SupportActivities

Primary Activities

Value Chain AnalysisValue Chain Analysis

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

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helps to identify which resources and capabilities can add value

MARG

IN

MARG

IN

MARGIN

MARGIN

SupportActivities

Primary Activities

OutsourcingOutsourcing

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

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MARG

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- strategic choice to purchase some activities from outside suppliers

SupportActivities

Primary Activities

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

Firm InfrastructureFirm Infrastructure

ProcurementProcurement

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MARG

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Inbound Inbound LogisticsLogistics

OperationsOperationsOutboundOutboundLogisticsLogistics

ServiceService

Marketing Marketing & Sales& Sales

Technological DevelopmentTechnological Development

Human Resource ManagementHuman Resource Management

ProcurementProcurement

MARGIN

MARGIN

Firms often purchase a portionportion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlymore efficiently

OutsourcingOutsourcing- strategic choice to purchase some activities from outside suppliers

OutsourcingOutsourcing- strategic choice to purchase some activities from outside suppliers

What are the Strategic Rationales for Outsourcing?

What are the Strategic Rationales for Outsourcing?

Lets company focus on broader business issues by having outside experts handle various operational detailsLets company focus on broader business issues by having outside experts handle various operational details

What are the Strategic Rationales for Outsourcing?What are the Strategic Rationales for Outsourcing?Improve Business FocusImprove Business Focus

Permits firm to redirect efforts from non-core activities toward those that serve customers more effectivelyPermits firm to redirect efforts from non-core activities toward those that serve customers more effectively

Free Resources for Other PurposesFree Resources for Other Purposes

Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities

Accelerate Business Re-Engineering BenefitsAccelerate Business Re-Engineering Benefits

Share RisksShare Risks

The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications

Achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over processAchieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process

Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

To capitalize on the usefulness of the Value Chain concept...

it is important to recognize that...

Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

Supplier Value Chain Firm Value ChainFirm Value Chain Channel Value Chain Buyer Value Chain

Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

Firm Value Chain Channel Value Chain Buyer Value Chain

Supplier Value ChainSupplier Value Chain

Upstream ValueUpstream Value

Perform valuable activities that complement the firm’s activities

Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Buyer Value Chain

Upstream Value

Perform valuable activities that complement the firm’s activities

Channel Value ChainChannel Value Chain

Each firm must eventually find a way to become a part of some buyer’s value chain

Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value

Perform valuable activities that complement the firm’s activities

Buyer Value ChainBuyer Value Chain

Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain

This creates VALUE!!

Each firm must eventually find a way to become a part of some buyer’s value chain

Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value

Perform valuable activities that complement the firm’s activities

Buyer Value Chain

Each firm must eventually find a way to become a part of some buyer’s value chain

Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain

This creates VALUE!!

Value chains vary for firms in an industry, reflecting each firm’s unique qualities

HistoryStrategySuccess at Implementation

Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders

It should never be taken for granted that core competencies will continue to provide a source of competitive advantageIt should never be taken for granted that core competencies will continue to provide a source of competitive advantage

All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats

Chapter 2Chapter 2ExternalExternal

EnvironmentEnvironment

Chapter 3Chapter 3InternalInternal

EnvironmentEnvironment

The StrategicThe StrategicManagementManagement

ProcessProcess

The StrategicThe StrategicManagementManagement

ProcessProcess

Strategic MissionStrategic MissionStrategic MissionStrategic Mission

A statement of the firm’s unique A statement of the firm’s unique purpose and the scope of its purpose and the scope of its operations in product market operations in product market termsterms

A statement of the firm’s unique A statement of the firm’s unique purpose and the scope of its purpose and the scope of its operations in product market operations in product market termsterms

Strategic IntentStrategic Intent

Strategic IntentStrategic Intent

Strategic MissionStrategic Mission

Leveraging of a firm’s resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the compe- titive environment

Leveraging of a firm’s resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the compe- titive environment

ResourcesResources

** TangibleTangible** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Sources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

StrategicStrategicCompetitivenessCompetitiveness

Above-AverageAbove-AverageReturnsReturns

CompetitiveCompetitiveAdvantageAdvantage

Gained throughGained throughCore CompetenciesCore Competencies

DiscoveringDiscoveringCoreCore

CompetenciesCompetencies

ValueChain

Analysis

Discovering Core CompetenciesDiscovering Core Competencies

ValuableRareCostly to ImitateNonsubstitutable

****

Outsource*

Criteria ofSustainableAdvantages