the internal environment resources, capabilities and

Teams of ResourcesSources of Core Competencies Competitive Advantage Strategic Competitiveness Above-Average Returns Competitive Advantage Gained through Core Competencies Discovering Co

Chapter 3

The Internal Environment:

Resources, Capabilities and

Core Competencies

Michael A Hitt

R Duane Ireland Robert E Hoskisson

Michael A Hitt

R Duane Ireland Robert E Hoskisson

Chapter 3

Internal Environment

Process

Strategic Intent

Strategic Mission

Strategic Competitiveness Above Average

Chapter 6

Corporate-Level Strategy

Chapter 8

International Strategy

Chapter 9

Cooperative Strategies

Teams of Resources

Sources of

Core Competencies

Competitive Advantage

Strategic Competitiveness

Above-Average Returns

Competitive Advantage

Gained through Core Competencies

Discovering

Core Competencies

Value Chain Analysis

Valuable Rare

*

*

* Outsource

How do we assemble bundles of Resources,

Capabilities and Core Competencies to create

VALUE for customers?

Will environmental changes make our core

competencies obsolete?

And

Are substitutes available for our core

competencies?

Are our core competencies easily imitated?

Key Questions for Managers

in Internal Analysis

Key Questions for Managers

in Internal Analysis

Conditions Affecting Managerial Decisions About Resources, Capabilities and Core Competencies

Conditions Affecting Managerial Decisions About Resources, Capabilities and Core Competencies

Uncertainty

regarding characteristics of the general and the industry environments, competitor’s actions, and customer’s preferences

Uncertainty

regarding characteristics of the general and the industry environments, competitor’s actions, and customer’s preferences

Complexity

regarding the interrelated causes shaping a firm’s

environments and perceptions of the environments

Complexity

regarding the interrelated causes shaping a firm’s

environments and perceptions of the environments

What a firm has to work with:

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

What a firm Has

Resources

Resources represent inputs into a firm’s production process

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

What a firm Has

What a firm has to work with:

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

Resources

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

“Some genius invented the Oreo We’re just living off the inheritance.” F Ross Johnson,

Former President & CEO,

What a firm Has

Resources

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

“Some genius invented the Oreo

We’re just living off the inheritance.”

F Ross Johnson,

Resources

Teams of Resources

Discovering Core

Competencies

Discovering Core

Competencies

What a firm Does

Capabilities represent:

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

Capabilities

What a firm Does

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.

interactions that take advantage of the interrelationships

are based on the development, transmission and

exchange or sharing of information and knowledge as

carried out by the firm's employees.

Capabilities represent:

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

Capabilities

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.

Capabilities

Teams of Resources

Competitive Advantage

Discovering

Core Competencies

What a firm Does

that is Strategically

Valuable

“…are the essence of what makes an organization

unique in its ability to provide value to

customers.”

Leonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co recommends identifying three to four

competencies to use in framing strategic actions.

Core Competencies

Teams of Resources

Sources of

Core Competencies

Competitive Advantage

Discovering

Core Competencies

Criteria of Sustainable Advantages

Valuable Rare

For a strategic capability to be a

Core Competency, it must be:

Core Competencies

Valuable Rare

Costly to Imitate Nonsubstitutable

What a firm Does

that is Strategically

Valuable

Rare

Costly to Imitate

Capabilities that other firms cannot develop easily,

usually due to unique historical conditions, causal

Capabilities that other firms cannot develop easily,

usually due to unique historical conditions, causal

Capabilities that are not possessed by many others

Capabilities that help a firm neutralize threats or exploit

What Criteria Make Core Competencies Costly to Imitate?

What Criteria Make Core Competencies Costly to Imitate?

Unique Historical Conditions

Causal Ambiguity

Social Complexity

This occurs when competitors are unable to detect how a firm uses

its competencies as a foundation for competitive advantage

This occurs when competitors are unable to detect how a firm uses

its competencies as a foundation for competitive advantage

Occurs when the firm’s capabilities are the result of complex social

phenomena, such as interpersonal relationships, trust and friendships

Occurs when the firm’s capabilities are the result of complex social

phenomena, such as interpersonal relationships, trust and friendships

Example: Disney created Mickey Mouse at a time when

animated motion pictures were new

An unusual evolutionary pattern of growth may contribute to the

development of competencies in a manner that is unique to those

particular circumstances

An unusual evolutionary pattern of growth may contribute to the

development of competencies in a manner that is unique to those

particular circumstances

Core Competencies must be:

Nonsubstitutable

Capabilities that do not have strategic equivalents, such as

Capabilities that do not have strategic equivalents, such as

firm-What a firm Does

Capabilities that other firms cannot develop easily, usually due to

unique historical conditions, causal ambiguity or social complexity

Capabilities 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

competitors

Capabilities 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

NO

Capability

• A nonstrategic team

Valuable Rare Costly to

Imitate

stitutable

Nonsub-Competitive Consequences

Performance Implications

NO NO NO NO Disadvantage Competitive

Below Average Returns

YES NO NO YES/NO Competitive Parity Average Returns

YES

Temporary Competitive Advantage

Aver./Above Average Returns

Above Average

Above Average

YES

Sustainable Competitive

Sustainable Competitive

Outcomes from Combinations of the Criteria for

Sustainable Competitive Advantage Outcomes from Combinations of the Criteria for

Sustainable Competitive Advantage

Teams of Resources

Sources of

Core Competencies

Competitive Advantage

Discovering

Core Competencies

Value Chain Analysis

Valuable Rare

*

*

Criteria of Sustainable Advantages

Discovering Core

Competencies

Discovering Core

Competencies

Activities

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Activities

Technological Development Procurement

Human Resource Management

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Activities

Technological Development Human Resource Management Firm Infrastructure

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Activities

Technological Development Human Resource Management Firm Infrastructure

M AR GIN

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Activities

Outsourcing

Technological Development Human Resource Management Firm Infrastructure

M AR GIN

Strategic Choice to Purchase Some Activities From Outside Suppliers

Activities

Technological Development Human Resource Management Firm Infrastructure

Operations

Outbound Logistics

Service

Marketing

& Sales

Technological Development Human Resource Management

Procurement

M AR GIN

M AR GIN

of their value-creating activities from specialty external suppliers who can perform these functions

more efficiently

Outsourcing

Strategic Choice to Purchase Some Activities From Outside Suppliers

Lets company focus on broader business issues by having outside

experts handle various operational details

Lets company focus on broader business issues by having outside

experts handle various operational details

Strategic Rationales for Outsourcing

Improve Business Focus

Permits firm to redirect efforts from non-core activities toward those Free Resources for Other Purposes

Provide Access to World-Class Capabilities

Accelerate Business Re-Engineering Benefits

Accelerate Business Re-Engineering Benefits

Share 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 who have already achieved world-class standards take over process

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

outsiders 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

it is important to recognize that

Value Chains are part of a Total Value System

Firm Value Chain Channel Value Chain Buyer Value Chain

Supplier Value Chain

Upstream Value

Perform valuable activities that

complement the firm’s activities

Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Buyer Value Chain

Upstream Value

Perform valuable activities that

Channel 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 System

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value

Perform valuable activities that

Buyer 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 System

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value

Perform valuable activities that

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:

• History

• Strategy

Value Chains are part of a Total Value System

Core Competencies Cautions and Reminders

Never take for granted that core competencies will continue to provide a source of competitive advantage

Never take for granted that core competencies will

continue to provide a source of competitive advantage

All core competencies have the potential to become

Core Rigidities

All 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

Teams of Resources

Sources of

Core Competencies

Competitive Advantage

Strategic Competitiveness

Above-Average Returns

Discovering

Core Competencies

Value Chain Analysis

Valuable Rare

*

*

Criteria of Sustainable Advantages

Discovering Core

Competencies

Discovering Core

Competencies

Process

Process

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

Teams of Resources

Sources of

Core Competencies

Competitive Advantage

Strategic Competitiveness

Above-Average Returns

Competitive Advantage

Gained through Core Competencies

Discovering

Core Competencies

Value Chain Analysis

Valuable Rare

*

*

Criteria of Sustainable Advantages

Discovering Core

Competencies

Discovering Core

Competencies