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Chapter 3
The Internal Environment:
Resources, Capabilities and
Core Competencies
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2000 South-Western College Publishing
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Chapter 3
Internal
Environment
Chapter 2
External
Environment
The Strategic
Management
Process
Strategic Intent
Strategic Mission
Strategic
Competitiveness
Above Average
Returns
Feedback
Strategy Formulation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 7
Acquisitions &
Restructuring
Strategy Implementation
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 12
Strategic
Leadership
Chapter 13
Entrepreneurship
& Innovation
Strategic
Actions
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Discovering Core Competencies
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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
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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.
Complexity
regarding the interrelated causes shaping a firm’s environments and perceptions of the environments
Intraorganizational Conflicts
among people making managerial decisions and those affected by them
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Discovering Core Competencies
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What a firm has to work with:
its assets, including its people and the value of its brand name
What a firm Has...
Resources
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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
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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,
RJR Nabisco
What a firm Has...
Resources
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Tangible 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
Intangible Resources
“Some genius invented the Oreo. We’re just living off the inheritance.”
F. Ross Johnson,
Former President & CEO, RJR Nabisco
Resources
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Discovering Core Competencies
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What a firm Does...
Capabilities
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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.
Capabilities
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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
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Discovering Core Competencies
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“…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
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Discovering Core Competencies
* Outsource
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For a strategic capability to be a Core Competency, it must be:
Core Competencies
What a firm Does...
that is Strategically Valuable
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Valuable
Rare
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity
Capabilities that are not possessed by many others
Capabilities that help a firm neutralize threats or exploit opportunities
Core Competencies
What a firm Does...
that is Strategically Valuable
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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
Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers
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
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Core Competencies must be:
Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships
What a firm Does...
that is Strategically Valuable
Core Competencies
Valuable
Rare
Costly to Imitate
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 either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment
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Core Competencies
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Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage
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* Outsource
Discovering Core Competencies
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Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
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Support
Activities
Primary Activities
Inbound
Logistics
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Inbound
Logistics
Operations
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Inbound
Logistics
Operations
Outbound
Logistics
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
Procurement
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
Procurement
Technological Development
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Technological Development
Procurement
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
Human Resource Management
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Ch3-*
Support
Activities
Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
MARGIN
MARGIN
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
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Support
Activities
Primary Activities
Outsourcing
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
MARGIN
MARGIN
Strategic Choice to Purchase Some Activities From Outside Suppliers
Ch3-*
Support
Activities
Primary Activities
Technological Development
Human Resource Management
Firm Infrastructure
Procurement
Inbound
Logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
MARGIN
Inbound
Logistics
Operations
Outbound
Logistics
Service
Marketing
& Sales
Technological Development
Human Resource Management
Procurement
MARGIN
Firms often purchase a portion 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
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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 that serve customers more effectively
Free Resources for Other Purposes
Provide Access to World-Class Capabilities
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
Achieves 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
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To capitalize on the usefulness of the Value Chain concept...
it is important to recognize that...
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Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
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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
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Supplier Value Chain
Firm Value Chain
Buyer Value Chain
Upstream Value
Perform valuable activities that complement the firm’s activities
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
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Supplier Value Chain
Firm Value Chain
Channel Value Chain
Upstream Value
Perform valuable activities that complement the firm’s activities
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
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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:
History
Strategy
Success at Implementation
Value Chains are part of a Total Value System
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Core Competencies--Cautions and Reminders
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* Outsource
Discovering Core Competencies
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The Strategic
Management
Process
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The Strategic
Management
Process
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The Strategic
Management
Process
Strategic Intent
Strategic Mission
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* Outsource
Discovering Core Competencies
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