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2004 by South-Western/Thomson Learning 1
The Internal Organization:The Internal Organization:
Resources, Capabilities, andResources, Capabilities, and
Core CompetenceCore Competence
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
Chapter 4Chapter 4
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Chapter 2Chapter 2
Strategic LeadershipStrategic Leadership
Chapter 4Chapter 4
The InternalThe Internal
OrganizationOrganization
Chapter 6Chapter 6
Competitive Rivalry andCompetitive Rivalry and
Competitive DynamicsCompetitive Dynamics
Chapter 9Chapter 9
International StrategyInternational Strategy
Chapter 1Chapter 1
Introduction toIntroduction to
Strategic ManagementStrategic Management
Chapter 3Chapter 3
The ExternalThe External
EnvironmentEnvironment
Chapter 5Chapter 5
Business-LevelBusiness-Level
StrategyStrategy
Chapter 8Chapter 8Acquisition andAcquisition and
Restructuring StrategiesRestructuring Strategies
Chapter 11Chapter 11
Corporate GovernanceCorporate Governance
Chapter 7Chapter 7
Corporate-Level StrategyCorporate-Level Strategy
Chapter 10Chapter 10
Cooperative StrategyCooperative Strategy
Chapter 12Chapter 12
Strategic EntrepreneurshipStrategic Entrepreneurship
Strategic
Analysis
Strategic
Thinking
Creating
Competitive
Advantage
Monitoring
And Creating
EntrepreneurialOpportunities
The Strategic Management ProcessThe Strategic Management Process
Strategic IntentStrategic Intent
Strategic MissionStrategic Mission
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Discussion QuestionsDiscussion Questions
1. What different perspectives aregained from external compared tointernal analyses of the firm?
2. What is the difference betweentangible and intangible resources?What is the difference betweenresources and capabilities?
3. What are the criteria to determinecore competence? What issustainable competitive advantage?
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Discussion Questions (cont.)Discussion Questions (cont.)
4. What is the value chain?
5. What is outsourcing and when
should it be used?
6. Are there risks to a sustainable
competitive advantage?
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Discussion Question 1Discussion Question 1
What different perspectives are
gained from external compared tointernal analyses of the firm?
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ExternalExternal and Internal Analysesand Internal Analyses
Gen
eral
Gen
eral
Envir
on
ment
Environ
ment
GeneralGeneral
EnvironmentEnvironment
Gen
eral
Gen
eral
Env
ironment
Env
ironment
SocioculturalSociocultural
Glo
bal
Global
TechnologicalTechnologicalP
olitic
al/L
egal
Politic
al/L
egal
Dem
ographic
Dem
ographic
Econom
ic
Econom
ic
IndustryIndustry
EnvironmentEnvironment
CompetitorCompetitor
EnvironmentEnvironment
By studying the externalBy studying the external
environment, firms identifyenvironment, firms identify
what theywhat they might choose to domight choose to do
Opportunities and threatsOpportunities and threats
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ExternalExternal and Internal Analysesand Internal Analyses
By studying the internalBy studying the internal
environment, firms identifyenvironment, firms identify
what theywhat they can docan do
Unique resources,Unique resources,
capabilities, and corecapabilities, and core
competenciescompetencies
(sustainable competitive(sustainable competitive
advantage)advantage)
External and Internal Analyses
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Components ofComponents of
Internal AnalysisInternal AnalysisDiscovering CoreDiscovering Core
CompetenciesCompetencies
ResourcesResources TangibleTangible IntangibleIntangible
CapabilitiesCapabilities
CoreCore
CompetenciesCompetencies
CompetitiveCompetitive
AdvantageAdvantage
Value CreationValue Creation
Four CriteriaFour Criteria
of Sustainableof Sustainable
AdvantagesAdvantages
ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable
ValueValue
ChainChain
AnalysisAnalysis
OutsourceOutsource
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Challenge of Internal AnalysisChallenge of Internal Analysis
How do we effectively manage current coreHow do we effectively manage current core
competencies while simultaneouslycompetencies while simultaneously
developing new ones?developing new ones?
How do we assemble bundles of resources,How do we assemble bundles of resources,
capabilities and core competencies tocapabilities and core competencies to
create value for customers?create value for customers?
How do we learn to change rapidly?How do we learn to change rapidly?
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Conditions Affecting ManagerialConditions Affecting Managerial
Decisions About Resources, Capabilities,Decisions About Resources, Capabilities,
and Core Competenciesand Core CompetenciesUncertaintyUncertainty regarding characteristics of theregarding characteristics of the
general and the industry environments,general and the industry environments,
competitors actions, and customers preferencescompetitors actions, and customers preferences
ComplexityComplexityregarding the interrelated causesregarding the interrelated causesshaping a firms environments and perceptions ofshaping a firms environments and perceptions of
the environmentsthe environments
Intraorganizational ConflictsIntraorganizational Conflicts amongamongpeople making managerial decisions and thosepeople making managerial decisions and thoseaffected by themaffected by them
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Discussion Question 2Discussion Question 2
What is the difference between
tangible and intangible resources?What is the difference between
resources and capabilities?
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Discovering CoreDiscovering Core
CompetenciesCompetencies
ResourcesResources TangibleTangible IntangibleIntangible
Resources are what a firm hasResources are what a firm has
to work with--its assets--to work with--its assets--
including its people and theincluding its people and the
value of its brand namevalue of its brand name
Resources represent inputs intoResources represent inputs into
a firms production process...a firms production process...
such as capital equipment, skillssuch as capital equipment, skills
of employees, brand names,of employees, brand names,
finances and talented managersfinances and talented managers
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Discovering CoreDiscovering Core
CompetenciesCompetencies
ResourcesResources TangibleTangible IntangibleIntangible
Tangible ResourcesTangible Resources
FinancialFinancial
OrganizationalOrganizational
PhysicalPhysical
TechnologicalTechnological
Intangible ResourcesIntangible Resources
HumanHuman
InnovationInnovation
ReputationReputation
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Discovering CoreDiscovering Core
CompetenciesCompetencies
CapabilitiesCapabilities
Capabilities become important when they are combinedCapabilities become important when they are combined
in unique combinations which create core competenciesin unique combinations which create core competencies
which have strategic value and can lead to competitivewhich have strategic value and can lead to competitive
advantageadvantage
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Discovering CoreDiscovering Core
CompetenciesCompetencies
CapabilitiesCapabilities
Capabilities are what a firm does, and represent the firmsCapabilities are what a firm does, and represent the firms
capacity to deploy resources that have been purposelycapacity to deploy resources that have been purposely
integrated to achieve a desired end stateintegrated to achieve a desired end state
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Discussion Question 3Discussion Question 3
What are the criteria to determine
core competence?What is sustainable competitiveadvantage?
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Discovering CoreDiscovering Core
CompetenciesCompetencies
CoreCoreCompetenciesCompetencies
Core competencies are resources and capabilities that serveCore 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 competitivelyCore competencies distinguish a company competitively
and make it distinctiveand make it distinctive
McKinsey and Co. recommends using three to fourMcKinsey and Co. recommends using three to four
competencies when framing strategic actionscompetencies when framing strategic actions
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Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantagesAdvantages
ValuableValuable
RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable
Discovering CoreDiscovering Core
CompetenciesCompetencies
Valuable: Capabilities that help a firm neutralize threats orValuable: Capabilities that help a firm neutralize threats or
exploit opportunitiesexploit opportunities
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Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantagesAdvantages
ValuableValuable
RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable
Discovering CoreDiscovering Core
CompetenciesCompetencies
Rare: Capabilities that are not possessed by many othersRare: Capabilities that are not possessed by many others
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Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantagesAdvantages
ValuableValuable
RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable
Discovering CoreDiscovering Core
CompetenciesCompetencies
Costly to imitate: capabilities that other firms cannotCostly to imitate: capabilities that other firms cannot
develop easily, usually due todevelop easily, usually due to Unique historical conditionsUnique historical conditions
Causal ambiguityCausal ambiguity
Social complexitySocial complexity
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Four CriteriaFour Criteriaof Sustainableof Sustainable
AdvantagesAdvantages
ValuableValuable
RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable
Discovering CoreDiscovering Core
CompetenciesCompetencies
Nonsubstitutable: capabilities that do not have strategicNonsubstitutable: capabilities that do not have strategic
equivalentsequivalents Invisible to competitorsInvisible to competitors
Firm specific knowledgeFirm specific knowledge
Trust-based working relationships between managersTrust-based working relationships between managers
and nonmanagerial personneland nonmanagerial personnel
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Core Competence as a StrategicCore Competence as a Strategic
CapabilityCapability
ResourcesResources Inputs to a firmsInputs to a firms
production processproduction process
CapabilityCapability A nonstrategicA nonstrategic
team or resourceteam or resource
Core CompetenceCore Competence A strategicA strategic
capabilitycapability
The source ofThe source of
Does it satisfy theDoes it satisfy the
criteria of sustainablecriteria of sustainable
competitivecompetitive
advantage?advantage?
YesYes
NoNo
CapabilityCapability An integration of aAn integration of a
team of resourcesteam of resources
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Sustainability of a CompetitiveSustainability of a Competitive
AdvantageAdvantage Sustainability of a competitive advantageSustainability of a competitive advantage
is a function of:is a function of:
the rate of core-competence obsolescence duethe rate of core-competence obsolescence due
to environmental changesto environmental changes
the availability of substitutes for the corethe availability of substitutes for the core
competencecompetence
the imitability of the core competencethe imitability of the core competence
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Performance ImplicationsPerformance Implications
Valu
able?
Valu
able?
Rare?
Rare?
Costlyt
oImita
te?
Costlyt
oImita
te?
Nonsub
stitutable
Nonsub
stitutab
le
CompetitiveCompetitive
ConsequencesConsequences
PerformancePerformance
ImplicationsImplications
NoNo NoNo NoNo NoNoCompetitiveCompetitive
DisadvantageDisadvantageBelow AverageBelow Average
ReturnsReturns
YesYes NoNo NoNoYes/Yes/
NoNoCompetitiveCompetitive
ParityParity Average ReturnsAverage Returns
YesYes YesYes NoNoYes/Yes/NoNo
Temporary Com-Temporary Com-petitive Advantagepetitive Advantage
Above Average toAbove Average toAverage ReturnsAverage Returns
YesYes YesYes YesYes YesYesSustainable Com-Sustainable Com-
petitive Advantagepetitive AdvantageAbove AverageAbove Average
ReturnsReturns
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Discussion Question 4Discussion Question 4
What is the value chain?
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ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFirmIn
fras
tructu
re
FirmIn
fras
tructu
re
Huma n
Resourc
eM
gm
t.
Huma n
Resourc
eM
gm
t.
Techno
logi c
alDe v
elopmen
t
Techn
ologicalDe v
elopmen
t
Procureme
nt
Procureme
nt
Margin
M
argin
Primary ActivitiesPrimary Activities
Suppo
rtAct i
vities
Suppo
rtAct i
vities
The BasicThe Basic
Value ChainValue Chain
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Questions
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Discussion Question 5Discussion Question 5
What is outsourcing and whenshould it be used?
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Margin
Margin Margin
Margin
Primary ActivitiesPrimary Activities
Suppo rt
Activ
ities
Support
Activ
ities
OutsourcingOutsourcing
Outsourcing is theOutsourcing is the
purchase of some orpurchase of some or
all of a value-all of a value-
creating activitycreating activityfrom an externalfrom an external
suppliersupplier
Usually this isUsually this is
because the specialtybecause the specialty
supplier can providesupplier can provide
these functions morethese functions more
efficientlyefficiently
ServiceService
Marketing & SalesMarketing & Sales
Outbound LogisticsOutbound Logistics
OperationsOperations
Inbound LogisticsInbound LogisticsFirm
Infrastructure
Firm
Infrastru
cture
Human
ResourceM
gmt.
Human
Reso
urceMgmt.
Techno
log
ica
lDevelopm
ent
Technologica
lDeve
lopm
ent
Procur e
m
ent
Procurem
ent
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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing
Improve Business FocusImprove Business Focus
lets company focus on broader businesslets company focus on broader business
issues by having outside experts handleissues by having outside experts handle
various operational detailsvarious operational details Provide Access to World-ClassProvide Access to World-Class
CapabilitiesCapabilities
the specialized resources of outsourcingthe specialized resources of outsourcing
providers makes world-class capabilitiesproviders makes world-class capabilities
available to firms in a wide range ofavailable to firms in a wide range of
applicationsapplications
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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing
Accelerate Business Re-EngineeringAccelerate Business Re-Engineering
BenefitsBenefits
achieves re-engineering benefits more quicklyachieves re-engineering benefits more quickly
by having outsiders--who have alreadyby having outsiders--who have alreadyachieved world-class standards--take overachieved world-class standards--take over
processprocess
Share RisksShare Risks
reduces investment requirements and makesreduces investment requirements and makes
firm more flexible, dynamic and better able tofirm more flexible, dynamic and better able to
adapt to changing opportunitiesadapt to changing opportunities
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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing
Free Resources for Other PurposesFree Resources for Other Purposes
permits firm to redirect efforts from non-corepermits firm to redirect efforts from non-core
activities toward those that serve customersactivities toward those that serve customers
more effectivelymore effectively
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Outsourcing IssuesOutsourcing IssuesGreatest ValueGreatest Value
outsource only to firms possessing a core competence inoutsource only to firms possessing a core competence in
terms of performing the primary or support activity beingterms of performing the primary or support activity being
outsourcedoutsourced
Evaluating Resources and CapabilitiesEvaluating Resources and Capabilities dont outsource activities in which the firm itself can createdont outsource activities in which the firm itself can create
and capture valueand capture value
Environmental Threats and Ongoing TasksEnvironmental Threats and Ongoing Tasks
do not outsource primary and support activities that aredo not outsource primary and support activities that are
used to neutralize environmental threats or completeused to neutralize environmental threats or complete
necessary ongoing organizational tasksnecessary ongoing organizational tasks
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Outsourcing IssuesOutsourcing IssuesNonstrategic Team of ResourcesNonstrategic Team of Resources
do not outsource capabilities that are critical todo not outsource capabilities that are critical to
their success, even though the capabilities aretheir success, even though the capabilities are
not actual sources of competitive advantagenot actual sources of competitive advantage Firms Knowledge BaseFirms Knowledge Base
do not outsource activities that stimulate thedo not outsource activities that stimulate the
development of new capabilities anddevelopment of new capabilities and
competenciescompetencies
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Discussion Question 6Discussion Question 6
Are there risks to a sustainablecompetitive advantage?
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Core Competencies: CautionsCore Competencies: Cautions
and Remindersand RemindersNever take for granted that coreNever take for granted that core
competencies will continue to provide acompetencies will continue to provide a
source of competitive advantagesource of competitive advantage
All core competencies have the potentialAll core competencies have the potential
to becometo become core rigiditiescore rigidities
Core rigidities are former coreCore rigidities are former core
competencies that now generate inertiacompetencies that now generate inertiaand stifle innovationand stifle innovation