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STRATEGIC
MANAGEMENT
INPUTS
CHAPTER 3
The Internal Environment:Resources, Capabilities,
and Core Competencies
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External Analyses Outcomes
By studying the external environment, firms
identify what they might choose to do.
Opportunitiesand threats
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Internal Analyses Outcomes
By studying the internal environment,
firms identify what they can do
Unique resources,
capabilities, andcompetencies(required forsustainablecompetitive advantage)
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FIGURE3.1 Components of Internal Analysis Leading toCompetitive Advantage and Strategic Competitiveness
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Competitive Advantage
Firms achieve strategic competitiveness andearn above-average returns when their core
competencies are effectively:
Acquired.
Bundled.Leveraged.
Over time, the benefits of any value-creating
strategy can be duplicated by competitors.
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Competitive Advantage (contd)
Sustainability of a competitive advantage is afunction of:
The rate of core competence obsolescence due to
environmental changes.
The availability of substitutes for the core
competence.
The difficulty competitors have in duplicating or
imitating the core competence.
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The Challenge of Internal Analysis
Strategic decisions in terms of the firmsresources, capabilities, and core competencies:
Are non-routine
Significantly influence the firms ability to earnabove-average returns.
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The Challenge of Internal Analysis (contd)
To develop and use core competencies,managers must have:
Self-confidence
The capacity to deal with uncertainty andcomplexity
A willingness to hold people (and themselves)
accountable for their work
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Resources, Capabilities and Core Competencies
ResourcesAre the source of a firms
capabilities.
Are broad in scope.
Cover a spectrum ofindividual, social and
organizational
phenomena.
Alone, do not yield acompetitive advantage.
Discovering CoreCompetencies
ResourcesTangibleIntangible
Capabilities
CoreCompetencies
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Resources
ResourcesAre a firms assets,
including people and
the value of its brand
name.
Represent inputs into
a firms production
process, such as:
Capital equipment
Skills of employees
Brand names
Financial resources
Talented managers
Types of ResourcesTangible resources
Financial resources
Physical resources
Technologicalresources
Organizational
resources
Intangible resources Human resources
Innovation resources
Reputation resources
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Resources, Capabilities and Core Competencies
Capabilities Represent the capacity to deploy
resources that have been
purposely integrated to achieve a
desired end state
Emerge over time through complex
interactions among tangible and
intangible resources
Often are based on developing,
carrying and exchanginginformation and knowledge through
the firms human capital
Discovering CoreCompetencies
ResourcesTangibleIntangible
Capabilities
CoreCompetencies
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Resources, Capabilities and Core Competencies
Capabilities (contd)The foundation of many
capabilities lies in:
The unique skills and
knowledge of a firms
employees
The functional expertise of
those employees
Capabilities are often
developed in specificfunctional areas or as part
of a functional area.
Discovering CoreCompetencies
ResourcesTangibleIntangible
Capabilities
CoreCompetencies
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Resources, Capabilities and Core Competencies
Four criteria fordetermining strategic
capabilities:
Value
Rarity
Costly-to-imitate
Nonsubstitutability
Discovering CoreCompetencies
ResourcesTangibleIntangible
Capabilities
CoreCompetencies
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Resources, Capabilities and Core Competencies
Core CompetenciesResources and capabilities that
are the sources of a firms
competitive advantage:
Distinguish a companycompetitively and reflect its
personality.
Emerge over time through an
organizational process ofaccumulating and learning
how to deploy different
resources and capabilities.
Discovering CoreCompetencies
ResourcesTangibleIntangible
Capabilities
CoreCompetencies
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Resources, Capabilities and Core Competencies
Core CompetenciesActivities that a firm performs
especially well compared to
competitors.
Activities through which the firmadds unique value to its goods
or services over a long period of
time.
Discovering CoreCompetencies
ResourcesTangibleIntangible
Capabilities
CoreCompetencies
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Building Sustainable Competitive Advantage
Valuable capabilitiesHelp a firm neutralize
threats or exploit
opportunities.
Rare capabilitiesAre not possessed by
many others.
Discovering CoreCompetencies
Valuable Rare Costly to imitate Nonsubstitutable
Four Criteria ofSustainableAdvantages
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Building Sustainable Competitive Advantage
Costly-to-Imitate Capabilities
Historical
A unique and a valuable
organizational culture or brand
name
Ambiguous cause The causes and uses of a
competence are unclear
Social complexity
Interpersonal relationships,trust, and friendship among
managers, suppliers, and
customers
Discovering CoreCompetencies
Valuable Rare Costly to Imitate Nonsubstitutable
Four Criteria ofSustainableAdvantages
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Building Sustainable Competitive Advantage
NonsubstitutableCapabilities
No strategic equivalent
Firm-specific knowledge
Organizational culture
Superior execution of the
chosen business model
Discovering CoreCompetencies
Valuable Rare Costly to imitate Nonsubstitutable
Four Criteria ofSustainableAdvantages
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Outcomes from Combinationsof the Four Criteria
CompetitiveConsequences
PerformanceImplications
No No No No CompetitiveDisadvantage
Below AverageReturns
Yes No No Yes/No
CompetitiveParity
Average Returns
Yes Yes No Yes/No Temporary Com-petitive Advantage Above Average toAverage Returns
Yes Yes Yes Yes Sustainable Com-petitive Advantage
Above AverageReturns
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Value Chain Analysis
Allows the firm to understand the parts of itsoperations that create value and those that do
not.
A template that firms use to:
Understand their cost position.
Identify multiple means that might be used to facilitate
implementation of a chosen business-level strategy.
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Value Chain Analysis (contd)
Primary activities involved with:A products physical creation
A products sale and distribution to buyers
The products service after the sale
Support Activities
Provide the assistance necessary for the primary
activities to take place.
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FIGURE3.3
The Basic ValueChain
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Value Chain Analysis (contd)
Value ChainShows how a product moves from the raw-material
stage to the final customer.
To be a source of competitive advantage, a
resource or capability must allow the firm:
To perform an activity in a manner that is superior to
the way competitors perform it, or
To perform a value-creating activity that competitorscannot complete
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Strategic Rationales for Outsourcing
Improving business focusHelps a company focus on broader business issues
by having outside experts handle various operational
details.
Providing access to world-class capabilitiesThe specialized resources of outsourcing providers
makes world-class capabilities available to firms in a
wide range of applications.
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Strategic Rationales for Outsourcing (contd)
Accelerating re-engineering benefitsAchieves re-engineering benefits more quickly by
having outsiderswho have already achieved world-
class standardstake over process.
Sharing risksReduces investment requirements and makes firm
more flexible, dynamic and better able to adapt to
changing opportunities.
Freeing resources for other purposesRedirects efforts from non-core activities toward those
that serve customers more effectively.
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Outsourcing Issues
Seeking greatest valueOutsource only to firms possessing a core
competence in terms of performing the primary orsupporting the outsourced activity.
Evaluating resources and capabilities
Do not outsource activities in which the firm itselfcan create and capture value.
Environmental threats and ongoing tasks
Do not outsource primary and support activities thatare used to neutralize environmental threats or tocomplete necessary ongoing organizational tasks.
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Outsourcing Issues (contd)
Nonstrategic team resourcesDo notoutsource capabilities critical to the firms
success, even though the capabilities are not actual
sources of competitive advantage.
Firms knowledge base
Do not outsource activities that stimulate thedevelopment of new capabilities and competencies.
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Cautions and Reminders
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
rigiditiesformer core competencies that now generate
inertia and stifle innovation. Determining what the firm can do through continuous and
effective analyses of its internal environment will increase
the likelihood of long-term competitive success.