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Transparency 3-1Transparency 3-1
Chapter 3Chapter 3
The Internal Environment: Resources, Capabilities and
Core Competencies
The Internal Environment: Resources, Capabilities and
Core Competencies
Michael A. HittMichael A. HittR. Duane IrelandR. Duane Ireland
Robert E. HoskissonRobert E. Hoskisson
Michael A. HittMichael A. HittR. Duane IrelandR. Duane Ireland
Robert E. HoskissonRobert E. Hoskisson
©1999 South-Western College Publishing©1999 South-Western College Publishing
Transparency 3-2Transparency 3-2
What the Firm Might Do
What the Firm Can Do
Chapter 2Chapter 2
External EnvironmentExternal Environment
Five Forces AnalysisFive Forces Analysis
Chapter 3Chapter 3
Internal EnvironmentInternal EnvironmentResources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies
Transparency 3-3Transparency 3-3
What the Firm Might Do
What the Firm Can Do
Chapter 2Chapter 2
External EnvironmentExternal Environment
Five Forces AnalysisFive Forces Analysis
Chapter 3Chapter 3
Internal EnvironmentInternal EnvironmentResources, Capabilities and Core CompetenciesResources, Capabilities and Core Competencies
SustainableSustainableCompetitiveCompetitiveAdvantageAdvantage
Transparency 3-4Transparency 3-4
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
Discovering Core CompetenciesDiscovering Core Competencies
Transparency 3-5Transparency 3-5
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...ResourcesResourcesResourcesResources
Transparency 3-6Transparency 3-6
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*
Transparency 3-7Transparency 3-7
CapabilitiesCapabilities What a firm Does...
Capabilities represent...the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.
Transparency 3-8Transparency 3-8
Core CompetenciesCore CompetenciesWhat a firm Does...that is Strategically
ValuableCore Competencies must be:ValuableValuableCapabilities 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
Transparency 3-9Transparency 3-9
Core CompetenciesCore Competencies
Core Competencies must be:ValuableValuable
RareRareCapabilities 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
Transparency 3-10Transparency 3-10
Core CompetenciesCore Competencies
Core Competencies must be:ValuableValuable
RareRare
Costly to ImitateCostly to ImitateCapabilities 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
Transparency 3-11Transparency 3-11
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
Transparency 3-12Transparency 3-12
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain AnalysisTo identify which resources and capabilities can add value
Transparency 3-13Transparency 3-13
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Inb
oun
d
Log
isti
cs
helps to identify which resources and capabilities can add value
Transparency 3-14Transparency 3-14
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
s
helps to identify which resources and capabilities can add value
Transparency 3-15Transparency 3-15
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
nd
Log
isti
cs
helps to identify which resources and capabilities can add value
Transparency 3-16Transparency 3-16
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
nd
Ou
tbou
nd
Log
isti
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ogis
tics
Mar
ket
ing
& S
ales
helps to identify which resources and capabilities can add value
Transparency 3-17Transparency 3-17
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
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Ou
tbou
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Log
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csL
ogis
tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
helps to identify which resources and capabilities can add value
Transparency 3-18Transparency 3-18
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
nd
Ou
tbou
nd
Log
isti
csL
ogis
tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
Ser
vice
helps to identify which resources and capabilities can add value
Procurement
Transparency 3-19Transparency 3-19
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
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Ou
tbou
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csL
ogis
tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
Ser
vice
helps to identify which resources and capabilities can add value
ProcurementProcurement
Technological Development
Transparency 3-20Transparency 3-20
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysishelps to identify which resources and capabilities can add value
Technological DevelopmentTechnological Development
ProcurementProcurement
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
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ns
Ou
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Log
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ogis
tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
Ser
vice
Human Resource Management
Transparency 3-21Transparency 3-21
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm Infrastructure
ProcurementProcurement
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
nd
Ou
tbou
nd
Log
isti
csL
ogis
tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
Ser
vice
helps to identify which resources and capabilities can add value
Transparency 3-22Transparency 3-22
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm InfrastructureFirm Infrastructure
ProcurementProcurement
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
nd
Ou
tbou
nd
Log
isti
csL
ogis
tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
Ser
vice
helps to identify which resources and capabilities can add value
MARG
IN
MARG
IN
MARGIN
MARGIN
Transparency 3-23Transparency 3-23
SupportActivities
Primary Activities
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm InfrastructureFirm Infrastructure
ProcurementProcurement
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
erat
ion
sO
per
atio
ns
Ou
tbou
nd
Ou
tbou
nd
Log
isti
csL
ogis
tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
Ser
vice
MARG
IN
MARG
IN
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
Transparency 3-24Transparency 3-24
To capitalize on the usefulness of the Value Chain concept...
it is important to recognize that...
Transparency 3-25Transparency 3-25
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
Transparency 3-26Transparency 3-26
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
Transparency 3-27Transparency 3-27
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
Downstream Value
Channel Value ChainChannel Value Chain
Each firm must eventually find a way to become a part of some buyer’s value chain
Transparency 3-28Transparency 3-28
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
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!!
Transparency 3-29Transparency 3-29
ResourcesResources
** TangibleTangible** IntangibleIntangible
CapabilitiesCapabilities
Teams of ResourcesTeams of Resources
Sources ofSources of
CoreCoreCompetenciesCompetencies
CompetitiveCompetitiveAdvantageAdvantage
StrategicStrategicCompetitivenessCompetitiveness
Above-AverageAbove-AverageReturnsReturns
DiscoveringDiscoveringCoreCore
CompetenciesCompetencies
ValueChain
Analysis
Discovering Core CompetenciesDiscovering Core Competencies
Outsource*ValuableRareCostly to ImitateNonsubstitutable
****
Criteria ofSustainableAdvantages
Transparency 3-30Transparency 3-30
Comparative Market Share (%)by Installed Units
0
2
4
6
8
10
12
14
16
1988 1989 1990 1991
IBM
Apple
NEC
Compaq
Transparency 3-31Transparency 3-31
Industry Growth(in $billions)
0
5
10
15
20
25
30
35
40
45
1982 1986 1990 1994
Desktops
Portables
Servers
TOTAL
Transparency 3-32Transparency 3-32
Cost of Processing (MIPS)
$75,000
$10,000
$2,000
$0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
$80,000
1980 1985 1991
Cost of Processing
Transparency 3-33Transparency 3-33
Comparative Profitability
-5
0
5
10
15
20
25
1991 ROS (%)
Apple
IBM
Compaq
Dell
Intel
Microsoft
Transparency 3-34Transparency 3-34
5-Forces Model of Computer Industry
Suppliers• O/S • Processors• Application Software• Memory Devices
Buyers• Price Sensitive• Mass Merchandisers• Mail Order
Substitutes• Workstations• Palm-tops/ PDA’s
Potential Entrants• Low Entry Barriers
Rivalry
• New Products• More Marketing• Price Cutting• Outsourcing• Windows
Transparency 3-35Transparency 3-35
Strategic Group Map Pre-Windows
Price
Premium
Low
Strategic Focus - Differentiation
Broad Narrow
Apple
IBM
Sun
Clones
Compaq
Transparency 3-36Transparency 3-36
Strategic Group Map Post-Windows
Price
Premium
Low
Strategic Focus - Differentiation
Broad Narrow
Apple
IBM
Sun
Clones
Compaq
Weakness
Transparency 3-37Transparency 3-37
SupportActivities
Primary Activities
Value Chain AnalysisValue Chain Analysis
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm InfrastructureFirm Infrastructure
ProcurementProcurement
Inb
oun
d
Inb
oun
d
Log
isti
csL
ogis
tics
Op
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ion
sO
per
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ns
Ou
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Ou
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Log
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tics
Mar
ket
ing
Mar
ket
ing
& S
ales
& S
ales
Ser
vice
Ser
vice
How to Create Value in the PC Industry?
MARG
IN
MARG
IN
MARGIN
MARGIN
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