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Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies and Competitive Advantages

Overview: Importance of understanding internal organization Value: Definition and importance Tangible vs. intangible resources Capabilities: Definition and development Core competencies: Four criteria of sustainable

competitive advantage Value Chain Analysis Outsourcing: Definition and “why?” Importance of internal organization assessment

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Analyzing the Internal Organization

Context of Internal Analysis Analyze firm’s portfolio of resources and the bundles of

heterogeneous resources and capabilities managers have created

Understand how to leverage these bundles An organization's core competencies creates and sustains

its competitive advantage

Creating Value Exploit core competencies or competitive advantage Value: measured by a product's performance

characteristics and by its attributes for which customers are willing to pay

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Analyzing the Internal Organization (IO)

Challenge of Internal Analysis Strategic decisions are non-routine, have ethical

implications and influence the organization’s above-average returns

Involves identifying, developing, deploying and protecting firms’ resources, capabilities and core competencies

Requires strategic thinking, making judgments, and taking intelligent risks

Managers face uncertainty, complexity, and interorganizational conflict when making decisions about resources, capabilities, and core competencies

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Analyzing the Internal Organization (IO)

Resource and Capability Analysis A tool used for sizing up the company’s competitive

assets and determining whether they can provide the foundation necessary for competitive success in the marketplace

2 Step Process Identify company’s resources and capabilities Closely examine resources and capabilities to determine

which are the most competitively important and whether they can support a sustainable competitive advantage over rivals

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Figure 3.1 Components of Internal Analysis

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Resources, Capabilities and Core Competencies

Competitive Advantage (CA) foundation includes Resources

Are bundled to create organizational capabilities Tangible and intangible (Tables 3.1 and 3.2)

Tangible Assets that can be seen, touched and quantified Four specific types: financial, organizational, physical, and

technological

Intangible Assets rooted deeply in the firm’s history, accumulated over

time Usually can’t be seen or touched Three specific types: human, innovation, and reputational

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Resources, Capabilities and Core Competencies

Competitive Advantage (CA) foundation includes Capabilities (Table 3.3 - Examples)

Resources purposely integrated to achieve a specific task or set of tasks

Source of a firm’s core competencies and basis for CA Often developed in specific functional areas

Core Competencies Capabilities that serve as a source of CA for a firm over its

rivals Distinguish a company from its competitors 2 tools can help firms identify and build their core

competencies 4 Criteria of Sustainable CA Value Chain Analysis

Examples of Firms’ Capabilities

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Building Core Competencies: Four Criteria of Sustainable Competitive Advantage

Four Criteria of Sustainable CA (Table 3.4) Valuable Capabilities – help exploit opportunities or neutralize

threats in external environment Rare Capabilities – few competitors possess them Costly-to-imitate Capabilities – other firms cannot easily develop Nonsubstitutable Capabilities – there are no strategic equivalents

Competitive consequences include (Table 3.5) Disadvantage, parity, temporary advantage and sustainable

advantage

Performance implications include returns Below-average, average, above-average

TABLE 3.5 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

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Building Core Competencies: Value Chain Analysis

Value Chain Analysis Primary activities

Involved with product’s physical creation, sales and distribution to buyers, and service after the sale

Service, marketing/sales, outbound/inbound logistics and operations Support activities

Provide assistance necessary for the primary activities to take place Includes firm infrastructure, HRM, technologies development and

procurement Helps firm to understand the parts of its operations that create value

and those that do not Can be used to identify competitive advantages and disadvantages

based on costs Can help with outsourcing decisions

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Figure 3.3 The Basic Value Chain

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The Basic Value Chain

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Outsourcing

Outsourcing: The purchase of a value-creating activity from an external supplier Effective execution includes an increase in flexibility, risk

mitigation and capital investment reduction Trend continues at a rapid pace

Can be used in areas where a firm cannot create value or is at a substantial disadvantage compared to competitors

Should also consider outsourcing non strategically critical activities

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Competencies, Strengths, Weaknesses and Strategic Decisions

Firms must identify their strengths and weaknesses Appropriate resources and capabilities needed to

develop desired strategy and create value for customers/other stakeholders

Tools (i.e., outsourcing) can help a firm focus on core competencies as the source for CA

Core competencies have potential to become core rigidities Competencies emphasized when no longer competitively

relevant can become a weakness Should keep updating and improving competencies

External environmental conditions and events impact a firm’s core competencies