Strategic Management Concepts and Cases. Examining the Internal Organization: Activities, Resources, and Capabilities

Strategic Management Concepts and Cases

• Examining the Internal Organization: Activities, Resources, and Capabilities

Chapter 2Chapter 2External EnvironmentExternal EnvironmentWhat the Firm Might DoWhat the Firm Might Do

Chapter 3Chapter 3Internal EnvironmentInternal EnvironmentWhat the Firm Can DoWhat the Firm Can Do

SustainableSustainableCompetitiveCompetitiveAdvantageAdvantage

The Challenge of Internal Analysis

• The strategic decisions managers make in terms of the firm’s resources, capabilities, and core competencies are nonroutine,31 have ethical implications,32 and significantly influence the firm’s ability to earn above-average returns.33 Making these decisions—identifying, developing, deploying, and protecting resources, capabilities, and core competencies— may appear to be relatively easy.

• When exercising judgment, decision makers often take intelligent risks. In the current competitive landscape, executive judgment can be a particularly important source of competitive advantage.

Resources, Capabilities, and Core Competencies

• Resources• Tangible resources are assets that can be seen

and quantified.• Intangible resources include assets that

typically are rooted deeply in the firm’s history and have accumulated over time.

ResourcesResources

** TangibleTangible** IntangibleIntangible

Discovering Core CompetenciesDiscovering Core Competencies

What a firm has to work with:What a firm has to work with:

its its assetsassets, including its , including its peoplepeople and and the value of its the value of its brand namebrand name

What a firm What a firm HasHas......ResourcesResources

Resources represent Resources represent inputs into a inputs into a firm’s production processfirm’s production process......

such as capital equipment, skills of such as capital equipment, skills of employees, brand names, finances employees, brand names, finances and talented managersand talented managers

What a firm What a firm HasHas......


its assets, including its people its assets, including its people and the value of its brand nameand the value of its brand name

ResourcesResources


its assets, including its people its assets, including its people and the value of its brand nameand the value of its brand name

Resources represent inputs into a Resources represent inputs into a firm’s production process...firm’s production process...

such as capital equipment, skills such as capital equipment, skills of employees, brand names, of employees, brand names, finances and talented managersfinances and talented managers

““Some genius invented the Oreo. We’re just Some genius invented the Oreo. We’re just living off the inheritance.”living off the inheritance.”

F. Ross Johnson,F. Ross Johnson,Former President & CEO, Former President & CEO,

RJR NabiscoRJR Nabisco

What a firm What a firm HasHas......ResourcesResources

Tangible ResourcesTangible ResourcesFinancialFinancial**

PhysicalPhysical**

Human ResourcesHuman Resources**

OrganizationalOrganizational**

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 ResourcesIntangible Resources

TechnologicalTechnological**

InnovationInnovation**

ReputationReputation**

“Some genius invented the Oreo. We’re just living off the inheritance.”

F. Ross Johnson,Former President & CEO, RJR Nabisco

ResourcesResources

ResourcesResources


CapabilitiesCapabilities

Teams of ResourcesTeams of Resources


What a firm Does...

Capabilities represent:Capabilities represent:

the firm’s capacity or ability to the firm’s capacity or ability to integrate integrate individual firm resources individual firm resources to achieve a desired to achieve a desired objective.objective.


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 Capabilities become important when they are combined in in unique combinations unique combinations which create core competencies which create core competencies which havewhich have strategic value strategic value and can lead toand can lead to competitive competitive advantageadvantage..


What a firm Does...



Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.


ResourcesResources





Sources ofSources of

CoreCoreCompetenciesCompetencies

CompetitiveCompetitiveAdvantageAdvantage

DiscoveringDiscoveringCoreCore

CompetenciesCompetencies

What a firm Does...that is Strategically

Valuable

““……are the essence of what makes an organization are the essence of what makes an organization unique in its ability to provide value to unique in its ability to provide value to customers.”customers.”

Leonard-Barton, Bowen, Clark, Holloway & WheelwrightLeonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to four McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.competencies to use in framing strategic actions.

Core CompetenciesCore Competencies

ResourcesResources









Criteria ofSustainableAdvantages

ValuableRareCostly to ImitateNonsubstitutable

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* Outsource

For a strategic capability to be a For a strategic capability to be a Core Competency, it must be:Core Competency, it must be:


ValuableValuable

RareRare

Costly to ImitateCostly to Imitate

NonsubstitutableNonsubstitutable


Valuable

ValuableValuable

RareRare

Costly to ImitateCostly to ImitateCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity

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 othersCapabilities that are not possessed by many others

Capabilities that help a firm neutralize threats or exploit opportunitiesCapabilities that help a firm neutralize threats or exploit opportunities

Core CompetenciesCore Competencies What a firm Does...that is Strategically

Valuable

What Criteria Make CoreCompetencies Costly to Imitate?

What Criteria Make CoreCompetencies Costly to Imitate?

Unique Historical ConditionsUnique Historical Conditions

Causal AmbiguityCausal Ambiguity

Social ComplexitySocial Complexity

This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantageThis 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

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:Example: Disney created Mickey Mouse at a time when Disney created Mickey Mouse at a time when animated motion pictures were newanimated 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

An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances

Core Competencies must be:

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


Valuable


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


ResourcesResources• Inputs to a firm’s Inputs to a firm’s

production processproduction process

Core CompetenceCore Competence• A strategic capabilityA strategic capability

The source ofThe source of CapabilityCapability• Integration of a Integration of a

team of resourcesteam of resources

Does the capability satisfy Does the capability satisfy the criteria of sustainable the criteria of sustainable competitive advantage?competitive advantage?

YESYES

NONO

CapabilityCapability• A nonstrategic team A nonstrategic team

of resourcesof resources

ValuableValuable RareRareCostly to Costly to ImitateImitate

Nonsub-Nonsub-stitutablestitutable

Competitive Competitive ConsequencesConsequences

Performance Performance ImplicationsImplications

NONO NONO NONO NONO CompetitiveCompetitiveDisadvantageDisadvantage

Below Below AverageAverageReturnsReturns

YESYES NONO NONO YES/NOYES/NO CompetitiveCompetitiveParityParity

AverageAverageReturnsReturns

YESYES NONO YES/NOYES/NOYESYESTemporaryTemporaryCompetitiveCompetitiveAdvantageAdvantage

Aver./Above Aver./Above AverageAverageReturnsReturns

AboveAboveAverageAverageReturnsReturns

AboveAboveAverageAverageReturnsReturns

YESYESYESYESYESYESYESYES YESYESYESYESYESYESYESYESSustainableSustainableCompetitiveCompetitiveAdvantageAdvantage

SustainableSustainableCompetitiveCompetitiveAdvantageAdvantage

Outcomes from Combinations of the Criteria for Outcomes from Combinations of the Criteria for Sustainable Competitive AdvantageSustainable Competitive Advantage

Outcomes from Combinations of the Criteria for Outcomes from Combinations of the Criteria for Sustainable Competitive AdvantageSustainable Competitive Advantage

ResourcesResources









ValueChain

Analysis

* Outsource


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SupportActivities

Primary Activities

Value Chain AnalysisValue Chain AnalysisIdentifying Resources and Capabilities That Can Add Value

SupportActivities

Primary Activities

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ProcurementProcurement


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Technological DevelopmentTechnological Development


SupportActivities

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Human Resource ManagementHuman Resource Management


SupportActivities

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Firm InfrastructureFirm Infrastructure


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SupportActivities

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OutsourcingOutsourcing





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Strategic Choice to Purchase Some Activities From Outside Suppliers

SupportActivities

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Inbound Inbound LogisticsLogistics

OperationsOperationsOutboundOutboundLogisticsLogistics

ServiceService

Marketing Marketing & Sales& Sales




MARGIN

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Firms often purchase a portion portion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlymore efficiently

OutsourcingOutsourcingStrategic Choice to Purchase Some Activities From Outside Suppliers

Lets company focus on broader business issues by having outside experts handle various operational detailsLets company focus on broader business issues by having outside experts handle various operational details

Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing

Improve Business FocusImprove Business Focus

Permits firm to redirect efforts from non-core activities toward those that serve customers more effectivelyPermits firm to redirect efforts from non-core activities toward those that serve customers more effectively

Free Resources for Other PurposesFree Resources for Other Purposes

Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities

Accelerate Business Re-Engineering BenefitsAccelerate Business Re-Engineering Benefits

Share RisksShare Risks

The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications 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 processAchieves 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 Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

ResourcesResources







StrategicStrategicCompetitivenessCompetitiveness

Above-AverageAbove-AverageReturnsReturns



ValueChain

Analysis

* Outsource


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Documents

Strategic Management Concepts and Cases. Examining the Internal Organization: Activities, Resources, and Capabilities