1. Chapter 3
The Internal Environment: Resources, Capabilities, and Core Competencies
Hitt, Ireland, and Hoskisson
In chapter 3 we take a look at the internal environment and look closely at resources, capabilities, and core competencies.
By studying the external environment, firms identify what they might choose to do. By studying the internal environment, firms identify what they CAN do.

2. The Context of Internal Analysis
Global Economy
Traditional sources of advantages can be overcome by competitors’ international strategies and by the flow of resources throughout the global economy.
Global Mind-Set
The ability to study an internal environment in ways that are not dependent on the assumptions of a single country, culture, or context.
Analysis Outcome
Understanding how to leverage the firm’s bundle of heterogeneous resources and capabilities.
The internal analysis focuses on what a firm can do within a given industry. The internal analysis begins with a discussion of a global mindset, an orientation toward the analysis that considers an industry within a global context beyond the boundaries of a single country or culture.
A global mind-set is the ability to study an internal environment in ways that are not dependent on the assumptions of a single country, culture, or context. In order to create value, firms must meet the demanding standards of global competition. Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay.
Copyright © 2008 Cengage

3. Components of internal analysis leading to competitive advantage and strategic competitiveness
By exploiting their core competencies or competitive advantages, firms create value. Value is measured by product performance characteristics and product attributes for which customers are willing to pay. Firms create value by innovatively bundling and leveraging their resources and capabilities. Superior value results in above-average returns.
Firms then can create competitive advantage by analyzing their core competencies. Core competencies are the firm’s capabilities that demonstrate sustainable advantage, shown in the diagram above as being valuable, rare, costly to imitate, and not having substitutable. By exploiting its core competencies, a firm can create and develop a competitive advantage.
Copyright © 2008 Cengage
Figure 3.1

4. Resources, capabilities, core competencies
A firm’s resources, capabilities, and core competencies may have a relatively stronger influence on its performance than do external environment conditions.
Strategic competitiveness and above-average returns can result only when a firm’s core competencies are matched with opportunities.
In the global business environment, traditional factors (e.g., labor costs and superior access to financial resources and raw materials) can still create a competitive advantage. However, these factors are less and less often a source of competitive advantage.
Copyright © 2008 Cengage

5. Competitive advantages change
Resources, capabilities, and core competencies change over time.
The Internet’s capabilities have generally reduced the sustainability of many competitive advantages.
Because competitive advantages are not permanently sustainable, firms must exploit their current advantages while also using their resources and capabilities to form new advantages that can lead to future competitive success.
Resources are a firm’s assets, including people and the value of its brand name. Resources include financial, organizational, physical, technological, human, innovation, and reputational.
Capabilities are the capacity to deploy resources that have been purposely integrated to achieve a desired end state. They emerge over time through complex interactions among tangible and intangible resources. They are often based on developing, carrying and exchanging information and knowledge through the firm’s human capital.
Copyright © 2008 Cengage

6. Core competency: human capital
A firm must carefully analyze its resources and capabilities to effectively manage core competencies.
A firm’s human capital and its knowledge may be the most significant competitive advantage of all, so a firm must create an environment that allows people to collaborate.
Effectively managing core competencies requires careful analysis of the firm’s resources (inputs to the production process) and capabilities (resources that have been purposely integrated to achieve a specific task or set of tasks).
The knowledge possessed by human capital is among the most significant of an organization’s capabilities and may ultimately be at the root of all competitive advantages. The firm must create an environment that allows people to integrate their individual knowledge with that held by others so that, collectively, the firm has significant organizational knowledge.
Copyright © 2008 Cengage

7. Core competencies
Four criteria for determining strategic capabilities:
Value
Rarity
Costly-to-imitate
Nonsubstitutability
Core competencies are a source of competitive advantage only when they allow the firm to create value by exploiting opportunities in its external environment. When it can no longer do so, the company shifts its attention to selecting or forming other capabilities that do satisfy the four criteria of sustainable competitive advantage.
Individual resources are usually not a source of competitive advantage. Capabilities are a more likely source of competitive advantages, especially relatively sustainable ones. The firm’s nurturing and support of core competencies that are based on capabilities are less visible to rivals and, as such, harder to understand and imitate.
Copyright © 2008 Cengage

8. Value chain analysis
The value chain analysis allows the firm to understand the parts of its operations that create value and those that do not. By studying their skills relative to those associated with primary and support activities, firms can understand their cost structure and identify the activities through which they can create value.
A value chain shows 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 perform a value-creating activity that competitors cannot complete.
Copyright © 2008 Cengage

9. Outsourcing Improve business focus
Gain access to world-class capabilities
Accelerate re-engineering benefits
Share risks
Free resources for other purposes
Seek greatest value
Evaluate resources and capabilities
When the firm cannot create value in either a primary or support activity, outsourcing is considered.
Used commonly in the global economy, outsourcing is the purchase of a value-creating activity from an external supplier. The firm must outsource only to companies possessing a competitive advantage in terms of the particular primary or support activity under consideration. In addition, the firm must continuously verify that it is not outsourcing activities from which it could create value.
A firm may consider outsourcing when the conditions listed on the slide exist.
A firm should NOT outsource the following:
Activities in which the firm itself can create and capture value.
Primary and support activities used to neutralize environmental threats or to complete necessary ongoing organizational tasks.
Capabilities critical to the firm’s success
Activities that stimulate the development of new capabilities and competencies
Copyright © 2008 Cengage