1. ©2003 South-Western Publishing Company 1 The Internal Environment: Resources, Capabilities and Core Competence Michael A. Hitt R. Duane Ireland Robert E. Hoskisson Chapter 3

2. 2 Sustainability of a Competitive Advantage Sustainability of a competitive advantage is a function of: Sustainability of a competitive advantage is a function of: –the rate of core-competence obsolescence due to environmental changes –the availability of substitutes for the core competence –the imitability of the core competence

3. 3 External and Internal Analyses General Environment GeneralEnvironmentGeneral Environment Sociocultural Global Technological Political/Legal Demographic Economic IndustryEnvironment CompetitorEnvironment By studying the external environment, firms identify what they might choose to do Opportunities and threats

4. 4 External and Internal Analyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies (sustainable competitive advantage) External and Internal Analyses

5. 5 Three Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments Intraorganizational Conflicts among people making managerial decisions and those affected by them Intraorganizational Conflicts among people making managerial decisions and those affected by them

6. 6 Components of Internal Analysis Discovering Core Competencies Resources TangibleTangible IntangibleIntangible Capabilities CoreCompetencies CompetitiveAdvantage StrategicCompetitiveness Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable ValueChainAnalysis OutsourceOutsource

7. 7 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Valuable: Capabilities that help a firm neutralize threats or exploit opportunities

8. 8 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Rare: Capabilities that are not possessed by many others

9. 9 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Costly to imitate: capabilities that other firms cannot develop easily, usually due to Unique historical conditionsUnique historical conditions Causal ambiguityCausal ambiguity Social complexitySocial complexity

10. 10 Four Criteria of Sustainable Advantages ValuableValuable RareRare Costly to ImitateCostly to Imitate NonsubstitutableNonsubstitutable Discovering Core Competencies Nonsubstitutable: capabilities that do not have strategic equivalents Invisible to competitorsInvisible to competitors Firm specific knowledgeFirm specific knowledge Trust-based working relationships between managers and nonmanagerial personnelTrust-based working relationships between managers and nonmanagerial personnel

11. 11 Core Competence as a Strategic Capability Resources Inputs to a firm’sInputs to a firm’s production process Capability A nonstrategicA nonstrategic team or resource Core Competence A strategicA strategiccapability The source of Does it satisfy the criteria of sustainable competitive advantage? Yes No Capability An integration of aAn integration of a team of resources

12. 12 Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement Margin Primary Activities Support Activities The Basic Value Chain

13. 13 Margin Margin Primary Activities Support Activities Outsourcing Outsourcing is the purchase of some or all of a value- creating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement

14. 14 Core Competencies: Cautions and Reminders Never take for granted that core competencies will continue to provide a source of competitive advantage 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 rigidities All core competencies have the potential to become core rigidities Core rigidities are former core competencies that now generate inertia and stifle innovation Core rigidities are former core competencies that now generate inertia and stifle innovation