1. Competing for Advantage
PART II
STRATEGIC ANALYSIS
Chapter 4
The Internal Organization:
Resources, Capabilities, and Core Competencies

2. The Strategic Management Process
Figure 1.6: The Strategic Management Process – A logical approach for responding to 21st century competitive challenges. Provides an outline of the content of the textbook by each chapter.
Strategic Analysis – highlights the two key sources of information-based inputs to the strategic management process which prepare the firm to develop its strategic direction and the specific strategies it will use to create a competitive advantage.
From the external environment – opportunities and threats
Internally – strengths and weaknesses derived collectively from the firm’s resources, capabilities, and core competencies
The strategic management process helps a firm successfully identify and use sources of competitive advantage over time. The key is to form and leverage unique core competencies to take advantage of opportunities in the external environment.

3. The Internal Organization
Firms rely on a unique bundle of resources to create a sustainable competitive advantage.
Factors that Determine Sustainability
Rate of core competence obsolescence
Availability of substitutes
Imitability of core competence
The Internal Organization – Firm resources provide a foundation for developing and implementing strategies. Due to rapidly developing technology, increasing globalization, and economic volatility, the strategic reality is that it is increasingly difficult to create and sustain a competitive advantage. This means turning to inimitable intangible resources as a source of competitive advantage.
Example: Intel’s brand name and R&D processes
Discussion points:
Possessing a unique bundle of resources puts a firm in a strong position to develop competitive advantages which can create value for stakeholders.
But, all competitive advantages have a limited life.
In general, the sustainability of a competitive advantage is a function of three factors.
The rate of core competence obsolescence caused by environmental change
The availability of substitutes for the core competence
The imitability of the core competence
Requires managers to keep an eye on developing new core competencies, even as they are effectively managing current core competencies.

4. Outcomes from Internal Organizational Analysis
Figure 4.1: Outcomes from Internal Organizational Analysis – In Chapter 3, we looked outside of the firm to examine general, industry, and competitor environments. In this chapter, we look inside the firm.
Discussion points:
What the firm can do is the actions permitted by its unique resources, capabilities, and core competencies.
By matching what the firm can do with what it might do, the firm gains insights required for wise selection and implementation of strategies.

5. Resource Decision Pitfalls
Neglecting international considerations
Pursuing only short-term earnings goals
Failing to recognize core competencies
Emphasizing resources and capabilities that do not form a competitive advantage
Internal Analysis and Value Creation – Making decisions related to an organization's resources, capabilities, and core competencies creates challenges for the managers of an organization.
Resource Decision Pitfalls – These decisions significantly influence firm performance.
Discussion points:
Resource-related decisions involve identifying, developing, deploying, and nurturing key organizational resources, capabilities, and core competencies.
Decision success is difficult and increasingly linked to international considerations.
Pressure to pursue only short-term performance targets can reduce the firm’s ability to achieve long-term organizational potential.
Recognizing a firm’s core competencies is essential before the firm can make important strategic decisions.
Admitting mistakes and taking corrective action can have a positive effect on future efforts to create a competitive advantage.
What types of strategic decisions should not be made before recognizing the firm’s core competencies?
To enter or exit key markets
To invest in new technologies
To build new or additional manufacturing capacity
To form strategic partnerships

6. Conditions That Influence Internal Analysis
Key Terms
Global mind-set
Ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context
Conditions Influencing Internal Analysis – Traditional sources of competitive advantage (such as labor costs, access to financial resources or raw material, and protected or regulated markets) can be duplicated by rivals using an international strategy, and the relatively free flow of resources across economic borders facilitates the effect. Environmental context now expands beyond any one national or cultural set of boundaries. Consequently, the adoption of a global mind set, is necessary for strategic leaders tasked with analyzing the firm’s internal organization.
Example: Japanese automobile manufacturers

7. Conditions That Influence Internal Analysis
Global interconnectedness
Pace of environmental change
Economic volatility
Conditions Influencing Internal Analysis – An emerging global economy and other conditions have had a great impact on the sources of competitive advantage for businesses and influence how firms make effective strategic decisions. Global considerations, the pace of environmental change, and a seemingly-permanent state of economic volatility significantly affect strategic thinking.
How can firms and their strategic leaders combat these influences?
Manage the tendency to deny or resist the need for change – involve more and diverse individuals in the strategic process to prevent inertia
Establish organizational settings which foster experimentation and learning – promote responsiveness to the need for change
Rethink earlier concepts of the firm and competition Example: Kodak
Hire and reward managers with the attributes and skills necessary for the challenge – confidence, boldness, integrity, the capacity to handle uncertainty and complexity, and willingness to hold people accountable
Define strategies in terms of unique (exclusive) and viable competitive positions beyond the demands of the external environment

8. Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies
Figure 4.2: Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies – Managerial decisions about resources, capabilities, and core competencies are characterized by three conditions: uncertainty, complexity, and intraorganizational conflict.
Discussion points:
Managers face uncertainty from a number of sources, including new proprietary technologies, economic and political volatility, transformations in societal values, and shifts in customer demands.
Biases about how to cope with uncertainty may affect decisions about the resources and capabilities that will become the foundation of the firm’s competitive advantage. (Chapter 2 examined several biases that influence the quality of strategic decisions.)
Complexity results from the dependence firms have on one another and on the sheer number of factors that influence firm performance.
Environmental uncertainty increases the complexity and range of issues the firm needs to examine when studying its internal organization.
Intraorganizational conflicts often surface when decisions are made about which core competencies to nurture as well as how to nurture them.

9. Resource Perspective
“The perspective that a firm is a bundle of heterogeneous resources, capabilities, and core competencies that can be used to create a unique market position is a critical characteristic of effective resource analysis.”
Resource Perspective – suggests that a firm possesses at least some resources and capabilities that other companies do not, at least not in the same combination

10. Resources, Capabilities, and Core Competencies
Resources are the source of a firm's capabilities.
Capabilities, in turn, are the source of a firm's core competencies.
A firm's core competencies are the basis for its competitive advantages in the marketplace.
Resources, Capabilities, and Core Competencies
Discussion points:
Are not inherently valuable, but they create value when the firm uses them to perform certain activities that result in a competitive advantage
Should be used to simultaneously achieve operational effectiveness and uniqueness
Operational effectiveness – able to do what competitors do, but better – signals that the firm is using its resources and capabilities efficiently relative to competitors
Unique strategic position – creates value by doing things differently or by doing different things than competitors – implementing a strategy which takes advantage of that position is required to consistently create value for stakeholders over the long-term
What are some measures of operational effectiveness?
Productivity
Quality
Speed
What types of management techniques are available in the quest for operational effectiveness?
TQM
Benchmarking
Time-based competition
Re-engineering

11. Components of Internal Analysis Leading to Competitive Advantage and Value Creation
Figure 4.3: Components of Internal Analysis Leading to Competitive Advantage and Value Creation – illustrates the relationships among resources, capabilities, and core competencies and shows how firms use the four criteria of sustainable competitive advantage and value chain analysis to identify sources of value and ultimately competitive advantage and strategic competitiveness - provides an outline of topics for much of the rest of this chapter
Combinations of resources and capabilities are managed to create core competencies. This can begin a discussion to define and provide examples of these building blocks of competitive advantage.

12. Creating Value Key Terms Value
Measured by a product's performance characteristics and by its attributes for which customers are willing to pay
Creating Value – for customers and other stakeholders by exploiting core competencies and meeting demanding standards of global competition
Discussion points:
The type of value a firm intends to create for customers affects its choice of business-level strategy and the organizational structure it will use to implement the strategy. These concepts are explained further in Chapter 5.
Today, core competencies, in combination with product-market positions, are recognized as the firm’s most important sources of competitive advantage.
By emphasizing core competencies when formulating strategies, companies learn to compete primarily on the basis of firm-specific resources that differ from their competitors’ resources.

13. Resources Key Terms Tangible resources Intangible resources
Assets that can be observed and quantified
Intangible resources
Assets that typically are rooted deeply in the firm's history and have accumulated over time
Organizational routines
Complex patterns of social interactions that allow firms to accomplish much of what they do
Resources – broad in scope, covering a spectrum of individual, social, and organizational phenomena
Discussion points:
It is in the unique bundling of resources that a competitive advantage is created.
Example: Nike
Because intangible resources are embedded in unique patterns of routines, they are relatively difficult for competitors to analyze, understand, purchase, imitate, or substitute for.

14. Tangible Resources
Table 4.1: Tangible Resources – visible assets, the value of which is usually recorded in financial statements
The value of tangible resources is constrained because they can be difficult to leverage for additional business or value.
Example: Airplane

15. Intangible Resources
Table 4.2: Intangible Resources – invisible assets, the value of which is rarely captured entirely by financial records
Discussion points:
A superior and more potent source of competitive advantage
Explains why firms are increasing efforts to nurture and develop employees
The more unobservable the resource, the more sustainable its competitive advantage
Less able to be analyzed, understood, purchased, imitated, or substituted for by competitors
Can be leveraged – the larger the network of users, the greater the potential benefit to each party
Example: Shared knowledge leveraged to create additional knowledge
What are some examples of intangible resources?
Knowledge
Trust between managers and employees
Ideas
Capacity for innovation
Managerial capabilities
Organizational routines
Scientific capabilities
Company reputation
Manner of interactions with stakeholders
Capacity for learning
Proprietary processes
Quality
Intellectual capabilities
Systems capabilities
Creativity
Speed

16. Resources Key Terms Social capital Strategic value of resources
Relationships with other organizations that contribute to the creation of value
Strategic value of resources
Degree to which resources can contribute to the development of capabilities, core competencies, and ultimately, competitive advantage
Discussion points:
Reputation
Level of awareness built with stakeholders
An important source of competitive advantage
Examples: Coke, Google, Southwest Airlines
Brand name
Powerful measure of an organization’s ability to create real and lasting value for shareholders
Examples: Apple, Google, IBM, McDonald’s, Microsoft
Social capital
Provides access to external resources to complement or supplement those of the firm
Strategic value of resources
Example: Value affiliated with a tangible resource such as a distribution facility

17. Capabilities Key Terms Capabilities
Firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state
Capabilities – As a source of capabilities, tangible and intangible resources are a critical part of the pathway to developing a competitive advantage.
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. But firms must also be able to utilize the knowledge that they have and transfer it among their operating businesses.
Discussion points:
The glue binding an organization together
Emerge over time through complex interactions between resources
Often based on developing, carrying, and exchanging information and knowledge through the firm’s human capital
A knowledge base, grounded in organizational actions, which may not be explicitly understood
Many founded on the skills and functional expertise of employees
Value of human capital cannot be overstated
Challenge to create an environment where knowledge is successfully shared to leverage the collective value of intellectual assets embedded in the employee base
CLO’s being employed to manage the firm’s knowledge resources, which traditionally have not been actively managed or measured

18. Examples of Firm’s Capabilities
Table 4.3: Examples of Firm’s Capabilities – Capabilities are often developed in specific functional areas or in a part of a functional area (for example, advertising within the marketing department). Research suggests that a relationship exists between capabilities developed in particular functional areas and the firm’s financial performance at both the corporate and business-unit levels, suggesting the need to develop capabilities at all levels.
The capabilities included in this table satisfy the Four Criteria of Sustainable Competitive Advantage discussed on Slides 21 and 22.

19. Core Competencies Key Terms Core competencies
Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals
Core Competencies – Core competencies distinguish a company competitively from its rivals and reflect the personality of the organization.
Discussion points:
Emerge over time through the organizational process of accumulating and learning to deploy resources and capabilities
The “crown jewels of a company” – activities the firm performs especially well compared with competitors
Strategic assets – resources and capabilities with a competitive value and potential to provide a competitive advantage
Success comes from identifying opportunities in the environment that can be exploited through core competencies, while avoiding competition in areas of weakness

20. How Many?
Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace.
Example: Walmart

21. Tools for Building Core Competencies
Four Criteria of Sustainable Competitive Advantage
Value Chain Analysis
Tools for Building Core Competencies – Two tools are commonly used to identify and build core competencies that create and sustain competitive advantages.
Four Criteria of Sustainable Competitive Advantage – to determine whether resources are or have the potential to be core competencies
Value Chain Analysis – to select the value-creating competencies that should be maintained, upgraded, or developed and those which should be outsourced

22. Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities
Rare Capabilities
Costly-to-Imitate Capabilities
Nonsubstitutable Capabilities
Four Criteria of Sustainable Competitive Advantage – Only capabilities that satisfy these four criteria are core competencies.

23. Four Criteria of Sustainable Competitive Advantage
Key Terms
Valuable capabilities
Allow the firm to exploit opportunities or neutralize threats in its external environment
Rare capabilities
Possessed by few, if any, current or potential competitors
Costly-to-imitate capabilities
Cost for other firms to develop is prohibitive, cannot easily be developed by other firms
Nonsubstitutable capabilities
Do not have strategic equivalents
Four Criteria of Sustainable Competitive Advantage – These four criteria are used to qualify capabilities as core competencies and to ultimately establish competitive advantages for firms.

24. Four Criteria for Determining Core Competencies
Table 4.4: Four Criteria for Determining Core Competencies – A sustainable competitive advantage is achieved only when competitors have failed in efforts to duplicate the benefits of a firm’s strategy.
Discussion points:
The length of time a firm can expect to maintain its competitive advantage is a function of how quickly competitors can imitate it.
Two valuable firm resources are strategically equivalent if they can each be separately exploited to implement the same strategies.

25. Costly-to-Imitate Capabilities
Unique historical conditions
Causal ambiguity
Socially complexity
Costly-to-Imitate Capabilities – three reasons capabilities are costly-to-imitate
Discussion points:
Capabilities were developed because of unique historical conditions. As firms evolve, they pick up skills, abilities, and resources that are unique to them, reflecting their particular path through history.
Examples: McKinsey & Company and UPS
Capabilities have a causally ambiguous link to competitive advantage. Competitors are unable to understand how the firm uses its capabilities as the foundation for a competitive advantage.
Examples: Southwest Airlines and Lincoln Electric
Capabilities are socially complex, or are the product of complex social phenomenon.
Examples: Trust, interpersonal relationships, friendships among managers and employees, and firm’s reputation with suppliers and customers

26. Core Competencies as a Strategic Capability
Figure 4.4: Core Competencies as a Strategic Capability – distinguishing between strategic capabilities and non-strategic capabilities
Strategic capabilities meet the four criteria of sustainable competitive advantage and have strategic relevance.
They are valuable and nonsubstitutable from the customer’s point of view.
They are unique and inimitable from the competitor’s point of view

27. Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage
Table 4.5: Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage – shows the competitive consequences and performance implications resulting from combinations of the four criteria of sustainability – helps managers determine the strategic value of the firm's capabilities
Discussion points:
Capabilities that fall into the first row of the table should not be emphasized.
Capabilities yielding competitive parity and either temporary or sustainable competitive advantage should be supported.

28. Value Chain Analysis Key Terms Value chain activities
Activities or tasks involved with the production of a firm’s product, the sale and distribution of products to buyers, and after-sales services in ways that create value for the customer
Support functions
Activities or tasks which support the firm’s work required to make, sell, distribute, and service its products
Value Chain Analysis – This is an internal analysis tool used to help managers understand the parts of their operations that create value and those that do not. This template can be used to identify a firm's cost position and the means that might be used to facilitate implementation of a chosen business-level strategy.

29. Value Chain Model
Figure 4.5: Value Chain Model – The value chain shows how a product moves through the stages of supply-chain management to follow-up service/support.
Discussion points:
The essential idea is to add as much value as possible as cheaply as possible and to capture that value.
Value chain activities that are considered during a value chain analysis:
Inbound logistics
Operations
Outbound logistics
Marketing and sales
Service
Support functions that are considered during a value chain analysis:
Procurement
Technological development
Human resource management
Firm infrastructure
In a globally competitive economy, the most valuable links on the chain tend to belong to people who have knowledge about customers.
It has become increasingly necessary to develop value-adding knowledge processes to compensate for the value and margin stripped from physical processes by the Internet.
Determining or rating a firm’s capability to execute value chain activities and support functions is challenging.
Example: Sony
Judgment is necessary for value chain analysis as no known accurate model or rule is available to help in the process.

30. Creating Value Through Value Chain Activities
Figure 4.6: Creating Value Through Value Chain Activities – Figures 4.6 and 4.7 list the items to consider when assessing the value-creating potential of value chain activities and support functions, respectively. The purpose of examining these activities and functions is to determine areas where the firm has the potential to create and capture value. All activities in both tables should be evaluated relative to competitors’ capabilities.

31. Creating Value Through Support Functions
Figure 4.7: Creating Value Through Support Functions – Figures 4.6 and 4.7 list the items to consider when assessing the value-creating potential of value chain activities and support functions, respectively. The purpose of examining these activities and functions is to determine areas where the firm has the potential to create and capture value. All activities in both tables should be evaluated relative to competitors’ capabilities.

32. Sources of Competitive Advantage
The resource or capability must allow the firm to perform a value chain activity or a support function in a manner superior to the way competitors perform it.
The resource or capability must allow the firm to perform a value-creating value chain activity or a support function that competitors cannot perform.
Sources of Competitive Advantage – To be a source of competitive advantage, two conditions must be met by a resource or capability. Only under these conditions does a firm create value for customers and have opportunities to capture that value.
Discussion points:
Start-up firms are known to create value by uniquely reconfiguring or recombining parts of the value chain.
Example: FedEx
The Internet has changed several aspects of the value chain for many firms.
Examples: Amazon and Twitter

33. Outsourcing Key Terms Outsourcing
The purchase of a value-creating activity from an external supplier
Outsourcing – the practice of going outside of a firm to acquire value-creating activities when the firm lacks capabilities linked to competitive success and when it is a viable option to internal competency development
Outsourcing is a trend which continues to increase at a rapid pace, especially in global industries.
Example: Pharmaceutical industry
In some industries, virtually all firms seek value that can be captured through effective outsourcing.
Examples: Automobile manufacturing and consumer electronics

34. Benefits of Outsourcing
Increased flexibility
Risk mitigation
Reduced capital investments

35. Outsourcing Viability
When a firm does not have the capabilities in the areas needed to succeed
When a firm lacks a resource or possesses inadequate skills essential to successfully implement a strategy
When few organizations possess the resources and capabilities required to achieve competitive superiority in all value chain activities and support functions
When extensive internal capabilities exist to effectively coordinate external sourcing and internal core competencies
Outsourcing Viability – Outsourcing value-creating activities can be a viable option for a firm.
Discussion points:
Few companies can afford to internally develop all of the technologies that might create a competitive advantage.
By nurturing a smaller number of capabilities, firms increase the probability of developing a competitive advantage.
Outsourcing allows the company to fully concentrate on areas where it can truly create value.
Intermediaries are available to facilitate the process.
Example: Outsourcing Institute
Critics argue that too much outsourcing can decrease a firm’s ability to innovate.
Taking advantage of mutually dependent supplier relationships or making unrealistic demands can encourage suppliers to integrate forward and become direct competitors.

36. Essential Skills for Outsourcing
Strategic thinking
Deal making
Partnership governance
Managing change
Essential Skills for Outsourcing – Outsourcing does not work effectively without the managers who administer these programs having extensive internal capabilities to effectively coordinate external sourcing with internal core competencies.
Discussion points:
Understand whether and how outsourcing creates competitive advantage within the firm
Be able to secure rights from external providers that internal managers can fully use
Complete effective outsourcing transactions
Be able to oversee and appropriately govern relationships with outsourcing partners and service providers
Understand that outsourcing can significantly change how an organization operates
Be able to resolve employee resistance to change

37. Core Competencies: Cautions
Never take for granted that core competencies will continue to provide a permanent source of competitive advantage.
All core competencies have the potential to become core rigidities – core rigidities are former core competencies that now generate inertia and stifle innovation.
Manager inflexibility stemming from the strength of shared beliefs (strategic myopia) is the primary reason core rigidities develop.
When Core Competencies Lose Their Value – Internal and external conditions can diminish the value of core competencies over time.
What external events may contribute to core competencies becoming core rigidities?
When new competitors figure out a better way to serve the firm’s customers
When new technologies emerge
When political or social events substantially shift the environment

38. Stakeholder Objectives and Power
Key Terms
Economic power
Comes from the ability to withhold economic support from the firm
Political power
Results from the ability to influence others to withhold economic support or to change the rules of the game
Formal power
Involves laws or regulations that specify the legal relationship existing between a firm and a particular stakeholder group
Firm Performance – High performance results are the primary objective of using the tools of internal analysis. Firm performance measurements are multidimensional in nature, and must take into account stakeholder expectations and stakeholder response to firm performance.
Stakeholders continue to support a firm when its performance meets or exceeds their expectations. The dependency and influence of stakeholders vary, but top managers tend to give shareholder needs a high priority when making decisions and taking strategic actions.
Stakeholder Objectives and Power – Effective managers must find ways to either accommodate or insulate the organization from the demands of stakeholders controlling critical resources. With various and sometimes conflicting stakeholder objectives to consider, managers must carefully prioritize the needs and desires of important stakeholders because the firm’s resources are finite at any set point in time. They must set priorities and make trade-offs to ensure the firm’s short-term success and long-term survival.
Discussion points:
Short-term enhancement of shareholder wealth can negatively affect the firm’s future competitive capability.
Stakeholder power, or level of influence, is the most critical criterion managers use to prioritize stakeholders.
Economic – such as investment funds which not only can sell a significant share of their stockholdings to reduce the value of the firm, but can persuade others to withdraw their support
Political – such as special interest groups which lobby government bodies for legal changes
Formal – such as legal obligations firms have to shareholders or to follow government regulations
Stakeholders can enjoy multiple sources of power.
Firms may give priority to a particular stakeholder group because of its strategic importance to future plans.
Example: Community relations where the firm hopes to build a new plant

39. Returns and Stakeholders
High economic returns – firm has the capability and flexibility to satisfy multiple stakeholders simultaneously
Average economic returns – firm is unable to maximize the interests of all stakeholders
Below-average returns – firm does not have the capacity to satisfy all stakeholders
Returns and Stakeholders – The levels of financial returns earned by firms affect their efforts to satisfy multiple stakeholder expectations.
Discussion points:
When firms earn high economic returns, the challenge of balancing stakeholder interests is lessened substantially - a firm can more easily satisfy multiple stakeholders simultaneously.
When firms earn average economic returns, the objective becomes one of at least minimally satisfying each stakeholder, and trade-off decisions are made in light of how dependent the firm is on the support of its stakeholder groups.
When firms earn below-average returns, the managerial challenge is to minimize the amount of support withdrawn by dissatisfied stakeholders.

40. Measures of Firm Performance
Capital market performance
Product market performance
Organizational stakeholder performance
Measures of Firm Performance – dimensions of firm performance from the perspective of all stakeholders – measuring is an essential component of internal analysis

41. Firm Performance from a Capital Market Perspective
Table 4.6: Firm Performance from a Capital Market Perspective – Table 4.6 shows examples of measures that are highly relevant to capital market stakeholders, measures that can be used to assess risk and to adjust shareholder returns.
Capital market stakeholders, shareholders, and lenders expect a firm to preserve and enhance the wealth they have entrusted to the firm.
Shareholders are particularly interested in receiving high returns for the investment they have made in a company’s stock. Those returns can be compared with the average return of all stocks in the market as a whole or in a designated industry for a particular period.
Discussion points:
Capital market stakeholders are concerned about the growth of the firm because growth is so closely associated with other measures of performance.
Capital market stakeholders are concerned when liquidity becomes too low or debt levels grow too high, because these factors can influence the ability of a company to remain solvent.
Capital market stakeholders are interested in firm efficiency because of its influence on future profitability. Consequently, measures like asset or inventory turnover and days receivable are also relevant.
Both shareholders and lenders anticipate returns that are commensurate with the degree of risk accepted for those investments (that is, lower returns are expected for low-risk investments, and higher returns are expected for high-risk investments). See Slide 42 for discussion of risk.
To calculate risk-adjusted returns, shareholders can deduct the average or market return for a particular period from the return that was actually received and then divide the result by the standard deviation of returns or beta.
Comparing the risk-adjusted return to the risk-adjusted return of other firms provides a better sense of how well the stock is performing relative to the amount of risk the shareholder is assuming.
Lenders are interested in risk measures such as standard deviation or beta because they are one indication of the financial stability of the firm.

42. Measures of Firm Performance
Key Terms
Risk
Investor uncertainty about the economic gains or losses that will result from a particular investment
Risk – Strategic leaders must assess the risks involved in pursuing various courses of action. Decisions that lead to lower variance in returns can enhance the value of an organization from the perspective of capital market stakeholders. See Table 4.6 or Slide 42 which contain a few common examples of measures that can be used to assess risk.

43. Other Measures of Firm Performance
Table 4.7: Other Measures of Firm Performance – The needs and desires of other key stakeholders are also important to the success of the firm, so managers should also establish measures that reflect how well the firm is responding to them. Table 4.7 contains a few examples of the types of measures firms might use.
Discussion points:
Stakeholder expectations are conflicting in nature, and resources expended to satisfy one stakeholder group can reduce resources available for others. Optimal value creation requires a balance of stakeholder interests.
It is in the interest of all stakeholders that a firm provides a steady and high return to shareholders to reduce the cost of capital for the firm.
Prosperity means that more resources are available for all stakeholders.
Even advocates of maximizing shareholder wealth recognize the importance of other stakeholder interests.
Traditional financial measures may not reflect the full amount of value the firm is creating and may not identify when stakeholder groups receive a disproportionate share of the firm’s value.

44. Sustainable Development
Key Terms
Sustainable development
Business growth that does not deplete the natural environment or damage society
Sustainable Development – Broader perspective of social responsibility is often added to the discussion of internal strategic considerations for firms. While pursuing stakeholder satisfaction makes the beginnings of a socially responsible firm, firms need to exceed legal and moral requirements while performing value-creating activities to benefit society.
Today, stakeholders and global communities are demanding more of “corporate citizens” with respect to environmental sustainability. Sustainability has become a competitive necessity in today’s marketplace.
Describe some corporate activities which demonstrate a commitment to sustainability.
McDonald’s – pork supplier requirements
Walmart – zero waste program
Novo Nordisk A/S – triple bottom line focus

45. Ethical Question
Could efforts to develop sustainable competitive advantages result in employees using unethical practices? If so, what unethical practices might be used to compare a firm’s core competencies with those held by rivals?

46. Ethical Question
Do ethical practices affect a firm’s ability to develop a brand name as a source of competitive advantage? If so, how does this happen? Identify some brands that are a source of competitive advantage in part because of the firm’s ethical practices.

47. Ethical Question
What is the difference between exploiting a firm’s human capital and using that capital as a source of competitive advantage? Are there situations in which the exploitation of human capital can be a source of advantage? If so, can you name such a situation? If the exploitation of human capital can be a source of competitive advantage, is this a sustainable advantage? Why or why not?

48. Ethical Question
Are there any ethical dilemmas associated with outsourcing? If so, what are they? How would you deal with those dilemmas?

49. Ethical Question
What ethical responsibilities do managers have if they determine that a set of employees has skills that are valuable only to a core competence that is becoming a core rigidity for the firm?

50. Ethical Question
Through postings to the Internet, firms sometimes make a vast array of data, information, and knowledge available to competitors as well as to customers and suppliers. What ethical issues, if any, are involved when the firm finds competitively relevant information on a competitor’s Website?

51. Ethical Question
To what extent does a firm have a moral obligation to distribute value back to stakeholders based on their relative contributions to its creation? Does a firm have any legal obligations to do so?