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

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

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

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

Figure 3.1 Components of Internal Analysis

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

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

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

Building Core Competencies: 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

Figure 3.3 The Basic Value Chain

The Basic Value Chain

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

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