©2004 by South-Western/Thomson Learning 1 The Internal Organization: Resources, Capabilities, and Core Competence Robert E. Hoskisson Michael A. Hitt R. Duane Ireland Chapter 4

2 Chapter 2 Chapter 2 Strategic Leadership Strategic Leadership Chapter 4 Chapter 4 The Internal The Internal Organization Chapter 6 Chapter 6 Competitive Rivalry and Competitive Rivalry and Competitive Dynamics Competitive Dynamics Chapter 9 Chapter 9 International Strategy International Strategy Chapter 1 Chapter 1 Introduction to Introduction to Strategic Management Strategic Management Chapter 3 Chapter 3 The External The External Environment Chapter 5 Chapter 5 Business-Level Strategy Chapter 8 Chapter 8 Acquisition and Acquisition and Restructuring Strategies Restructuring Strategies Chapter 11 Chapter 11 Corporate Governance Corporate Governance Chapter 7 Chapter 7 Corporate-Level Strategy Corporate-Level Strategy Chapter 10 Chapter 10 Cooperative Strategy Cooperative Strategy Chapter 12 Chapter 12 Strategic Entrepreneurship Strategic Entrepreneurship Strategic Analysis Strategic Thinking Creating Competitive Advantage Monitoring And Creating Entrepreneurial Opportunities The Strategic Management Process Strategic Intent Strategic Intent Strategic Mission Strategic Mission

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 External and Internal Analyses By studying the internal environment, firms identify what they can do Core competencies that sustain competitive advantage External and Internal Analyses

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

6 Challenge of Internal Analysis How do we effectively manage current core competencies while simultaneously developing new ones? How do we effectively manage current core competencies while simultaneously developing new ones? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we assemble bundles of resources, capabilities and core competencies to create value for customers? How do we learn to change rapidly? How do we learn to change rapidly?

7 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

8 Discovering Core Competencies Resources TangibleTangible IntangibleIntangible Tangible Resources FinancialFinancial OrganizationalOrganizational PhysicalPhysical TechnologicalTechnological Intangible Resources HumanHuman InnovationInnovation ReputationReputation

9 Discovering Core Competencies Capabilities Capabilities are the firm’s capacity to deploy resources that have been purposely integrated to achieve a desired end state Capabilities emerge over time through complex interactions among tangible and intangible resources Capabilities are often developed in functional areas (see Table 4.4)

10 Discovering Core Competencies CoreCompetencies Core competencies are resources and capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive McKinsey and Co. recommends using three to four competencies when framing strategic actions

11 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 Rare: Capabilities that are not possessed by many others Nonsubstitutable: capabilities that do not have strategic equivalents

12 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

13 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

14 Performance Implications Valuable? Rare? Costly to Imitate? Nonsubstitutable CompetitiveConsequencesPerformanceImplications NoNoNoNo CompetitiveDisadvantage Below Average Returns YesNoNo Yes/NoCompetitiveParity Average Returns YesYesNo Yes/No Temporary Com- petitive Advantage Above Average to Average Returns YesYesYesYes Sustainable Com- petitive Advantage Above Average Returns

15 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

16 Value Chain Analysis Allows a firm to understand the parts of its operations that create value and those that do not (see Table 4.7 and 4.8) Allows a firm to understand the parts of its operations that create value and those that do not (see Table 4.7 and 4.8) Each activity should be examined relative to competitors’ abilities and rated as: superior, equivalent, or inferior Each activity should be examined relative to competitors’ abilities and rated as: superior, equivalent, or inferior Use judgment because there is no known accurate model or rule available to help in the analysis Use judgment because there is no known accurate model or rule available to help in the analysis

17 Margin Margin Primary Activities Support Activities Outsourcing Outsourcing is the purchase of a value- creating activity from an external supplier Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement

18 Strategic Rationales for Outsourcing Lacks Resources and Capabilities to Capture the Value of the Activity Lacks Resources and Capabilities to Capture the Value of the Activity Provide Access to World-Class Capabilities Provide Access to World-Class Capabilities –the specialized resources of outsourcing providers makes world- class capabilities available to firms in a wide range of applications

19 Strategic Rationales for Outsourcing Share Risks Share Risks –reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Free Resources for Other Purposes Free Resources for Other Purposes –allows company focus on broader business issues by having outside experts handle various operational details –permits firm to redirect efforts from non-core activities toward those that serve customers more effectively

20 Outsourcing Issues Greatest Value Greatest Value –outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced Evaluating Resources and Capabilities Evaluating Resources and Capabilities –don’t outsource activities in which the firm itself can create and capture value Firm’s Knowledge Base Firm’s Knowledge Base –do not outsource activities that stimulate the development of new capabilities and competencies

21 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 (i.e., former core competencies that now generate inertia and stifle innovation) All core competencies have the potential to become core rigidities (i.e., former core competencies that now generate inertia and stifle innovation) Why? Why?