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.

Competitive Advantage Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively: Acquired. Bundled. Leveraged. Over time, the benefits of any value-creating strategy can be duplicated by competitors. Copyright © 2008 Cengage

Competitive Advantage (cont’d) 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 difficulty competitors have in duplicating or imitating the core competence. Copyright © 2008 Cengage

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

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

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

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

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

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

Value Chain Analysis Allows the firm to understand the parts of its operations that create value and those that do not. A template that firms use to: Understand their cost position. Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy. Copyright © 2008 Cengage

Value Chain Analysis (cont’d) Primary activities involved with: A product’s physical creation A product’s sale and distribution to buyers The product’s service after the sale Support Activities Provide the assistance necessary for the primary activities to take place. Copyright © 2008 Cengage

Value Chain Analysis (cont’d) 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 To perform a value-creating activity that competitors cannot complete Copyright © 2008 Cengage

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

The Value-Creating Potential of Primary Activities Inbound Logistics Activities used to receive, store, and disseminate inputs to a product Operations Activities necessary to convert the inputs provided by inbound logistics into final product form Outbound Logistics Activities involved with collecting, storing, and physically distributing the product to customers Copyright © 2008 Cengage

The Value-Creating Potential of Primary Activities (cont’d) Marketing and Sales Activities completed to provide the means through which customers can purchase products and to induce them to do so. Service Activities designed to enhance or maintain a product’s value Each activity should be examined relative to competitor’s abilities and rated as superior, equivalent or inferior. Copyright © 2008 Cengage

The Value-Creating Potential of Primary Activities: Support Procurement Activities completed to purchase the inputs needed to produce a firm’s products. Technological Development Activities completed to improve a firm’s product and the processes used to manufacture it. Human Resource Management Activities involved with recruiting, hiring, training, developing, and compensating all personnel. Copyright © 2008 Cengage

The Value-Creating Potential of Primary Activities: Support (cont’d) Firm Infrastructure Activities that support the work of the entire value chain (general management, planning, finance, accounting, legal, government relations, etc.) Effectively and consistently identify external opportunities and threats Identify resources and capabilities Support core competencies Each activity should be examined relative to competitor’s abilities and rated as superior, equivalent or inferior. Copyright © 2008 Cengage

Outsourcing The purchase of a value-creating activity from an external supplier Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities. By performing fewer capabilities: A firm can concentrate on those areas in which it can create value. Specialty suppliers can perform outsourced capabilities more efficiently. Copyright © 2008 Cengage

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

Outsourcing Decisions Margin Primary Activities Support Activities A firm may outsource all or only part of one or more primary and/or support activities. Service Firm Infrastructure Procurement Human Resource Mgmt. Technological Development Marketing and Sales Outbound Logistics Operations Inbound Logistics Copyright © 2008 Cengage