1. Chapter 3
Examining the Internal Environment: Resources, Capabilities and Activities

2. Why Internal Analysis?
Early strategy theory rooted in industry structural analysis - external focus
This approach has lost its appeal because:
internationalization & deregulation has all but removed safe havens
technology and changes in demand have blurred industry lines

3. Components of Internal Analysis Leading to Competitive Advantage and Value Creation
Figure 4.3 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. Figure 4.3 also 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.

4. Tangible Resources Four types of tangible resources/assets: Financial
Organizational
Physical
Technological

5. Intangible Resources Three types of intangible resources/assets: Human
Innovative
Reputational

6. Evaluation of Resources
Strength or Weakness
relative to competitors
basic business requirements
key vulnerabilities

9. Tangible
Resources
Org.
Capabilities
Inputs into Outputs
Intangible
Resources
Examples…..
Customer Service
Product Development
Employee Productivity

10. Examples of Firm’s Capabilities
Discuss some capabilities that can be found in an organization's functional areas.
Table 4.3 illustrates that capabilities are often developed in specific functional areas (such as manufacturing, R&D, and marketing) or in a part of a functional area (for example, advertising). 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.
Firms committed to continuously developing their people’s capabilities are the most likely to sustain a competitive advantage longer than those firms that do not make such commitments. Educational benefits and employee training can have immediate positive effects on the skill levels of employees and managers, as well as new ideas leading to technological innovation. Also, applicants are drawn to firms that have a reputation for excellent employee treatment, which can increase the quality of human resources in the firm.
Global business leaders increasingly support the view that 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. But firms must also be able to utilize the knowledge that they have and transfer it among their operating businesses.

11. Core Competencies central to the firm’s competitiveness
rewarded in market place
combination of skills & knowledge, not products or functions
flexible, long term platforms
embedded in the organization’s systems
distinctive competencies are those the firm performs better than rivals
All core competencies have the potential to become core rigidities

12. 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
Core Competencies (cont.) - Core competencies distinguish a company competitively and reflect its personality.
Features of core competencies:
Core competencies emerge within a firm over time
Core competencies are the capacity of an organization to take action
Core competencies are the activities that a firm performs well relative to its competitors, adding unique value for its customers
Core competencies do not represent all of a firm's resources and capabilities, only those with strategic value
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

13. Tools for Building Core Competencies
Four Criteria of Sustainable Competitive Advantage
Value Chain Analysis
Building Core Competencies – Two tools are commonly used to identify and build core competencies that will create and sustain competitive advantages.

14. Sustainable Competitive Advantage
Must be valuable, rare, inimitable, and non-substitutable, exploitable
Sustainability is a function of
Durability - how long will it last?
Technology? Reputation? Fixed Assets?
Imitability - how quickly can it be copied?
Transparent - easy to see?
Transferable - can it be done elsewhere?
Replicable - can we do it here?

15. Factors that Limit Imitation
Physical Uniqueness – location, patents
Path Dependency – accumulation effect
Causal Ambiguity – unable to disentangle
Social Complexity – social interactions are not readily understood nor duplicated
Absorptive Capacity – ability to identify, value, assimilate and use knowledge

16. Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage
Table 4.5 shows the competitive consequences and performance implications resulting from combinations of the four criteria of sustainability. Discuss how this analysis helps managers determine the strategic value of the firm's capabilities.
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.
Additional Discussion Notes for Discovering Core Competencies - These notes include additional materials that cover the criteria to determine core competencies, using Cartier and Starbucks as an examples to illustrate the process.
Core Competencies
A firm’s core competencies are those things that it does that give it a competitive advantage over another firm. They are generally valuable, rare, costly to imitate, and nonsubstitutable. They may or may not be unique to the firm. They may simply be an industry practice that a firm does better, or a set of industry practices that the firm does in a specific combination or sequence that allows the firm to be more efficient than its competitors.
Using the Cartier example, to be able to manipulate the supply of gems in the market, Cartier must be very efficient and competent at predicting the demand for its gems. If they were not very skilled at this, there would be fluctuations in the supply and demand curve and, therefore, market price that would leave an opportunity for arbitrage. The value of this arbitrage represents lost profits for Cartier. It was this ability to predict demand that allowed Cartier to see higher profits than its competitors in the 1800s, eventually eroding the market share and profitability of these competitors. Cartier subsequently acquired these firms to create the monopoly it now holds on the world’s diamond market.
As noted in the textbook, an important question is “How many core competencies are required for the firm to have a sustained competitive advantage?” While responses to this question vary, McKinsey & Co. recommends that its clients identify no more than three or four competencies. Recent actions by Starbucks demonstrate this point.
Growing rapidly, Starbucks decided that it could use the Internet as a distribution channel to achieve additional growth. However, the firm quickly realized that it lacked the capabilities required to successfully distribute its products through this channel—and that its unique coffee, not the delivery of that product, is its competitive advantage. In part, this recognition forced Starbucks to renew its emphasis on existing capabilities to create more value through its supply chain. To do so, the firm trimmed the number of its milk suppliers from sixty-five to fewer than twenty-five and negotiated long-term contracts with coffee-bean growers. The firm also decided to place automated espresso machines in its busy units. These machines reduced Starbucks’ cost while providing improved service to its customers, who can now move through the line much faster. Using its supply chain and service capabilities in these ways allows Starbucks to strengthen its competitive advantages of coffee and the unique venue in which on-site customers experience it.
When capabilities are valuable, rare, costly to imitate, and nonsubstitutable, they are effectively called core competencies. Alternatively, every core competence is a capability, but not every capability is a core competence. Operationally, one could argue that for a capability to be a core competence, it must be valuable and nonsubstitutable from a customer’s point of view, but unique and inimitable from a competitor’s point of view.
As discussed in the textbook, an important key to success occurs when the link between the firm’s capabilities and its competitive advantage is causally ambiguous, where rivals can’t tell how a firm uses its capabilities as the foundation for competitive advantage. Gordon Forward, CEO of Chaparral Steel, allows rivals to tour his firm’s facilities and see almost everything. In Chaparral Steel’s causally ambiguous operations, workers use the concept of mentalfacturing, by which manufacturing steel is done by using their minds instead of their hands.

17. 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 - exploiting core competencies and meeting global standards of competition to create superior value for customers

18. Value Creation per Unit

19. Comparing Toyota and General Motors

20. Relative costs and prices
Where do cost/price differences come from?
raw materials and components
differences in technology, plant, equipment
efficiencies, learning, experience, wages, productivity
marketing, sales, promotion, warehousing, distribution, administration costs
distribution
inflation, exchange and tax rates

21. Porter’s Value Chain
Views the organization as a series (chain) of activities, which may or may not create value

22. Porter’s Value Chain (cont.)
Primary Activities
Inbound logistics – Supply Chain Management
Operations
Outbound logistics - Distribution
Marketing and sales
After-sales service
Contribute to the physical creation of the product/service, its sale and transfer to the buyer, and its service after the sale

23. Tables 4.6 and 4.7 list the items to consider when assessing the value-creating potential of primary activities and support activities, respectively. The intent in examining both primary and support activities 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.

24. Porter’s Value Chain (cont)
Support Activities
Procurement
Technological development
Human resource management
Firm infrastructure

25. The Value-Creating Potential of Support Activities
Tables 4.6 and 4.7 list the items to consider when assessing the value-creating potential of primary activities and support activities, respectively. The intent in examining both primary and support activities 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.

26. The Value Chain Firm Infrastructure HRM Marginp o r t
Firm Infrastructure
HRM
Technological Development
Margin
Procurement
Service
Marketing
& Sales
Inbound
Logistics
Operations
Outbound
Logistics
Margin
Primary

27. …tries to pull the arrow back…..
A low cost strategy…..
Firm Infrastructure
HRM
Technological Development
Margin
Procurement
Service
Marketing
& Sales
Inbound
Logistics
Operations
Outbound
Logistics
Margin
…tries to pull the arrow back…..

28. Low Cost - Support Activity examples…...
Fewer layers of management
Policies to reduce turnover
IBM Printer to 62 parts, 3.5 minutes
Margin
Monitor supplier performance
Service
Marketing
& Sales
Inbound
Logistics
Operations
Outbound
Logistics
Margin

29. Low cost - Primary Activity examples….
Inbound - Toyota
Operations - Subway
Outbound - Campbell Soup’ Continuous Replenishment
Marketing/Sales - WalMart
Customer Service - Federal Express

30. A differentiation strategy…..
Firm Infrastructure
HRM
Technological Development
Margin
Procurement
Service
Marketing
& Sales
Inbound
Logistics
Operations
Outbound
Logistics
Margin
….tries to pull the arrow forward...

31. Differentiation - Support Activity examples…...
Commitment to quality
Compensation rewarding innovation
Amazon Recommendations
Margin
Purchasing high-quality components
Service
Marketing
& Sales
Inbound
Logistics
Operations
Outbound
Logistics
Margin

32. Differentiation - Primary Activity examples…...
Inbound - Dell
Operations - Marriott
Outbound - WebVan
Market/Sales - Nordstrom’s
Customer Service - Pirtek

33. Your Firm
Buyers
Suppliers
Your Rivals

34. Your Firm Buyers Suppliers Your Rivals
Opportunities for
Advantage
Buyers
Suppliers
Your Rivals

35. Your Firm Buyers Suppliers Your Rivals
Opportunities for
Adding Value
Opportunities for
Adding Value
Buyers
Suppliers
Your Rivals

36. Outsourcing
Key Terms
Outsourcing – purchase of a value-creating activity from an external supplier
Outsourcing - This is the practice of going outside of a firm to acquire value-creating activities, when it is a viable option to do so. This trend continues to increase at a rapid pace.

37. 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 needed to implement a strategy
When few organizations possess the resources and capabilities needed for competitive superiority in all primary and support activities necessary to compete
When extensive internal capabilities exist for effectively coordinating external sourcing and internal core competencies
Outsourcing value-creating activities can be a viable option for a firm under certain conditions:
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 primary and support activities necessary to compete
When extensive internal capabilities exist for effectively coordinating external sourcing and internal core competencies

38. Benefits of Outsourcing
Increased flexibility
Mitigation of risks
Reduced capital investments