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STRATEGIC
MANAGEMENT
Lecturer in charge: Nguyễn Hiệp and Lê Gia Phúc
CHAPTER
3
The Internal Organization: Resources, Capabilities,
Core Competencies, and Competitive Advantages
LEARNING OBJECTIVES
Explain why firms need to study and understand their internal organization.
Define value and discuss its importance.
Describe the differences between tangible and intangible resources.
Define capabilities and discuss their development.
Define four criteria used to determine if resources and capabilities are core
competencies.
Explain how firms analyze their value chain to determine where they are
able to create value when using their resources, capabilities, and core
competencies.
Define outsourcing and discuss reasons for its use.
Discuss the importance of identifying internal strengths and weaknesses.
Describe the importance of avoiding core rigidities.
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Introduction
• Firms and organizations achieve strategic competitiveness and earn above-average
returns by acquiring, bundling, and leveraging their resources for the purpose of
taking advantage of opportunities in the external environment in ways that create
value for customers.
• Competitors will eventually learn how to duplicate the benefits of any firm’s value-
creating strategy.
• Thus, all competitive advantages have a limited life.
Introduction
• A competitive advantage’s sustainability is a function of three factors:
1. The rate of core competence obsolescence because of environmental changes
2. The availability of substitutes for the core competence
3. The imitability of the core competence
• The challenge to all firms is to effectively manage current core competencies while
simultaneously developing new ones.
• Only when firms are able to do this can they expect to:
• Achieve strategic competitiveness
• Earn above-average returns
• Remain ahead of competitors in both the short and long term
Analyzing the Internal Organization
• By analyzing its internal organization, a firm determines what it can do.
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The Context of
Internal Analysis
• In today’s global economy, some of the resources that were traditionally
critical to firms’ efforts to produce, sell, and distribute their goods or
services are now less likely to be the source of competitive advantages.
• This is because an increasing number of firms are using their resources to form
core competencies through which they successfully implement an international
strategy as a means of overcoming the advantages created by more traditional
resources.
The Context of
Internal Analysis
• Firms analyzing their internal organization should use a global mind-set
to do so.
• A global mind-set is the ability to analyze, understand, and manage an internal
organization in ways that are not dependent on the assumptions of a single
country, culture, or context.
• Analyzing the firm’s internal organization requires that evaluators
understand how to leverage the firm’s unique bundle of resources and
capabilities.
Components
of an Internal Analysis
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Creating Value
• Value is measured by a product’s performance characteristics and by its attributes for
which customers are willing to pay.
• Firms create value by innovatively building and leveraging their resources to form
capabilities and core competencies.
• Ultimately, creating value for customers is the source of above-average returns for a
firm.
• What the firm intends regarding value creation affects its choice of business-level
strategy and its organizational structure.
Creating Value
• Core competencies, in combination with product-market positions, are the
firm’s most important sources of competitive advantage.
• A firm’s core competencies, integrated with an understanding of the results of
studying the conditions in the external environment, should drive the selection of
strategies.
The Challenge of Analyzing
the Internal Organization
• The strategic decisions managers make about the internal
organization:
• Are nonroutine
• Have ethical implications
• Significantly influence the firm’s ability to earn above-
average returns
• Making decisions regarding the firm’s assets:
• Involves identifying, developing, deploying, and protecting
resources, capabilities, and core competencies
• Is challenging and difficult
• Is increasingly internationalized
• A firm can improve by studying its mistakes.
• The learning generated by making and correcting mistakes
can be important in the creation of new capabilities and
core competencies.
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The Challenge of Analyzing
the Internal Organization
• Three conditions affect managers as they
analyze the internal organization and make
decisions about resources:
1. Uncertainty
2. Complexity
3. Intraorganizational conflict
Conditions Affecting Managerial Decisions about
Resources, Capabilities, and Core Competencies
The Challenge of Analyzing
the Internal Organization
• In making decisions affected by these three
conditions, judgment is required.
• Judgment is the capability of making successful
decisions when no obviously correct model or rule is
available or when relevant data are unreliable or
incomplete.
• When exercising judgment, decision makers:
• Must be aware of possible cognitive biases, such as
overconfidence
• Often take intelligent risks
• Strategic leaders are individuals with an ability
to examine the firm’s resources, capabilities, and
core competencies and make effective choices
about their use.
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Resources, Capabilities, and Core Competencies
• The foundation of competitive advantage
are:
• Resources
• Capabilities
• Core competencies
• Resources are bundled to create
organizational capabilities.
• In turn, capabilities are the source of a
firm’s core competencies, which are the
basis of establishing competitive
advantages.
Resources
• Broad in scope, resources cover a spectrum of individual, social, and
organizational phenomena.
• By themselves, resources do not allow firms to create value for customers
as the foundation for earning above-average returns.
Resources
• Some of a firm’s resources are tangible, while others are intangible.
• Tangible resources are assets that can be observed and quantified.
• Examples: Production equipment, manufacturing facilities, distribution centers, and formal
reporting structures
• Four primary categories of tangible resources are:
1. Financial
2. Organizational
3. Physical
4. Technological
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Tangible Resources
Financial Resources • The firm’s capacity to borrow
• The firm’s ability to generate funds through internal
operations
Organizational Resources • Formal reporting structures
Physical Resources • The sophistication of a firm’s plant and equipment and
the attractiveness of its location
• Distribution facilities
• Product inventory
Technological Resources • Availability of technology-related resources such as
copyrights, patents, trademarks, and trade secrets
Resources
• Intangible resources are assets that are rooted deeply in the firm’s history,
accumulate over time, and are relatively difficult for competitors to analyze and
imitate.
• Examples: Knowledge, managerial capabilities, organizational routines, brand name, and
organizational culture
• Three primary categories of intangible resources are:
1. Human
2. Innovation
3. Reputational
Intangible Resources
Human Resources • Knowledge
• Trust
• Skills
• Abilities to collaborate with others
Innovation Resources • Ideas
• Scientific capabilities
• Capacity to innovate
Reputational Resources • Brand name
• Perceptions of product quality, durability, and reliability
• Positive reputation with stakeholders such as suppliers and
customers
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Resources
Tangible Resources
• Tangible resources are hard to leverage.
• That is, it is difficult to derive additional business or value from a tangible resource.
Intangible Resources
• Compared to tangible resources, intangible resources:
• Are less visible and more difficult for competitors to understand, purchase, imitate, or substitute
for
• Are more relied on to be the foundation for a firm’s capabilities
• Can be leveraged
Capabilities
• Capabilities
• Created by combining individual tangible and intangible resources
• Used to complete the organizational tasks required to produce, distribute, and
service the goods or services the firm provides to customers for the purpose of
creating value for them
• The foundation for building core competencies and hopefully competitive
advantages
• Often based on developing, carrying, and exchanging information and knowledge
through the firm’s human capital
• Often developed in specific functional areas or in a part of a functional area
Example of Firms’ Capabilities
Functional Areas Capabilities Examples of Firms
Distribution • Effective use of logistics management • Walmart
techniques
Human Resources • Motivating, empowering, and retaining • Microsoft
employees
Management • Effective and efficient control of • Walmart
Information Systems inventories through point-of-purchase
data collection methods
Marketing • Effective promotion of brand-name • Procter & Gamble
products • Ralph Lauren Corp.
• Effective customer service • McKinsey & Co.
• Innovative merchandising • Nordstrom Inc.
• Crate & Barrel
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Example of Firms’ Capabilities
Functional Areas Capabilities Examples of Firms
Management • Ability to envision the future of clothing • Hugo Boss
• Zara
Manufacturing • Design and production skills yielding • Komatsu
reliable products • Witt Gas Technology
• Product and design quality • Sony
• Miniaturization of components and
products
Research & • Innovative technology • Caterpillar
Development • Development of sophisticated elevator • Otis Elevator Co.
control solutions • Chaparral Steel
• Rapid transformation of technology into • Thomson Consumer
new products and processes Electronics
• Digital technology
Core Competencies
• Core competencies:
• Are capabilities that serve as a source of
competitive advantage for a firm over its rivals
• Emerge over time through an organizational
process of accumulating and learning how to
deploy different resources and capabilities
• The activities the company performs especially
well compared to competitors
• The activities through which the firm adds unique
value to the goods or services it sells to customers
Building Core Competencies
• Two tools help firms identify their core competencies:
1. The four criteria of sustainable competitive advantage
2. Value chain analysis
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The Four Criteria of Sustainable Competitive Advantage
• Core competencies are capabilities that are:
• Valuable
• Valuable capabilities allow the firm to exploit opportunities or neutralize threats in its external
environment.
• Rare
• Rare capabilities are capabilities that few, if any, competitors possess.
• Costly to imitate
• Costly-to-imitate capabilities are capabilities that other firms cannot easily develop.
• Nonsubstitutable
• Nonsubstitutable capabilities are capabilities that do not have strategic equivalents.
The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities • Help a firm neutralize threats or exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational
culture or brand name
• Ambiguous cause: The causes and uses of a
competence are unclear
• Social complexity: Interpersonal relationships, trust, and
friendship among managers, suppliers, and customers
Nonsubstitutable Capabilities • No strategic equivalent
The Four Criteria of Sustainable Competitive Advantage
• Capabilities failing to satisfy the four criteria are not core competencies,
meaning that although every core competence is a capability, not every
capability is a core competence.
• In slightly different wording:
• For a capability to be a core competence, it must be valuable and unique from a customer’s
point of view.
• For a core competence to be a potential source of competitive advantage, it must be
inimitable and
nonsubstitutable by competitors.
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Outcomes from Combinations of the Criteria
for Sustainable Competitive Advantage
Value Chain Analysis
• Value chain analysis allows the firm to understand the parts of its
operations that create value and those that do not.
• Understanding these issues is important because the firm earns above-average
returns only when the value it creates is greater than the costs incurred to create
that value.
Value Chain Analysis
• The value chain is:
• A template that firms use to analyze their cost position and to identify the multiple means that can
be used to facilitate implementation of a chosen strategy
• Segmented into value chain activities and support functions
• Value chain activities are activities or tasks the firm completes in order to produce products and then
sell, distribute, and service those products in ways that create value for customers.
• Support functions include the activities or tasks the firm completes in order to support the work being
done to produce, sell, distribute, and service the products the firm is producing.
• A firm can develop a capability and/or a core competence in any of the value chain
activities and support functions.
• When it does so, it has the ability to create value for customers.
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A Model of the Value Chain
Creating Value through Value Chain Activities
Creating Value through Support Functions
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Outsourcing
• When the firm cannot create value in either a value chain activity or a support
function, outsourcing is considered.
• Outsourcing is the purchase of a value-creating activity or a support function activity from an
external supplier.
• Firms engaging in effective outsourcing:
• Increase their flexibility
• Mitigate risks
• Reduce their capital investments
• Firms should use outsourcing only for activities where they:
• Cannot create value
• Are at a substantial disadvantage compared to competitors
Outsourcing
• Outsourcing can be effective because few, if any, organizations possess the resources and capabilities
required to achieve competitive superiority in each value chain activity and support function.
• By outsourcing activities in which it lacks competence, a firm:
• Increases the probability of developing core competencies and achieving a competitive advantage
because it does not become overextended
• Can fully concentrate on those areas in which it has the potential to create value
• There are two significant concerns associated with outsourcing:
1. The potential loss in a firm’s ability to innovate
2. The loss of jobs within the focal firm
• Outsourcing to a foreign supplier is commonly called offshoring.
Competencies, Strengths, Weaknesses, and Strategic Decisions
• By analyzing the internal organization, firms identify their strengths and
weaknesses as reflected by their resources, capabilities, and core
competencies.
• If a firm has weak capabilities or does not have core competencies in areas
required to achieve a competitive advantage, it must acquire those resources and
build the needed capabilities and competencies.
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Competencies, Strengths, Weaknesses, and Strategic Decisions
• Having a significant quantity of resources is not the same as having the “right”
resources.
• The “right” resources are those with the potential to be formed into core competencies as the
foundation for creating value for customers and developing competitive advantages because of
doing so.
• The ability of a core competence to be a permanent competitive advantage can’t be
assumed.
• All core competencies have the potential to become core rigidities that generate inertia and stifle
innovation.
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