Michael
Michael A.
A. Hitt
Hitt
R.
R. Duane
Duane Ireland
Ireland
Robert
Robert E.
E. Hoskisson
Hoskisson
The
The Internal
Internal Environment:
Environment:
Resources,
Resources, Capabilities
Capabilities and
and
Core
Core Competencies
Competencies
External Environmental Opportunities and Threats
Macroenvironment Industry Environment
The Internal Environment
The Firm’s Resources, Organizational Mission, and Goals
Strategy Formulation
Strategic Corporate Strategy
Formulation
Management Business Unit
PROCESS Strategy Formulation
Functional Strategy
Formulation
Feedback
Strategy Implementation
Organizational Structure
Leadership, Power, and Organizational Culture
Strategic Control
Strategic Control Process and Performance
External Analysis
General
Environment
3
i c al Eco
o l og n om
h n Specific Environment ic
Tec Industry-Competitors
Substitute Current
Products Organization Rivalry
Bargaining
Power of Potential
Po
litic Suppliers Bargaining Entrants
p h ic
al-L Power of g ra
ega o
l Buyers Dem
Sociocultural
What the Firm Might Do
External Environment
Five Forces Analysis
Sustainable
Competitive
Advantage
Internal Environment
Resources, Capabilities
and Core Competencies
What the Firm Can Do
The road to Competitive Advantage
Performance Results
Competitive Advantage
Distinctive Organizational
Capabilities
Organizational Organizational Core
Resources Capabilities Competencies
Financial assets Organizational processes
Physical assets and routines
Human resources Accumulated knowledge
Intangible assets Actual work activities
Structural-cultural assets 5
Internal Analysis
• Understand organizational strengths and
weaknesses
• Understand the relationship between organizational
resources, organizational capabilities, core
competencies, and distinctive organizational
capabilities
• Understand the Value Chain
6
What is an Internal Analysis
• Identifies and evaluates resources, capabilities,
and core competencies
• As such organizations need to understand their
– Strengths are resources that an organization possesses and
capabilities that an organization has developed that can be
exploited and developed into a sustainable competitive
advantage
– Weaknesses are resources and capabilities that are lacking or
deficient and prevents an organization from developing a
sustainable competitive advantage
7
To understand the heterogeneity
of the firms in an industry...
We have to look inside the firm to see what
resources, capabilities, and core competencies
it has and identify its strengths and
weaknesses
To achieve strategic competitiveness and
above average returns, a firm must achieve a fit
or match between what the firm might do (i.e.,
external environmental analysis) and what the
firm can do (i.e., internal analysis)
Two fundamental assumptions to
identify firm’s internal strengths &
weaknesses
Resource heterogeneity: Firms can be thought
of as bundles of productive resources and that
different firms possess different bundles of
resources.
Resource immobility: Some of these resources
are inelastic to supply. That is, no matter how
much a firm is willing to pay for resources and
capabilities it might be difficult for them to do so
because some resources are inelastic to
supply.
Capabilities
The Source of The Source of
Teams of
Resources
Core
Competencies
Resources
Sources of
* Tangible Competitive
* Intangible Components of Advantage
Internal Analysis
Strategic Sustained
Competitiveness Competitive The
Advantage Foundation
Above-Average
of
Returns Gained through
Core Competencies
The Pathway to
Resources
Resources What a firm Has...
Resources
Tangible Resources What a firm has to work with:
* Financial its assets, including its people
* Physical and the value of its brand name
* Technological
* Organizational
Resources represent inputs into a
firm’s production process...
Intangible Resources
Human Resources
Resources such as capital equipment, skills
* Human
of employees, brand names,
* Innovation finances and talented managers
* Reputation
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex
interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that are
based on the development, transmission and exchange or
sharing of information and knowledge as carried out by the
firm's employees.
Capabilities become important when they are combined
in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage.
Four Attributes of Resources and
Capabilities (Competitive Advantage)
Valuable allow the firm to exploit opportunities or
neutralize threats in its external
Resources and Capabilities
environment
Rare possessed by few, if any, current and
potential competitors
Costly to imitate when other firms cannot obtain them or
must obtain them at a much higher cost
Nonsubstitutable the firm is organized appropriately to
obtain the full benefits of the resources in
order to realize a competitive advantage
Resources and capabilities that meet
these four criteria become a source of:
Valuable
Resources and Capabilities
Rare
Core Competencies
Costly to imitate
Nonsubstitutable
Core Competency
What a firm does with what a firm
has that is Strategically
Valuable
Question:
How do we determine if what a firm does with what
a firm has is strategically valuable?
Answer:
Does it give the firm a Sustained Competitive
Advantage?
Advantage
Outcomes from Combinations of the Criteria
for Sustainable Competitive Advantage
Costly to Nonsub- Competitive Performance
Valuable Rare
Imitate stitutable Consequences Implications
Below
Competitive
NO NO NO NO Average
Disadvantage
Returns
Competitive Average
YES NO NO YES/NO
Parity Returns
Temporary Aver./Above
YES YES NO YES/NO Competitive Average
Advantage Returns
Sustainable Above
YES YES YES YES Competitive Average
Advantage Returns
Core Competencies are the basis for a
firm’s
Competitive
advantage
Strategic
competitiveness Core Competencies
Ability to earn
above-average
returns
Identifying Core Competencies
Step Question
1. Prepare a current 1. What are we selling, to
product/market profile whom and how are we
doing?
2. Identify sources of 2. Why do our customers
advantage in primary choose our products over
product/markets others?
3. What about our org. gives
3. Determine organizational us advantage with
competencies customers?
4. Determine if competencies 4. Is the competency rare,
give you a sustained valuable, difficult to
competitive advantage imitate or substitute?
Canon’s Core Competencies
Question Answer
1. What are we selling, to 1. High end cameras (prior to
whom and how are we expansion of the business)
doing?
2. Because of the superior
2. Why do our customers
choose our products over optics associated with our
others? lenses
3. What about our org. gives 3. The ability to produce
us advantage with superior optical devices
customers? 4. Yes, especially as related
4. Is the competency rare, to cameras BUT also as
valuable, difficult to imitate related to copiers!
or substitute?
Canon’s expertise is with optics, not photography. Thus, moving
into copiers makes sense. Moving into film does not. This is why
we focus on resources and capabilities, NOT products.
Warning, Warning, Warning!!!
Products or services that customers
like are NOT core competencies.
Core competencies are the
combination of resources and
capabilities that ALLOW the firm to
produce the products and services
that customers like.
Core Competencies--Cautions and Reminders
It should never be taken for granted that core competencies
will continue to provide a source of competitive advantage
All core competencies have the potential to become
Core Rigidities
Core Rigidities are former core competencies that sow the
seeds of organizational inertia and prevent the firm from
responding appropriately to changes in the external
environment
Strategic myopia and inflexibility can strangle the firm’s
ability to grow and adapt to environmental change or
competitive threats
Resource-based Model of Above
Average Returns
1. Firm’s Resources 1. Strategy dictated by
unique resources and
capabilities of the firm
(what can the firm do
best?)
2. Find an environment in
which to exploit these
assets (where are the best
opportunities?)
Resource-based Model of Above
Average Returns
Resource-based 1. Identify the firm’s
Model resources-- strengths and
weaknesses compared with
Resources
competitors
Resources: inputs into a firm’s
production process
Resource-based Model of Above
Average Returns
Resource-based 2. Determine the firm’s
Model capabilities--what it can do
better than its competitors
Resources
Capability Capability: capacity of an
integrated set of resources to
integratively perform a task or
activity
Resource-based Model of Above
Average Returns
Resource-based 3. Determine the potential of the
Model firm’s resources and
capabilities in terms of a
Resources competitive advantage
Capability
Competitive Advantage Competitive advantage: ability
of a firm to outperform its
rivals
Resource-based Model of Above
Average Returns
Resource-based 4. Locate an attractive industry
Model
Resources
Capability
Competitive Advantage
An Attractive Industry An attractive industry: an
industry with opportunities that
can be exploited by the firm’s
resources and capabilities
Resource-based Model of Above
Average Returns
Resource-based 5. Select a strategy that best
Model allows the firm to utilize its
resources and capabilities
Resources relative to opportunities in
Capability the external environment
Competitive Advantage
An Attractive Industry
Strategy Formulation/ Strategy formulation and
Implementation implementation: strategic
actions taken to earn above
average returns
Resource-based Model of Above
Average Returns
Resource-based
Model
Resources
Capability
Competitive Advantage
An Attractive Industry Superior returns: earning
of above-average returns
Strategy Form/Impl
Superior Returns
Value Chain Analysis
helps to identify which resources and capabilities can add value
Firm Infrastructure
Human Resource Management M
Support AR
Activities G
Technological Development IN
Procurement
Service
Operations
Outbound
Marketing
Logistics
Inbound
& Sales
Logistics
IN
G
R
A
M
Primary Activities
Capabilities
The Source of The Source of
Teams of
Resources
Core
Competencies
Resources
Sources of
* Tangible Competitive
* Intangible Components of Advantage
Internal Analysis
Strategic Sustained
Competitiveness Competitive The
Advantage Foundation
Above-Average
of
Returns Gained through
Core Competencies
The Pathway to
Resources as the Basis of Superior Profitability
Patents
Brands
Barriers to Entry Retaliatory capability
Industry
Attractive-
Monopoly Market share
ness
Vertical
Rate of Profit Bargaining
Firm size
in Excess of Financial resources
Power
the Competitive
Level
Process technology
Cost
Size of plants
Advantage Access to low-cost inputs
Competitive
Advantage
Differentiation Brands
Advantage Product technology
Marketing distributions
7’s McKinsey
Resources, Capabilities, and Competitive Advantage:
The Basic Relationship
INDUSTRY
COMPETITIVE KEY
ADVANTAGE STRATEGY
SUCCESS
FACTOR
ORGANIZATIONAL
CAPABILITY
RESOURCES
Tangible Intangible Human
Physical Financial Technology Reputation Culture Skill and Communi- Motivation
Knowledge cation
A Framework for Analyzing Resources and Capabilities
4. Select a strategy that best exploits
the firm’s capabilities relative to STRATEGY
external opportunities
3. Appraise the rent-generating Identify resource gaps
POTENTIAL FOR 5.
potential of resources/capabilities that need to be filled.
in term of their potential for SUSTAINABLE
Invest in replenishing
creating, sustaining, and exploiting COMPETITIVE
and augmenting
competitive advantage ADVANTAGE the firm’s resource base
2. Identify the firm’s capabilities
(what can the firm do?) CAPABILITIES
1. Identify the firm’s resources
and locate areas of strength and RESOURCES
weakness relative to competitors
Checklist for Analyzing
Organizational Strengths and Weaknesses
Management and Organization Marketing Human Resources
Management quality Distribution channels Employee experience,
Staff quality Market share education
Degree of centralization Advertising efficiency Union status
Organization charts Customer satisfaction Turnover, absenteeism
Planning, information, Product quality
Work satisfaction
control systems Service reputation
Grievances
Sales force turnover
Finance Production Research and Development
Profit margin Plant location Basic applied research
Debt-equity ratio Machinery obsolescence Laboratory capabilities
Inventory ratio Purchasing system Research programs
Return on investment Quality control New-product innovations
Credit rating Productivity/efficiency Technology innovations
Sources: Based on Howard H. Stevenson, “ Defining Corporate Strengths and Weaknesses,” Sloan Management Review 17 (spring 1976), 51-68; and [Link],
Long-Range Planning for Your Business (New York: American Management Association, 1976).
35
