Lecture - 3 Sm

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THE INTERNAL

ENVIRONMENT:

RESOURCES, CAPABILITIES, AND CORE COMPETENCIES

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Internal Assessment

“Weak leadership can wreck (crash) the soundest strategy.”

– Sun Tzu

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INTRODUCTION

Competitive advantagesand thedifferences

created in firm performance are often strongly

related to the resources firms hold and how they

are managed

Resources are the foundation for strategy and

unique bundles of resources generate competitive

advantages that lead to wealth creation.

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COMPETITIVE ADVANTAGE

Firms achievestrategic competitivenessand earn

above-average returnswhen their core

competencies are effectively:

Acquired.

Bundled.

Leveraged.(to derive additional business/value)

To take advantage of opportunities in the external

environment in ways that create value for customers

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People are an especially critical resource for

helping organizations learn how to continuously

innovate as a means of achieving successful

growth

Wherever talent goes, innovation, creativity and

economic growth are sure to followRichard Florida

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BE CAREFUL

Fact

Over time, thebenefits of any value-creating strategy

can be duplicatedby competitors

key reason for having employees who know how to

manage resources

Competitive advantage have limited life

The question is notif itwill happen, butwhen

Have employeeswho know how to manage resources

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How do we assemblebundles of Resources, Capabilities

and Core Competencies to createVALUE forcustomers?

Willenvironmental changes make our corecompetencies obsolete?

And...

Aresubstitutes available for our core competencies?

Are our core competencies easilyimitated?

Key Questions for Managers

in Internal Analysis

Key Questions for Managers

in Internal Analysis

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CHALLENGE

To effectively manage current

core competence while

simultaneously developing new

ones

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THE CHALLENGE

When firms develop a continuous stream of

capabilities that contribute to competitive

advantages:they achieve

strategic competitiveness

earn above-average returns, and

remain ahead of competitors

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EXTERNAL ANALYSES’ OUTCOMES

By studying the external environment,

firms identify what theymight choose to do.

Opportunities andthreats

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INTERNAL ANALYSES’ OUTCOMES

By studying the internal environment,

firms identifywhat theycan do

Unique resources,

capabilities, andcompetencies(required for sustainablecompetitiveadvantage)

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External EnvironmentExternal EnvironmentWhat the Firm Might DoWhat the Firm Might Do

Internal EnvironmentInternal Environment

What the FirmCan DoWhat the FirmCan Do

• Vision

• Mission

•Strategies selection

& implementation

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CONDITIONS ASSOCIATED WITH ANALYSINGTHE FIRM’S INTERNAL ORGANISATION

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THE CONTEXT OF INTERNAL

ANALYSIS

Global EconomyTraditional sources of advantages(labour costs, access to financial resources

& raw materials and protected or regulated markets)can be overcome by

competitors’ international strategies and by the flow of resources

throughout the global economy.

Global Mind-Set (use)The ability to analyze, understand, and manage (if in a managerial

position) an internal organization in ways that are not dependent on

the assumptions of a single country, culture, or context

Firms populated with people having a global mind-set have a “keysource of long-term competitive advantage in the global marketplace.”

Evaluators examinePortfolio of resources and the firm’s bundle of heterogeneous

resources and capabilities that have been created. (combination)

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Understanding how toleveragethe firm’s unique

bundle of resources and capabilities is a key

outcome; decision makers seek when analyzing

the internal organization

THE CONTEXT OF INTERNAL

ANALYSIS

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COMPONENTS OF INTERNAL ANALYSIS LEADING

TO COMPETITIVE ADVANTAGE AND STRATEGIC

COMPETITIVENESS

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CREATING VALUE Firms create value for customersBy exploiting core

competencies to meet if not exceed the demanding standards ofglobal competition,

Value is measured by:

Product performance characteristicsProduct attributes for which customers are willing to pay

Why people pay for Daewoo

Firms with a competitive advantage offer value to customers

that is superior to the value competitors provide

Firms create value by innovatively bundling and leveraging their

resources and capabilities.

Superior value Above-average returns. Otherwise

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Firms fail to understand what customers value

GM focused on visual design to create value for

buyers

People buying cars and trucks valued durability,

reliability, good fuel economy and low cost of

operation

CREATING VALUE

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CREATING COMPETITIVE

ADVANTAGE

SM Initially; understanding of characteristics of

industry and placement relative to competitors

Under estimation of firm’s resources and capabilities

Core competencies,incombination withproduct-

market positions,are the firm’s most important

sources of competitive advantage.

Core competencies of a firm, in addition to its

analysis of its general, industry, and competitor

environments, should drive its selection of strategies.

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THE CHALLENGE OF INTERNAL

ANALYSIS

Strategic decisions in terms of the firm’s

resources, capabilities, and core competencies:

Are non-routine.

Have ethical implications.

Significantly influence the firm’s ability to earn

above-average returns.

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Making decisions involving the firm’s assetsIdentifying

Developing

Deploying and protecting

resources, capabilities and core competencies

May seem easy

Polaroid corporationMis-identification

Capability as core competence

Decision makers continued to believe that the skills it used to build

its instant film cameras were highly relevant at the time its

competitors were developing and using the skills required to

introduce digital cameras


ANALYSIS

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ANALYSIS (CONT’D)

To develop and use core competencies, managers

must have:

Courage

Self-confidenceIntegrity

The capacity to deal with uncertainty and complexity

A willingness to hold people (and themselves)

accountable for their work

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CONDITIONS AFFECTING MANAGERIAL

DECISIONS ABOUT RESOURCES, CAPABILITIES,

AND CORE COMPETENCIES

New proprietary

technologies

Rapidly changing economiand political trends

Transformation in societalvalues

Shifts in customer

demands

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RESOURCES, CAPABILITIES AND CORE COMPETENCIES

Resources Are the source of a firm’s

capabilities.

Are broad in scope.

Cover a spectrum of

individual, social andorganizational phenomena.

Alone, do not yield a

competitive advantage.

Discovering Core

Competencies

Resources•Tangible•Intangible

Capabilities

CoreCompetencies

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RESOURCES

Resources Are a firm’s assets,

including people and

the value of its brand

name.Represent inputs into

a firm’s production

process, such as:Capital equipment

Skills of employeesBrand namesFinancial resourcesTalented managers

Types of Resources

Tangible resourcesFinancial resources

Physical resources

Technological resources

Organizational

resources

Intangible resourcesKnowledge

trust

Managerial capabilities

Org routines

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TANGIBLE RESOURCES (HARD TO LEVERAGE, DECREASES BY SHARING)

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Capabilities

Represent the capacity to deploy

resources that have been

purposely integrated to achieve a

desired end state

Emerge over time through complexinteractions among tangible and

intangible resources

Often are based on developing,

carrying and exchanging

information and knowledgethrough the firm’s human capital

Discovering Core

Competencies


Capabilities

CoreCompetencies

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Capabilities (cont’d)The foundation of many

capabilities lies in:The unique skills and knowledge

of a firm’s employeesThe functional expertise of those

employees

Capabilities are often developed

in specific functional areas or

as part of a functional area.

Discovering Core

Competencies


Capabilities

CoreCompetencies

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Four criteria for determining

strategic capabilities:

Value

Rarity

Costly-to-imitateNonsubstitutability

Discovering Core

Competencies


Capabilities

CoreCompetencies

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Core Competencies

Resources and capabilities that are

the sources of a firm’s competitive

advantage:

Distinguish a company

competitively and reflect itspersonality.

Emerge over time through an

organizational process of

accumulating and learninghow to deploy different

resources and capabilities.

Discovering Core

Competencies


Capabilities

CoreCompetencies

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Core Competencies

Activities that a firm performs

especially well compared to

competitors.

Activities through which the firmadds unique value to its goods or

services over a long period of time.

Discovering Core

Competencies


Capabilities

CoreCompetencies

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BUILDING CORE COMPETENCIES

Four Criteria of Sustainable

Competitive Advantage

Valuable capabilities

Rare capabilities

Costly to imitateNonsubstituable

Discovering Core

Competencies

• Valuable• Rare• Costly to imitate• Nonsubstitutable

Four Criteria ofSustainable

Advantages

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BUILDING SUSTAINABLE

COMPETITIVE ADVANTAGE Valuable capabilities

Help a firm neutralize

threats or exploit

opportunities.

Rare capabilities Are not possessed by many

others.

Discovering Core

Competencies



Advantages

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COMPETITIVE ADVANTAGECostly-to-Imitate Capabilities

Unique Historical Conditions A unique and a valuable

organizational culture or brand name

(Mustang)

Ambiguous causeLink between capabilities and

competitive advantage - unclearThe causes and uses of a competence

are unclear

SouthWest Air

Social complexityInterpersonal relationships, trust,

and friendship among managers,

suppliers, and customers

Discovering Core

Competencies

• Valuable• Rare• Costly to Imitate• Nonsubstitutable


Advantages

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COMPETITIVE ADVANTAGE

Nonsubstitutable CapabilitiesNo strategic equivalent

Firm-specific knowledge

Organizational culture

Superior execution of the chosen

business model

Discovering Core

Competencies



Advantages

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OUTCOMES FROM COMBINATIONS

OF THE FOUR CRITERIA

V a l u a b l e ?

R a r e ? C o s t l y t o I m i t a

t e ?

N o n s u b s t i t u t a b

l e

?

Competitive

Consequences

Performance

Implications

NoNo NoNo NoNo NoNo Competitive

Disadvantage

Competitive

DisadvantageBelow Average

Returns

Below Average

Returns

Yes Yes NoNo NoNo Yes/

No

Yes/

NoCompetitive

Parity

Competitive

Parity Average Returns Average Returns

Yes Yes Yes Yes NoNo Yes/

No

Yes/

NoTemporary Com-

petitive Advantage

Temporary Com-

petitive Advantage Above Average to

Average Returns

Above Average to

Average Returns

Yes Yes Yes Yes Yes Yes Yes Yes Sustainable Com-

petitive Advantage

Sustainable Com-

petitive Advantage Above Average

Returns

Above Average

Returns

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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.

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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 saleSupport Activities

Provide the assistance necessary for the primary

activities to take place.

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VALUE CHAIN ANALYSIS (CONT’D)

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

To perform a value-creating activity that competitors

cannot complete

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THE BASIC VALUE CHAIN

EXAMININGTHEVALUECREATING

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Inbound Logistics Activities, such as materials handling, warehousing, and inventory

control, 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. Machining, packaging, assembly,

and equipment maintenance are examples of operations activities.

Outbound Logistics

Activities involved with collecting, storing, and physically

distributing the final product to customers. Examples of these

activities include finished goods warehousing, materials handling,

and order processing.

EXAMINING THE VALUE CREATING

POTENTIAL OF PRIMARY

ACTIVITIES


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Marketing and Sales Activities completed to provide means through which customers can

purchase products and to induce them to do so. To effectively market

and sell products, firms develop advertising and promotional

campaigns, select appropriate distribution channels, and select,

develop, and support their sales force.

Service Activities designed to enhance or maintain a product’s value. Firms

engage in a range of service-related activities, including installation,

repair, training, and adjustment.

Each activity should be examined relative to competitors’

abilities. Accordingly, firms rate each activity as superior,

equivalent, or inferior.


POTENTIAL OF PRIMARY

ACTIVITIES


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Procurement Activities completed to purchase the inputs needed to produce a firm’s

products. Purchased inputs include items fully consumed during the

manufacture of products (e.g., raw materials and supplies, as well as

fixed assets—machinery, laboratory equipment, office equipment, and

buildings).

Technological Development Activities completed to improve a firm’s product and the processes used

to manufacture it. Technological development takes many forms, such

as process equipment, basic research and product design, and servicing

procedures.


POTENTIAL OF SUPPORT

ACTIVITIES


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Human Resource Management Activities involved with recruiting, hiring, training, developing, and

compensating all personnel.

Firm InfrastructureFirm infrastructure includes activities such as general management,planning, finance, accounting, legal support, and governmental

relations that are required to support the work of the entire value

chain. Through its infrastructure, the firm strives to effectively and

consistently identify external opportunities and threats, identifyresources and capabilities, and support core competencies.

Each activity should be examined relative to competitors’

abilities. Accordingly, firms rate each activity assuperior,

equivalent,orinferior.

NNG V U CR NG

POTENTIAL OF SUPPORT

ACTIVITIES

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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

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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.

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OF SUPPORT ACTIVITIES:

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.

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OF SUPPORT ACTIVITIES: (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 externalopportunities and threats

Identify resources and capabilitiesSupport core competencies

Each activity should be examined relative to competitor’s

abilities and rated as superior, equivalent or inferior.

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OUTSOURCING

The purchase of a value-creating activity from an

external supplierFew 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.

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OUTSOURCING DECISIONS

A /rm ma0

outsource all or onl0part o1 one or moreprimar0 and2orsupport acti3ities*

M a r g i n

M ar g in

Primary Activities

S u p p o r t A c t i v i t i e s Service

F i r m

I n f r a s t r u c t u r e

P r o c u r e

m e n t

H u m a n R e s o u r c e M g m

t .

T e c h n o l o g i c a l D e v e l o p m e n t

Marketing and Sales

Outbound Logistics

Operations

Inbound Logistics

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STRATEGIC RATIONALES FOR

OUTSOURCING

Improving business focusHelps a company focus on broader business issues by

having outside experts handle various operational

details.

Enhanced flexibility

Providing access to world-class capabilities

The specialized resources of outsourcing providersmakes world-class capabilities available to firms in a

wide range of applications.

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STRATEGIC RATIONALES FOR

OUTSOURCING (CONT’D)

Accelerating re-engineering benefits Achieves re-engineering benefits more quickly by

having outsiders—who have already achieved world-

class standards—take over process.

Sharing risksReduces investment requirements and makes firm

more flexible, dynamic and better able to adapt to

changing opportunities.

Freeing resources for other purposesRedirects efforts from non-core activities toward

those that serve customers more effectively.

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OUTSOURCING ISSUES

Loss of jobs within companies

Potential loss in firms’ innovative ability

Innovation and technological uncertainty are twoimportant issues to consider

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OUTSOURCING ISSUES

Seeking greatest valueOutsource only to firms possessing a core competencein terms of performing the primary or supporting theoutsourced activity.

Evaluating resources and capabilities

Do not outsource activities in which the firmitself can create and capture value.

Environmental threats and ongoing tasks

Do not outsource primary and support activitiesthat are used to neutralize environmental threats orto complete necessary ongoing organizational tasks.

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OUTSOURCING ISSUES (CONT’D)

Nonstrategic team resources

Do not outsource capabilities critical to the firm’ssuccess, even though the capabilities are not actual

sources of competitive advantage.

Firm’s knowledge base

Do not outsource activities that stimulate the

development of new capabilities and competencies.

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CAUTIONS AND REMINDERS

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—former core competencies that now

generate inertia and stifle innovation.

Determining what the firm can do through

continuous and effective analyses of its internal

environment will increase the likelihood of long-

term competitive success.

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To verify that the appropriate primary and

support activities are outsourced, managers

should have four skills:

Strategic thinking

Deal making

Partnership governance

Change management

CAUTIONS AND REMINDERS

WHATARETHEFIRM’SSTRENGTHS

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WHAT ARE THE FIRM’S STRENGTHS,WEAKNESSES, OPPORTUNITIES AND

THREATS

S W O T represents the first letter inS trengths

W eaknesses

O pportunities

T hreats

Strategy-making must be well-matched toboth A firm’s resource strengths and weaknesses

A firm’sbest market opportunities and external threats to

its well-being

S W

O T

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SWOT ANALYSIS

STRENGTH – INTERNAL

WEAKNESS – INTERNAL

OPPORTUNITIES –EXTERNAL

THREATS -EXTERNAL

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IDENTIFYING RESOURCE STRENGTHS

AND COMPETITIVE CAPABILITIES

Astrength is something a firm does well or a

characteristic that enhances its competitiveness Valuable competencies or know-how

Valuable physical assets

Valuable human assets Valuable organizational assets

Valuable intangible assets

Important competitive capabilities

An attribute that places a company in

a position of market advantage

Alliances or cooperative ventures

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IDENTIFYING RESOURCE

WEAKNESSES

AND COMPETITIVE DEFICIENCIES

Aweakness is something a firm lacks,

does poorly, or a condition placing it at

a disadvantage Resource weaknesses relate to

Deficiencies in know-how or expertise or

competencies

Lack of important physical, organizational,

or intangible assets

Missing capabilities in key areas

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IDENTIFYING EXTERNAL THREATS

Emergence of cheaper/better technologiesIntroduction of better products by rivalsIntensifying competitive pressures

Onerous regulations A rise in interest ratesPotential of a hostile takeoverUnfavorable demographic shifts

Adverse shifts in foreign exchange ratesPolitical upheaval in a country

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ROLE OF SWOT ANALYSIS IN

CRAFTING A BETTER STRATEGY

Developing a clear understanding of a company’sResource strengthsResource weaknessesBest opportunities

External threats

Drawing conclusionsabout how best to deployresources in light of the company’s internal

and external situation

Thinking strategically about how to strengthen thecompany’s resource base for the future

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Changes in the external

environment do not cause core

competencies to become core

rigidities; rather, strategic myopia

and inflexibility on the part of

managers are the causes

Documents

Lecture - 3 Sm