Internal Enviorment Analysis

Chapter 3
The Internal Environment:

Resources, Capabilities and Core Competencies
Michael A. Hitt Michael A. Hitt R. Duane Ireland R. Duane Ireland Robert E. Hoskisson Robert E. Hoskisson
2000 South-Western College Publishing
Ch3
Strategic Inputs
Chapter 2 External Environment Chapter 3 Internal Environment
Strategic Intent Strategic Mission
The Strategic Management Process

Strategy Implementation
Chapter 10 Corporate Governance Chapter 12 Strategic Leadership Chapter 11 Structure & Control
Entrepreneurship
Strategy Formulation
Chapter 4 Business-Level Strategy Chapter 7 Acquisitions & Restructuring Chapter 5 Competitive Dynamics Chapter 8 International Strategy Chapter 6 Corporate-Level Strategy Chapter 9 Cooperative Strategies
Strategic Actions
Chapter 13
& Innovation
Outcomes
Strategic
Feedback
Strategic Competitiveness Above Average Returns
Ch3
External Environment
What the Firm Might Do
Chapter 2
Sustainable Competitive Advantage

Chapter 3
Internal Environment
What the Firm Can Do
Ch3
Discovering Core Competencies

Competitive Advantage
Gained through Core Competencies
Strategic Competitiveness
Above-Average Returns
Core Competencies
Sources of Competitive Advantage
Capabilities
Teams of Resources
Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable
Value Chain Analysis

* Outsource
Resources
* Tangible * Intangible
Ch3
Key Questions for Managers in Internal Analysis

How do we assemble bundles of Resources, Capabilities and Core Competencies to create VALUE for customers? And... Will environmental changes make our core competencies obsolete? Are substitutes available for our core competencies? Are our core competencies easily imitated?
Ch3
Conditions Affecting Managerial Decisions About Resources, Capabilities and Core Competencies Uncertainty
regarding characteristics of the general and the industry environments, competitors actions, and customers preferences.
Complexity
regarding the interrelated causes shaping a firms environments and perceptions of the environments
Intraorganizational Conflicts
among people making managerial decisions and those affected by them
Ch3
Resources
Ch3
Resources
What a firm Has...
What a firm has to work with: its assets, including its people and the value of its brand name
Ch3
Resources
What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name
Resources represent inputs into a firms production process... such as capital equipment, skills of employees, brand names, finances and talented managers
Ch3
Resources
What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firms production process... such as capital equipment, skills of employees, brand names, finances and talented managers
Some genius invented the Oreo. Were just living off the inheritance. F. Ross Johnson,
Former President & CEO, RJR Nabisco
Ch3-
Resources
Tangible Resources
* * * * Financial Physical Human Resources Organizational
What a firm Has...

What a firm has to work with: its assets, including its people and the value of its brand name Resources represent inputs into a firms production process... such as capital equipment, skills of employees, brand names, finances and talented managers Some genius invented the Oreo. Were just living off the inheritance. F. Ross Johnson,
Former President & CEO, RJR Nabisco
Intangible Resources
* Technological * Innovation * Reputation
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Capabilities
Teams of Resources
Resources
Ch3-
Capabilities
What a firm Does...
Capabilities represent: the firms capacity or ability to integrate individual firm resources to achieve a desired objective.
Ch3-
Capabilities
What a firm Does...
Capabilities represent: the firms 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 firms 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.
Ch3-
Capabilities
What a firm Does...
Capabilities represent: the firms 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 firms 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.
Ch3-

Core Competencies
Capabilities
Teams of Resources
Resources
Ch3-
Core Competencies
What a firm Does... that is Strategically Valuable
are the essence of what makes an organization unique in its ability to provide value to customers.
Leonard-Barton, Bowen, Clark, Holloway & Wheelwright
McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.
Ch3-

Core Competencies
Capabilities
Teams of Resources
Criteria of Sustainable Advantages

* * * * Valuable Rare Costly to Imitate Nonsubstitutable
Resources
* Outsource
Ch3-
Core Competencies
For a strategic capability to be a Core Competency, it must be:
Valuable Rare Costly to Imitate Nonsubstitutable
Ch3-
Core Competencies
Valuable
Capabilities that help a firm neutralize threats or exploit opportunities
Rare
Capabilities that are not possessed by many others
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity
Ch3-
What Criteria Make Core Competencies Costly to Imitate?

An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances Example: Disney created Mickey Mouse at a time when animated motion pictures were new
Unique Historical Conditions
Causal Ambiguity
This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage
Social Complexity
Occurs when the firms capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firms reputation with suppliers and customers
Ch3-
Core Competencies
Core Competencies must be: Valuable
Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment Capabilities that are possessed by few, if any, current or potential competitors
Rare
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity
Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firmspecific knowledge or trust-based relationships
Ch3-
Core Competencies
Resources Core Competence
Inputs to a firms production process
A strategic capability
The source of
Capability
Integration of a team of resources
Does the capability satisfy the criteria of sustainable competitive advantage?
YES
NO
Capability
A nonstrategic team of resources
Ch3-
Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Valuable Rare Costly to Imitate Nonsubstitutable Competitive Performance Consequences Implications Competitive Disadvantage Competitive Parity Below Average Returns Average Returns
NO YES
NO NO
NO NO
NO YES/NO
YES
YES
NO
YES/NO
Temporary Aver./Above Competitive Average Advantage Returns Sustainable Competitive Advantage Above Average Returns
YES
YES
YES
YES
Ch3-

Core Competencies
Capabilities
Teams of Resources

Resources
* Outsource
Ch3-
Identifying Resources and Capabilities That Can Add Value
Support Activities
Primary Activities
Ch3-
Support Activities
Inbound Logistics
Primary Activities
Ch3-
Support Activities
Primary Activities
Operations
Inbound Logistics
Ch3-
Support Activities
Operations
Primary Activities
Outbound Logistics
Inbound Logistics
Ch3-
Support Activities
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Ch3-
Support Activities
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Service
Ch3-
Support Activities
Procurement
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Service
Ch3-
Support Activities
Technological Development Procurement
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Service
Ch3-
Support Activities
Human Resource Management Technological Development Procurement
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Service
Ch3-
Firm Infrastructure
Support Activities
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Service
Ch3-
Firm Infrastructure
Support Activities
M A RG IN
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Service M A RG IN
Ch3-
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Support Activities
M A RG IN
Operations
Outbound Logistics
Primary Activities
Marketing & Sales
Inbound Logistics
Service M A RG IN
Ch3-
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
FirmResource Management Infrastructure Human

Support Activities
M Human Resource Management purchase a portion Firms often A Technological Development RG of their value-creating activities IN from Technological Development specialty external suppliers Procurement
who can perform these functions more efficiently
Procurement
Operations
Outbound Logistics
Marketing & Sales
Inbound Logistics
Inbound Logistics
Operations
Outbound Logistics
Marketing & Sales
Primary Activities
Service M A RG IN
Service
Ch3-
Strategic Rationales for Outsourcing

Improve Business Focus
Lets company focus on broader business issues by having outside experts handle various operational details The specialized resources of outsourcing providers makes worldclass capabilities available to firms in a wide range of applications Achieves re-engineering benefits more quickly by having outsiders-who have already achieved world-class standards--take over process Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities
Provide Access to World-Class Capabilities
Accelerate Business Re-Engineering Benefits Share Risks
Permits firm to redirect efforts from non-core activities toward those that serve customers more effectively Ch3-
Free Resources for Other Purposes
To capitalize on the usefulness of the Value Chain concept...
it is important to recognize that...
Ch3-
Value Chains are part of a Total Value System

Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Ch3-

Firm Value Chain Channel Value Chain Buyer Value Chain
Supplier Value Chain
Upstream Value Perform valuable activities that complement the firms activities
Ch3-

Supplier Value Chain Firm Value Chain Buyer Value Chain
Channel Value Chain
Each firm must eventually find a way to become a part of some buyers value chain
Ch3-

Supplier Value Chain Firm Value Chain Channel Value Chain
Each firm must eventually find a way to become a part of some buyers value chain
Buyer Value Chain
Ultimate basis for differentiation is the ability to play a role in a buyers value chain
This creates VALUE!!
Ch3-

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain
Each firm must eventually find a way to become a part of some buyers value chain Ultimate basis for differentiation is the ability to play a role in a buyers value chain This creates VALUE!!
Value chains vary for firms in an industry, reflecting each firms unique qualities: History Strategy Success at Implementation
Ch3-
Core Competencies--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 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 firms ability to grow and adapt to environmental change or competitive threats
Ch3-

Core Competencies
Capabilities
Teams of Resources

Resources
* Outsource
Ch3-
Strategic Intent Strategic Intent Strategic Mission
Ch3-
Strategic Intent
Ch3-
Strategic Intent
Leveraging of a firms resources, capabilities and core competencies to accomplish what may appear to be unattainable goals in the competitive environment
Strategic Mission
A statement of the firms unique purpose and the scope of its operations in product market terms
Ch3-

Competitive Advantage
Gained through Core Competencies
Core Competencies
Capabilities
Teams of Resources

Resources
* Outsource
Ch3-

Internal Enviorment Analysis

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Chapter 3

The Internal Environment:

Chapter 2 External Environment Chapter 3 Internal Environment

Strategic Intent Strategic Mission

The Strategic Management Process

Strategic Competitiveness Above Average Returns

Sustainable Competitive Advantage

Discovering Core Competencies

Criteria of Sustainable Advantages * * * * Valuable Rare Costly to Imitate Nonsubstitutable

Value Chain Analysis

Key Questions for Managers in Internal Analysis

Discovering Core Competencies

What a firm Has...

What a firm Has...

What a firm Has...

What a firm Has...

Discovering Core Competencies

What a firm Does...

What a firm Does...

What a firm Does...

Discovering Core Competencies

What a firm Does... that is Strategically Valuable

Discovering Core Competencies

Criteria of Sustainable Advantages

What a firm Does... that is Strategically Valuable

Valuable Rare Costly to Imitate Nonsubstitutable

What a firm Does... that is Strategically Valuable

Capabilities that help a firm neutralize threats or exploit opportunities

What Criteria Make Core Competencies Costly to Imitate?

Unique Historical Conditions

What a firm Does... that is Strategically Valuable

Inputs to a firms production process

Integration of a team of resources

Does the capability satisfy the criteria of sustainable competitive advantage?

A nonstrategic team of resources

Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

Discovering Core Competencies

Criteria of Sustainable Advantages

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Marketing & Sales

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Marketing & Sales

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Marketing & Sales

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis

Technological Development Procurement

Marketing & Sales

Identifying Resources and Capabilities That Can Add Value

Value Chain Analysis