Chapter 3

1. Chapter 3 The Internal Environment: Resources, Capabilities and Core Competencies Michael A. Hitt R. Duane Ireland Robert E. Hoskisson ©2000 South-Western College Publishing

2. Chapter 2 External Environment What the Firm Might Do Sustainable Competitive Advantage Chapter 3 Internal Environment What the Firm Can Do

3. Strengths Weaknesses Opportunities Threats SWOT Analysis

4. It is an easy-to-use tool for developing an overview of a company’s strategic situation It forms a basis for matching your company’s strategy to its situation The purpose of SWOT Analysis

5. A STRENGTH is something a company is good at doing or a characteristic that gives it an important capability. Possible Strengths: Name recognition Proprietary technology Cost advantages Skilled employees Loyal Customers Strengths

6. A WEAKNESS is something a company lacks or does poorly (in comparison to others) or a condition that places it at a disadvantage Possible Weaknesses: Poor market image Obsolete facilities Internal operating problems Poor marketing skills Weaknesses

7. By examining strengths, you can discover untapped potential or identify distinct competencies that helped you succeed in the past. By examining weaknesses, you can identify gaps in performance, vulnerabilities, and erroneous assumptions about existing strategies. Strengths and Weakness form a basis for INTERNAL analysis

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

9. 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?

10. Discovering Core Competencies Resources * Tangible * Intangible

11. Resources What a firm Has... What a firm has to work with: its assets, including its people and the value of its brand name

12. 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 firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers

13. 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 firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers “Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson, Former President & CEO, RJR Nabisco

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

15. Discovering Core Competencies Capabilities Teams of Resources Resources * Tangible * Intangible

16. Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities What a firm Does...

17. Capabilities represent: the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective. Capabilities What a firm Does... 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.

18. 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 havestrategic value and can lead tocompetitive advantage.

19. Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Teams of Resources Resources * Tangible * Intangible

20. 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.

21. Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Criteria of Sustainable Teams of Resources Advantages Resources * Valuable * Tangible * Rare * Intangible Costly to Imitate * * Nonsubstitutable * Outsource

22. Core Competencies What a firm Does... Valuable Rare Costly to Imitate Nonsubstitutable that is Strategically Valuable For a strategic capability to be a Core Competency, it must be:

23. Core Competencies What a firm Does... that is Strategically Valuable 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 Rare Capabilities that are possessed by few, if any, current or potential competitors 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 firm-specific knowledge or trust-based relationships

24. Discovering Core Competencies Discovering Core Competencies Core Competencies Sources of Competitive Advantage Capabilities Value Criteria of Chain Sustainable Teams of Resources Analysis Advantages Resources * Valuable * Tangible * Rare * Intangible Costly to Imitate * * Nonsubstitutable * Outsource

25. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Primary Activities

26. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Inbound Logistics Primary Activities

27. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Inbound Logistics Operations Primary Activities

28. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Inbound Logistics Outbound Logistics Operations Primary Activities

29. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Marketing & Sales Inbound Logistics Outbound Logistics Operations Primary Activities

30. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Primary Activities

31. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Primary Activities

32. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Support Activities Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Primary Activities

33. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Human Resource Management Support Activities Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Primary Activities

34. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Firm Infrastructure Human Resource Management Support Activities Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics Operations Primary Activities

35. Value Chain Analysis Identifying Resources and Capabilities That Can Add Value Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics MARGIN Operations Primary Activities

36. Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Service Marketing & Sales Inbound Logistics Outbound Logistics MARGIN Operations Primary Activities

37. Outsourcing Strategic Choice to Purchase Some Activities From Outside Suppliers Firm Infrastructure Human Resource Management Human Resource Management Firms often purchase a portionof their value-creating activities from specialty external suppliers who can perform these functionsmore efficiently Support Activities Technological Development MARGIN Technological Development Procurement Procurement Service Service Marketing & Sales Inbound Logistics Outbound Logistics MARGIN Operations Outbound Logistics Marketing & Sales Operations Inbound Logistics Primary Activities

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

39. 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 firm’s ability to grow and adapt to environmental change or competitive threats Core Competencies--Cautions and Reminders

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