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PowerPoint slides by: R. Dennis Middlemist Colorado State University Copyright 2004 South-Western All rights reserved. Chapter 3 The Internal Environment: Resources, Capabilities, and Core Competencies Slide 2 Copyright 2004 South-Western. All rights reserved.32 Knowledge Objectives Studying this chapter should provide you with the strategic management knowledge needed to: Explain the need for firms to study and understand their internal environment. Define value and discuss its importance. Describe the differences between tangible and intangible resources. Define capabilities and discuss how they are developed. Describe four criteria used to determine whether resources and capabilities are core competencies. Slide 3 Copyright 2004 South-Western. All rights reserved.33 Knowledge Objectives (contd) Studying this chapter should provide you with the strategic management knowledge needed to: Explain how value chain analysis is used to identify and evaluate resources and capabilities. Define outsourcing and discuss the reasons for its use. Discuss the importance of preventing core competencies from becoming core rigidities. Slide 4 Copyright 2004 South-Western. All rights reserved.34 Figure 1.1 Copyright 2004 South-Western. All rights reserved. The Strategic Management Process Slide 5 Copyright 2004 South-Western. All rights reserved.35 Discussion Questions 1.What is the difference between the resource-based and I/O perspectives of Strategic Management? How do these perspectives together form the foundation for strategic analysis? 2.What is the difference between tangible and intangible resources? What is the difference between between resources and capabilities? 3.What are the criteria to determine core competence? What is sustainable competitive advantage? Slide 6 Copyright 2004 South-Western. All rights reserved.36 Discussion Questions 4.What is the value chain? 5.What is outsourcing and when should it be used? 6.Are there risks to a sustainable competitive advantage? Slide 7 Copyright 2004 South-Western. All rights reserved.37 Competitive Advantage Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively Acquired Bundled Leveraged Over time, the benefits of any value-creating strategy can be duplicated by competitors Slide 8 Copyright 2004 South-Western. All rights reserved.38 Competitive Advantage (contd) Sustainability of a competitive advantage is a function of The rate of core competence obsolescence due to environmental changes The availability of substitutes for the core competence The difficulty competitors have in duplicating or imitating the core competence Slide 9 Copyright 2004 South-Western. All rights reserved.39 Outcomes from External and Internal Environmental Analyses Figure 3.1 Examine opportunities and threats Examine unique resources, capabilities, and competencies (sustainable competitive advantage) Slide 10 Copyright 2004 South-Western. All rights reserved.310 The Context of Internal Analysis Effective analysis of a firms internal environment (learning what the firm can do ) requires: Fostering an organizational setting in which experimentation and learning are expected and promoted Using a global mind-set Thinking of the firm as a bundle of heterogeneous resources and capabilities that can be used to create an exclusive market position Slide 11 Copyright 2004 South-Western. All rights reserved.311 Components of Internal Analysis Figure 3.2 Slide 12 Copyright 2004 South-Western. All rights reserved.312 Creating Value By exploiting their core competencies or competitive advantages, firms create value Value is measured by A products performance characteristics The products attributes for which customers are willing to pay Firms create value by innovatively bundling and leveraging their resources and capabilities Slide 13 Copyright 2004 South-Western. All rights reserved.313 Creating Competitive Advantage Core competencies, in combination with product-market positions, are the firms 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 Slide 14 Copyright 2004 South-Western. All rights reserved.314 The Challenge of Internal Analysis Strategic decisions in terms of the firms resources, capabilities, and core competencies Are non-routine Have ethical implications Significantly influence the firms ability to earn above-average returns Slide 15 Copyright 2004 South-Western. All rights reserved.315 The Challenge of Internal Analysis (contd) To develop and use core competencies, managers must have Courage Self-confidence Integrity The capacity to deal with uncertainty and complexity A willingness to hold people (and themselves) accountable for their work Slide 16 Copyright 2004 South-Western. All rights reserved.316 Conditions Affecting Managerial Decisions about Resources, Capabilities and Core Competencies Figure 3.3 SOURCE: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic Management Journal, 14: 33. Slide 17 Copyright 2004 South-Western. All rights reserved.317 Resources, Capabilities and Core Competencies Resources Are the source of a firms capabilities Are broad in scope Cover a spectrum of individual, social and organizational phenomena Alone, do not yield a competitive advantage Slide 18 Copyright 2004 South-Western. All rights reserved.318 Resources, Capabilities and Core Competencies Resources Are a firms assets, including people and the value of its brand name Represent inputs into a firms production process, such as: Capital equipment Skills of employees Brand names Financial resources Talented managers Slide 19 Copyright 2004 South-Western. All rights reserved.319 Resources, Capabilities and Core Competencies Resources Tangible resources Financial resources Physical resources Technological resources Organizational resources Intangible resources Human resources innovation resources Reputation resources Slide 20 Copyright 2004 South-Western. All rights reserved.320 Tangible Resources Financial Resources The firms borrowing capacityThe firms ability to generate internal funds Organizational Resources The firms formal reporting structure and its formal planning, controlling, and coordinating systems Physical Resources Sophistication and location of a firms plant and equipmentAccess to raw materials Technological Resources Stock of technology, such as patents, trade-marks, copyrights, and trade secrets SOURCES: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100102. Table 3.1 Slide 21 Copyright 2004 South-Western. All rights reserved.321 Intangible Resources Human Resources Knowledge Trust Managerial capabilities Organizational routines Innovation Resources Ideas Scientific capabilities Capacity to innovate Reputational Resources Reputation with customers Brand name Perceptions of product quality, durability, and reliability Reputation with suppliers For efficient, effective, supportive, and mutually beneficial interactions and relationships SOURCES: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101104. Table 3.2 Slide 22 Copyright 2004 South-Western. All rights reserved.322 Resources, Capabilities and Core Competencies Capabilities Are the firms capacity to deploy resources that have been purposely integrated to achieve a desired end state Emerge over time through complex interactions among tangible and intangible resources Often are based on developing, carrying and exchanging information and knowledge through the firms human capital Slide 23 Copyright 2004 South-Western. All rights reserved.323 Resources, Capabilities and Core Competencies Capabilities The foundation of many capabilities lies in: The unique skills and knowledge of a firms employees The functional expertise of those employees Capabilities are often developed in specific functional areas or as part of a functional area Slide 24 Copyright 2004 South-Western. All rights reserved.324 Examples of Firms Capabilities Table 3.3 Slide 25 Copyright 2004 South-Western. All rights reserved.325 Resources, Capabilities and Core Competencies Core Competencies Resources and capabilities that serve as a source of a firms competitive advantage: Distinguish a company competitively and reflect its personality Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities Slide 26 Copyright 2004 South-Western. All rights reserved.326 Resources, Capabilities and Core Competencies Core Competencies Activities that a firm performs especially well compared to competitors Activities through which the firm adds unique value to its goods or services over a long period of time Slide 27 Copyright 2004 South-Western. All rights reserved.327 Building Sustainable Competitive Advantage Four Criteria of Sustainable Competitive Advantage Valuable Rare Costly to imitate Nonsubstituable Slide 28 Copyright 2004 South-Western. All rights reserved.328 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 nameAmbiguous cause: The causes and uses of a competence are unclear Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers Nonsubstitutable CapabilitiesNo strategic equivalent Table 3.4 Slide 29 Copyright 2004 South-Western. All rights reserved.329 Building Sustainable Competitive Advantage Valuable capabilities Help a firm neutralize threats or exploit opportunities Rare capabilities Are not possessed by many others Slide 30 Copyright 2004 South-Western. All rights reserved.330 Building Sustainable Competitive Advantage 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 Slide 31 Copyright 2004 South-Western. All rights reserved.331 Building Sustainable Competitive Advantage Nonsubstitutable Capabilities No strategic equivalent Slide 32 Copyright 2004 South-Western. All rights reserved.332 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Table 3.5 Slide 33 Copyright 2004 South-Western. All rights reserved.333 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 Slide 34 Copyright 2004 South-Western. All rights reserved.334 Value Chain Analysis (contd) Primary activities involved with: A products physical creation A products sale and distribution to buyers The products service after the sale Support activities Provide the support necessary for the primary activities to take place Slide 35 Copyright 2004 South-Western. All rights reserved.335 Value Chain Analysis (contd) Value chain Shows how a product moves from 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 Slide 36 Copyright 2004 South-Western. All rights reserved.336 The Basic Value Chain Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Firm InfrastructureHuman Resource ManagementTechnological DevelopmentProcurement Slide 37 Copyright 2004 South-Western. All rights reserved.337 The Value-Creating Potential of Primary Activities Inbound logistics Activities used to receive, store, and disseminate inputs to a product (materials handling, warehousing, inventory control, etc.) Operations Activities necessary to convert the inputs provided by inbound logistics into final product form (machining, packaging, assembly, etc.) Outbound logistics Activities involved with collecting, storing, and physically distributing the product to customers (finished goods warehousing, order processing, etc.) Slide 38 Copyright 2004 South-Western. All rights reserved.338 The Value-Creating Potential of Primary Activities (contd) Marketing and sales Activities completed to provide means through which customers can purchase products and to induce them to do so (advertising, promotion, distribution channels, etc.) Service Activities designed to enhance or maintain a products value (repair, training, adjustment, etc.) Each activity should be examined relative to competitors abilities and rated as superior, equivalent or inferior Slide 39 Copyright 2004 South-Western. All rights reserved.339 The Value-Creating Potential of Primary Activities: Support Procurement Activities completed to purchase the inputs needed to produce a firms products (raw materials and supplies, machines, laboratory equipment, etc.) Technological development Activities completed to improve a firms product and the processes used to manufacture it (process equipment, basic research, product design, etc) Human resource management Activities involved with recruiting, hiring, training, developing, and compensating all personnel Slide 40 Copyright 2004 South-Western. All rights reserved.340 The Value-Creating Potential of Primary Activities: Support (contd) 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 external opportunities and threats Identify resources and capabilities Support core competencies Each activity should be examined relative to competitors abilities and rated as superior, equivalent or inferior Slide 41 Copyright 2004 South-Western. All rights reserved.341 Outsourcing The purchase of a value-creating activity from an external supplier Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities By forming and emphasizing fewer capabilities A firm can concentrate on those areas in which it can create value Specialty suppliers can perform outsourced capabilities more efficiently Slide 42 Copyright 2004 South-Western. All rights reserved.342 Operations Marketing and Sales Firm Infrastructure Outsourcing Decisions A firm may outsource all or only part of one or more primary and/or support activities. Outsourced activity Inbound Logistics Service Outbound Logistics Human Resource ManagementTechnological DevelopmentProcurement Slide 43 Copyright 2004 South-Western. All rights reserved.343 Strategic Rationales for Outsourcing Improve business focus Lets a 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 Slide 44 Copyright 2004 South-Western. All rights reserved.344 Strategic Rationales for Outsourcing (contd) Accelerate business re-engineering benefits Achieves re-engineering benefits more quickly by having outsiderswho have already achieved world-class standardstake over process Sharing risks Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Frees resources for other purposes Redirects efforts from non-core activities toward those that serve customers more effectively Slide 45 Copyright 2004 South-Western. All rights reserved.345 Outsourcing Issues Greatest value Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity Evaluating resources and capabilities Do not outsource activities in which the firm itself can create and capture value Environmental threats and ongoing tasks Do not outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks Slide 46 Copyright 2004 South-Western. All rights reserved.346 Outsourcing Issues (contd) Nonstrategic team of resources Do not outsource capabilities that are critical to the firms success, even though the capabilities are not actual sources of competitive advantage Firms knowledge base Do not outsource activities that stimulate the development of new capabilities and competencies Slide 47 Copyright 2004 South-Western. All rights reserved.347 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 now generate inertia and stifle innovation Determining what the firm can do through continuous and effective analyses of its internal environment increases the likelihood of long-term competitive success Slide 48 Copyright 2004 South-Western. All rights reserved.348 Cautions and Reminders (contd) Determining what the firm can do through continuous and effective analyses of its internal environment increase the likelihood of long-term competitive success