Module 3

Part 2
The Internal Organization: Resources,
Capabilities, Core Competencies, and
Competitive Advantages
LEARNING OBJECTIVES

Studying this chapter should provide you with the strategic

management knowledge needed to:
3-1 Explain why firms need to study and understand their internal
organization.
3-2 Define value and discuss its importance.
3-3 Describe the differences between tangible and intangible resources.
3-4 Define capabilities and discuss their development.
3-5 Define four criteria used to determine if resources and capabilities are
core competencies.
3-6 Explain how firms analyze their value chain to determine where they are
able to create value when using their resources, capabilities, and core
competencies.
3-7 Define outsourcing and discuss reasons for its use.
3-8 Discuss the importance of identifying internal strengths and weaknesses.
3-9 Describe the importance of avoiding core rigidities.
 Capabilities

• Capabilities are:
• Created by combining individual tangible and intangible
resources
• Used to complete the organizational tasks required to produce,
distribute, and service the goods or services the firm provides to
customers for the purpose of creating value for them
• The foundation for building core competencies and hopefully
competitive advantages
• Often based on developing, carrying, and exchanging
information and knowledge through the firm’s human capital
• Often developed in specific functional areas or in a part of a
functional area
 Example of Firms’ Capabilities
Functional Areas Capabilities Examples of Firms

Distribution • Effective use of logistics management • Walmart

techniques
Human Resources • Motivating, empowering, and retaining • Microsoft
employees
Management • Effective and efficient control of inventories • Walmart
Information Systems through point-of-purchase data collection
methods
Marketing • Effective promotion of brand-name products • Procter & Gamble
• Effective customer service • Ralph Lauren Corp.
• Innovative merchandising • McKinsey & Co.
• Nordstrom Inc.
• Crate & Barrel
 Example of Firms’ Capabilities
Functional Areas Capabilities Examples of Firms

Management • Ability to envision the future of clothing • Hugo Boss

• Zara
Manufacturing • Design and production skills yielding • Komatsu
reliable products • Witt Gas Technology
• Product and design quality • Sony
• Miniaturization of components and products
Research & • Innovative technology • Caterpillar
Development • Development of sophisticated elevator • Otis Elevator Co.
control solutions • Chaparral Steel
• Rapid transformation of technology into new • Thomson Consumer
products and processes Electronics
• Digital technology
 Core Competencies

• Core competencies:
• Are capabilities that serve as a source of competitive advantage
for a firm over its rivals
• Emerge over time through an organizational process of
accumulating and learning how to deploy different resources and
capabilities
• The activities the company performs especially well compared to
competitors
• The activities through which the firm adds unique value to the
goods or services it sells to customers
 Building Core Competencies

• Two tools help firms identify their core competencies:

1. The four criteria of sustainable competitive advantage
2. Value chain analysis
 The Four Criteria of Sustainable Competitive
Advantage
• Core competencies are capabilities that are:
• Valuable
• Valuable capabilities allow the firm to exploit opportunities or
neutralize threats in its external environment.
• Rare
• Rare capabilities are capabilities that few, if any, competitors
possess.
• Costly to imitate
• Costly-to-imitate capabilities are capabilities that other firms
cannot easily develop.
• Nonsubstitutable
• Nonsubstitutable capabilities are capabilities that do not
have strategic equivalents.
 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 name
• Ambiguous cause: The causes and uses of a
competence are unclear
• Social complexity: Interpersonal relationships, trust, and
friendship among managers, suppliers, and customers
Nonsubstitutable Capabilities • No strategic equivalent
 The Four Criteria of Sustainable Competitive
Advantage
• Capabilities failing to satisfy the four criteria are not
core competencies, meaning that although every core
competence is a capability, not every capability is a core
competence.
• In slightly different wording:
• For a capability to be a core competence, it must be valuable and
unique from a customer’s point of view.
• For a core competence to be a potential source of competitive
advantage, it must be inimitable and
nonsubstitutable by competitors.
Outcomes from Combinations of the Criteria for
Sustainable Competitive Advantage
 Value Chain Analysis

• Value chain analysis allows the firm to understand the

parts of its operations that create value and those that
do not.
• Understanding these issues is important because the firm earns
above-average returns only when the value it creates is greater
than the costs incurred to create that value.
 Value Chain Analysis

• The value chain is:

• A template that firms use to analyze their cost position and to
identify the multiple means that can be used to facilitate
implementation of a chosen strategy
• Segmented into value chain activities and support functions
• Value chain activities are activities or tasks the firm completes
in order to produce products and then sell, distribute, and service
those products in ways that create value for customers.
• Support functions include the activities or tasks the firm
completes in order to support the work being done to produce,
sell, distribute, and service the products the firm is producing.
• A firm can develop a capability and/or a core competence
in any of the value chain activities and support functions.
• When it does so, it has the ability to create value for customers.
A Model of the Value Chain
Creating Value through Value Chain Activities
Creating Value through Support Functions
 Outsourcing

• When the firm cannot create value in either a value

chain activity or a support function, outsourcing is
considered.
• Outsourcing is the purchase of a value-creating activity or a
support function activity from an external supplier.
• Firms engaging in effective outsourcing:
• Increase their flexibility
• Mitigate risks
• Reduce their capital investments
• Firms should use outsourcing only for activities where
they:
• Cannot create value
• Are at a substantial disadvantage compared to competitors
 Outsourcing

• Outsourcing can be effective because few, if any, organizations

possess the resources and capabilities required to achieve
competitive superiority in each value chain activity and support
function.
• By outsourcing activities in which it lacks competence, a firm:
• Increases the probability of developing core competencies and achieving
a competitive advantage because it does not become overextended
• Can fully concentrate on those areas in which it has the potential to
create value
• There are two significant concerns associated with outsourcing:
1. The potential loss in a firm’s ability to innovate
2. The loss of jobs within the focal firm
• Outsourcing to a foreign supplier is commonly called offshoring.
 Competencies, Strengths, Weaknesses, and
Strategic Decisions
• By analyzing the internal organization, firms identify
their strengths and weaknesses as reflected by their
resources, capabilities, and core competencies.
• If a firm has weak capabilities or does not have core
competencies in areas required to achieve a competitive
advantage, it must acquire those resources and build the needed
capabilities and competencies.
 Competencies, Strengths, Weaknesses, and
Strategic Decisions
• Having a significant quantity of resources is not the
same as having the “right” resources.
• The “right” resources are those with the potential to be formed
into core competencies as the foundation for creating value for
customers and developing competitive advantages because of
doing so.
• The ability of a core competence to be a permanent
competitive advantage can’t be assumed.
• All core competencies have the potential to become core
rigidities that generate inertia and stifle innovation.