STRATEGIC MANAGEMENT

TOPIC 4
THE INTERNAL ENVIRONMENT: RESOURCES,
CAPABILITIES, & CORE COMPETENCIES

Dr. K P C KISHAN
Professor in Strategic Management
Authored by:
Marta Szabo White. PhD.
Georgia State University
 KNOWLEDGE OBJECTIVES
● Explain why firms need to study and
understand their internal organization.

● Define value and discuss its importance.

● Describe the differences between tangible

and intangible resources.

● Define capabilities and discuss their

development.

● Describe four criteria used to determine

whether resources and capabilities are core
competencies.
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 KNOWLEDGE OBJECTIVES
● Explain how firms analyze their value chain
for the purpose of determining where they are
able to create value when using their resources,
capabilities, and core competencies.

● Define outsourcing and discuss reasons for

its use.

● Discuss the importance of identifying

internal strengths and weaknesses.

● Discuss the importance of avoiding core

rigidities.

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EXTERNAL ANALYSES’ OUTCOMES

Opportunities
and Threats

By studying the external environment, firms

identify what they MIGHT CHOOSE TO DO
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 INTERNAL ANALYSES’ OUTCOMES

Unique
Resources,
Capabilities, and
Competencies
(required for
sustainable
competitive
advantage)

By studying the internal environment,

firms identify what they CAN DO
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STRATEGIC COMPETITIVENESS AND
ABOVE-AVERAGE RETURNS RESULT WHEN:

INTERNAL What a firm can do:

Function of resources,
ORGANIZATIO capabilities, and core
competencies
N
MATCH
ES
What a firm might do:
EXTERNAL Function of opportunities in
the firm’s external
ENVIRONMENT environment

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 Resource audit
An internal review of all aspects of the
resources the organisation uses.
— Some resources are easy to define, identify
and measure (e.g. plant and machinery,
finance).
— Others are more problematic, such as
management skills, technical competence
and culture.

Resources only generate value if they are

properly organised: management and
organisation are vital resources.

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 Value drivers
— Crucial organisational capabilities which create
value for an organisation and help it generate
competitive advantage.
Many value drivers are intangible:
— Superior management
— Employees’ skills and knowledge
— Brand and reputation
— Intellectual property
— Network relationships and linkages
— Quality management
— First mover advantage

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 ANALYZING THE INTERNAL
ORGANIZATION

Creating Value
By innovatively bundling and leveraging their resources and
capabilities; by exploiting their core competencies or
competitive advantages, firms create value.

Value is measured by:

• Product performance characteristics
• Product attributes for which customers are willing to pay

Superior value  Above-average returns

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 ANALYZING THE INTERNAL
ORGANIZATION

The Challenge of Analyzing the

Internal Organization
Learning
● Generated by making and correcting mistakes; can
be important in creating new capabilities and core
competencies
Judgment is required under these conditions
● Decision makers often take intelligent risks
● With good judgment, successful strategic leaders
achieve strategic competitiveness

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 RESOURCES, CAPABILITIES, AND
CORE COMPETENCIES
Resources and superior
Core capabilities that are sources of
Competencies competitive advantage over a
firm’s rivals

An integrated and coordinated set of

actions taken to exploit core
Capabilities
competencies and gain competitive
advantage

Providing value to customers and

Resources gaining competitive advantage by
•Tangible
•Intangible exploiting core competencies in
individual product markets
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 RESOURCES, CAPABILITIES, AND
CORE COMPETENCIES

Core RESOURCES
Competencies • Are the source of a firm’s capabilities
• Are broad in scope
• Cover a spectrum of individual, social,
and organizational phenomena
Capabilities • Represent inputs into a firm’s production
process
• Alone, do not yield a competitive
Resources advantage, i.e., by themselves do not
•Tangible
•Intangib
allow firms to create value that results in
le above-average returns
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 Resource audit
Typical resources (9 Ms)
— Materials: costs, security of supply
— Men and women (staff): skills, number, morale
— Management: skills, capacity
— Machinery: age, efficiency, capacity
— Money: sources, gearing, cash flow
— Markets: products, customers
— Make-up: culture and structure, brands, patents
— Methods: structure, outsourcing, JIT
— Management information: ideas, innovation,
info systems
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 RESOURCES, CAPABILITIES, AND
CORE COMPETENCIES
TYPES OF RESOURCES
Tangible Resources
• Assets that can be seen, touched, and
quantified
Intangible Resources
• Assets
rooted deeply in the firm’s history,
accumulated over time
• In comparison
Compared toresources,
to tangible ‘tangible’intangible
resources,
resources
are a superior
usually source
can’t be seenoforcore competencies
touched
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 RESOURCES, CAPABILITIES AND,
CORE COMPETENCIES
TYPES OF RESOURCES
Tangible Resources
• FINANCIAL RESOURCES - the firm’s capacity to
borrow and generate internal funds
• ORGANIZATIONAL RESOURCES - formal reporting
structures
• PHYSICAL RESOURCES - sophistication and location
of a firm’s plant and equipment; distribution
facilities; product inventory
• TECHNOLOGICAL RESOURCES - stock of technology,
such as patents, trademarks, copyrights, and trade
secrets
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 RESOURCES, CAPABILITIES AND,
CORE COMPETENCIES
TYPES OF RESOURCES
Intangible Resources
• HUMAN RESOURCES - knowledge; trust;
skills; collaborative abilities
• INNOVATION RESOURCES - scientific
capabilities; capacity to innovate
• REPUTATIONAL RESOURCES - brand name;
perceptions of product quality, durability,
and reliability; positive reputation with
stakeholders, e.g., suppliers/customers

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 RESOURCES, CAPABILITIES, AND
CORE COMPETENCIES

Core
CAPABILITIES
Competencies ■ Emerge over time through complex interactions
among tangible and intangible resources
■ Stem from employees
• Unique skills and knowledge
Capabilities • Functional expertise
■ Are activities that a firm performs
exceptionally well relative to rivals
Resources ■ Are activities through which the firm adds
•Tangible
•Intangib unique value to its goods or services over an
le extended period of time
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 RESOURCES, CAPABILITIES, AND
CORE COMPETENCIES

Core
CAPABILITIES (cont’d)
Competencies ■ Exist when resources have been purposely
integrated to achieve a specific task or set of
tasks
■ Are often developed in specific functional areas
Capabilities • Distribution
• Human resources
• Management information systems
• Marketing
Resources • Management
•Tangible • Manufacturing
•Intangib
• Research & Development
le
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 COMPETITIVE ADVANTAGE
Components of Internal Analysis Leading to Competitive
FIGURE 3.1 Advantage and Strategic Competitiveness
Components of
an Internal
Analysis

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 RESOURCES, CAPABILITIES AND,
CORE COMPETENCIES

TABLE 3.3

Examples of
Firms’
Capabilities

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 COMPETITIVE ADVANTAGE
KEY POINTS
■ NO COMPETITIVE ADVANTAGE LASTS
FOREVER
■ OVER TIME, RIVALS USE THEIR OWN UNIQUE
RESOURCES, CAPABILITIES, AND CORE
COMPETENCIES TO DUPLICATE THE FOCAL
FIRM’S ABILITY TO CREATE VALUE FOR
CUSTOMERS
■ WITH GLOBALIZATION, SUSTAINABLE
COMPETITIVE ADVANTAGE IS ESPECIALLY
CHALLENGING
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 COMPETITIVE ADVANTAGE
KEY POINTS
■ FIRMS MUST EXPLOIT THEIR CURRENT
ADVANTAGES WHILE SIMULTANEOUSLY
USING THEIR RESOURCES AND
CAPABILITIES TO FORM NEW ADVANTAGES
THAT CAN LEAD TO FUTURE COMPETITIVE
SUCCESS
■ INNOVATION AND PEOPLE ARE CRITICAL
RESOURCES FOR ORGANIZATIONS IN
THEIR QUEST FOR COMPETITIVE
ADVANTAGE
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 COMPETITIVE ADVANTAGE
SUSTAINABILITY

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 imitability of the core competence

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 BUILDING CORE COMPETENCIES

TWO TOOLS FIRMS USE TO IDENTIFY

Core
Competencies AND BUILD CORE COMPETENCIES:
• Four Specific Criteria of Sustainable
Competitive Advantage that can be used to
determine which capabilities are core
Capabilities
competencies
• Value Chain Analysis - this tool helps select
the value-creating competencies that should
Resources
•Tangible be maintained, upgraded, or developed and
•Intangib those that should be outsourced
le
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 BUILDING CORE COMPETENCIES

The Four Criteria of Sustainable

Competitive Advantage
Capabilities must fulfill four specific
criteria in order to be
CORE COMPETENCIES
1. Valuable
2. Rare
3. Costly-to-imitate
4. Nonsubstitutable capabilities

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 BUILDING CORE COMPETENCIES

The Four Criteria of Sustainable

TABLE 3.4 Competitive Advantage
The Four
Criteria of
Sustainable VALUABLE CAPABILITIES
Competitive
Advantage • Help a firm neutralize threats or
exploit opportunities
RARE CAPABILITIES
• Are not possessed by many others

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 BUILDING CORE COMPETENCIES

The Four Criteria of Sustainable Competitive

TABLE 3.4
Advantage
The Four COSTLY-TO-IMITATE CAPABILITIES
Criteria of
Sustainable • Historical: A unique and a valuable organizational
Competitive
Advantage 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

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 BUILDING CORE COMPETENCIES

The Four Criteria of Sustainable

TABLE 3.4 Competitive Advantage
The Four
Criteria of
NONSUBSTITUTABLE CAPABILITIES
Sustainable
Competitive • No strategic equivalent
Advantage
• Firm-specific knowledge
• Organizational culture
•Superior execution of the chosen business
model

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 BUILDING CORE COMPETENCIES

The Four Criteria of Sustainable Competitive

Advantage
SUSTAINABLE COMPETITIVE ADVANTAGE
1.Exists only when competitors cannot duplicate a firm’s
strategy or when they lack the resources to attempt
imitation
2.Exists until competitors can successfully imitate a good,
service, or process
3.Lasts for a relatively long period of time if all four of the
criteria discussed are satisfied

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 BUILDING CORE COMPETENCIES

The Four Criteria of Sustainable

Competitive Advantage
COMPETITIVE CONSEQUENCES
Focus on capabilities that yield competitive parity and either
temporary or sustainable competitive advantage

PERFORMANCE IMPLICATIONS
Parity = average returns
Temporary advantage = average to above average returns
Sustainable advantage = above average returns using
valuable, rare, costly-to-imitate, and nonsubstitutable
capabilities

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 BUILDING CORE COMPETENCIES

TABLE 3.5

Outcomes
from
Combinations
of the Criteria
for Sustainable
Competitive
Advantage

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 BUILDING CORE COMPETENCIES

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
• Facilitate the implementation of a chosen
business-level strategy
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 VALUE CHAIN ANALYSIS
• Porter grouped the various activities which create value
for an organisation’s customers into a value chain.

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 BUILDING CORE COMPETENCIES

VALUE CHAIN ANALYSIS

• Both value chain (primary) and support
activities should be analyzed
• Competitive landscape demands that •

value chains and supply chains be

examined in a global context
• Each activity should be examined
relative to competitor’s abilities and
rated as superior, equivalent, or inferior
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 BUILDING CORE COMPETENCIES

VALUE CHAIN ANALYSIS

To become a core competence and a
source of competitive advantage, a
capability must allow the firm: •

1. to perform an activity in a manner that

provides superior value relative to
competitors, or
2. to perform a value-creating activity that
competitors cannot perform

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 BUILDING CORE COMPETENCIES

VALUE CHAIN ANALYSIS

VALUE CHAIN ACTIVITIES: activities 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: activities the firm
completes in order to support the work being
done to produce, sell, distribute, and service
the products the firm is producing
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 VALUE CHAIN ANALYSIS 2
The margin
• ‘The excess the customer is prepared to pay over the
cost to the firm of obtaining resource inputs and
providing value activities’.
• It represents the value created by the value activities
and by the management of the linkages between
them.
• Linkages connect the activities in the value chain.
• Activities affect one another and must be
coordinated.

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 VALUE CHAIN ANALYSIS 3
• An entity’s individual value chain is connected to what
Porter calls a value system.

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 VALUE CHAIN ANALYSIS 4
Value chains in the service sector
• The value chain was designed for use in
manufacturing industries, and can be
difficult to apply to service organisations.
• Stabell &Fjeldstad developed an
alternative model for use in service
organisations. This is the value shop.
• Value shop highlights the importance of
utilising expertise within the primary
activities.
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 VALUE CHAIN ANALYSIS 5
Advantages of using the value chain
A firm can secure competitive advantage in
several ways:
• Invent new or better ways to do activities.

• Combine activities in new or better ways.

• Manage the linkages in its own value

chain.
• Manage the linkages in the value system.

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 BUILDING CORE COMPETENCIES

VALUE CHAIN ANALYSIS

FIGURE 3.4
•

Creating Value
through Value
Chain Activities

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 BUILDING CORE COMPETENCIES

FIGURE 3.5

Creating Value
through
Support
Functions

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 OUTSOURCING
• Definition: purchase of a value-creating
activity or support function from an
external supplier
• Effective execution includes an increase in •

flexibility and risk mitigation, and a

reduction in capital investment
• Global industries trend continues at a
rapid pace
• Firms must outsource activities where they
cannot create value or are at a substantial
disadvantage compared to competitors

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 OUTSOURCING
STRATEGIC RATIONALES
■ Few organizations are competitively
superior in all value chain activities and •

support functions
■ By outsourcing activities where it lacks
competence, the firm can fully concentrate
on those areas in which it can create value
■ Freeing resources for other purposes
redirects efforts from non-core activities
toward those that serve customers more
effectively
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 OUTSOURCING
STRATEGIC RATIONALES
■ Specialty suppliers can perform outsourced
capabilities more efficiently.
•

■ Sharing risks - reduces investment

requirements and makes firm more
flexible, dynamic, and better able to adapt
to changing opportunities
■ Providing access to world-class standards –
the specialized resources of outsourcing
providers makes world-class capabilities
available to firms
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 OUTSOURCING
■ Outsource those value chain activities
and support functions that are NOT a
source of core competence
•

■ Concerns: innovation, technological

uncertainty, and job loss; usually
revolves around firm’s innovative
ability and loss of jobs to external
supplier  
■ Offshoring - foreign supply source

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COMPETENCIES, STRENGTHS, WEAKNESSES,
AND STRATEGIC DECISIONS

• Firms must identify their strengths and •

weaknesses
• Appropriate resources and capabilities
are needed to develop desired strategy
and create value for customers and
other stakeholders

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COMPETENCIES, STRENGTHS, WEAKNESSES,
AND STRATEGIC DECISIONS

• The “right” resources (as opposed to •

“many” resources) are those with the

potential to be formed into core
competencies as the foundation for
competitive advantage
• Tools (e.g., outsourcing) can help a firm
focus on core competencies as the
source for competitive advantage
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COMPETENCIES, STRENGTHS, WEAKNESSES,
AND STRATEGIC DECISIONS

• Core competencies have potential to •

become CORE RIGIDITIES

• Former core competencies that now
generate inertia and stifle innovation
• External environmental conditions
and events impact a firm’s core
competencies

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 COMPETENCIES, STRENGTHS,
WEAKNESSES, AND STRATEGIC DECISIONS

What a firm can do:

INTERNAL Function of resources,
capabilities, and core
ORGANIZATION competencies

STRATEG
Y
What a firm might do:
Function of opportunities in
EXTERNAL the firm’s external
ENVIRONMENT environment

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 What is SWOT Analysis?
Acronym for Strengths,
Weaknesses,
Opportunities, and
Threats.
Technique is credited to
Strengths Stanford University in
the 1960s and 1970s.
Planning tool used to
understand Strengths,
Weaknesses,

Oppurtunity
SWOT Weakness
Opportunities, & Threats
involved in a project /
Analysis business.
Used as framework
for organizing and
using data and
information gained from
situation analysis of
Threats Technique that enables a
internal and external
group / individual to move
from everyday problems / environment.
traditional strategies to a
fresh perspective.
What is SWOT Analysis? OPPORTUNITIES
Chances to make greater profits in the environment -
External attractive factors that represent the reason for an
organization to exist & develop.
Organization should be careful and recognize the
opportunities and grasp them whenever they arise.
Opportunities may arise from market, competition,
industry/government and technology.
Arise when an organization can take benefit of conditions in
its environment to plan and execute strategies that enable it
to become more profitable.
Examples - Rapid market growth, Rival firms are complacent, Changing
customer needs/tastes, New uses for product discovered, Economic
boom, Government deregulation, Sales decline for a substitute product .
What is SWOT Analysis?
WEAKNESSES
Characteristics that place the firm at a disadvantage
relative to others.
Detract the organization from its ability to attain the core
goal and influence its growth.
Weaknesses are the factors which do not meet the
standards we feel they should meet. However,
weaknesses are controllable. They must be
minimized and eliminated
Examples - Limited financial resources, Weak spending on
R & D, Very narrow product line, Limited distribution,
Higher costs, Out-of-date products / technology, Weak
market image, Poor marketing skills, Limited management
skills, Under-trained employees.
 What
SWOT is SWOT
ANALYSIS Analysis?
- THREAT
THREATS

External elements in the environment that could cause

trouble for the business - External factors, beyond an
organization’s control, which could place the organization’s
mission or operation at risk.
!
Arise when conditions in external environment jeopardize
the reliability and profitability of the organization’s
business.
Compound the vulnerability when they relate to the
weaknesses. Threats are uncontrollable. When a threat
comes, the stability and survival can be at stake.
Examples - Entry of foreign competitors, Introduction of new
substitute products, Product life cycle in decline, Changing
customer needs/tastes, Rival firms adopt new strategies,
Increased government regulation, Economic downturn.
What is SWOT Analysis? STRENGTHS

Characteristics of the business or a team that give

it an advantage over others in the industry.
Positive tangible and intangible attributes,
internal to an organization.
Beneficial aspects of the organization or the capabilities
of an organization, which includes human competencies,
process capabilities, financial resources, products and
services, customer goodwill and brand loyalty.
Examples - Abundant financial resources, Well-known
brand name, Economies of scale, Lower costs [raw
materials or processes], Superior management talent,
Better marketing skills, Good distribution skills,
Committed employees.
Benefits & Pitfalls of SWOT Analysis

Benefits of SWOT Analysis

Benefits of
SWOT
Analysis

Knowing the Competion Forecasting

Reviews a company's Provides a variety of information
competitors & benchmarks critical to forecasted variables.
against them to configure Threats, for e.g., can impact a
strategies that will put the Decision Making Tool business's forecast. By
company in a competitive understanding the company's
Provides well-rounded
advantage. advantages & disadvantages,
information that prompt
forecasts will be more accurate.
well-informed decisions.
Benefits & Pitfalls of SWOT Analysis

Benefits of SWOT Analysis

Besides the broad benefits, here are few more benefits of conducting SWOT
Analysis:

Helps in setting of objectives for strategic planning

Provides a framework for identifying & analyzing strengths,

weaknesses, opportunities & threats

Provides an impetus to analyze a situation & develop suitable

strategies and tactics

Basis for assessing core capabilities & competencies

Evidence for, and cultural key to, change

Provides a stimulus to participation in a group experience

Benefits & Pitfalls of SWOT Analysis

Pitfalls of SWOT Analysis

Can be very subjective. Two people rarely come up with the same
final version of a SWOT. Use it as a guide and not as a prescription.

May cause organizations to view circumstances as very simple due

to which certain key strategic contact may be overlooked.

Categorizing aspects as strengths, weaknesses, opportunities &

threats might be very subjective as there is great degree of
uncertainty in market.
To be effective, SWOT needs to be conducted regularly. The pace of
change makes it difficult to anticipate developments.

The data used in the analysis may be based on assumptions that

subsequently prove to be unfounded [good and bad].

It lacks detailed structure, so key elements may get missed.

Tips & Exercise

EXAMPLE

Mc Donald’s SWOT Analysis

Tips & Exercise
Mc Donald’s
SWOT Analysis INTERNAL

STRENGTHS WEAKNESSES

• Ranks very high on the Fortune Magazine's most • Failing pizza test market thus limiting the
admired list ability to compete with pizza providers.
• Community oriented • High training costs due to high turnover.
• Global operations all over the world • Minimal concentration on organic foods.
• Cultural diversity in the foods • Not much variation in seasonal products .
• Excellent location • Quality concerns due to franchised operations.
• Assembly line operations. • Focus on burgers / fried foods not on healthier
• Use of top quality products options for their customers.

OPPORTUNITIES THREATS
• Opening more joint ventures. • Marketing strategies that entice people from
• Being more responsive to healthier options. small children to adults.
• Advertising wifi services in the branches. • Lawsuits for offering unhealthy foods.
• Expanding on the advertising on being • Contamination risks that include the threat of
more socially responsible e-coli containments.
• Expansions of business into newly developed • The vast amount of fast food restaurants that
parts of the world.
• Open products up to are open as competition.
allergen free options • Focus on healthier dieting by consumers.
such as peanut free. • Down turn in economy affecting the ability to eat
EXTERNAL
that much.
Mr. Sherpinsky's Honors Marketing Class.
2015 All rights reserved.