Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies and Competitive Advantages

1. Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies and Competitive Advantages • Overview: • Importance of understanding internal organization • Value: Definition and importance • Tangible vs. intangible resources • Capabilities: Definition and development • Core competencies: Criteria (N=4) • Value Chain Analysis • Outsourcing: Definition and “why?” • Importance of internal organization assessment

2. Analyzing the Internal Organization • Context of Internal Analysis • Analyze firm’s portfolio of resources and the bundles of heterogeneous resources and capabilities managers have created • Understand how to leverage these bundles • An organization's core competencies creates and sustains its competitive advantage • Creating Value • Exploit core competencies or competitive advantage • Value: measured by a product's performance characteristics and by its attributes for which customers are willing to pay

3. Analyzing the Internal Organization (IO) • Challenge of Internal Analysis • Strategic decisions are non-routine, have ethical implications and influence the organization’s above-average returns • Involves identifying, developing, deploying and protecting firms’ resources, capabilities and core competencies • Requires strategic thinking, making judgments, and taking intelligent risks • Managers face uncertainty, complexity, and interorganizational conflict when making decisions about resources, capabilities, and core competencies

4. Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies

5. Figure 3.1 Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness

6. Resources, Capabilities and Core Competencies • Competitive Advantage (CA) foundation includes • Resources • Are bundled to create organizational capabilities • Tangible and intangible (Tables 3.1 and 3.2) • Tangible • Assets that can be seen, touched and quantified • Four specific types: financial, organizational, physical, and technological • Intangible • Assets rooted deeply in the firm’s history, accumulated over time • Usually can’t be seen or touched • Three specific types: human, innovation, and reputational

7. Resources, Capabilities and Core Competencies • Competitive Advantage (CA) foundation includes • Capabilities (Table 3.3 - Examples) • Resources purposely integrated to achieve a specific task or set of tasks • Source of a firm’s core competencies and basis for CA • Often developed in specific functional areas • Core Competencies • Capabilities that serve as a source of CA for a firm over its rivals • Distinguish a company from its competitors • 2 tools can help firms identify and build their core competencies • 4 Criteria of Sustainable CA • Value Chain Analysis

8. Examples of Firms’ Capabilities

9. Building Core Competencies: 4 Criteria and Value Chain Analysis • Four Criteria of Sustainable CA (Table 3.4) • Valuable – help exploit opportunities or neutralize threats in external environment • Rare – few competitors possess them • Costly-to-imitate – other firms cannot easily develop • Nonsubstitutable – there are no strategic equivalents • Competitive consequences include (Table 3.5) • Disadvantage, parity, temporary advantage and sustainable advantage • Performance implications include returns • Below-average, average, above-average

10. TABLE 3.5 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage

11. Building Core Competencies: Criteria and Value Chain Analysis • Value Chain Analysis • Primary activities • Involved with product’s physical creation, sales and distribution to buyers, and service after the sale • Service, marketing/sales, outbound/inbound logistics and operations • Support activities • Provide assistance necessary for the primary activities to take place • Includes firm infrastructure, HRM, technologies development and procurement • Helps firm to understand the parts of its operations that create value and those that do not • Can be used to identify competitive advantages and disadvantages based on costs • Can help with outsourcing decisions

12. Figure 3.3 The Basic Value Chain

13. The Basic Value Chain

14. Outsourcing • Outsourcing: The purchase of a value-creating activity from an external supplier • Effective execution includes an increase in flexibility, risk mitigation and capital investment reduction • Trend continues at a rapid pace • Can be used in areas where a firm cannot create value or is at a substantial disadvantage compared to competitors

15. Competencies, Strengths, Weaknesses and Strategic Decisions • Firms must identify their strengths and weaknesses • Appropriate resources and capabilities needed to develop desired strategy and create value for customers/other stakeholders • Tools (i.e., outsourcing) can help a firm focus on core competencies as the source for CA • Core competencies have potential to become core rigidities • Competencies emphasized when no longer competitively relevant can become a weakness • Should keep updating and improving competencies • External environmental conditions and events impact a firm’s core competencies