Business Policy and Strategy

(Handout #1-Midterms)

THE INTERNAL ENVIRONMENT: Resources, Capabilities, and Core Competencies.

Learning Objectives:
1. Explain the need for firms to study and understand their internal environment.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss how they are developed.
5. Describe four criteria used to determine whether resources and capabilities are core
competencies.
6. Explain how value chain analysis is used to identify and evaluate resources and capabilities.
7. Define outsourcing and discuss the reasons for its use.
8. Discuss the importance of preventing core competencies from becoming core rigidities.

THE IMPORTANCE OF INTERNAL ANALYSIS

Traditional Factors:
1. Labor cost
2. Access to financial resources
3. Raw materials
4. Protected or regulated markets
--continue to be the sources of competitive advantage

Key challenge in developing the ability to change rapidly:

1. Fostering an organizational setting in which experimentation and learning are expected and
promoted.
2. A different managerial mind-set is required for firms to be in the global economy.
Resources, Capabilities and Core Competencies
 are the characteristics that make up the foundation of competitive advantage.

RESOURCES- source of a firms capabilities.

 cover the spectrum of individual, social and organizational phenomena.
Competitive advantage- created through the unique bundling of several resources.

2 Types of Resources:
1. Tangible
 assets that can be seen and quantified
 The value of many tangible resources can be established through financial statements,
but these statements do not account for the value of all of firm’s assets.
 The value of tangible resources is also constrained because they are difficult to
leverage- it is hard to derive additional business or value from tangible resources.
Examples:
 production equipment
 manufacturing plants
 formal reporting structures
4 Types of tangible Resources:
a. Financial resources- the firms borrowing capacity
- The firm’s ability to generate internal funds.
b. Organizational resources- the firm’s formal reporting structure and its formal planning,
controlling and coordinating systems.
c. Physical resources- sophistication and location of a firm’s plant and equipment.
- Access to raw materials.
d. Technological resources- stock of technology, such as patents, trademarks, copyrights and
trade secrets.
2. Intangible
 includes assets that typically are rooted deeply in the firm’s history and have accumulated
overtime.
 Relatively difficult for competitors to analyze and imitate.
 Is a superior and more potent source of core competencies.
Examples:
 knowledge
 trust between managers and employees
 ideas
 the capacity for innovation
 managerial capabilities
 organizational routines
  specific capabilities
 firms reputation for its goods or services and how it interact with people.

3 Types of Intangible:
a. Human resources –knowledge; trust ; managerial capabilities; organizational routines
b. Innovation resources –ideas; scientific capabilities ;capacity to innovate
c. Reputational resources –reputation with customers; brand name; perceptions of product quality,
durability and reliability;-reputation and suppliers (for
efficient, effective, supportive and mutually beneficial
interactions and relationships)

John Kendrick –a well-known Economists studying the main drives of economic growth, found a
general increase in the contribution of intangible assets to U.S. economic growth since
the early 1900’s.
-in fact, the more unobservable a resource is, the more sustainable will be the
competitive advantage.
-the larger the network of users, the greater the benefit to each party.

CAPABILITIES
 these are the firm’s capacity to deploy resources that have been purposely integrated to achieve
a desired end state
 the foundation of many capabilities lies in the skills and knowledge of a firm’s employees and
often, their functional expertise. Hence, the value of human capital in developing and using
capabilities and, ultimately, core competencies cannot be overstated.
 Firms committed to continuously developing their people’s capabilities seem to accept the adage
that “the person who knows how will always have a job. The person who knows why will always
be his boss.”
 Global business leaders support the view that the knowledge possessed by human capital is
among the most significant of an organization’s capabilities and ultimately be at the root of all
competitive advantages

CORE COMPETENCIES
 are sources and capabilities that serve as a source of a firm’s competitive advantage over
rivals.
 distinguish a company competitively and reflect its personality.
 emerge overtime through an organizational process of accumulating and learning how to
deploy different resources and capabilities.
 , it is the “crown jewels of a company”.

Strategic Assets –assets that have competitive value and potential that serves as a source of
competitive advantage.
*Some resources and capabilities may result in incompetence.

Creating Value
Value –is measured by a products performance characteristic and by its attributes which customers
are willing to pay.
Creating Customer Value –is the source of a firms potential to earn above-average returns.
*Firms intend regarding value creation affect its choice of business-level strategy and its organizational
structure.
Differentiation strategy –is an integrated set of actions designed by a firm to produce or deliver goods
or services (at an acceptable cost) that customers perceived as being different in ways that are important
to them.

The challenge of Internal Analysis

Resources
Capabilities
Core Competencies
-have a significant influence on the firms ability to earn above-average returns.
Making these decisions –identifying, developing, deploying and protecting resources, capabilities and
are competencies.
 This task is challenging and difficult as any other with which managers are involved.

To facilitate the development and use of core competencies, managers must have:
*courage
*self-confidence
 *integrity
*the capacity to deal with uncertainty
*complexity
*willingness to hold people accountable for their work and to be held accountable to themselves.

Conditions Affecting Managerial Decisions about Resources, Capabilities and Core

Competencies:
1. Uncertainty –regarding characteristics of the general and the industry environments, competitor’s
action and customer’s preferences.
2. Complexity –regarding the interrelated causes shaping a firms environments and perceptions of
the environments.
3. Intra organizational conflicts –among people making managerial decisions and those affected
by them.

Judgment –is the capability of making successful decisions when no obviously correct model or rule is
available or when relevant data are unreliable or incomplete.

Denial –is unconscious coping mechanism used to block out and not initiate painful changes.

BUILDING CORE COMPETENCIES

2 Tools help the firm identify and build its core competencies:
1. Four specific criteria of sustainable advantage
a. Valuable –allow the firm to exploit opportunities or neutralize threats in its external environment.
b. Rare capabilities –not possess by many other firm.
c. Costly to imitate –capabilities that other firms cannot easily develop.
d. Non-substitutable –capabilities that do not have strategic equivalents.
2. Value Chain Analysis –allows the firms to understand the parts of its operations that create value
and those that do not. Refers to the process whereby a firm determines the costs associated with
organizational activities from purchasing raw materials to manufacturing product/s to marketing those
products.
Activities:
 Obtaining raw materials, designing products, building manufacturing facilities, developing
cooperative agreements, and providing customer service.

VALUE CHAIN SEGMENTS

1. Primary Activities –are involved with a products physical creation, its sale and distribution to buyers
and its service after the sale.
a. Inbound logistics –activities such as materials handing, warehousing and inventory control,
used to received, stores and disseminate inputs to a product.
b. Operations –activities necessary to convert the inputs provided by inbound logistics into final
product form. Machining, packaging, assembly and equipment maintenance are examples of
operations activities.
c. Outbound logistics –activities involved with collecting, storing and physically distributing the
final product to customer. Ex: finished goods warehousing, materials handling and order
processing.
d. Marketing and Sales –activities completed to provide means through which customers can
purchase products and to induce them to do so.
-to effectively market and sell products, firms develop advertising and promotional
campaigns, select appropriate distribution channels, and select, develop and support their
sales force.
e. Service –activities designed to enhance or maintain a products value. Firms engage in a range
of service-related activities, including installation, repair, training and adjustments.

2. Support Activities –provide the support necessary for the primary activities to take place.
a. Procurement –activities completed to purchase the inputs needed to produce a firm’s
product. Ex: raw materials and surplus, as well as fixed assets- machinery, laboratory equipment, office
equipment, buildings.
b. Technological Development –activities completed to improve a firm’s product and the
processes used to manufactures it. Ex: process equipment, basic research and product design and
servicing procedure.
c. Human Resource Mgmt. –activities involved with recruiting, hiring, and training,
developing and compensating all personnel.
d. Firm Infrastructure –includes activities such as general management, planning, finance,
accounting, legal support, and government relations that are required to support the work of the entire
value chain.
OUTSOURCING – is the purchase of a value-creating activity from an external supplier. Outsourcing is
contracting with another company or person to do a particular function.

To verify that the appropriate primary and support activities are outsourced, four skills are
essential for managers involved in outsourcing programs:
-Strategy thinking
-Deal making
-Partnership governance
-Managing change

Outsourcing can significantly change how an organization operates; managers administering

these programs must also be able to manage that change, including resolving employees’ resistance that
accompanies any significant change effort.

Reasons for outsourcing

1. LACK OF EXPERTISE:
a. You have to outsource if you don't have the rightly skilled professionals.
b. Leverage the provider's extensive investments in technology, methodologies and people
2. CAPITAL:
a. Conservation: Reduce overheads, free up resources, the money can be applied to develop the
Core business rather on overheads such as computers, desks etc.
b. Cost Effective: No HR recruiting, training, solution providing.
c. Reduced operating costs.
d. Reduction of financial risk: as investment shared.
3. MANAGEMENT
a. Sharper focus on core business
b. Improved efficiency
c. Better concentration on strategic thinking, process developing
d. Increasing customer satisfaction
e. Reduce the risk of technological obsolescence and increase efficiency by consolidating and
centralizing functions
f. Reduce the overall head ache and develop market presence tension free.
g. Obtain needed project management and implementation consulting expertise, along with
access to best practices and proven methodologies
4. GOOD BUSINESS SENSE
a. Availability of world best services at half the cost.
b. Save the ever critical time
c. Get access to specialized professionals and skills
d. Great flexibility: it is much easier to cancel a contract than fire personal employees.
e. Avoid the cost of starting from scratch and gain from the experience of custom built outsourcing
solutions available.
5. EDGE OVER COMPETITION
a. Provide value added service
b. Provide better, specialized, customized and dedicated customer service
c. Increase customer satisfaction
d. Keep pace with the rapidly changing business modules
e. Be reliable and innovative
f. Shedding of HR or IT burden helps you do better in core business.
6. TOWARDS GLOBALIZATION
a. Reduce your marketing and software delivery costs
b. Gain access to global buyer base needing software development
c. Manage your projects online with buyer participation
d. Neutral marketplace with global choices

Disadvantages of Outsourcing

Less managerial control - It may be harder to manage the outsourcing service provider as compared to
managing your own employees.

May be more expensive - Sometimes it is cheaper to keep a process in-house as compared to

outsourcing.

Security and confidentiality issues - If your company is outsourcing business processes such as payroll,
confidential information such as salary will be known to the outsourcing service provider.
Quality Risk - Outsourcing can expose an organization to potential risks and legal exposure. As an
example, if a car is recalled for faulty parts and that part was outsourced, the car manufacturer carries
the burden of correcting the potentially damaged reputation of the car maker. While the vendor would
need to make good on the faulty product by contract, the manufacturer still has the “black eye” from the
incident and carries the burden of correcting the negative public perception.

Quality Service - Unless a contract specifically identifies a measurable process for quality service
reporting, there could be a poor service quality experience. Some contracts are written to intentionally
leave service levels out to save on costs.

Language Barriers - If a customer call center is outsourced to a country that speaks a different language,
there may be levels of dissatisfaction for customers dealing with the language barriers of someone with a
strong accent.

Employee/Public Opinion - There can be negative perceptions with outsourcing and the sympathy of lost
jobs. This needs to be managed with sensitivity and grace.

Organizational Knowledge - An outsourced employee may not have the same understanding and
passion for an organization as a regular employee. There is the potential that an outsourced employee
will come in contact with customers and not be as knowledgeable of the organization, resulting in a
negative customer experience.

Labor Issues - Organized labor in the United States has very strong feelings about outsourcing to other
countries that have a less standard of living and worse working conditions. This viewpoint can affect how
the workforce responds to outsourcing and can affect their daily productivity.

Legal Compliance and Security - It is important that issues regarding legal compliance and security be
addressed in formal documentation. Processes that are outsourced need to be managed to ensure
there is diligence with legal compliance and system security. An example of this is outsourcing the IT
function and having an outsourced employees use their access to confidential customer data for their
own gain.

Employee Layoffs - Outsourcing commonly results in the need to reduce staffing levels. Unless it can be
planned through attrition, layoffs are inevitable. This is difficult at best and if not managed appropriately,
can have a negative impact on remaining employees.

Finally, when researching vendors for outsourcing be sure to think through your specific needs and get at
least three Requests for Proposals (RFP) to ensure you are getting the best value for your dollar.

Core Competencies: Cautions and Reminders

Tools such as outsourcing can help the firm focus on its core competencies. However, evidence
shows that the value-creating ability of core competencies should never be taken for granted.
The ability of a core competence to be a permanent competitive advantage can’t be assumed.
The reason for these cautions is that all core competencies have the potential to become core rigidities.
Competence:
Strength –because it is the source of competitive advantage.
-strategic competitiveness
Weakness –because if emphasized when it is no longer competitively relevant, it can be a seed of
organizational inertia.(apathy, sluggishness)