Chapter-3

The internal Environment:

Resources, Capabilities,
Competencies, and competitive
StrategicAdvantage
Management and
competitiveness
 Outlines:

1. Analyzing the internal organization

2. Building Core Competencies: Four Criteria of Sustainable
Competitive Advantage
3. Value Chain Analysis
4. Strategic Rationales/reasons for Outsourcing
 Analyzing the Internal Organization
Challenge of Internal Analysis
⚫ Strategic decisions are non-routine, have ethical implications and
influence the organization’s above-average returns.
⚫ It involves identifying, developing, deploying and protecting
firms’ resources, capabilities and core competencies
⚫ It requires strategic thinking, making judgments, and taking
intelligent risks
⚫ Managers face uncertainty, complexity, and inter-organizational
conflict when making decisions about resources, capabilities, and
core competencies.
 Resource and Capability Analysis
⚫ A tool used for sizing up the company’s competitive
assets and determining whether they can provide the
foundation necessary for competitive success in the
marketplace.
2 Step Process:
1) Identify company’s resources and capabilities
2) Closely examine resources and capabilities to
determine which are the most competitively
important and whether they can support a
sustainable competitive advantage over rivals
Components of Internal Analysis
Resources, Capabilities and Core Competencies
Competitive Advantage foundation includes
1.Resources
Resources are bundled to create organizational capabilities
which have two types:
⚫ Tangible
o Assets that can be seen, touched and quantified
o Four specific types: financial, organizational, physical,
and technological
⚫ Intangible
o Assets rooted deeply in the firm’s history, accumulated
over time
o Usually can’t be seen or touched
o Three specific types: human, innovation, and reputational
 2. Capabilities
⚫ 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. It distinguish a company from its competitors
⚫ 2 tools can help firms identify and build their core
competencies
1. 4 Criteria of Sustainable CA
2. Value Chain Analysis
Building Core Competencies: Four Criteria
of Sustainable Competitive Advantage
⚫ Four Criteria of Sustainable CA
⚫ Valuable Capabilities – help exploit opportunities or
neutralize threats in external environment
⚫ Rare Capabilities – few competitors possess them
⚫ Costly-to-imitate Capabilities – other firms cannot easily
develop
⚫ Non-substitutable Capabilities – there are no strategic
equivalents
Competitive consequences include
⚫ Disadvantage, parity, temporary advantage and sustainable
advantage
 Valuable

Valuable capabilities allow the firm to exploit opportunities or

neutralize threats in its external environment. By effectively using
capabilities to exploit opportunities, a firm creates value for
customers.
Under former CEO Jack Welch’s leadership, GE built a valuable
competence in financial services. It built this powerful competence
largely through acquisitions and its core competence in integrating
newly acquired businesses. In addition, making such competencies as
financial services highly successful required placing the right people
in the right jobs. As Welch emphasized, human capital is important
in
creating value for customers.
 Rare
Rare capabilities are capabilities that few, if any, competitors
possess. A key question to be answered when evaluating this
criterion is, “How many rival firms possess these valuable
capabilities?”

Capabilities possessed by many rivals are unlikely to be sources

of competitive advantage for any one of them. Instead, valuable
but common (i.e., not rare) resources and capabilities are sources
of competitive parity.

Competitive advantage results only when firms develop and

exploit valuable capabilities that differ from those shared with
competitors
 Costly to Imitate
Costly-to-imitate capabilities are capabilities that other firms cannot
easily develop. Capabilities that are costly to imitate are created
because of one reason or a combination of three reasons. First, a firm
sometimes is able to develop capabilities because of unique historical
conditions.
“As firms evolve, they pick up skills, abilities and resources that are
unique to them, reflecting their particular path through history.”
A firm with a unique and valuable organizational culture that emerged
in the early stages of the company’s history “may have an imperfectly
imitable advantage over firms founded in another historical
period”—one in which less valuable or less competitively useful values
and beliefs strongly influenced the development of the firm’s culture.
Organizational culture is a set of values that are shared by members in
the organization . An organizational culture is a source of advantage
when employees are held together tightly by their belief in it.
A second condition of being costly to imitate occurs when the link
between the firm’s capabilities and its competitive advantage is
causally ambiguous.

In these instances, competitors can’t clearly understand how a firm

uses its capabilities as the foundation for competitive advantage. As
a result, firms are uncertain about the capabilities they should
develop to duplicate the benefits of a competitor’s value-creating
strategy. For years, firms tried to imitate Southwest Airlines’
low-cost strategy but most have been unable to do so, primarily
because they can’t duplicate Southwest’s unique culture.
Social complexity is the third reason that capabilities can be
costly to imitate. Social complexity means that at least some,
and frequently many, of the firm’s capabilities are the product
of complex social phenomena.

Interpersonal relationships, trust, friendships among managers

and between managers and employees, and a firm’s reputation
with suppliers and customers are examples of socially
complex capabilities. Southwest Airlines is careful to hire
people that fit with its culture. This complex interrelationship
between the culture and human capital adds value in ways that
other airlines cannot such as jokes by the flight attendants or
the cooperation between gate personnel and pilots.
 Nonsubstitutable
Nonsubstitutable capabilities are capabilities that do not
have strategic equivalents. This final criterion for a capability
to be a source of competitive advantage “is that there must be
no strategically equivalent valuable resources that are
themselves either not rare or imitable.
Two valuable firm resources (or two bundles of firm
resources) are strategically equivalent when they each can be
separately exploited to implement the same strategies.”The
strategic value of capabilities increases as they become more
difficult to substitute.
The more invisible capabilities are, the more difficult
it is for firms to find substitutes and the greater the
challenge is to competitors trying to imitate a firm’s
value-creating strategy.
Firm-specific knowledge and trust-based working
relationships between managers and nonmanagerial
personnel, such as existed for years at Southwest
Airlines, are examples of capabilities that are difficult
to identify and for which finding a substitute is
challenging.
 Building Core Competencies:
Value Chain Analysis
⚫ Value Chain Analysis
⚫ 1.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
⚫ 2.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
 The Basic Value
Chain

Human Resource Management

Service

Technological Development
Marketing and Sales
Firm Infrastructure

Outbound Logistics

Procurement
Operations

Inbound Logistics

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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.)
 The Value-Creating Potential of Primary Activities

⚫ 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 product’s value
(repair, training, adjustment, etc.)

Each activity should be examined relative to competitors’

abilities and rated as superior, equivalent or inferior

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 The Value-Creating Potential of Support Activities
⚫ Procurement
Activities completed to purchase the inputs needed to
produce a firm’s products (raw materials and supplies,
machines, laboratory equipment, etc.)
⚫ Technological development
Activities completed to improve a firm’s 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
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The Value-Creating Potential of Support Activities:
⚫ 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
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 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.

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 Outsourcing Decisions
A firm may
outsource all or only
part of one or more
primary and/or

Human Resource Management

support activities. Service

Technological Development
Outsourced Marketing and Sales
Firm Infrastructure
activity
Outbound Logistics

Procurement
Operations

Inbound Logistics

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 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
⚫ Accelerate business re-engineering benefits
Achieves re-engineering benefits more quickly by having
outsiders—who have already achieved world-class
standards—take over process
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 Strategic Rationales for Outsourcing (cont’d)

⚫ 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

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 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

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 Outsourcing Issues (cont’d)
⚫ Nonstrategic team of resources
⚫ Do not outsource capabilities that are critical to the firm’s
success, even though the capabilities are not actual
sources of competitive advantage
⚫ Firm’s knowledge base
⚫ Do not outsource activities that stimulate the
development of new capabilities and competencies

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 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

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 Cautions and Reminders (cont’d)
⚫ Determining what the firm can do through continuous
and effective analyses of its internal environment
increase the likelihood of long-term competitive
success

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