Chapter 3
The Internal Environment:
Resources, Capabilities and
Core Competencies
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
©2000 South-Western College Publishing
Ch3-1
Strategic
Inputs
Chapter 2
External
Environment
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Strategy Implementation
Chapter 4
Business-Level
Strategy
Chapter 5
Competitive
Dynamics
Chapter 6
Corporate-Level
Strategy
Chapter 10
Corporate
Governance
Chapter 11
Structure
& Control
Chapter 7
Acquisitions &
Restructuring
Chapter 8
International
Strategy
Chapter 9
Cooperative
Strategies
Chapter 12
Strategic
Leadership
Chapter 13
Outcomes
Strategic
Strategic
Actions
Strategy Formulation
The Strategic
Management
Process
Feedback
Entrepreneurship
& Innovation
Strategic
Competitiveness
Above Average
Returns
Ch3-2
Chapter 2
External Environment
What the Firm Might Do
Sustainable
Competitive
Advantage
Chapter 3
Internal Environment
What the Firm Can Do
Ch3-3
Competitive
Advantage
Discovering Core
Competencies
Gained through
Core Competencies
Strategic
Competitiveness
Core
Competencies
Discovering
Core
Competencies
Above-Average
Returns
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Criteria of
Sustainable
Advantages
Value
Chain
Analysis
Valuable
Rare
Costly to Imitate
Nonsubstitutable
* Outsource
Resources
* Tangible
* Intangible
*
*
*
*
Ch3-4
Key Questions for Managers
in Internal Analysis
How do we assemble bundles of Resources,
Capabilities and Core Competencies to create
VALUE for customers?
And...
Will environmental changes make our core
competencies obsolete?
Are substitutes available for our core
competencies?
Are our core competencies easily imitated?
Ch3-5
Conditions Affecting Managerial Decisions About
Resources, Capabilities and Core Competencies
Uncertainty
regarding characteristics of the general and the
industry environments, competitor’s actions, and
customer’s preferences.
Complexity
regarding the interrelated causes shaping a firm’s
environments and perceptions of the environments
Intraorganizational Conflicts
among people making managerial decisions and
those affected by them
Ch3-6
Discovering Core
Competencies
Resources
* Tangible
* Intangible
Ch3-7
Resources
What a firm Has...
What a firm has to work with:
its assets, including its people and
the value of its brand name
Ch3-8
Resources
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers
Ch3-9
Resources
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers
“Some genius invented the Oreo. We’re just
living off the inheritance.”
F. Ross Johnson,
Former President & CEO,
RJR Nabisco
Ch3-10
Resources
Tangible Resources
*
*
*
*
Financial
Physical
Human Resources
Organizational
Intangible Resources
* Technological
* Innovation
* Reputation
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers
“Some genius invented the Oreo.
We’re just living off the inheritance.”
F. Ross Johnson,
Former President & CEO, RJR Nabisco
Ch3-11
Discovering Core
Competencies
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Ch3-12
Capabilities
What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate
individual firm resources to achieve a desired
objective.
Ch3-13
Capabilities
What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex
interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that
are based on the development, transmission and
exchange or sharing of information and knowledge as
carried out by the firm's employees.
Ch3-14
Capabilities
What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex
interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that are
based on the development, transmission and exchange or
sharing of information and knowledge as carried out by the
firm's employees.
Capabilities become important when they are combined
in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage.
Ch3-15
Discovering Core
Competencies
Core
Competencies
Discovering
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Ch3-16
Core Competencies
What a firm Does...
that is Strategically
Valuable
“…are the essence of what makes an organization
unique in its ability to provide value to
customers.”
Leonard-Barton, Bowen, Clark, Holloway & Wheelwright
McKinsey & Co. recommends identifying three to four
competencies to use in framing strategic actions.
Ch3-17
Discovering Core
Competencies
Core
Competencies
Discovering
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Criteria of
Sustainable
Advantages
Teams of
Resources
Resources
* Tangible
* Intangible
*
*
*
*
Valuable
Rare
Costly to Imitate
Nonsubstitutable
* Outsource
Ch3-18
Core Competencies
For a strategic capability to be a
Core Competency, it must be:
What a firm Does...
that is Strategically
Valuable
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Ch3-19
Core Competencies
What a firm Does...
that is Strategically
Valuable
Valuable
Capabilities that help a firm neutralize threats or exploit
opportunities
Rare
Capabilities that are not possessed by many others
Costly to Imitate
Capabilities that other firms cannot develop easily,
usually due to unique historical conditions, causal
ambiguity or social complexity
Ch3-20
What Criteria Make Core
Competencies Costly to Imitate?
Unique Historical Conditions
An unusual evolutionary pattern of growth may contribute to the
development of competencies in a manner that is unique to those
particular circumstances
Example: Disney created Mickey Mouse at a time when
animated motion pictures were new
Causal Ambiguity
This occurs when competitors are unable to detect how a firm uses
its competencies as a foundation for competitive advantage
Social Complexity
Occurs when the firm’s capabilities are the result of complex social
phenomena, such as interpersonal relationships, trust and friendships
among managers or a firm’s reputation with suppliers and customers
Ch3-21
Core Competencies
Core Competencies must be:
Valuable
What a firm Does...
that is Strategically
Valuable
Capabilities that either help a firm to exploit opportunities to create
value for customers or to neutralize threats in the environment
Rare
Capabilities that are possessed by few, if any, current or potential
competitors
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to
unique historical conditions, causal ambiguity or social complexity
Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firmspecific knowledge or trust-based relationships
Ch3-22
Core Competencies
Resources
Core Competence
• Inputs to a firm’s
production process
The source of
• A strategic capability
Capability
Does the capability satisfy
the criteria of sustainable
competitive advantage?
• Integration of a
team of resources
YES
NO
Capability
• A nonstrategic team
of resources
Ch3-23
Outcomes from Combinations of the Criteria for
Sustainable Competitive Advantage
Valuable
Rare
Costly to
Imitate
Nonsubstitutable
Competitive Performance
Consequences Implications
Below
Average
Returns
NO
NO
NO
NO
Competitive
Disadvantage
YES
NO
NO
YES/NO
Competitive
Parity
Average
Returns
YES/NO
Temporary
Competitive
Advantage
Aver./Above
Average
Returns
Sustainable
Competitive
Advantage
Above
Average
Returns
YES
YE
S
YES
YE
S
NO
YE
S
YE
S
Ch3-24
Discovering Core
Competencies
Core
Competencies
Discovering
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Criteria of
Sustainable
Advantages
Teams of
Resources
Value
Chain
Analysis
Resources
* Tangible
* Intangible
*
*
*
*
Valuable
Rare
Costly to Imitate
Nonsubstitutable
* Outsource
Ch3-25
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities
Ch3-26
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Inbound
Logistics
Support
Activities
Primary Activities
Ch3-27
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Ch3-28
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Ch3-29
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Primary Activities
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Ch3-30
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Ch3-31
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Support
Activities
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Ch3-32
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Ch3-33
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Ch3-34
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Ch3-35
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Ch3-36
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Human Resource Management
Technological Development
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Ch3-37
Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers
Firm Infrastructure
Human Resource Management
Human Resource Management
Firms often purchase a portion
Technological Development
Inbound
Logistics
Operations
Outbound
Logistics
Primary Activities
Marketing
& Sales
Service
Operations
Procurement
Marketing
& Sales
Procurement
of their value-creating activities
from specialty external suppliers
Development
who can perform these functions
more efficiently
Outbound
Logistics
Technological
Inbound
Logistics
Support
Activities
Service
Ch3-38
Strategic Rationales for Outsourcing
Improve Business Focus
Lets 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 worldclass 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
Share Risks
Reduces investment requirements and makes firm more flexible,
dynamic and better able to adapt to changing opportunities
Free Resources for Other Purposes
Permits firm to redirect efforts from non-core activities toward those
that serve customers more effectively
Ch3-39
To capitalize on the usefulness of the
Value Chain concept...
it is important to recognize that...
Ch3-40
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Ch3-41
Value Chains are part of a Total Value System
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Supplier Value Chain
Upstream Value
Perform valuable activities that
complement the firm’s activities
Ch3-42
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Upstream Value
Buyer Value Chain
Channel Value Chain
Perform valuable activities that
complement the firm’s activities
Each firm must eventually find a way to
become a part of some buyer’s value chain
Ch3-43
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Upstream Value
Perform valuable activities that
complement the firm’s activities
Channel Value Chain
Each firm must eventually
find a way to become a part of
some buyer’s value chain
Buyer Value Chain
Ultimate basis for differentiation is the ability
to play a role in a buyer’s value chain
This creates VALUE!!
Ch3-44
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Upstream Value
Perform valuable activities that
complement the firm’s activities
Channel Value Chain
Buyer Value Chain
Each firm must eventually find a way to
become a part of some buyer’s value chain
Ultimate basis for differentiation is the
ability to play a role in a buyer’s value chain
This creates VALUE!!
Value chains vary for firms in an industry,
reflecting each firm’s unique qualities:
• History
• Strategy
• Success at Implementation
Ch3-45
Core Competencies--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 sow
the seeds of organizational inertia and prevent the firm
from responding appropriately to changes in the
external environment
Strategic myopia and inflexibility can strangle the firm’s
ability to grow and adapt to environmental change or
competitive threats
Ch3-46
Discovering Core
Competencies
Strategic
Competitiveness
Core
Competencies
Discovering
Core
Competencies
Above-Average
Returns
Sources of
Competitive
Advantage
Capabilities
Criteria of
Sustainable
Advantages
Teams of
Resources
Value
Chain
Analysis
Resources
* Tangible
* Intangible
*
*
*
*
Valuable
Rare
Costly to Imitate
Nonsubstitutable
* Outsource
Ch3-47
Chapter 2
External
Environment
Strategic Intent
Chapter 3
Internal
Environment
Strategic Mission
The Strategic
Management
Process
Ch3-48
Chapter 2
External
Environment
Chapter 3
Internal
Environment
Strategic Intent
Strategic Mission
The Strategic
Management
Process
Strategic Intent
Ch3-49
Chapter 2
External
Environment
Chapter 3
Internal
Environment
Strategic Intent
Strategic Mission
The Strategic
Management
Process
Strategic Intent
Leveraging of a firm’s resources,
capabilities and core competencies
to accomplish what may appear to
be unattainable goals in the competitive environment
Strategic Mission
A statement of the firm’s unique
purpose and the scope of its
operations in product market
terms
Ch3-50
Competitive
Advantage
Discovering Core
Competencies
Gained through
Core Competencies
Strategic
Competitiveness
Core
Competencies
Discovering
Core
Competencies
Above-Average
Returns
Sources of
Competitive
Advantage
Capabilities
Criteria of
Sustainable
Advantages
Teams of
Resources
Value
Chain
Analysis
Resources
* Tangible
* Intangible
*
*
*
*
Valuable
Rare
Costly to Imitate
Nonsubstitutable
* Outsource
Ch3-51