Chapter 4
The Internal Organization:
Resources, Capabilities, and
Core Competence
Robert E. Hoskisson
Michael A. Hitt
R. Duane Ireland
©2004 by South-Western/Thomson Learning
1
The Strategic Management Process
Strategic
Thinking
Chapter 1
Introduction to
Strategic Management
Chapter 2
Strategic Leadership
Strategic
Analysis
Chapter 3
The External
Environment
Chapter 4
The Internal
Organization
Strategic Intent
Strategic Mission
Chapter 5
Business-Level
Strategy
Chapter 6
Competitive Rivalry and
Competitive Dynamics
Chapter 7
Corporate-Level Strategy
Chapter 8
Acquisition and
Restructuring Strategies
Chapter 9
International Strategy
Chapter 10
Cooperative Strategy
Creating
Competitive
Advantage
Monitoring
And Creating
Entrepreneurial
Opportunities
Chapter 11
Corporate Governance
Chapter 12
Strategic Entrepreneurship
2
Discussion Questions
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1.
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2.
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3.
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What different perspectives are
gained from external compared to
internal analyses of the firm?
What is the difference between
tangible and intangible resources?
What is the difference between
resources and capabilities?
What are the criteria to determine
core competence? What is
sustainable competitive advantage?
More discussion questions
3
Discussion Questions (cont.)
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4.
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5.
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6.
What is the value chain?
What is outsourcing and when
should it be used?
Are there risks to a sustainable
competitive advantage?
4
Discussion Question 1
What different perspectives are
gained from external compared to
internal analyses of the firm?
5
External and Internal Analyses
Environment
Sociocultural
Industry
Environment
By studying the external
environment, firms identify
what they might choose to do
Opportunities and threats
Competitor
Environment
Technological
General
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External and Internal Analyses
By studying the internal
environment, firms identify
what they can do
Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)
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Components of
Internal Analysis
Core
Competencies
Discovering Core
Competencies
Value Creation
Competitive
Advantage
Capabilities
Four Criteria
of Sustainable
Advantages
Resources
• Tangible
• Intangible
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Value
Chain
Analysis
• Outsource
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Challenge of Internal Analysis

How do we effectively manage current core
competencies while simultaneously
developing new ones?
 How do we assemble bundles of resources,
capabilities and core competencies to
create value for customers?
 How do we learn to change rapidly?
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Conditions Affecting Managerial
Decisions About Resources, Capabilities,
and Core Competencies

Uncertainty regarding characteristics of the
general and the industry environments,
competitors’ actions, and customers’ 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
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Return to Discussion Questions
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Discussion Question 2
What is the difference between
tangible and intangible resources?
What is the difference between
resources and capabilities?
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Discovering Core
Competencies
Resources
• Tangible
• Intangible
Resources are 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
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Discovering Core
Competencies
Resources
• Tangible
• Intangible
Tangible Resources
• Financial
• Organizational
• Physical
• Technological
Intangible Resources
• Human
• Innovation
• Reputation
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Discovering Core
Competencies
Capabilities
Capabilities become important when they are combined
in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage
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Discovering Core
Competencies
Capabilities
Capabilities are what a firm does, and represent the firm’s
capacity to deploy resources that have been purposely
integrated to achieve a desired end state
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Discussion Question 3
What are the criteria to determine
core competence?
What is sustainable competitive
advantage?
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Discovering Core
Competencies
Core
Competencies
Core competencies are resources and capabilities that serve
as a source of competitive advantage over rivals
Core competencies distinguish a company competitively
and make it distinctive
McKinsey and Co. recommends using three to four
competencies when framing strategic actions
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Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Valuable: Capabilities that help a firm neutralize threats or
exploit opportunities
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Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Rare: Capabilities that are not possessed by many others
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Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Costly to imitate: capabilities that other firms cannot
develop easily, usually due to
• Unique historical conditions
• Causal ambiguity
• Social complexity
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Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages
•
•
•
•
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Nonsubstitutable: capabilities that do not have strategic
equivalents
• Invisible to competitors
• Firm specific knowledge
• Trust-based working relationships between managers
and nonmanagerial personnel
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Core Competence as a Strategic
Capability
Resources
• Inputs to a firm’s
production process
The source of
Capability
• An integration of a
team of resources
Core Competence
• A strategic
capability
Does it satisfy the
criteria of sustainable
competitive
advantage?
Yes
No
Capability
• A nonstrategic
team or resource22
Sustainability of a Competitive
Advantage

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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Return to Discussion Questions
Performance Implications
Competitive
Consequences
No
Yes
Yes
Yes
Competitive
Disadvantage
Below Average
Returns
Competitive
Parity
Average Returns
Yes/
No
Temporary Competitive Advantage
Above Average to
Average Returns
Yes
Sustainable Competitive Advantage
Above Average
Returns
No
No
No
Yes/
No No
Yes No
Yes Yes
Performance
Implications
No
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Discussion Question 4
What is the value chain?
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Return to Discussion
Questions
Service
Marketing & Sales
Procurement
Technological Development
Human Resource Mgmt.
Firm Infrastructure
Support Activities
The Basic
Value Chain
Outbound Logistics
Operations
Inbound Logistics
Primary Activities
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Discussion Question 5
What is outsourcing and when
should it be used?
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Service
Procurement
Technological Development
Human Resource Mgmt.
Usually this is
because the specialty
supplier can provide
these functions more
efficiently
Firm Infrastructure
Outsourcing is the
purchase of some or
all of a valuecreating activity
from an external
supplier
Support Activities
Outsourcing
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
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Primary Activities
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 world-class capabilities
available to firms in a wide range of
applications
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Strategic Rationales for Outsourcing

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
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Strategic Rationales for Outsourcing

Free Resources for Other Purposes
– permits firm to redirect 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 support activity being outsourced

Evaluating Resources and Capabilities
– don’t 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 complete necessary ongoing
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organizational tasks
Outsourcing Issues

Nonstrategic Team of Resources
– do not outsource capabilities that are critical to
their 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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Discussion Question 6
Are there risks to a sustainable
competitive advantage?
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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 now generate inertia
and stifle innovation
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