The Internal Environment:
Resources, Capabilities, and
Core Competencies
Chapter Four
© 2006 by Nelson, a division of Thomson Canada Limited.
4-1
Strategic
Inputs
Chapter 4
Internal
Environment
Strat. Intent
Strat. Mission
Strategy Formulation
Chapter 5
Bus. - Level
Strategy
Chapter 6
Chapter 7
Competitive Corp. - Level
Dynamics
Strategy
Chapter 9
Chapter 8
Acquisitions & International
Strategy
Restructuring
Strategic
Outcomes
Strategic Actions
Chapter 3
External
Environment
Chapter 2
Above Average
Returns
Chapter 10
Cooperative
Strategies
Chapter 1
Strategic
Competitiveness
The Strategic
.
Management
Process
.
Strategy Implementation
Chapter 11
Corporate
Governance
Chapter 12
Structure
& Control
Chapter 13 Chapter 14
Strategic Entrepreneurship
Leadership & Innovation
Feedback
© 2006 by Nelson, a division of Thomson Canada Limited.
4-2
The Internal Environment: Resources,
Capabilities and Core Competencies
Knowledge Objectives:
1. Explain the need for firms to study &
understand their internal environment.
2. Define value & discuss its importance.
3. Describe the differences between tangible &
intangible resources.
4. Define capabilities & discuss how they are
developed.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-3
The Internal Environment: Resources,
Capabilities and Core Competencies
Knowledge objectives – continued…
5.
Describe four criteria used to determine whether
resources & capabilities are core competencies.
6. Explain how value chain analysis is used to
identify and evaluate resources and capabilities.
7. Define outsourcing & discuss the reasons for its
use.
8. Discuss the importance of preventing core
competencies from becoming core rigidities.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-4
Canada’s most admired companies
© 2006 by Nelson, a division of Thomson Canada Limited.
4-5
The Resource-Based model of Above
Average Returns
• Capabilities evolve and must be managed
dynamically in pursuit of above-average returns.
• Firms acquire different resources and develop
unique capabilities. These resources may not be
mobile across firms and that the differences in
resources are the basis of competitive
advantage.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-6
The Resource-Based model of Above
Average Returns
The resource based view suggests that a
firm’s unique resources and capabilities
provide the basis for a strategy.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-7
The Resource-Based Model of
Superior Returns
Action required:
Resources
Inputs to a firm’s
production
process.
Identify firm resources.
Study strengths &
weaknesses relative to
rivals.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-8
*
an
The Resource-Based Model of
Superior Returns
Action required:
Resources
Capability
Determine what firm
capabilities allow it to
do better than rivals.
Inputs to a firm’s
Capacity
for integrated
production
process.
set of resources to
integratively perform
a task or activity.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-9
*
an
The Resource-Based Model of
Superior Returns
Action required:
Resources
Capability
Inputs to a firm’s Competitive
Capacity
for
an
Advantage
production
process.
Determine how firm’s
resources & capabilities
may create competitive
advantage.
integrated set of
resources Ability
to
of a firm to
integratively
perform its rivals
outperform
a task or activity.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-10
*
an
The Resource-Based Model of
Superior Returns
Action required:
Locate an attractive
industry.
Resources
Capability
Competitive
Inputs to a firm’s
Advantage
Capacity
for
an
An Attractive
production
process.
integrated set of
Ability of aIndustry
firm to
resources to
Location
of an industry
outperform
its rivals
integratively
perform
a task or activity. with opportunities that
can be exploited by
firm’s resources &
capabilities
© 2006 by Nelson, a division of Thomson Canada Limited.
4-11
*
an
The Resource-Based Model of
Superior Returns
Action required:
Select strategy that best
exploits res.& capabilities
relative to opportunities
in environments.
Resources
Capability
Competitive
Inputs to a firm’s
Advantage
Capacity
for
an
An Attractive
production
process.
integrated set of
Strategy
Industry
of a firm to
resourcesAbility
to
Formulation
and
Location
of
an
ind.
outperform
its
rivals
integratively perform a
with opportunities
Implementation
task or activity.
that can be exploited
actions taken
by firm’sStrategic
resources
to earn above-average
& capabilities
returns
© 2006 by Nelson, a division of Thomson Canada Limited.
4-12
*
an
The Resource-Based Model of
Superior Returns
Action required:
Maintain selected strat.
in order to outperform
industry rivals.
Resources
Capability
Competitive
Inputs to a firm’s
Advantage
Capacity
for
an
An Attractive
production
process.
integrated set of
Strategy
Industry
of a firm to
resourcesAbility
to
Formulation
and
Location
of
an
ind.
Superior
outperform
its
rivals
integratively perform a
Implementation
with opportunities
Returns
task or activity.
that can be exploited
Earningtaken
of aboveStrategic
actions
by firm’s resources
average returns
to
earn
above-average
& capabilities
returns
© 2006 by Nelson, a division of Thomson Canada Limited.
4-13
*
an
Discovering Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Discovering
Core
Competencies
Criteria of
Sustainable
Advantages
Competitive
Advantage
Gained through
Core Competencies
Strategic
Competitiveness
Above-Average
Returns
Value
Chain
Analysis
* Valuable
* Rare
* Costly to Imitate
* Organized to be exploited
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* Outsource
4-14
The Components of Internal
Analysis
© 2006 by Nelson, a division of Thomson Canada Limited.
4-15
Value
Value is measured by a product’s performance
characteristics and it’s attributes for which
clients are willing to pay.
Core competencies in combination with productmarket positions are the firms most important
sources of competitive advantage and should
drive it’s selection of strategies.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-16
Resources, Capabilities & Core
Competencies
© 2006 by Nelson, a division of Thomson Canada Limited.
4-17
Resources, Capabilities & Core
Competencies
© 2006 by Nelson, a division of Thomson Canada Limited.
4-18
Discovering Core
Competencies
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
© 2006 by Nelson, a division of Thomson Canada Limited.
4-19
Discovering Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage
Discovering
Core
Competencies
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
© 2006 by Nelson, a division of Thomson Canada Limited.
4-20
Resources, Capabilities & Core
Competencies
© 2006 by Nelson, a division of Thomson Canada Limited.
4-21
Resources, Capabilities & Core
Competencies
© 2006 by Nelson, a division of Thomson Canada Limited.
4-22
Discovering Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Discovering
Core
Competencies
Criteria of
Sustainable
Advantages
* Valuable
* Rare
* Costly to Imitate
* Organized to be exploited
© 2006 by Nelson, a division of Thomson Canada Limited.
* Outsource
4-23
Core Competencies
For a strategic
capability to be a Core Competency, it must be:
Valuable
Allow a firm to neutralize threats or exploit
opportunities in its external environment.
Rare
Possessed by few, if any, current and
potential competitors.
Costly to
Imitate
When other firms either cannot obtain
them or must obtain them at a much higher
cost.
Organized
to be
Exploited
$
The firm must be organized appropriately to
obtain full benefits of the resources in order to
realize a competitive advantage.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-24
*
Core Competencies
Resources
• Inputs to a firm’s
production process
The source of
Capability
Core Competence
• A strategic capability
Does the capability
satisfy the criteria of
sustainable competitive
advantage?
• Integration of a
team of resources
YES
NO
Capability
• A non-strategic team
of resources
© 2006 by Nelson, a division of Thomson Canada Limited.
4-25
The VRIO Framework
Costly to Org. to be Competitive
Performance
Valuable
Valuable Rare
Imitate Exploited Consequences Implications
NO
YES
YES
YES
NO
NO
YES
YES
NO
NO
NO
YES
NO
Competitive
Disadvantage
Below
Average
Returns
YES
Competitive
Parity
Average
Returns
YES
Temporary
Competitive
Advantage
Avg./Above
Average
Returns
YES
Sustainable
Competitive
Advantage
Above
Average
Returns
© 2006 by Nelson, a division of Thomson Canada Limited.
4-26
Discovering Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Discovering
Core
Competencies
Criteria of
Sustainable
Advantages
Value
Chain
Analysis
* Valuable
* Rare
* Costly to Imitate
* Organized to be exploited
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* Outsource
4-27
Value Chain Analysis
Firm Infrastructure
Human Resource Management
Technological Development
Service
Marketing
& Sales
Outbound
Logistics
Operations
Procurement
Inbound
Logistics
Support
Activities
Primary Activities
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4-28
Strategic choice to purchase some
activities from outside suppliers
Firm Infrastructure
Outsourcing
Human Resource Management
Support
Activities
Technological Development
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Firms often buy a portion
of their value-creating activities from specialty
Primary Activities
external suppliers who can perform these functions more efficiently.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-29
Strategic choice to purchase some
activities from outside suppliers
Firm Infrastructure
Outsourcing
Human Resource Management
Support
Activities
Human
Resource Management
Technological
Development
Technological Development
Procurement
Marketing
& Sales
Service
Outbound
Operations Logistics
Marketing
& Sales
Outbound
Logistics
Inbound
Logistics
Operations
Inbound
Logistics
Procurement
Service
Firms often buy a portion of their value-creating activities from specialty
external suppliers who can perform these functions more efficiently.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-30
Strategic choice to purchase some
activities from outside suppliers
Firm Infrastructure
Outsourcing
Human Resource Management
Support
Activities
Human
Resource Management
Technological
Development
Technological Development
Procurement
Marketing
& Sales
Service
Outbound
Operations Logistics
Marketing
& Sales
Outbound
Logistics
Inbound
Logistics
Operations
Inbound
Logistics
Procurement
Service
Firms often buy a portion of their value-creating activities from specialty
external suppliers who can perform these functions more efficiently.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-31
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
They are former core competencies that sow
the seeds of organizational inertia.
Prevent the firm from responding appropriately to
changes in the external environment.
© 2006 by Nelson, a division of Thomson Canada Limited.
4-32
Discovering Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Discovering
Core
Competencies
Criteria of
Sustainable
Advantages
Strategic
Competitiveness
Above-Average
Returns
Value
Chain
Analysis
* Valuable
* Rare
* Costly to Imitate
* Organized to be exploited
© 2006 by Nelson, a division of Thomson Canada Limited.
* Outsource
4-33