Chapter 3
The Internal Environment:
Resources, Capabilities and
Core Competencies
Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson
Transparency 3-1
©1999 South-Western College Publishing
Chapter 2
What the Firm Might Do
External Environment
Five Forces Analysis
Chapter 3
Internal Environment
Resources, Capabilities
and Core Competencies
Transparency 3-2
What the Firm Can Do
Chapter 2
What the Firm Might Do
External Environment
Five Forces Analysis
Sustainable
Competitive
Advantage
Chapter 3
Internal Environment
Resources, Capabilities
and Core Competencies
Transparency 3-3
What the Firm Can Do
Competitive
Advantage
Discovering Core Competencies
Gained through
Core Competencies
Strategic
Competitiveness
Core
Competencies
Sources of
Competitive
Advantage
Capabilities
Teams of
Resources
Resources
* Tangible
* Intangible
Transparency 3-4
Discovering
Core
Competencies
Above-Average
Returns
Resources
Resources
What a firm Has...
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers
Transparency 3-5
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
Transparency 3-6
*
*
*
*
Capabilities
What a firm Does...
Capabilities represent...
the firm’s capacity or ability to integrate
individual firm resources to achieve a
desired objective.
Transparency 3-7
What a firm Does...
Core Competencies
that is Strategically
Core Competencies must be:
Valuable
Valuable
Capabilities that either help a firm to exploit opportunities to create
value for customers or to neutralize threats in the environment
Transparency 3-8
What a firm Does...
Core Competencies
that is Strategically
Core Competencies must be:
Valuable
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
Transparency 3-9
What a firm Does...
Core Competencies
that is Strategically
Core Competencies must be:
Valuable
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
Transparency 3-10
What a firm Does...
Core Competencies
that is Strategically
Core Competencies must be:
Valuable
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
Transparency 3-11
Value Chain Analysis
To identify which resources and capabilities can add value
Support
Activities
Transparency 3-12
Primary Activities
Value Chain Analysis
helps to identify which resources and capabilities can add value
Inbound
Logistics
Support
Activities
Transparency 3-13
Primary Activities
Value Chain Analysis
helps to identify which resources and capabilities can add value
Transparency 3-14
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
helps to identify which resources and capabilities can add value
Transparency 3-15
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Primary Activities
Value Chain Analysis
helps to identify which resources and capabilities can add value
Transparency 3-16
Primary Activities
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Value Chain Analysis
helps to identify which resources and capabilities can add value
Transparency 3-17
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Support
Activities
Value Chain Analysis
helps to identify which resources and capabilities can add value
Support
Activities
Transparency 3-18
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Value Chain Analysis
helps to identify which resources and capabilities can add value
Support
Activities
Technological Development
Transparency 3-19
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Value Chain Analysis
helps to identify which resources and capabilities can add value
Support
Activities
Human Resource Management
Technological Development
Transparency 3-20
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Value Chain Analysis
helps to identify which resources and capabilities can add value
Firm Infrastructure
Support
Activities
Human Resource Management
Technological Development
Transparency 3-21
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
Value Chain Analysis
helps to identify which resources and capabilities can add value
Firm Infrastructure
Support
Activities
Human Resource Management
Technological Development
Transparency 3-22
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement
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
Procurement
Inbound
Logistics
Operations
Procurement
Inbound
Logistics
Transparency 3-23
Operations
Outbound
Logistics
Primary Activities
Marketing
& Sales
Service
Technological
of their value-creating activities
from specialty external suppliers
Development
who can perform these functions
more efficiently
Outbound
Logistics
Support
Activities
Service
Marketing
& Sales
To capitalize on the usefulness of the
Value Chain concept...
it is important to recognize that...
Transparency 3-24
Value Chains are part of a Total Value System
Supplier Value Chain
Transparency 3-25
Firm Value Chain
Channel Value Chain
Buyer Value Chain
Value Chains are part of a Total Value System
Firm Value Chain
Supplier Value Chain
Upstream Value
Perform valuable activities
that complement the firm’s
activities
Transparency 3-26
Channel Value Chain
Buyer Value Chain
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Buyer Value Chain
Channel Value Chain
Downstream Value
Each firm must eventually find
a way to become a part of some
buyer’s value chain
Transparency 3-27
Value Chains are part of a Total Value System
Supplier Value Chain
Firm Value Chain
Channel 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!!
Transparency 3-28
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
Transparency 3-29
*
*
*
*
Valuable
Rare
Costly to Imitate
Nonsubstitutable
* Outsource
Comparative Market Share (%)
by Installed Units
16
14
12
IBM
Apple
NEC
Compaq
10
8
6
4
2
0
1988
Transparency 3-30
1989
1990
1991
Industry Growth
(in $billions)
45
40
35
30
Desktops
Portables
Servers
TOTAL
25
20
15
10
5
0
1982
Transparency 3-31
1986
1990
1994
Cost of Processing (MIPS)
$75,000
$80,000
$70,000
$60,000
$50,000
$40,000
Cost of Processing
$30,000
$10,000
$20,000
$2,000
$10,000
$0
1980
Transparency 3-32
1985
1991
Comparative Profitability
25
20
Apple
IBM
Compaq
Dell
Intel
Microsoft
15
10
5
0
-5
1991 ROS (%)
Transparency 3-33
5-Forces Model of Computer Industry
Potential
Entrants
• Low
Entry Barriers
Suppliers
Buyers
• O/S
• Price
• Processors
• Application Software
• Memory Devices
Rivalry
Substitutes
• Workstations
• Palm-tops/ PDA’s
Transparency 3-34
Sensitive
• Mass Merchandisers
• Mail Order
• New Products
• More Marketing
• Price Cutting
• Outsourcing
• Windows
Strategic Group Map
Pre-Windows
Premium
Sun
Apple
Price
Compaq
IBM
Low
Clones
Broad
Narrow
Strategic Focus - Differentiation
Transparency 3-35
Weakness
Strategic Group Map
Post-Windows
Premium
Sun
Apple
Price
Compaq
IBM
Clones
Low
Broad
Narrow
Strategic Focus - Differentiation
Transparency 3-36
Value Chain Analysis
How to Create Value in the PC Industry?
Firm Infrastructure
Support
Activities
Human Resource Management
Technological Development
Transparency 3-37
Primary Activities
Service
Marketing
& Sales
Outbound
Logistics
Operations
Inbound
Logistics
Procurement