Chapter 3:
The Internal Organization:
Resources, Capabilities, Core Competencies and Competitive Advantages
Diane M. Sullivan, Ph.D., 2012
Sections modified from Hitt, Ireland, and Hoskisson, Copyright © 2008 Cengage
Step 1 in the Strategic Management Process
Continued
• Collect information/
knowledge to help
you determine what
type of strategy
would be effective
and how it could best
be implemented
• Next, examine the
strategic inputs
important in the
Resource-based
model (R-B model)
Insert figure 1.1 graphic
Context for Analyzing the Internal Organization
• Context of Internal Analysis
– ‘Global mind-set’
• Study internal environment in ways that do not depend on the
assumptions of a single country, culture, or context
• Important because of increasing global competition
– Analyze firm’s portfolio of resources and bundles of heterogeneous
resources and capabilities
• Understand how to leverage these bundles to create the most value
– An organization's core competencies creates and sustains its
competitive advantage
Analyzing the Internal Organization:
Using Resources to Create Value for Customers
•
Creating Value
– By exploiting core competencies or competitive advantages, firms create value
– Value is created by innovatively bundling and leveraging firm resources and
capabilities
– Key: to effectively bundle and leverage resources  firms must understand what
customers value
– A competitive advantage occurs when firms offer value to customers that is greater
than the value competitors provide
Pets.com
misread what
customers
valued and
failed
The Lieutenant Commander Geordi La Forge got sad because Pets.com didn’t deliver his food
expeditiously. As a result, he’s decided to shop exclusively at PetSmart for all of his dietary needs .
Analyzing the Internal Organization:
Resources, Capabilities and Core Competencies
The Foundation of a Competitive Advantage
•
Resources
•
Capabilities
•
Core Competencies
Resource 1
Resource 2
Capability
Capability
Core
Competency
Competitive
Advantage
Resources: Two Types
Tangible Resources: Assets that can be seen and quantified
Financial
• Cash; capacity to raise equity; borrowing capacity
Physical
• Modern plant and facilities; favorable manufacturing locations; access
to raw materials
Technological
• Stock of technology like trade secrets; innovative production processes;
patents, copyrights, trademarks
Organizational
• The firm’s formal reporting structure, formal planning, controlling, and
coordinating systems
Intangible Resources: Assets rooted in the firm’s history and that have accumulated over time
Human
Innovation & Creativity
Reputation
• Knowledge, trust, employee experience and skills; organizational
routines
• Ideas, scientific skills; innovation capacities
• Brand name; quality and reliability reputation; supplier relations
Combining Resources to Create Capabilities
Resource 1
Resource 2
Capability
• Capabilities exist when resources are purposely integrated to
achieve a specific task or set of tasks.
• Example 1: Wal-Mart uses tangible resources from its
distribution centers + its MIS infrastructure to create capabilities
in distribution and inventory management
• Example 2: Southwest uses it intangible resources of HR’s
organizational routines + physical resources of planes and landing
gates to create a logistics management
When Capabilities become Core Competencies
Capability
Core
Competency
Competitive
Advantage
• Core competencies are capabilities that serve as a source of a
competitive advantage for a firm over its rivals
• Firms should have no more than 3-4 core competencies around
which strategic actions can be framed
• Two tools to help firms identify and build core competencies
1. Barney’s Four Criteria of a Sustainable Competitive Advantage (VRIO)
2. Porter’s Value Chain
Tool 1: Barney’s Four Criteria of a Sustainable
Competitive Advantage
• Capabilities that meet the four criteria are core
competencies that can generate a sustainable
competitive advantage
– The four criteria are
1. Valuable: Does the capability enable a firm to exploit an environmental
opportunity, and/or neutralize an environmental threat thereby creating value for
customers?
2. Rarity: Is a capability currently possessed by only a small number of competing
firms?
3. Inimitability: Do firms without the capability face a cost disadvantage in
obtaining or developing it? [is what the firm doing difficult to imitate?]
4. Nonsubstitutable: Does the capability lack a strategic equivalent?
Using Barney’s Four Criteria to Assess the
Potential for a Sustainable Competitive Advantage
• According to Barney, a supportive answer to each question would
indicate the firm can sustain a competitive advantage
• Below is how to apply the criteria and the associated outcomes
Using the Four Criteria , Competitive Implications, and Performance Implications
Valuable?
Rare?
Costly to
Imitate?
Nonsubstitutable?
No
Yes
No
Yes
Yes
No
Yes
Yes
Yes
Yes
Competitive
Implications
Performance
Implications
Disadvantage
Below-average
returns
Parity
Average returns
Temporary
Advantage
Above-average
returns (at least for
some amount of time)
Sustained
Advantage
Above-average
returns
Firms should
NOT emphasize
these capabilities
in strategy
development and
implementation
Firms should
emphasize these
capabilities and
implement
strategies that
rely on these
capabilities
Tool 2: Porter’s Value Chain Analysis
• Allows a firm to understand the parts of its operations
that create value and those that do not
• Used to understand a firm’s cost position and identify
the how to implement a business-level strategy
• Analysis is broken down into two types of activities:
1. Primary activities: deal with the physical creation, sale,
distribution, and servicing of a product/service
2. Support activities: provide assistance for the primary
activates to take place
• Key: Create additional value without incurring significant costs while
doing so and to capture value that has been created
How Business Models Emerge:
Porter’s Value Chain
(Firm Infrastructure)
(Production)
• The Value Chain: proposes that each activity can either add or subtract value for the firm.
Activities supported by capabilities that are core competencies should be value adding and
completed internally. Activities that require capabilities that are not core competencies of the
firm generally subtract value and should be outsourced.
Select a Business-level Strategy
• External environment  provides information on what a firm might choose
to do
• Internal environment  provides information on what the firm can do
– The cumulative results of these analyses provide the firm with the information
required to select a business-level strategy that will help it reach its vision and
mission
• Business-level strategies will be discussed next in Chapter 4