Chapter 3: The Internal Organization:
Resources, Capabilities, Core Competencies and
Competitive Advantages
 Overview:
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Importance of understanding internal organization
Value: Definition and importance
Tangible vs. intangible resources
Capabilities: Definition and development
Core competencies: Four criteria of sustainable
competitive advantage
Value Chain Analysis
Outsourcing: Definition and “why?”
Importance of internal organization assessment
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Analyzing the Internal Organization
 Context of Internal Analysis
 Analyze firm’s portfolio of resources and the bundles of
heterogeneous resources and capabilities managers have
created
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Understand how to leverage these bundles
An organization's core competencies creates and sustains
its competitive advantage
 Creating Value
 Exploit core competencies or competitive advantage
 Value: measured by a product's performance
characteristics and by its attributes for which customers
are willing to pay
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Analyzing the Internal Organization (IO)
 Challenge of Internal Analysis
 Strategic decisions are non-routine, have ethical
implications and influence the organization’s aboveaverage returns
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Involves identifying, developing, deploying and protecting
firms’ resources, capabilities and core competencies
Requires strategic thinking, making judgments, and taking
intelligent risks
Managers face uncertainty, complexity, and
interorganizational conflict when making decisions about
resources, capabilities, and core competencies
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Analyzing the Internal Organization (IO)
 Resource and Capability Analysis
 A tool used for sizing up the company’s competitive
assets and determining whether they can provide the
foundation necessary for competitive success in the
marketplace
 2 Step Process
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Identify company’s resources and capabilities
Closely examine resources and capabilities to determine
which are the most competitively important and whether they
can support a sustainable competitive advantage over rivals
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Figure 3.1 Components of Internal Analysis
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Resources, Capabilities and Core Competencies
 Competitive Advantage (CA) foundation includes
 Resources
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Are bundled to create organizational capabilities
Tangible and intangible (Tables 3.1 and 3.2)
 Tangible
 Assets that can be seen, touched and quantified
 Four specific types: financial, organizational, physical, and
technological
 Intangible
 Assets rooted deeply in the firm’s history, accumulated over
time
 Usually can’t be seen or touched
 Three specific types: human, innovation, and reputational
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Resources, Capabilities and Core Competencies
 Competitive Advantage (CA) foundation includes
 Capabilities (Table 3.3 - Examples)
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Resources purposely integrated to achieve a specific task
or set of tasks
Source of a firm’s core competencies and basis for CA
Often developed in specific functional areas
Core Competencies
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Capabilities that serve as a source of CA for a firm over its
rivals
Distinguish a company from its competitors
2 tools can help firms identify and build their core
competencies
 4 Criteria of Sustainable CA
 Value Chain Analysis
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Examples of Firms’ Capabilities
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Building Core Competencies: Four Criteria of
Sustainable Competitive Advantage
 Four Criteria of Sustainable CA (Table 3.4)
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Valuable Capabilities – help exploit opportunities or neutralize
threats in external environment
Rare Capabilities – few competitors possess them
Costly-to-imitate Capabilities – other firms cannot easily develop
Nonsubstitutable Capabilities – there are no strategic equivalents
 Competitive consequences include (Table 3.5)
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Disadvantage, parity, temporary advantage and sustainable
advantage
 Performance implications include returns
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Below-average, average, above-average
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TABLE 3.5 Outcomes from Combinations of the
Criteria for Sustainable Competitive Advantage
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Building Core Competencies:
Value Chain Analysis
 Value Chain Analysis
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Primary activities
 Involved with product’s physical creation, sales and distribution to
buyers, and service after the sale
 Service, marketing/sales, outbound/inbound logistics and operations
Support activities
 Provide assistance necessary for the primary activities to take place
 Includes firm infrastructure, HRM, technologies development and
procurement
 Helps firm to understand the parts of its operations that create value
and those that do not
 Can be used to identify competitive advantages and disadvantages
based on costs
 Can help with outsourcing decisions
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Figure 3.3 The Basic Value Chain
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The Basic Value Chain
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Outsourcing
 Outsourcing: The purchase of a value-creating
activity from an external supplier
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Effective execution includes an increase in flexibility, risk
mitigation and capital investment reduction
Trend continues at a rapid pace
 Can be used in areas where a firm cannot create value
or is at a substantial disadvantage compared to
competitors
 Should also consider outsourcing non strategically
critical activities
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Competencies, Strengths, Weaknesses
and Strategic Decisions
 Firms must identify their strengths and weaknesses
 Appropriate resources and capabilities needed to
develop desired strategy and create value for
customers/other stakeholders
 Tools (i.e., outsourcing) can help a firm focus on core
competencies as the source for CA
 Core competencies have potential to become core
rigidities
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Competencies emphasized when no longer competitively
relevant can become a weakness
Should keep updating and improving competencies
 External environmental conditions and events impact a
firm’s core competencies
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