The document discusses a firm's internal organization, including its resources, capabilities, core competencies, and competitive advantages. It defines these terms and explains how they relate. Resources include tangible assets as well as intangible assets like human capital and reputation. Capabilities emerge from how resources are deployed. Core competencies provide competitive advantages and are valuable, rare, costly to imitate, and non-substitutable. Firms can develop sustainable advantages by effectively acquiring, bundling, and leveraging their core competencies.

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Chapter 3
The Internal Organization: Resources, Capabilities, Core
Competencies, and Competitive Advantages
1–1

2. Learning Objectives
Studying this chapter should provide you with the strategic management
knowledge needed to:
1. Explain why firms need to study and understand their internal organization.
2. Define value and discuss its importance.
3. Describe the differences between tangible and intangible resources.
4. Define capabilities and discuss their development.
5. Describe four criteria used to determine whether resources and capabilities are core
competencies.
6. Explain how firms analyze their value chain for the purpose of determining where they
are able to create value when using their resources, capabilities, and core
competencies.
7. Define outsourcing and discuss reasons for its use.
8. Discuss the importance of identifying internal strengths and weaknesses.
9. Discuss the importance of avoiding core rigidities.
3–2
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3. Competitive Advantage
• Firms achieve strategic competitiveness and
earn above-average returns when their core
competencies are effectively:
– acquired
– bundled
– leveraged
• Over time, the benefits of any value-creating
strategy can be duplicated by competitors.
3–3
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4. Competitive Advantage (cont’d)
• Sustainability of a competitive advantage is a
function of the:
– rate of core competence obsolescence because of
environmental changes.
– availability of substitutes for the core competence.
– imitability of the core competence.
3–4
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5. Analyzing the External Environment
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By studying the external environment, firms identify what
they might choose to do.
Opportunities
and threats

6. Analyzing the Internal Organization
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By studying the internal environment, firms identify what
they can do.
Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

7. The Context of Internal Analysis
• Global Economy
– Traditional sources of advantages can be overcome
by competitors’ international strategies and by the
flow of resources throughout the global economy.
• Global Mind-Set
– The ability to study an internal environment in ways
that are not dependent on the assumptions of a single
country, culture, or context.
• Analysis Outcome
– Understanding how to leverage the firm’s bundle of
heterogeneous resources and capabilities.
3–7
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8. Components of an Internal Analysis
3–8
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9. Creating Value
• By exploiting their core competencies or
competitive advantages, firms create value.
• Value is measured by:
– product performance characteristics.
– product attributes for which customers will pay.
• Firms create value by innovatively bundling and
leveraging their resources and capabilities.
• Superior value leads to above-average returns.
3–9
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10. Creating Competitive Advantage
• Core competencies, in combination with
product-market positions, are the firm’s most
important sources of competitive advantage.
• Core competencies of a firm, in addition to the
analysis of its general, industry, and competitor
environments, should drive its selection of
strategies.
3–10
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11. The Challenge of Analyzing
the Internal Organization
• Strategic decisions in terms of the firm’s
resources, capabilities, and core competencies:
– are non-routine.
– have ethical implications.
– significantly influence the firm’s ability to earn above-
average returns.
3–11
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12. The Challenge of Analyzing
the Internal Organization (cont’d)
• When making strategic decisions, managers as
strategic leaders must:
– know when a capability is not a competence.
– learn quickly from failures and mistakes.
– have the maturity of judgment to deal effectively with
uncertainty, complexity, and intra-organizational
conflicts in an unbiased manner.
– be willing to take intelligent risks.
3–12
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13. 3–13
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Conditions Affecting Managerial Decisions

14. Resources, Capabilities, and Core
Competencies
• Resources:
– are the source of a
firm’s capabilities.
– are broad in scope.
– cover a spectrum of
individual, social and
organizational
phenomena.
– alone, do not yield a
competitive
advantage.
3–14
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Competitive
Advantage
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies

15. Resources
• Resources
– A firm’s assets,
including people and
the value of its brand
name, that represent
inputs into a firm’s
production process:
• capital equipment
• skills of employees
• brand names
• financial resources
• talented managers
• Types of Resources
– Tangible resources:
• financial
• physical
• technological
• organizational
– Intangible resources:
• human
• innovation
• reputation
3–15
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16. Tangible Resources
3–16
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17. Intangible Resources
3–17
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18. Resources, Capabilities and Core
Competencies
Capabilities:
• represent the capacity to
deploy resources that have
been purposely integrated
to achieve a desired end
state.
• emerge over time through
complex interactions among
tangible and intangible
resources.
3–18
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Competitive
Advantage
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies

19. Resources, Capabilities and Core
Competencies
Capabilities (cont’d):
• often are based on
developing, carrying and
exchanging information and
knowledge through the
firm’s human capital.
• composed of the unique
skills and knowledge of a
firm’s employees.
• include functional expertise
of employees.
• often developed in specific
functional areas or as part
of a functional area.
3–19
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Competitive
Advantage
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies

20. Example of Firms’ Capabilities
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21. Resources, Capabilities and Core
Competencies
The four criteria for
determining strategic
capabilities:
• value
• rarity
• costly-to-imitate
• non-substitutability
3–21
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Competitive
Advantage
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies

22. Resources, Capabilities and Core
Competencies
Core Competencies
• Resources and capabilities
that are the sources of a
firm’s competitive advantage
that:
– distinguish a firm
competitively and reflect
its personality.
– emerge over time through
an organizational process
of accumulating and
learning how to deploy
different resources and
capabilities.
3–22
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Competitive
Advantage
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies

23. Resources, Capabilities and Core
Competencies
Core Competencies (cont’d):
• activities that a firm
performs especially well
compared to competitors.
• activities through which the
firm adds unique value to its
goods or services over a
long period of time.
3–23
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Competitive
Advantage
Resources
• Tangible
• Intangible
Capabilities
Core
Competencies

24. Building Core Competencies
The four criteria of sustainable
competitive advantages:
• valuable capabilities
• rare capabilities
• costly to imitate
• non-substitutable
3–24
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Sustainable
Competitive
Advantage
• Valuable
• Rare
• Costly to imitate
• Nonsubstitutable
Four Criteria of
Sustainable
Advantages

25. The Four Criteria of Sustainable Advantage
3–25
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26. Building Sustainable Competitive Advantage
• Valuable capabilities:
– help a firm neutralize
threats or exploit
opportunities.
• Rare capabilities
– are not possessed by
many others.
3–26
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Sustainable
Competitive
Advantage
• Valuable
• Rare
• Costly to imitate
• Non-substitutable
Four Criteria of
Sustainable
Advantages

27. • Costly-to-Imitate
Capabilities
– Historical
• A unique and a valuable
organizational culture or
brand name
– Ambiguous cause
• The causes and uses of a
competence are unclear
– Social complexity
• Interpersonal
relationships, trust, and
friendship among
managers, suppliers, and
customers
3–27
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Sustainable
Competitive
Advantage
• Valuable
• Rare
• Costly to imitate
• Non-substitutable
Four Criteria of
Sustainable
Advantages
Building Sustainable Competitive Advantage

28. Building Sustainable Competitive Advantage
• Non-substitutable
Capabilities
– No strategic equivalent
• firm-specific
knowledge
• organizational culture
• superior execution of
the chosen business
model
3–28
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Sustainable
Competitive
Advantage
• Valuable
• Rare
• Costly to imitate
• Non-substitutable
Four Criteria of
Sustainable
Advantages

29. Outcomes from Combinations
of the Four Criteria
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Competitive
Consequences
Performance
Implications
No No No No Competitive
Disadvantage
Below Average
Returns
Yes No No Yes/
No
Competitive
Parity
Average Returns
Yes Yes No Yes/
No
Temporary Com-
petitive Advantage
Above Average to
Average Returns
Yes Yes Yes Yes Sustainable Com-
petitive Advantage
Above Average
Returns

30. Criteria for Sustainable Advantage
3–30
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31. Value Chain Analysis
• Value Chain Analysis:
– allows a firm to understand the parts of its operations
that create value and those that do not.
– is a template that firms use to:
• understand their cost position.
• identify multiple means that might be used to facilitate
implementation of a chosen business-level strategy.
3–31
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32. Value Chain Analysis (cont’d)
• Primary Activities:
– are involved with:
• a product’s physical creation.
• a product’s sale and distribution to buyers.
• the product’s service after the sale.
• Support Activities:
– provide the assistance necessary for the primary
activities to take place.
3–32
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33. Value Chain Analysis (cont’d)
• Value Chain shows how a product moves from
the raw-material stage to the final customer.
• To be a source of competitive advantage, a
resource or capability must allow the firm to
perform:
– an activity in a manner that is superior to the way
competitors perform it, or
– a value-creating activity that competitors cannot
complete
3–33
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34. A Model of the Value Chain
3–34
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35. Creating Value through Value Chain Activities
3–35
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36. Creating Value through Support
Functions
3–36
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37. The Value-Creating Potential
of Primary Activities
• Inbound Logistics
– Activities used to receive, store, and disseminate
inputs to a product.
• Operations
– Activities necessary to convert the inputs provided by
inbound logistics into final product form.
• Outbound Logistics
– Activities involved with collecting, storing, and
physically distributing the product to customers.
3–37
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38. The Value-Creating Potential
of Primary Activities (cont’d)
• Marketing and Sales
– Activities completed to provide the means through
which customers can purchase products and to
induce them to do so.
• Service
– Activities designed to enhance or maintain a product’s
value.
• Each activity should be examined relative to
competitor’s abilities and rated as superior,
equivalent or inferior.
3–38
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39. The Value-Creating Potential
of Primary Activities: Support
• Procurement
– Activities completed to purchase the inputs needed to
produce a firm’s products.
• Technological Development
– Activities completed to improve a firm’s product and
the processes used to manufacture it.
• Human Resource Management
– Activities involved with recruiting, hiring, training,
developing, and compensating all personnel.
3–39
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40. The Value-Creating Potential of
Primary Activities: Support (cont’d)
• Firm Infrastructure
– Activities that support the work of the entire value
chain (general management, planning, finance,
accounting, legal, government relations, etc.).
• Effectively and consistently identify external opportunities
and threats
• Identify resources and capabilities
• Support core competencies
• Each activity should be examined relative to
competitor’s abilities and rated as superior,
equivalent or inferior.
3–40
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41. Outsourcing
• Outsourcing is the purchase of a value-creating
activity from an external supplier.
• Few organizations possess the resources and
capabilities required to achieve competitive
superiority in all primary and support activities.
• By performing fewer capabilities:
– a firm can concentrate on those areas in which it can
create value.
– specialty suppliers can perform outsourced
capabilities more efficiently.
3–41
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Outsourcing Decisions
A firm may outsource all
or only part of one or
more primary and/or
support activities.
Primary Activities
Support
Activities
Service
Firm
Infrastructure
Procurement
Human
Resource
Mgmt.
Technological
Development
Marketing and Sales
Outbound Logistics
Operations
Inbound Logistics

43. Strategic Rationales for Outsourcing
• Improving business focus helps a firm focus on
broader business issues by having outside
experts handle various operational details.
– Provides access to world-class capabilities
– Makes world-class capabilities available to firms in a
wide range of applications
3–43
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44. Strategic Rationales for Outsourcing (cont’d)
• Accelerating re-engineering benefits
– achieves re-engineering benefits more quickly by
having outsiders - who have already achieved world-
class standards - take over processes.
• Sharing risks
– reduces investment requirements and makes firm
more flexible, dynamic and better able to adapt to
changing opportunities.
• Freeing resources for other purposes
– redirects efforts from non-core activities toward those
that serve customers more effectively.
3–44
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45. Outsourcing Issues
• Seeking greatest value
– Outsource only to firms possessing a core
competence in terms of performing the primary or
supporting the outsourced activity.
• Evaluating resources and capabilities
–Do not 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 to
complete necessary ongoing organizational tasks.
3–45
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46. Outsourcing Issues (cont’d)
• Nonstrategic team resources
–Do not outsource capabilities critical to the firm’s
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.
3–46
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47. Competencies, Strengths, Weaknesses, and
Strategic Decisions
• 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 – former core competencies that now
generate inertia and stifle innovation.
– Determining what the firm can do through continuous
and effective analyses of its internal environment will
increase the likelihood of long-term competitive
success.
3–47
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