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Internal Analysis Competencies.

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Rameshwar Patel

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Internal Analysis Competencies.

  1. 1. The Internal Organization: Resources, Capabilities, and Core Competencies Rameshwar Patel
  2. 2. External and Internal Analyses By studying the external environment, firms identify what they might choose to do Opportunities and threats What different perspectives are gained from external compared to internal analyses of the firm? Rameshwar Patel, PIM, Udaipur General Environment General Environment General Environment Sociocultural Global Technological Political/Legal Demographic Economic Industry Environment Competitor Environment
  3. 3. External and Internal Analyses By studying the internal environment, firms identify what they can do Unique resources, capabilities, and core competencies ( sustainable competitive advantage ) External and Internal Analyses Rameshwar Patel, PIM, Udaipur The Firm
  4. 4. Components of Internal Analysis Rameshwar Patel, PIM, Udaipur Discovering Core Competencies <ul><li>Resources </li></ul><ul><li>Tangible </li></ul><ul><li>Intangible </li></ul>Capabilities Core Competencies Competitive Advantage Value Creation Four Criteria of Sustainable Advantages <ul><li>Valuable </li></ul><ul><li>Rare </li></ul><ul><li>Costly to Imitate </li></ul><ul><li>Nonsubstitutable </li></ul>Value Chain Analysis <ul><li>Outsource </li></ul>
  5. 5. Challenge of Internal Analysis <ul><li>How do we assemble bundles of resources, capabilities and core competencies to create value for customers? </li></ul><ul><li>How do we effectively manage current core competencies while simultaneously developing new ones? </li></ul><ul><li>How do we learn to change rapidly and/or continuously? </li></ul>Rameshwar Patel, PIM, Udaipur
  6. 6. Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies <ul><li>Uncertainty regarding characteristics of the general and the industry environments, competitors’ actions, and customers’ preferences (=forecasting unpredictability ) </li></ul><ul><li>Complexity regarding the interrelated causes shaping a firm’s environments and perceptions of the environments (=cause-effect ambiguity ) </li></ul><ul><li>Intra-organizational Conflicts among people making managerial decisions and those affected by them (= resistance to implementation) </li></ul>Rameshwar Patel, PIM, Udaipur
  7. 7. Resources are WHAT a firm HAS to work with--its assets--including its people and the value of its brand name Resources represent inputs into a firm’s production process... such as capital equipment, skills of employees, brand names, finances and talented managers What is the difference between tangible and intangible resources? What is the difference between resources and capabilities? Rameshwar Patel, PIM, Udaipur Discovering Core Competencies <ul><li>Resources </li></ul><ul><li>Tangible </li></ul><ul><li>Intangible </li></ul>
  8. 8. <ul><li>Tangible Resources </li></ul><ul><li>Financial </li></ul><ul><li>Physical </li></ul><ul><li>Technological </li></ul><ul><li>Intangible Resources </li></ul><ul><li>Human—Talents, knowledge, commitment </li></ul><ul><li>Innovation/Creativity </li></ul><ul><li>Reputation/Brand </li></ul>Rameshwar Patel, PIM, Udaipur Discovering Core Competencies <ul><li>Resources </li></ul><ul><li>Tangible </li></ul><ul><li>Intangible </li></ul>
  9. 9. Capabilities are what a firm DOES , and represent the firm’s capacity to deploy resources that have been purposely bundled/integrated to achieve a desired end state ( HOW ) Capabilities become important when they are combined in unique combinations which create core competencies that have strategic value and can lead to competitive advantage Rameshwar Patel, PIM, Udaipur Discovering Core Competencies Capabilities
  10. 10. Core competencies are [ resources and] capabilities that serve as a source of competitive advantage over rivals Core competencies distinguish a company competitively and make it distinctive McKinsey and Co. recommends focusing on three to four competencies when framing strategic actions What are the criteria to determine core competence? What is sustainable competitive advantage? Rameshwar Patel, PIM, Udaipur Discovering Core Competencies Core Competencies
  11. 11. Valuable : Capabilities that help a firm neutralize threats or exploit opportunities [provide external leverage ] Rare : Capabilities that are not possessed by many others Rameshwar Patel, PIM, Udaipur Four Criteria of Sustainable Advantages <ul><li>Valuable </li></ul><ul><li>Rare </li></ul><ul><li>Costly to Imitate </li></ul><ul><li>Nonsubstitutable </li></ul>Discovering Core Competencies
  12. 12. <ul><li>Hard to imitate : capabilities that other firms cannot develop easily, usually due to </li></ul><ul><li>Unique historical conditions </li></ul><ul><li>Invisible to competitors </li></ul><ul><li>Causal ambiguity (unclear what causes it to happen) </li></ul><ul><li>Social complexity (requisite human dynamics hard to replicate) </li></ul>Rameshwar Patel, PIM, Udaipur Four Criteria of Sustainable Advantages <ul><li>Valuable </li></ul><ul><li>Rare </li></ul><ul><li>Hard to Imitate </li></ul><ul><li>Nonsubstitutable </li></ul>Discovering Core Competencies
  13. 13. <ul><li>Non-substitutable : capabilities that do not have strategic equivalents (e.g. other ways to achieve the same advantage) </li></ul><ul><li>Essential Firm-specific knowledge </li></ul><ul><li>Essential Trust-based working relationships between managers and non-managerial personnel </li></ul>Rameshwar Patel, PIM, Udaipur Four Criteria of Sustainable Advantages <ul><li>Valuable </li></ul><ul><li>Rare </li></ul><ul><li>Costly to Imitate </li></ul><ul><li>Nonsubstitutable </li></ul>Discovering Core Competencies
  14. 14. Core Competence as a Strategic Capability for Advantage The source of Does it satisfy the criteria of sustainable competitive advantage? Yes No Rameshwar Patel, PIM, Udaipur <ul><li>Resources </li></ul><ul><li>Inputs to a firm’s </li></ul><ul><li>production process </li></ul><ul><li>Capability </li></ul><ul><li>A non-strategic </li></ul><ul><li>bundle of resources </li></ul><ul><li>Core Competence </li></ul><ul><li>A strategic </li></ul><ul><li>capability </li></ul><ul><li>Capability </li></ul><ul><li>An integration of a </li></ul><ul><li>bundle of resources </li></ul>
  15. 15. Sustainability of a Competitive Advantage <ul><li>Sustainability of a competitive advantage is a function of: </li></ul><ul><ul><li>the rate of core-competence obsolescence due to environmental changes </li></ul></ul><ul><ul><li>the difficulty of imitating the core competence </li></ul></ul><ul><ul><li>the availability of substitutes for the core competence </li></ul></ul>Rameshwar Patel, PIM, Udaipur
  16. 16. Performance Implications Valuable? Rare? Hard to Imitate? Non-substitutable 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 Rameshwar Patel, PIM, Udaipur
  17. 17. The Firm as a Value Chain <ul><li>Capabilities can be created through: </li></ul><ul><li>Primary Activities: </li></ul><ul><ul><li>Those activities having to do with creating, marketing and delivering the product to customers and providing support and after-sales service. </li></ul></ul><ul><li>Support Activities: </li></ul><ul><ul><li>Provide inputs that allow primary activities to occur (R&D, HR systems, procurement) </li></ul></ul><ul><li>Including An Efficient Infrastructure: </li></ul><ul><ul><li>Leadership, culture, IT/communication systems </li></ul></ul><ul><ul><li>helps create value and/or reduce the cost of creating value. </li></ul></ul>What is the internal value chain that creates capabilities ? Rameshwar Patel, PIM, Udaipur
  18. 18. Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement Margin Margin Primary Activities Support Activities The Basic Value Chain Upstream Costs Percvd Value Price Market Share “ RED BOX” Value Proposition/Consumer Surplus Rameshwar Patel, PIM, Udaipur
  19. 19. Outsourcing Outsourcing is the purchase of some or all of a value-creating activity from an external supplier Usually this is because the specialty supplier can provide these functions more efficiently What is outsourcing and when should it be used? Rameshwar Patel, PIM, Udaipur Margin Margin Primary Activities Support Activities Service Marketing & Sales Outbound Logistics Operations Inbound Logistics Firm Infrastructure Human Resource Mgmt. Technological Development Procurement
  20. 20. Strategic Rationales for Outsourcing <ul><li>Improve Business Focus </li></ul><ul><ul><li>lets company focus on broader business issues by having outside experts handle various operational details </li></ul></ul><ul><li>Provide Access to World-Class Capabilities </li></ul><ul><ul><li>the specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications </li></ul></ul>Rameshwar Patel, PIM, Udaipur
  21. 21. Strategic Rationales for Outsourcing <ul><li>Free Resources for Other Purposes </li></ul><ul><ul><li>permits firm to redirect efforts from non-core activities toward those that serve customers more effectively </li></ul></ul><ul><li>Accelerate Business Re-Engineering Benefits </li></ul><ul><ul><li>achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process </li></ul></ul><ul><li>Share Risks & Increase Flexibility </li></ul><ul><ul><li>reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities </li></ul></ul>Rameshwar Patel, PIM, Udaipur
  22. 22. Outsourcing Issues <ul><li>Outsource only to firms possessing a core competence in terms of performing the primary or support activity being outsourced </li></ul><ul><li>Do not outsource primary and support activities that are </li></ul><ul><ul><li>Critical to success , even though the capabilities are not actual sources of competitive advantage </li></ul></ul><ul><ul><li>Used to neutralize environmental threats or complete necessary ongoing organizational tasks </li></ul></ul><ul><ul><li>Necessary to stimulate the development of new capabilities and competencies </li></ul></ul><ul><ul><li>Are value-adding in themselves </li></ul></ul>Rameshwar Patel, PIM, Udaipur
  23. 23. Core Competencies: Cautions and Reminders <ul><li>Never take for granted that core competencies will continue to provide a source of competitive advantage </li></ul><ul><li>All core competencies have the potential to become core rigidities </li></ul><ul><ul><li>Core rigidities are former core competencies that now generate inertia and stifle innovation </li></ul></ul>Are there risks to a sustainable competitive advantage ? Rameshwar Patel, PIM, Udaipur

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