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Competing for ADVANTAGE
1
Chapter 4The Internal Organization: Resources, Capabilities, and Core Competencies
PART IISTRATEGIC ANALYSIS
The Strategic Management Process
The Internal Organization
Firms rely on a unique bundle of resources to create a sustainable competitive advantage.
Factors that Determine Sustainability
Rate of core competence obsolescence
Availability of substitutes
Imitability of core competence
Outcomes from Internal Organizational Analysis
Resource Decision Pitfalls
Neglecting international considerations
Pursuing only short-term earnings goals
Failing to recognize core competencies
Emphasizing resources and capabilities that do not form a competitive advantage
Conditions That InfluenceInternal Analysis
Key Terms
Global mind-set
Ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context
Conditions That InfluenceInternal Analysis
Global interconnectedness
Pace of environmental change
Economic volatility
Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core
Competencies
Resource Perspective
“The perspective that a firm is a bundle of heterogeneous resources, capabilities, and core competencies that can be used to create a unique market position is a critical characteristic of effective resource analysis.”
Resources, Capabilities, and Core Competencies
Resources are the source of a firm's capabilities.
Capabilities, in turn, are the source of a firm's core competencies.
A firm's core competencies are the basis for its competitive advantages in the marketplace.
Components of Internal Analysis Leading to Competitive Advantage and Value Creation
Creating Value
Key Terms
Value
Measured by a product's performance characteristics and by its attributes for which customers are willing to pay
Resources
Key Terms
Tangible resources
Assets that can be observed and quantified
Intangible resources
Assets that typically are rooted deeply in the firm's history and have accumulated over time
Organizational routines
Complex patterns of social interactions that allow firms to accomplish much of what they do
Tangible Resources
Intangible Resources
Resources
Key Terms Social capital
Relationships with other organizations that contribute to the creation of value
Strategic value of resources
Degree to which resources can contribute to the development of capabilities, core competencies, and ultimately, competitive advantage
Capabilities
Key Terms
Capabilities
Firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state
Examples of Firm’s Capabilities
Core Competencies
Key Terms
Core competencies
Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals
How Many?
Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to fully exploit its competencies in the marketplace.
Tools for Building Core Competencies
Four Criteria of Sustainable Competitive Advantage
Value Chain Analysis
Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities
Rare Capabilities
Costly-to-Imitate Capabilities
Nonsubstitutable Capabilities
Four Criteria of Sustainable Competitive Advantage
Key Terms
Valuable capabilities
Allow the firm to exploit opportunities or neutralize threats in its external environment
Rare capabilities
Possessed by few, if any, current or potential competitors
Costly-to-imitate capabilities
Cost for other firms to develop is prohibitive, cannot easily be developed by other firms
Nonsubstitutable capabilities
Do not have strategic equivalents
Four Criteria for Determining Core Competencies
Costly-to-Imitate Capabilities
Unique historical conditions
Causal ambiguity Socially complexity
Core Competencies as a Strategic Capability
Outcomes from Combinations of the Criteria for Sustainable
Competitive Advantage
Value Chain Analysis
Key Terms
Value chain activities
Activities or tasks involved with the production of a firm’s product, the sale and distribution of products to buyers, and after-sales services in ways that create value for the customer
Support functions
Activities or tasks which support the firm’s work required to make, sell, distribute, and service its products
Value Chain Model
Creating Value Through Value Chain Activities
Creating Value Through Support Functions
Sources of Competitive Advantage
The resource or capability must allow the firm to perform a value chain activity or a support function in a manner superior to the way competitors perform it.
The resource or capability must allow the firm to perform a value-creating value chain activity or a support function that competitors cannot perform.
Outsourcing
Key Terms
Outsourcing
The purchase of a value-creating activity from an external supplier
Benefits of Outsourcing
Increased flexibility Risk mitigation Reduced capital
investments
Outsourcing Viability
When a firm does not have the capabilities in the areas needed to succeed
When a firm lacks a resource or possesses inadequate skills essential to successfully implement a strategy
When few organizations possess the resources and capabilities required to achieve competitive superiority in all value chain activities and support functions
When extensive internal capabilities exist to effectively coordinate external sourcing and internal core competencies
Essential Skills for Outsourcing
Strategic thinking
Deal making
Partnership governance
Managing change
Core Competencies: Cautions
Never take for granted that core competencies will continue to provide a permanent source of competitive advantage.
All core competencies have the potential to become core rigidities – core rigidities are former core competencies that now generate inertia and stifle innovation.
Manager inflexibility stemming from the strength of shared beliefs (strategic myopia) is the primary reason core rigidities develop.
Stakeholder Objectives and Power
Key Terms
Economic power
Comes from the ability to withhold economic support from the firm
Political power
Results from the ability to influence others to withhold economic support or to change the rules of the game
Formal power
Involves laws or regulations that specify the legal relationship existing between a firm and a particular stakeholder group
Returns and Stakeholders
High economic returns – firm has the capability and flexibility to satisfy multiple stakeholders simultaneously
Average economic returns – firm is unable to maximize the interests of all stakeholders
Below-average returns – firm does not have the capacity to satisfy all stakeholders
Measures of Firm Performance
Capital market performance
Product market performance
Organizational stakeholder performance
Firm Performance from a Capital Market Perspective
Measures of Firm Performance
Key Terms
Risk
Investor uncertainty about the economic gains or losses that will result from a particular investment
Other Measures of Firm Performance
Sustainable Development
Key Terms
Sustainable development
Business growth that does not deplete the natural environment or damage society
ETHICAL QUESTION
Could efforts to develop sustainable competitive advantages result in
employees using unethical practices? If so, what unethical practices might be
used to compare a firm’s core competencies with those held by rivals?
ETHICAL QUESTION
Do ethical practices affect a firm’s ability to develop a brand name as a source of competitive advantage? If so, how does this happen? Identify some brands that are a source of competitive advantage in
part because of the firm’s ethical practices.
ETHICAL QUESTION What is the difference between
exploiting a firm’s human capital and using that capital as a source of
competitive advantage? Are there situations in which the exploitation of
human capital can be a source of advantage? If so, can you name such a situation? If the exploitation of human capital can be a source of competitive
advantage, is this a sustainable advantage? Why or why not?
ETHICAL QUESTION
Are there any ethical dilemmas associated with outsourcing? If so, what are they? How would you deal
with those dilemmas?
ETHICAL QUESTION
What ethical responsibilities do managers have if they determine that a
set of employees has skills that are valuable only to a core competence
that is becoming a core rigidity for the firm?
ETHICAL QUESTION
Through postings to the Internet, firms sometimes make a vast array of data, information, and knowledge available to competitors as well as to customers and suppliers. What ethical issues, if any, are involved when the firm finds
competitively relevant information on a competitor’s Website?
ETHICAL QUESTION
To what extent does a firm have a moral obligation to distribute value back to stakeholders based on their relative
contributions to its creation? Does a firm have any legal obligations to do so?