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

In general, a competitive advantage’s sustainability is a function of three factors:

• The rate of core competence obsolescence because of environmental changes

• The availability of substitutes for the core competence

• The imitability of the core competence

Thus, all competitive advantages have a:

limited life

For all firms, the challenge is to:

effectively manage current core competencies while simultaneously developing new ones.

When firms can effectively manage current core competencies while developing new ones, they can expect to:

• achieve strategic competitiveness.

• earn above-average returns.

• remain ahead of competitors in both the short and long term.

What a firm can do:

a function of its resources, capabilities, and core competencies in the internal organization

What a firm might do:

a function of opportunities and threats in the external environment

Global Mindset

the ability to analyze, understand, and manage an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context.

Analyzing the firm’s internal organization requires:

that evaluators understand how to leverage the firm’s unique bundle of resources and capabilities.

Value

measured by a product’s performance characteristics and by its attributes for which customers are willing to pay

Firms create value by:

innovatively building and leveraging their resources to form capabilities and core competencies

Create value for customers is:

the source of above-average returns for a firm

The strategic decisions managers make about the internal organization:

• are nonroutine.

• have ethical implications.

• significantly influence the firm’s ability to earn above-average returns.

Making decisions regarding the firm’s assets:

• involves identifying, developing, deploying, and protecting resources, capabilities, and core competencies.

• is challenging and difficult.

• is increasingly internationalized.

Uncertainty

exists about the characteristics of the firm’s general and industry environments and customers’ needs

Complexity

results from the interrelationships among conditions shaping a firm

Intraorganizational Conflcits

may exist among managers making decisions as well as among those affected by the decisions

Judgment

the capability of making successful decisions when no obviously correct model or rule is available or when relevant data are unreliable or incomplete

When exercising judgment, decision makers:

must be aware of possible cognitive biases, such as overconfidence.

often take intelligent risks.

Executive Judgment

Can become a value capability in a competitive landscape

The foundations of competitive advantage are:

• Resources

• Capabilities

• Core competencies

Resources are bundled to create:

organizational capabilities.

Capabilities:

the source of a firm’s core competencies, which are the basis of establishing competitive advantages.

•By themselves, resources:

do not allow firms to create value for customers as the foundation for earning above-average returns.

Tangible Assets

assets that can be observed and quantified.

Four primary categories of tangible resources are:

• Financial

• Organizational

• Physical

• Technological

Financial Resources

• The firm’s capacity to borrow

• The firm’s ability to generate funds through internal operations

Organizational Resources

Formal reporting structures

Physical Resources

• The sophistication of a firm’s plant and equipment and the attractiveness of its location

• Distribution facilities

• Product inventory

Technological Resources

Availability of technology-related resources such as copyrights, patents, trademarks, and trade secrets

Intangible Resources

assets that are rooted deeply in the firm’s history, accumulate over time, and are relatively difficult for competitors to analyze and imitate.

Three primary categories of intangible resources are:

• Human

• Innovation

• Reputational

Human Resources

• Knowledge

• Trust

• Skills

• Abilities to collaborate with others

Innovation Resources

• Ideas

• Scientific capabilities

• Capacity to innovate

Reputational Resources

• Brand name

• Perceptions of product quality, durability, and reliability

• Positive reputation with stakeholders such as suppliers and customers

Tangible Resources are:

• Harder to leverage than intangible resources

• Difficult to derive additional business or value from

Intangible Resources are:

• less visible and more difficult for competitors to understand, purchase, imitate, or substitute for.

• more relied on to be the foundation for a firm’s capabilities.

• can be leveraged.

Capabilities are:

• created by combining individual tangible and intangible resources.

• used to complete the organizational tasks required to produce, distribute, and service the goods or services the firm provides to customers.

• the foundation for building core competencies and competitive advantages.

• often based on developing, carrying, and exchanging information and knowledge through the firm’s human capital.

Strategic Human Capital

allows a firm to develop capabilities through matching the knowledge, skills, and abilities of their employees to particular strategic objectives.

Distribution:

Effective use of logistics management techniques

Human Resources:

Motivating, empowering, and retaining employees

Management Information Systems:

Effective and efficient control of inventories through point-of-purchase data collection methods

Marketing:

• Effective promotion of brand-name products

• Effective customer service

• Innovative merchandising

Management:

Ability to envision the future of clothing

Manufacturing:

• Design and production skills yielding reliable products

• Product and design quality

• Miniaturization of components and products

Research & Development

• Innovative technology

• Development of sophisticated elevator control solutions

• Rapid transformation of technology into new products and processes

• Digital technology

Core Competencies

• Are capabilities that serve as a source of competitive advantage for a firm over its rivals

• Distinguish a company competitively and reflect its personality.

• Emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities

• The activities the company performs especially well compared to competitors

• The activities through which the firm adds unique value to the goods or services it sells to customers

Two tools help firms identify their core competencies:

• The four criteria of sustainable competitive advantage

• Value chain analysis

Four criteria for capabilities to be core competencies:

valuable, rare, costly to imitate, and nonsubstitutable

Valuable Capabilities

allow the firm to exploit opportunities or neutralize threats in its external environment.

• Help a firm neutralize threats or exploit opportunities

Rare Capabilities

Are not possessed by many others

Costly-to-Imitate Capabilities

capabilities that other firms cannot easily develop.

Non substitutable Capabilities

No strategic equivalent

Reasons for Costly-To-Imitate Capabilities

• Historical

• Ambiguous

• Social Complexity

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

Below-Average Returns

Results from capabilities that are not valuable, rare, costly to imitate, nor nonsubstitutable

Average Returns

Results from capabilities that are valuable, not rare nor costly to imitate, but possibly nonsubstitutable

Average Returns

Results from capabilities that are value and rare, not costly to imitate, and possibly nonsubstitutable

Above Average Returns

Result when capabilities cover all four crtieria

Value chain analysis

allows the firm to understand the parts of its operations that create value and those that do not

• a template that firms use to analyze their cost positions and to identify the multiple means that can be used to facilitate implementation of their chosen strategies

Value chain activities

activities or tasks the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for customers

Support Functions

include the activities or tasks the firm completes in order to support the work being done to produce, sell, distribute, and service the products the firm is producing

To become a core competence and a source of competitive advantage, a capability must allow the firm to either:

• perform an activity in a manner that provides value superior to that provided by competitors, or

• perform a value-creating activity that competitors cannot perform.

Value Creation System

each part of a system depends on other parts of the system to create value

Social Capital

Creating value for customers by completing activities that are part of the value chain requires building strong and productive relationships with stakeholders

Outsourcing

the purchase of a value-creating activity or a support function activity from an external supplier

Firms engaging in effective outsourcing:

• increase their flexibility.

• mitigate risks.

• reduce their capital investments.

Firms should use outsourcing only for activities where they:

• cannot create value.

• are at a substantial disadvantage compared to competitors.

By nurturing a smaller number of capabilities, a firm:

• increases the probability of developing core competencies and achieving a competitive advantage because it does not become overextended.

• can fully concentrate on those areas in which it has the potential to create value.

There are concerns associated with outsourcing; two significant concerns are:

• The potential loss in a firm’s ability to innovate

• The loss of jobs within the focal firm

Core Rigidities

generate inertia and stifle innovation → all core competencies have the potential be become one