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Ch3-1
The Internal Environment: The Internal Environment: Resources, Capabilities and Resources, Capabilities and
Core CompetenciesCore Competencies
Michael A. HittMichael A. HittR. Duane IrelandR. Duane Ireland
Robert E. HoskissonRobert E. Hoskisson
Michael A. HittMichael A. HittR. Duane IrelandR. Duane Ireland
How do we assemble How do we assemble bundlesbundles of Resources, of Resources, Capabilities and Core Competencies to create Capabilities and Core Competencies to create
VALUEVALUE for customers? for customers?
Will environmental changes make our core Will environmental changes make our core competencies obsolete?competencies obsolete?
And...And...
Are substitutes available for our core Are substitutes available for our core competencies?competencies?
What a firm has to work with:What a firm has to work with:
its its assetsassets, including its , including its peoplepeople and and the value of its the value of its brand namebrand name
What a firm What a firm HasHas......ResourcesResources
Ch3-8
Resources represent Resources represent inputs into a inputs into a firm’s production processfirm’s production process......
such as capital equipment, skills of such as capital equipment, skills of employees, brand names, finances employees, brand names, finances and talented managersand talented managers
What a firm What a firm HasHas......
What a firm has to work with:What a firm has to work with:
its assets, including its people its assets, including its people and the value of its brand nameand the value of its brand name
ResourcesResources
Ch3-9
What a firm has to work with:What a firm has to work with:
its assets, including its people its assets, including its people and the value of its brand nameand the value of its brand name
Resources represent inputs into a Resources represent inputs into a firm’s production process...firm’s production process...
such as capital equipment, skills such as capital equipment, skills of employees, brand names, of employees, brand names, finances and talented managersfinances and talented managers
““Some genius invented the Oreo. We’re just Some genius invented the Oreo. We’re just living off the inheritance.”living off the inheritance.”
F. Ross Johnson,F. Ross Johnson,Former President & CEO, Former President & CEO,
RJR NabiscoRJR Nabisco
What a firm What a firm HasHas......ResourcesResources
the firm’s capacity or ability to the firm’s capacity or ability to integrate integrate individual firm resources individual firm resources to achieve a desired to achieve a desired objective.objective.
CapabilitiesCapabilities
Ch3-13
What a firm Does...
Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.
Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.
Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.
CapabilitiesCapabilities
Ch3-14
What a firm Does...
Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.
Capabilities become important when they are Capabilities become important when they are combined in combined in unique combinations unique combinations which create which create core competencies which havecore competencies which have strategic value strategic value and and can lead tocan lead to competitive advantagecompetitive advantage..
“…“…are the essence of what makes an organization are the essence of what makes an organization unique in its ability to provide value to unique in its ability to provide value to customers.”customers.”
McKinsey & Co. recommends identifying three to four McKinsey & Co. recommends identifying three to four competencies to use in framing strategic actions.competencies to use in framing strategic actions.
For a strategic capability to be a For a strategic capability to be a Core Competency, it must be:Core Competency, it must be:
Core CompetenciesCore Competencies
ValuableValuable
RareRare
Costly to ImitateCostly to Imitate
NonsubstitutableNonsubstitutable
What a firm Does...that is Strategically
Valuable
Ch3-19
ValuableValuable
RareRare
Costly to ImitateCostly to ImitateCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity
Capabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity
Capabilities that are not possessed by many othersCapabilities that are not possessed by many others
Capabilities that help a firm neutralize threats or exploit opportunitiesCapabilities that help a firm neutralize threats or exploit opportunities
Core CompetenciesCore Competencies What a firm Does...that is Strategically
Valuable
Ch3-20
What Criteria Make CoreCompetencies Costly to Imitate?
What Criteria Make CoreCompetencies Costly to Imitate?
This occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantageThis occurs when competitors are unable to detect how a firm uses its competencies as a foundation for competitive advantage
Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers
Occurs when the firm’s capabilities are the result of complex social phenomena, such as interpersonal relationships, trust and friendships among managers or a firm’s reputation with suppliers and customers
Example:Example: Disney created Mickey Mouse at a time when Disney created Mickey Mouse at a time when animated motion pictures were newanimated motion pictures were new
An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances
An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances
Ch3-21
Core Competencies must be:
NonsubstitutableNonsubstitutableCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationshipsCapabilities that do not have strategic equivalents, such as firm-specific knowledge or trust-based relationships
What a firm Does...that is Strategically
Valuable
Core CompetenciesCore Competencies
ValuableValuable
RareRare
Costly to ImitateCostly to ImitateCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexityCapabilities that other firms cannot develop easily, usually due to unique historical conditions, causal ambiguity or social complexity
Capabilities that are possessed by few, if any, current or potential competitorsCapabilities that are possessed by few, if any, current or potential competitors
Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment
Capabilities that either help a firm to exploit opportunities to create value for customers or to neutralize threats in the environment
Ch3-22
Core CompetenciesCore Competencies
ResourcesResources• Inputs to a firm’s Inputs to a firm’s
production processproduction process
Core CompetenceCore Competence• A strategic capabilityA strategic capability
The source ofThe source of CapabilityCapability• Integration of a Integration of a
team of resourcesteam of resources
Does the capability satisfy Does the capability satisfy the criteria of sustainable the criteria of sustainable competitive advantage?competitive advantage?
YESYES
NONO
CapabilityCapability• A nonstrategic team A nonstrategic team
of resourcesof resources
Ch3-23
ValuableValuable RareRareCostly to Costly to ImitateImitate
Outcomes from Combinations of the Criteria for Outcomes from Combinations of the Criteria for Sustainable Competitive AdvantageSustainable Competitive Advantage
Outcomes from Combinations of the Criteria for Outcomes from Combinations of the Criteria for Sustainable Competitive AdvantageSustainable Competitive Advantage
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
ProcurementProcurement
MARGIN
MARGIN
Firms often purchase a portionportion of their value-creating activities from specialty external suppliers who can perform these functions more efficientlymore efficiently
OutsourcingOutsourcingStrategic Choice to Purchase Some Activities From Outside Suppliers
Ch3-38
Lets company focus on broader business issues by having outside experts handle various operational detailsLets company focus on broader business issues by having outside experts handle various operational details
Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing
Improve Business FocusImprove Business Focus
Permits firm to redirect efforts from non-core activities toward those that serve customers more effectivelyPermits firm to redirect efforts from non-core activities toward those that serve customers more effectively
Free Resources for Other PurposesFree Resources for Other Purposes
Provide Access to World-Class CapabilitiesProvide Access to World-Class Capabilities
Accelerate Business Re-Engineering BenefitsAccelerate Business Re-Engineering Benefits
Share RisksShare Risks
The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications The specialized resources of outsourcing providers makes world-class capabilities available to firms in a wide range of applications
Achieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over processAchieves re-engineering benefits more quickly by having outsiders--who have already achieved world-class standards--take over process
Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities
Ch3-39
To capitalize on the usefulness of the To capitalize on the usefulness of the Value ChainValue Chain concept...concept...
it is important to recognize that...it is important to recognize that...
Ch3-40
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System
Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain Buyer Value ChainBuyer Value Chain
Ch3-41
Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain Buyer Value ChainBuyer Value Chain
Supplier Value ChainSupplier Value Chain
Upstream ValueUpstream Value
Perform valuable activities that complementcomplement the firm’s activities
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System
Ch3-42
Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Buyer Value ChainBuyer Value Chain
Upstream Value
Perform valuable activities that complement the firm’s activities
Channel Value ChainChannel Value Chain
Each firm must eventually find a way to Each firm must eventually find a way to become a part of become a part of somesome buyer’s value chain buyer’s value chain
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System
Ch3-43
Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain
Upstream Value
Perform valuable activities that complement the firm’s activities
Buyer Value ChainBuyer Value Chain
Ultimate basis for Ultimate basis for differentiationdifferentiation is the ability is the ability to play a role in a to play a role in a buyer’s value chainbuyer’s value chain
This createsThis creates VALUE!! VALUE!!
Each firm must eventually find a way to become a part of some buyer’s value chain
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System
Ch3-44
Supplier Value Chain Firm Value Chain Channel Value Chain
Upstream Value
Perform valuable activities that complement the firm’s activities
Buyer Value Chain
Each firm must eventually find a way to become a part of some buyer’s value chain
Ultimate basis for differentiation is the ability to play a role in a buyer’s value chain
This creates VALUE!!
Value chains vary for firms in an industry, reflecting each firm’s unique qualities:
• History• Strategy• Success at Implementation
Value Chains are part of a Total Value SystemValue Chains are part of a Total Value System
Ch3-45
Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders
Never take for granted that core competencies will continue to provide a source of competitive advantageNever take for granted that core competencies will continue to provide a source of competitive advantage
All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities
Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment
Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment
Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats
Strategic myopia and inflexibility can strangle the firm’s ability to grow and adapt to environmental change or competitive threats
A statement of the firm’s unique A statement of the firm’s unique purpose and the scope of its purpose and the scope of its operations in product market operations in product market termsterms
A statement of the firm’s unique A statement of the firm’s unique purpose and the scope of its purpose and the scope of its operations in product market operations in product market termsterms
Leveraging of a firm’s resources, Leveraging of a firm’s resources, capabilities and core competencies capabilities and core competencies to accomplish what may appear to to accomplish what may appear to be unattainable goals in the compe- be unattainable goals in the compe- titive environmenttitive environment
Leveraging of a firm’s resources, Leveraging of a firm’s resources, capabilities and core competencies capabilities and core competencies to accomplish what may appear to to accomplish what may appear to be unattainable goals in the compe- be unattainable goals in the compe- titive environmenttitive environment