The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
Study outcome
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.
The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
Study outcome
5.Describe four criteria used to determine whether resources and capabilities are core competencies.
6.Explain how value chain analysis is used to identify and evaluate resources and capabilities.
7.Define outsourcing and discuss reasons for its use.
8.Discuss the importance of identifying internal strengths and weaknesses
Analyzing the Internal Organization
•A global mind-set is the ability to study an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context.
•Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay.
Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness
Resources - Tangible - IntangibleCapabilitiesCore CompetenciesDiscovering Core CompetenciesCompetitive AdvantageStrategic Competitive-nessFour Criteria of Sustainable AdvantagesValue Chain Analysis- Valuable- Rare- Costly to Imitate- Nonsubstitutable- Outsource
Resources, Capabilities, and Core Competencies
Resources are inputs into a firm’s production process, such as capital equipment, the skills of individual employees, patents, finances, and talented managers.
•Tangible resources are assets that can be seen and quantified.
•Intangible resources include assets that are rooted deeply in the firm’s history and have accumulated over time.
Tangible Resources
Resources
Details
Financial Resources
• The firm’s borrowing capacity
• The firm’s ability to generate internal funds
Organizational Resources
• The firm’s formal reporting
structure and its formal planning, controlling, and coordinating systems
Physical Resources
• Sophistication and location of a firm’s plant and equipment
• Access to raw materials
Technological Resources
• Stock of technology, such as patents, trademarks, copyrights, and trade secrets
Intangible Resources
Resources
Details
Human Resources
• Knowledge
• Trust
• Managerial capabilities
• Organizational routines
Innovation Resources
• Ideas
• Scientific capabilities
• Capacity to innovate
Reputational Resources
• Reputation with customers
• Brand name
• Perceptions of product quality, durability, and reliability
• Reputation with suppliers
• For efficient, effective, supportive, and mutually beneficial interactions and relationships
Resources, Capabilities, and Core Competencies
•A capability is the capacity for a set of resources to perform a task or an activity in an integrative manner.
•Capabilities are often based on developing, carrying, and exchanging information and knowledge through the firm’s human capital.
•Capabilities evolve over time and must be managed dynamically in pursuit of above-average returns.
Resources, Capabilities, and Core Competencies
Examples of Firms
Functional Areas
Capabilities
Microsoft
Human resources
Motivating, empowering, and retaining employees
Sony
Manufacturing
Miniaturization of components and products
Procter & Gamble
Marketing
Effective promotion of brand-name products
Wal-Mart
Distribution
Effective use of logistics management techniques
Resources, Capabilities, and Core Competencies
•Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals.
•Two tools help firms identify and build their core competencies:
–The first consists of four specific criteria.
–The second tool is the value chain analysis.
Four Criteria of Sustainable Competitive Advantage
•Valuable capabilities allow the firm to exploit opportunities or neutralize threats in its external environment.
•Rare capabilities are capabilities that few, if any, competitors possess.
•Costly-to-imitate capabilities are capabilities that other firms cannot easily develop.
•Non-substitutable capabilities are capabilities that do not have strategic equivalents.
Case study
Zara clip
Question
•What is the core competency that Zara uses to compete with its rivals?
Value Chain Analysis
•The value chain is a template that firms use to understand their cost position and to identify the multiple means that might be used to facilitate implementation of a chosen business-level strategy.
•Value chain analysis allows the firm to understand the parts of its operations that create value and those that do not.
Value Chain Analysis
•Firms use this tool to select the value-creating competencies that should be maintained, upgraded, or developed and those that should be outsourced.
•Primary activities are involved with a product’s physical creation, its sale and distribution to buyers, and its service after the sale.
•Support activities provide the assistance necessary for the primary activities to take place.
The Basic Value Chain
Examining the Value-Creating Potential of Primary Activities
Inbound Logistics
•Activities, such as materials handling, warehousing, and inventory control, 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.
•Machining, packaging, assembly, and equipment maintenance are examples of operations activities.
Outbound Logistics
•Activities involved with collecting, storing, and physically distributing the final product to customers.
•Examples of these activities include finished-goods warehousing, materials handling, and order processing.
Examining the Value-Creating Potential of Primary Activities
Marketing and Sales
•Activities completed to provide means through which customers can purchase products and to induce them to do so.
•To effectively market and sell products, firms develop advertising and promotional campaigns, select appropriate distribution channels, and select, develop, and support their sales force.
Examining the Value-Creating Potential of Primary Activities
Service
•Activities designed to enhance or maintain a product’s value. Firms engage in a range of service related activities, including installation, repair, training, and adjustment.
•Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.
Examining the Value-Creating Potential of Support Activities
Procurement
•Activities completed to purchase the inputs needed to produce a firm’s products. Purchased inputs include items fully consumed during the manufacture of products (e.g., raw materials and supplies, as well as fixed assets—machinery, laboratory equipment, office equipment, and buildings).
Examining the Value-Creating Potential of Support Activities
Technological Development
•Activities completed to improve a firm’s product and the processes used to manufacture it.
•Technological development takes many forms, such as process equipment, basic research and product design, and servicing procedures.
Human Resource Management
•Activities involved with recruiting, hiring, training, developing, and compensating all personnel.
Examining the Value-Creating Potential of Support Activities
Firm Infrastructure
•Firm infrastructure includes activities such as general management, planning, finance, accounting, legal support, and governmental relations that are required to support the work of the entire value chain. Through its infrastructure, the firm strives to effectively and consistently identify external opportunities and threats, identify resources and capabilities, and support core competencies.
Examining the Value-Creating Potential of Support Activities
Firm Infrastructure
•Each activity should be examined relative to competitors’ abilities. Accordingly, firms rate each activity as superior, equivalent, or inferior.
Outsourcing
•When the firm cannot create value in either a primary or support activity, outsourcing is considered.
•Outsourcing is the purchase of a value-creating activity from an external supplier.
•Firms must outsource only activities where they cannot create value or where they are at a substantial disadvantage compared to competitors.