Internal Environment: Resources, Capabilities, and Competitive Advantages

CHAPTER 3 THE INTERNAL ENVIRONMENT: RESOURCES, CAPABILITIES, COMPETENCIES, AND COMPETITIVE ADVANTAGES EXTERNAL ANALYSES’ OUTCOMES Opportunities and Threats By studying the external environment, firms identify what...

CHAPTER 3 THE INTERNAL ENVIRONMENT: RESOURCES, CAPABILITIES, COMPETENCIES, AND COMPETITIVE ADVANTAGES EXTERNAL ANALYSES’ OUTCOMES Opportunities and Threats By studying the external environment, firms identify what they MIGHT CHOOSE TO DO INTERNAL ANALYSES’ OUTCOMES Unique Resources, Capabilities, and Competencies (required for sustainable competitive advantage) By studying the internal environment, firms identify what they CAN DO  SKOT What Does Internal Analysis Tell Us? internal external Internal analysis provides a comparative look at a firm’s capabilities what are the firm’s strengths? what are the firm’s weaknesses? how do these strengths & weaknesses compare to competitors? Why Does Internal Analysis Matter? Internal analysis helps a firm: determine if its resources and capabilities are likely sources of competitive advantage establish strategies that will exploit any sources of competitive advantage Resource Based View and I/O Model are complementary RBV fills the gap of I/O Model - how do they things differently Internal Analysis External Analysis Strengths Opportunities Weaknesses Threats Resource Based Model I/O Models of Competitive Advantage 6 Why are there intra-industry differences? Wal-Mart vs K-Mart David and Goliath Cross-Docking - Walmart logistic system The Theory Behind Internal Analysis The Resource-Based View developed to answer the question: Why do some firms achieve better economic performance than others? used to help firms achieve competitive advantage and superior economic performance assumes that a firm’s resources and capabilities are the primary drivers of competitive advantage and economic performance The Resource-Based View Resources and Capabilities Resources: What a firm has to work with.. products,... reputation tangible and intangible assets of a firm » tangible: factories, products intangible: reputation used to conceive of and implement strategies Capabilities: What a firm Does.. a subset of resources that enable a firm to take full advantage of other resources » marketing skill, cooperative relationships COMPETITIVE ADVANTAGE KEY POINTS NO COMPETITIVE ADVANTAGE LASTS FOREVER OVER TIME, RIVALS USE THEIR OWN UNIQUE RESOURCES, CAPABILITIES, AND CORE COMPETENCIES TO DUPLICATE THE FOCAL FIRM’S ABILITY TO CREATE VALUE FOR CUSTOMERS WITH GLOBALIZATION, SUSTAINABLE COMPETITIVE ADVANTAGE IS ESPECIALLY CHALLENGING  „Company is people" - Lee, founder of Samsung COMPETITIVE ADVANTAGE KEY POINTS Firms must exploit their current advantages while simultaneously using their resources and capabilities to form new advantages that can lead to future competitive success INNOVATION and PEOPLE are critical resources for organizations in their quest for competitive advantage The Resource-Based View Two Critical Assumptions of the RBV Resource Heterogeneity » different firms may have different resources Resource Immobility » it may be costly for firms without certain resources to acquire or develop them » some resources may not spread from firm to firm easily  COMPETITIVE ADVANTAGE Components of Internal Analysis Leading to Competitive FIGURE 3.1 Advantage and Strategic Competitiveness Components of an Internal Analysis Figure 3.2 Conditions Affecting Managerial Decisions About Resources, Capabilities, and Core Competencies Condition Uncertainty Uncertainty exists about the characteristics of the firm’s general and industry environments and customers’ needs. Condition Complexity Complexity results from the interrelationships among conditions shaping a firm. Condition Intraorganizational Conflicts Intraorganizational conflicts may exist among managers making decisions as well as among those affected by the decisions. RESOURCES, CAPABILITIES, AND CORE COMPETENCIES Resources and superior capabilities Core Competencies that are sources of competitive advantage over a firm’s rivals An integrated and coordinated set of actions taken to exploit core Capabilities competencies and gain competitive a dvantage What a firm has to work with: its Resources assets, including its people and the Tangible Intangible value of its brand name, etc. RESOURCES, CAPABILITIES, AND CORE COMPETENCIES TYPES OF RESOURCES Tangible Resources Assets that can be seen, touched, and quantified Intangible Resources Assets rooted deeply in the firm’s history, accumulated over time In comparison to ‘tangible’ resources, usually can’t be seen or touched Compared to tangible resources, intangible resources are a superior source of core competencies  RESOURCES, CAPABILITIES AND, CORE COMPETENCIES TYPES OF RESOURCES Tangible Resources FINANCIAL RESOURCES - the firm’s capacity to borrow and generate i nternal funds ORGANIZATIONAL RESOURCES - formal reporting structures PHYSICAL RESOURCES - sophistication and location of a firm’s plant a nd equipment; distribution facilities; product inventory  RESOURCES, CAPABILITIES AND, CORE COMPETENCIES TYPES OF RESOURCES Intangible Resources HUMAN RESOURCES - knowledge; trust; skills; collaborative abilities INNOVATION RESOURCES - scientific capabilities; capacity to innovate REPUTATIONAL RESOURCES - brand name; perceptions of product quality, durability, and reliability; positive reputation with stakehold ers, e.g., suppliers/customers  RESOURCES, CAPABILITIES, AND CORE COMPETENCIES Core CAPABILITIES: What a firm Does... Competencies Emerge over time through complex interactions among tangible and intangible resources Stem from employees Capabilities Unique skills and knowledge Functional expertise Are activities that a firm performs exceptionally well relative to rivals Resources Are activities through which the firm Tangible Intangible adds unique value to its goods or services over an extended period of time  BUILDING CORE COMPETENCIES Core TWO TOOLS FIRMS USE TO IDENTIFY AND Competencies BUILD CORE COMPETENCIES: Four Specific Criteria of Sustainable Competitive Advantage that can be used to determine which capabilities are core competencies Capabilities Value Chain Analysis - this tool helps select the value-creating competencies that should be maintained, upgraded, or developed and those Resources that should be outsourced Tangible Intangibl e  BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage Capabilities must fulfill four specific criteria in order to be CORE COMPETENCIES 1. Valuable 2. Rare 3. Costly-to-imitate 4. Nonsubstitutable capabilities Four Criteria that Lead to Core Competencies Valuable Help a firm neutralize threats or exploit opportunities Must assess resources and capabilities relative to competitors’ Disaggregate the company’s resources - value chain support. value chain Manža ↓ ‘Marketing Skills’ are too broad activity ‘Effective Brand Management’ is still broad Sales ‘Product line extension without incurring much primary additional costs’, or value chain activity Designing capabilities to make most user-friendly interfaces Four Criteria that Lead to Core Competencies Valuable Are not possessed by many others Legally protected Patents Rare Copyrights Brand names Well-established Brand image Reputation for quality Four Criteria that Lead to Core Competencies Valuable Test inimitability of company’s resources and capabilities Unique Historical Condition - frigh attendant in Southwest Rare Social complexity Ambiguous cause (Causal Ambiguity) Costly to Imitate Leadership organized culture  BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage COSTLY-TO-IMITATE CAPABILITIES Unique Historical Condition: An unusual evolutionary pattern of growth may contribute to the development of competencies in a manner that is unique to those particular circumstances Ambiguous cause: The causes and uses of a competence are unclear Social complexity: Interpersonal relationships, trust, and friendship among managers, suppliers, and customers Four Criteria that Lead to Core Competencies Valuable No strategic equivalent Firm-specific knowledge Rare Organizational culture Superior execution of the chosen business model Costly to Imitate Non-substitutable BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage SUSTAINABLE COMPETITIVE ADVANTAGE 1. Exists only when competitors cannot duplicate a firm’s strategy or when they lack the resources to attempt imitation 2. Exists until competitors can successfully imitate a good, service, or process 3. Lasts for a relatively long period of time if all four of the criteria discussed are satisfied  BUILDING CORE COMPETENCIES The Four Criteria of Sustainable Competitive Advantage COMPETITIVE CONSEQUENCES Focus on capabilities that yield competitive parity and either temporary or sustainable competitive advantage PERFORMANCE IMPLICATIONS Parity = average returns (always) Temporary advantage = average to above average returns Sustainable advantage = above average returns using valuable, rare, costly-to-imitate, and nonsubstitutable capa bilities  BUILDING CORE COMPETENCIES TABLE 3.5 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Strategic Management (13th edition), Hitt, M.A. Ireland, R.D., and Hoskisson, R.E., 2019. Cengage  BUILDING CORE COMPETENCIES 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: Understand their cost position Facilitate the implementation of a chosen business-level strategy  https://youtu.be/6uc_huc5G24 The Value Chain Sushi is an iconic Japanese cuisine beloved by many people. Find what’s it like to own a sushi restaurant in Japan. Think about the value chain of a sushi restaurant. What are the most important activities in the value chain? Firm infrastructure (e.g., Finance, Planning) Support Activities Sushi ustancant → great fishes are the mostu important Human resource management Technology development (R&D, Design, etc.) Management Information Systems Inbound Operations Outbound Marketing After-sale Logistics: Logistics: and sales service Supply Distribution Chain Management Primary Activities  Value Chain Analysis Value chains are segmented into: Primary Activities are activities or tasks the firm completes in order Not necessarily to produce products and then sell, distribute, and service those pro the most important activities ducts 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. A firm can develop a capability and/or a core competence in any of the value chain activities and support functions. Figure 3.4 Creating Value through Value Chain Activities Figure 3.5 Creating Value through Support Functions  Value Chain Analysis Value chain analysis can also be used to look for deficiencies in the organization that could be holding back the creation of value. This part of the analysis rests on the assumption that a firm is a value creation system. In a value creation system, each part of a system depends on other parts of the system to create value. Value chain analysis can help managers determine which activities hold the most potential for the firm to develop a competence. BUILDING CORE COMPETENCIES VALUE CHAIN ANALYSIS Both value chain (primary and support) activities should be analyzed Competitive landscape demands that value chains and supply chains be examined in a global context Each activity should be examined relative to competitor’s abilities and rated as superior, equivalent, or inferior BUILDING CORE COMPETENCIES VALUE CHAIN ANALYSIS To become a core competence and a source of competitive advantage, a capability must allow the firm: 1. to perform an activity in a manner that provides superior value relative to competitors, or 2. to perform a value-creating activity that competitors cannot perform