CHAPTER 3

STRATEGIC MANAGEMENT INPUTS

The Internal Environment: Resources, Capabilities, and Core Competencies

Strategic Management
PowerPoint Presentation by Charlie Cook The University of West Alabama 2007 Thomson/South-Western. All rights reserved.

Competitiveness and Globalization: Seventh edition Concepts and Cases

Michael A. Hitt R. Duane Ireland Robert E. Hoskisson

KNOWLEDGE OBJECTIVES Studying this chapter should provide you with the strategic management knowledge needed to:

1. Explain the need for firms to study and understand their internal environment.
2. Define value and discuss its importance. 3. Describe the differences between tangible and intangible resources. 4. Define capabilities and discuss how they are developed. 5. Describe four criteria used to determine whether resources and capabilities are core competencies.
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In preparing for battle I have always found that plans are useless, but planning is indispensable.
- Dwight D. Eisenhower

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The Internal Environment

Owner: someone who has legal property rights to a business. Board of directors: governing body elected by a corporations stockholders and charged with overseeing the general management of the firm. Employees: those employed by the organization. Physical work environment: the firms facilities.

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The Organizational Environment

Public pressure groups

Suppliers

Customers

Government

The Organization

Labor unions

Competitors

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Additional Dimensions
Political-Legal dimension: the government regulation of business and the general relationship between business and government. International dimension: the extent to which an organization is involved in or affected by business in other countries.

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The Task Environment

Competitors: an organization that competes with other organizations. Customer: whoever pays money to acquire an organizations products or services. Supplier: an organization that provides resources for other organizations. Regulator: a unit that has the potential to control, legislate, or influence an organizations policies and practices.

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Task Environments Continued

Interest group: a group organized by its members to attempt to influence organizations. Strategic partner: an organization working together with one or more organizations in a joint venture or other partnership.

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Competitive Advantage
Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively:
Acquired. Bundled. Leveraged.

Over time, the benefits of any value-creating strategy can be duplicated by competitors.

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Competitive Advantage (contd)

Sustainability of a competitive advantage is a function of:
The rate of core competence obsolescence due to environmental changes.
The availability of substitutes for the core competence. The difficulty competitors have in duplicating or imitating the core competence.

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Internal Analyses Outcomes

Unique resources, capabilities, and competencies

(required for sustainable competitive advantage)

By studying the internal environment, firms identify what they can do

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The Context of Internal Analysis

Global Economy
Traditional sources of advantages can be overcome by competitors international strategies and by the flow of resources throughout the global economy.

Global Mind-Set
The ability to study an internal environment in ways that are not dependent on the assumptions of a single country, culture, or context.

Analysis Outcome
Understanding how to leverage the firms bundle of heterogeneous resources and capabilities.
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Creation and Maintenance of Organizational Cultures

Company Founder

Organizational Stories

Organizational Heroes

5.1
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Successful Organizational Cultures

Adaptability Consistency Involvement

Clear Vision

Sales Growth Return on Assets

5.2
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Employee Satisfaction Profits Quality

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Adapted from Exhibit 2.7 D.R. Denison & A.K. Mishra, Organization Science 6(1995): 204-223

Blast from the Past

Corporate history helps employees and managers understand the people, and events, and changes that shaped a company Preserves culture and values Gets people involved in the culture of a company

5.2
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Changing Organizational Cultures

Behavioral addition
is the process of having managers and employees perform a new behavior

Behavioral substitution
is having managers and employees perform a new behavior in place of another behavior

Change visible artifacts

such as the office design and layout, company dress codes, etc.
5.3
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FIGURE 3.1

Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness

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Creating Value
By exploiting their core competencies or competitive advantages, firms create value.

Value is measured by:

Product performance characteristics Product attributes for which customers are willing to pay

Firms create value by innovatively bundling and leveraging their resources and capabilities. Superior value Above-average returns
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Creating Competitive Advantage

Core competencies, in combination with productmarket positions, are the firms most important sources of competitive advantage. Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.

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The Challenge of Internal Analysis

Strategic decisions in terms of the firms resources, capabilities, and core competencies:
Are non-routine.
Have ethical implications. Significantly influence the firms ability to earn aboveaverage returns.

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The Challenge of Internal Analysis (contd)

To develop and use core competencies, managers must have:
Courage
Self-confidence Integrity The capacity to deal with uncertainty and complexity A willingness to hold people (and themselves) accountable for their work

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Innovation
Innovation is the act of creating
processes Product innovation
Creates products that customersperceive as more valuable and Increases the companys pricing options

new products or new

Process innovation
Creates value by lowering production costs

Successful innovation can be a major source of competitive advantage by giving a company something unique, something its competitors lack.
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FIGURE

3.2

Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies

Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic Management Journal, 14: 33. 2007 Thomson/South-Western. All rights reserved.

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Resources
Resources
Are a firms assets, including people and the value of its brand name. Represent inputs into a firms production process, such as:
Capital equipment Skills of employees Brand names Financial resources Talented managers

Types of Resources
Tangible resources
Financial resources Physical resources Technological resources Organizational resources

Intangible resources
Human resources Innovation resources Reputation resources
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TABLE

3.1

Tangible Resources

The firms borrowing capacity The firms ability to generate internal funds Organizational Resources The firms formal reporting structure and its formal planning, controlling, and coordinating systems Physical Resources Sophistication and location of a firms plant and equipment Access to raw materials Technological Resources Stock of technology, such as patents, trademarks, copyrights, and trade secrets Financial Resources

Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100102. 2007 Thomson/South-Western. All rights reserved.

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TABLE

3.2

Intangible Resources
Knowledge Trust Managerial capabilities Organizational routines Ideas Scientific capabilities Capacity to innovate 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
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Human Resources

Innovation Resources

Reputational Resources

Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101104. 2007 Thomson/South-Western. All rights reserved.

The Resource-Based model of Above Average Returns

The resource based view suggests that a firms unique resources and capabilities provide the basis for a strategy.

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The Resource-Based Model of Superior Returns Action required: Identify firm resources. Study strengths & weaknesses relative to rivals.

Resources

Inputs to a firms production process.

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The Resource-Based Model of Superior Returns Action required: Determine what firm capabilities allow it to do better than rivals.

Resources Capability
Inputs to a firms Capacity for production process. integrated set of resources to integratively perform a task or activity.

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The Resource-Based Model of Superior Returns Action required: Determine how firms resources & capabilities may create competitive advantage.

Resources Capability Inputs to a firms Competitive Capacity for an Advantage production process.

integrated set of resources Ability of a firm to to integratively perform its rivals outperform a task or activity.

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The Resource-Based Model of Superior Returns Action required: Locate an attractive industry. Resources Capability Competitive Inputs to a firms Advantage Attractive Capacity for an An production process. integrated set of Industry Ability of a firm to

resources to Location of outperform integratively perform its rivals an industry a task or activity. with opportunities that can be exploited by firms resources & capabilities

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The Resource-Based Model of Superior Returns Action required: Select strategy that best exploits res.& capabilities relative to opportunities in environments.

Resources Capability Competitive Inputs to a firms Advantage Attractive Capacity for an An production process. integrated set of Strategy Industry resourcesAbility of a firm to Formulation and to Location of outperform its integratively perform a rivals an ind. with opportunities Implementation task or activity.

that can be exploited by firmsStrategic actions taken resources to earn & capabilities above-average returns

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Value Chain Analysis

Firm Infrastructure Human Resource Management

Support Activities

Technological Development Procurement

Operations

Outbound Logistics

Inbound Logistics

Primary Activities
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Marketing & Sales

Service

Environmental Change, Complexity, and Uncertainty

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Management Culture
The set of values, beliefs, behaviors, customs, and attitudes that helps the members of the organization understand what it stands for, how it does things, and what it considers important. Organizational culture is important for it determines the feel of the organization. Its starting point is often the founder.

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Managing Organizational Culture

The manager must understand the current culture and then decide if it should be maintained or changed. Managers must walk a fine line between maintaining a culture that still works effectively versus changing a culture that has become dysfunctional.

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Organizational Environment Relationships

Uncertainty: a driving force that influences many organizational decisions. Competitive forces:
Threat of new competitive entrants. Competitive rivalry. Threat of substitute products. The power of buyers. The power of suppliers.

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Environmental Turbulence
Terrorist attacks. Workplace violence. Computer viruses. Such crises affect organizations in different ways.

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How Organizations Respond to Their Environments:

General environment Task environment

Information management
Mergers, takeovers acquisitions, alliances

Social responsibility

The Organization
Strategic responses Organization design and flexibility

Direct influence

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How Organizations Adapt to Their Environments

Each organization must asses its own unique situation then adapt according to the wisdom of senior management, for example:
Information systems. Strategic responses. Mergers, acquisitions, and alliances. Organizational design and flexibility. Direct influence of the environment.

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The Environment and Organizational Effectiveness

How well the organization understands, reacts to, and influences its environment. The systems resources approach: extent to which the organization can acquire needed resources. The internal processes approach: internal mechanisms of the organization and forces on minimizing strain. The goal approach: how well the firm obtains goals. Strategic constituencies: groups who have a stake in the organization.

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