Quote

Know your enemy and know yourself, and in a

hundred battles you will never be defeated.
When you are ignorant of the enemy but know
yourself, your chances of winning or losing are
equal. If ignorant of both of your enemy and
of yourself, you are sure to be defeated in
every battle.
-Sun Tzu, 323 b.c.e

Topic 3: The Internal

Environment

Review

Internal Analysis

Mission and Vision

How do we use firm resources to achieve

competitive advantage?

Focus the activities of the firm

External Analysis
Identify opportunities and threats that affect the
firm now, and might possibly affect the firm in the
future

Resources are costly

Resources provide value
Most resources: value = cost
Some resources: value > cost
These resources are core competencies and are a source
of strength to the firm

Conditions Affecting Managerial

Decisions

The Challenge of Internal Analysis

Strategic decisions in terms of the firms
resources, capabilities, and core competencies

Uncertainty: regarding characteristics of the general and

the industry environments, competitors actions, and consumer
preferences

Are non-routine
Have ethical implications
Significantly influence the firms ability to earn
above-average returns

Complexity: regarding the interrelated causes shaping the

firms environment and perceptions of the environment

Interorganizational conflicts: among people making

managerial decisions and those affected by them

The Challenge of Internal Analysis

(contd)
To develop and use core competencies,
managers must have

Strengths and Weaknesses

Difficult to understand
Complex and unpredictable

Courage
Self-confidence
Integrity
The capacity to deal with uncertainty and
complexity
A willingness to hold people (and themselves)
accountable for their work

Currently understood using RBV theory

Strengths = Core competencies
Weaknesses = Core Rigidities

Both strengths and weaknesses come from

Resources and Capabilities
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Competitive Advantage

Competitive Advantage (contd)

Firms achieve strategic competitiveness and

earn above-average returns when their core
competencies are effectively

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

Acquired, maintained, and organized

Leveraged against opportunities

Over time, the benefits of any value-creating

strategy can be duplicated by competitors

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Resources and Capabilities of

Organizations

Creating Value
By exploiting their core competencies firms create
value
Value is measured by

Resources

A products performance characteristics

The products attributes for which customers are willing to
pay
Economic value due to scarcity and cost

Firms create value by innovatively bundling and

resources and capabilities in ways that allow them to
satisfy consumer needs
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Inputs into a firms

production process
Capital equipment
Skills of individual
employees
Patents
Finances
Talented managers

Capabilities
Capacity of a set of
resources to perform in
an integrative manner
A capability should not
be
So simple that it is
highly imitable
So complex that it
defies internal
steering and control
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Resources, Capabilities and Core

Competencies

Tangible resources
Financial resources

Resources
Are the source of a firms
capabilities
Are broad in scope
Cover a spectrum of
individual, social and
organizational phenomena
Alone, do not yield a
competitive advantage
Examples

Resource Examples

Classification of
Resources

The firms borrowing capacity

The firms ability to generate internal
funds

Physical resources

Tangible resources
Intangible resources

Sophistication and location of a firms

plant and equipment
Access to raw materials

Technological resources
Stock of technology, such as patents,
trade-marks, copyrights, and trade
secrets

Organizational resources
The firms formal reporting
structure and its formal planning,
controlling, and coordinating
systems

Capital equipment
Skills of employees
Brand names
Financial resources
Talented managers
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Knowledge
Trust
Managerial capabilities
Organizational routines

innovation resources
Ideas
Scientific capabilities
Capacity to innovate

Reputation 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

Core Competencies

Capabilities

Are the firms capacity to

deploy resources that have
been purposely integrated to
achieve a desired end state
Emerge over time through
complex interactions among
tangible and intangible
resources
Often are based on developing,
carrying, and exchanging
information and knowledge
through the firms human
capital

Human resources

14
SOURCES: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136139; 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, 100104.

Capabilities
Capabilities

Intangible resources

Activities that a firm

performs especially well
Resources and capabilities that
compared to competitors
serve as a source of a firms
Activities through which the
competitive advantage:
firm adds unique value to its
Distinguish a company
goods or services over a long
competitively and reflect its
personality
period of time

Core Competencies

The foundation of many

capabilities lies in:
The unique skills and
knowledge of a firms
employees
The functional expertise of
those employees

Capabilities are often

developed in specific
functional areas or as part of a
functional area

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Four Key Criteria of

Resources and Capabilities

Implications

Valuable

Core competencies are resources and

capability that can be controlled by the firm
External or uncontrollable resources and
capabilities cannot be core competencies
Tangible resources can only be core competencies
under very rare conditions
They are too easy to copy or imitate

Resources and capabilities are valuable when they allow a

firm to take advantage of opportunities or neutralize threats
in external environment

Rare
Resources and capabilities are rare when possessed by few,
if any, current and potential competitors

Costly to Imitate
Resources and capabilities are costly to imitate when other
firms either cannot obtain them or are at a cost
disadvantage in obtaining them

Nonsubstitutable
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Resources and capabilities are nonsubstitutable when they 18

have no structural equivalents

Special Situations

Core Competencies
When the four key criteria of resources and
capabilities are met, they become core
competencies

Intangible resources are hard to imitate

Tangible resources are easy to imitate

Tangible resources are almost never core

competencies, except when the following
exist:

Core competencies are the source of strengths

Strengths provide competitive advantage
Managerial competencies are especially important

When resources and capabilities are costly, they

are core rigidities

Unique historical conditions

Causal ambiguity
Social complexity

Core rigidities are weaknesses and a source of

competitive disadvantage
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Outcomes from Combinations of the

Criteria for Sustainable Competitive
Advantage

20

Identification of Core Competencies

Benchmarking
Comparing the organizations practices and
performance to other organizations especially
those with exemplary performance

Value chain analysis

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Value Chain Analysis

22

Value Chain Analysis (contd)

Allows the firm to understand the parts of its

operations that create value and those that do
not
A template that firms use to:

Primary activities involved with:

A products physical creation
A products sale and distribution to buyers
The products service after the sale

Understand their cost position

Identify multiple means that might be used to
facilitate implementation of a chosen businesslevel strategy

Support activities
Provide the support necessary for the primary
activities to take place

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24

The Basic
Value Chain

Value Chain Analysis (contd)

To perform an activity in a manner that is superior

to the way competitors perform it, or
To perform a value-creating activity that
competitors cannot
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Things that Cannot be Core

Competencies

Service
Marketing and Sales

Procurement

Firm Infrastructure

To be a source of competitive advantage, a

resource or capability must allow the firm:

Technological Development

Illustrates how a product moves from raw-material

stage to the final customer

Human Resource Management

Value chain

Outbound Logistics
Operations
Inbound Logistics

26

Michael Porter, 1985, Competitive Advantage, Free Press, NY.

Things that Could be Core

Competencies

Firm outputs (goods: products and services)

Firm abilities and activities used to produce

valuable goods and services for customers

Outputs are the actions taken to satisfy customers

Outputs result from the use of core competencies

Reputation
Not under the control of management

Tangible resources and capabilities

Too easy to imitate or substitute
E.g. real estate, equipment
27

Firm inventiveness, creativity, originality

Manufacturing efficiency or quality
Managerial ability to anticipate opportunities and
threats, manage, plan for the future
Employee efficiency or talent,
The ability to understand or anticipate customer
needs
28
Organizational routines and processes

A firm can concentrate on those areas in which it can

create value
Specialty suppliers can perform outsourced capabilities
more efficiently

29

Michael Porter, 1985, Competitive Advantage, Free Press, NY.

Service
Marketing and Sales

Procurement

Outsourced
activity

By forming and emphasizing fewer capabilities

Technological Development

Few organizations possess the resources and capabilities

required to achieve competitive superiority in all primary
and support activities

Firm Infrastructure

A firm may
outsource all or only
part of one or more
primary and/or
support activities.

The purchase of a value-creating activity from an

external supplier

Human Resource Management

Outsourcing Decisions

Outsourcing

Outbound Logistics
Operations
Inbound Logistics

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Strategic Rationales for

Outsourcing

Outsourcing Issues

Improve business focus - Lets a company focus on broader

business issues by having outside experts handle various operational details

Provide access to world-class capabilities - The

Evaluating resources and capabilities - Do not outsource

activities in which the firm itself can create and capture value

Environmental threats and ongoing tasks - Do not

specialized resources of outsourcing providers makes world-class

capabilities available to firms in a wide range of applications

outsource primary and support activities that are used to neutralize

environmental threats or to complete necessary ongoing organizational
tasks

Accelerate business re-engineering benefits - Achieves

re-engineering benefits more quickly by having outsiderswho have
already achieved world-class standardstake over process

Greatest value - Outsource only to firms possessing a core

competence in terms of performing the primary or supporting the
outsourced activity

Sharing risks - Reduces investment requirements and makes firm

more flexible, dynamic and better able to adapt to changing opportunities

Nonstrategic team of resources - Do not outsource capabilities

Frees resources for other purposes - Redirects efforts from

that are critical to the firms success, even though the capabilities are not
actual sources of competitive advantage

non-core activities toward those that serve customers more effectively

Firms knowledge base - Do not outsource activities that

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Cautions and Reminders

stimulate the development of new capabilities and competencies

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Last Slide

Never take for granted that core competencies will

continue to provide a source of competitive advantage
All core competencies have the potential to become
core rigidities
Core rigidities are former core competencies that now
generate inertia and stifle innovation

Determining what the firm can do through continuous

and effective analyses of its internal environment
increases the likelihood of long-term competitive
success
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Today

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Chapter 3
Analyzing the Internal Environment
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