HI6006

Competitive Strategy

Lecture 3: Internal Capabilities

An Overview
 The Quest for ROI

•What a firm can do:

Function of resources,
INTERNAL capabilities and core
ORGANISATION competencies

•What a firm might do:

Function of opportunities in the
EXTERNAL firm’s external environment
ENVIRONMENT
 Terminology

• Strategic competitiveness is achieved when a

firm successfully formulates and implements a
value-creating strategy.
• Strategy is an integrated and coordinated set of
commitments and actions designed to exploit core
competencies and gain a competitive advantage.
• Competitive advantage occurs when a firm
implements a strategy that creates superior value
for customers, which competitors are unable to
duplicate it or find too costly to imitate it.
Internal Analysis Process
 Resource-Based View

An organisation has its resources and capabilities

When combined these represent a unique set of

‘core competencies’

Those ‘core competencies’ allow a firm to compete

and develop ‘sustainable competitive advantage’
 Competitive Advantage

• No competitive advantage can expect to last

forever.
• Environment changes AND rivals use their own
unique resources, capabilities and core
competencies to match, leap-frog, or overtake
each other.
• With globalization, achieving a sustainable
competitive advantage is especially challenging
Activity: Discuss how globalization is impacting
firms.
 A Model of Assessing Internal Capability
Look at the resources our company has:
 P – physical resources
 R - reputation
 O – organizational capability
 F – financial resources
 I – intellectual property / innovation
 T – technical
According to Jay Barney, circa 1988, P F T are
necessary tangible resources but will NOT create
sustainable competitive advantage; R O I (the
intangible resources) will give our firm the edge in
the long term.
Tangible Resources
Intangible Resources
 How strong are we (relative to others)?

For each resource:

1. How valuable is it?
2. How rare is it? (if every firm in our industry has
this resource, then it has little ‘relative value’
3. Can it be copied?
4. Can it be substituted?
If we have resources that are valuable, rare, hard
to copy and non-substitutable, then we may have a
relative competitive advantage within our industry.
Four Criteria of Sustainable Competitive Advantage
 Core Competence

• Can exist if all four criteria are satisfied.

• Can exists when competitors cannot copy a firm’s

strategy

• Can exist when competitors don’t have the

resources to do the same as us

• Can come to an end when external environmental

changes occur and/or rivals overtake us
 Watch out for Inertia

• Core competencies should not become core

rigidities, (as we have seen in long-lived firms
that have become over-focused on their historic
strengths) …… consider examples
• Core rigidities generate inertia and stifle
innovation.
• A firm must adjust as the world changes by
adjusting as External Environmental Conditions
change
 Competitive Advantage

To become a core competence and a source of

competitive advantage, a capability must allow a firm
to do one of the following:
• perform an activity in a manner that provides
superior value relative to competitors; OR
• perform a value-creating activity that
competitors cannot perform.
 Value Chain Analysis

• Value chain activities:

• Completed by a firm in order to produce
products and then sell, distribute and service
those products in ways that create value for
customers,
• Support functions:
• Completed by a firm in order to support the
work being done to produce, sell, distribute
and service the products the firm is producing.
The Value Chain
Elements of the Value Chain
How do Support Activities help create Value?
 Outsourcing

 The purchase of a value-creating activity or support

function from an external supplier

 Firms outsource activities when they cannot create

value themselves and are therefore at a
substantial disadvantage compared to their
competitors.

 If done skillfully, outsourcing can be effective as it

negates capital investment.
(lower fixed costs, although higher variable costs)
 Rationale for Outsourcing

• Specialty suppliers can typically perform

outsourced capabilities more efficiently.

• by negating the investment requirement, a firm is

more flexible and therefore better able to adapt to
changing opportunities.

• The specialised resources of outsourcing

providers allows small firms to also access world-
class capabilities available to firms
 Introduction to Case Analysis

 Read the Case – looking to identify (highlight)

key strategic issues
 Decide which Strategy Model or theoretical
concepts are relevant to this case
 Use the model as your ‘template’ to summarise
the key issues identified in the case
 Form a picture of how this company (case)
applies the strategy model or theoretical
concepts
 Evaluate how well the company (case) has
applied Strategy Theory
 Tutorial Activity in small groups

Examine the Zara mini-case (p73) and identify their

Tangible and Intangible resources
 Case Study

Analyse the Kindle Case (Case 6, p460) to

determine how core competencies were used to
create competitive advantages for Kindle Fire