Chapter 3

The Internal Environment: Resource, Capabilities, Core Competencies, and Competitive Advantages

To identify and successfully use resources over time, those leading firms need to think
constantly about how to manage resources for the purpose of increasing the value for customers
as compared to the value rivals products create. Firms achieve strategic competitiveness and
earn above-average returns by acquiring, bundling, and leveraging. Even if the firm develops and
manages resources in ways that create core competencies and competitive advantages,
competitors will eventually learn how to duplicate the benefits of any firms value-creating
strategy; thus all competitive advantages have a limited life. In general, a competitive
advantages sustainability is a function of three factors :
1. The rate of core competence obsolescence because of environmental changes
2. The availability of substitutes for the core competence
3. The difficulty competitors have in duplicating or imitating the core competence
By analyzing its internal organization, a firm determines what it can do (a function of its
resources, capabilities, and core competencies in the internal organization).
Analyzing the Internal Organization
The context of Internal Analysis
Increasingly, those analyzing their firms internal organization should use a global midset to do so. A global mid-set is the ability to analyze, understand, and manage an internal
organization in ways that are not dependent on the assumptions of a single country, culture, or
context. Because they are able to span artificial boundaries, those with a global mind-set
recognize that their firms must possess resources and capabilities that allow understanding of and
appropriate responses to competitive situations that are influenced by country-specific factors
and unique cultures. Using a global mind-set to analyze the internal organization has the
potential to significantly help the firm in its efforts to outperform rivals. Understanding how to
leverage the firms unique bundle of resources and capabilities is a key outcome decision makers
seek when analyzing the internal organization. This figure illustrates the relationships among
resources, capabilities, core competencies, and competitive advantages and shows how their
integrated use can lead to strategic competitiveness.

Creating Value
Firms use their resources as the foundation for producing goods or services that will
create value for customers. Value is measured by a products performance characteristics and by
its attributes for which customers are willing to pay. Firms create value by innovatively bundling
and leveraging their resources to form capabilities and core competencies. Firms with a
competitive advantage create more value for customers than do competitors. The stronger these
firms core competencies, the greater the amount of value theyre able to create for their
customers. In fact, core competencies, in combination with product-market positions, are the
firms most important sources of competitive advantage. A firms core competencies, integrated
with an understanding of the result of studying the condition in the external environment, should
drive the selection of strategies.
The Challenge of Analyzing the Internal Organization

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The strategic decision managers make about their firms internal organization are non-routine,
have ethical implications, and significantly influences the firms ability to earn above-average
returns. Making decisions involving the firms assets-identifying, developing, deploying, and
protecting resources, capabilities, and core competencies-may appear to be relatively easy.
However, this task is as challenging and difficult as any other with which managers are involved;
moreover, the task is increasingly internationalized. There is three conditions, uncertainty,
complexity, and intra-organizational conflict, affect managers as they analyze the internal
organization and make decisions about resources.
Resources, Capabilities and Core Competencies
Resources, capabilities and core competencies are the foundation of competitive advantage.
Resources are bundled to create organizational capabilities. In turn, capabilities are the sources of
a firms core competencies, which are the basis of establishing competitive advantages.
Resources
Broad in scope, resources cover a spectrum of individual, social, and organizational phenomena.
Indeed, resources are combined to form capabilities. Some of a firms resources are tangible
while others are intangible. Tangible resources are assets that can be observed and quantified.
Intangible resources are assets that are rooted deeply in the firms history and have accumulated
over time. Because they are embedded in unique pattern of routines, intangible resources are
difficult for competitors to analyze and imitate.

Tangible Resources
Financial Resources
The firms borrowing capacity

The firms ability to generate internal

funds
Organizational Resources
The firms formal reporting structure

Intangible Resources
and its formal planning, controlling,
Human Resources
and
coordinating systems
Knowledge
Physical Resources
Trust
Sophistication and location of a firms
plant and equipment
Managerial capabilities
Access to raw materials
Organizational routines
Technological Resources
Stock of technology, such as patents, trade-marks,
Innovation Resources
copyrights, and trade secrets
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

Capabilities
The firm combines individual tangible and intangible resources t create capabilities. In turn,
capabilities are used to complete the organizational tasks required to produce, distribute, and
service the goods or services the firm provide to customer for the purpose of creating value for
them. As a foundation for building core competencies and hopefully competitive advantages,
capabilities are often based on developing, carrying and exchanging information and knowledge
through the firms human capital.

Core Competencies
Core competencies are capabilities that serve as a source of competitive advantage for a firm
over its rivals. Core competencies distinguish a company competitively and reflects itd
personality. Core competencies emerge over time through an organizational process of
accumulating and learnong how to deploy different resources and capabilities.
Building Core Competencies
Two tools help firms identify their core competencies. The first consists of four spesific criteria
of sustainable competitive advantage that can be used which capabilities are core competencies.
The second tool is the value chain analysis. Firm use this tool to select the value-creating
competencies that should be maintained, upgraded, or developed and those that should be
outsourced.
The Four Criteria of Sustainable Competitive Advantage

Valuable Capabilities

Help a firm neutralize threats or

exploit opportunities
Rare Capabilities

Are not possessed by many others

Costly-to-Imitate Capabilities

Historical: A unique and a valuable

organizational culture or brand name

Ambiguous cause: The causes and
uses of a

competence are unclear

Social complexity: Interpersonal relationships,
trust, and friendship among managers, suppliers,
and customers

Non-substitutable Capabilities

In turn, core competencies can lead to competitive advantages for the firm over its rivals.

No strategic equivalent

Capabilities failing to satisfy the four criteria are not core competencies, meaning that although
every core competence is a capability, not every capability is a core competence. In slightly
different words, for a capability to be a core competence, it must be valuable and unique from a
customers point of view. For a core competence to be potential source of competitive advantage,
it must be inimitable and non-sustainable by competitors.

Valuable
Valuable competencies allow the firm to exploit opportunities or neutralize threats in its external
environment. By effectively using capabilities to exploit opportunities or neutralize threats, a
firm creates value for customer.
Rare
Rare capabilities are capabilities that few, if any, competitors posses. Capabilities possessed by
many rivals are unlikely to become core competencies for any of the involved firms. Instead,
valuable but common (i.e., not rare) capabilities are sources of competitive parity. Competitive
advantage results only when firms develop and exploit valuable capabilities that become core
competencies and that differ from those shared with competitors.
Costly to Imitate
Costly to imitate capabilities are capabilities that other firms cannot easily develop. Capabilities
that are costly to imitate are created because of one reason or a combination of three reasons.
First, a firm sometimes is able to develop capabilities because of unique historical conditions. As
firms evolve, they often acquire or develop capabilities that are unique to them. A firm with a
unique and valuable organizational culture that emerged in the early stages of the companys
history may have an imperfectly imitable advantage over firms founded in another historical
period.
A second condition of being costly to imitate occurs when the link between the firms core
competencies and its competitive advantage is causally ambiguous. In these instances,
competitor cant clearly understand how a firm uses its capabilities that are core competencies as
the foundation for competitive advantage. As a result, firm are uncertain about the capabilities
they should develop to duplicate the benefits of a competitors value-creating strategy.

Social complexity is the third reason that capabilities can be costly to imitate. Social complexity
means that at least some, and frequently many, of the firms capabilities are the product of
complex social phenomena.
Non-substitutable
Non-substitutable capabilities are capabilities that do not have strategic equivalents. This final
criterion is that there must be no strategically equivalent valuable resources that are themselves
either not rare or imitable. Two valuable firm resources (or two bundles of firm resources) are
strategically equivalent when they each can be separately exploited to implement the same
strategies. In general, the strategic value of capabilities increases as they become more difficult
to substitute. The more intangible and hence invisible capabilities are, the more difficult it is for
firms to find substitutes and the greater the challenge is to competitors trying to imitate a firms
value-creating strategy.
Value Chain Analysis
Value chain analysis allows the firm to understand the parts of its operations that create value and
those that do not. Understanding these issues is important because the firm earns above-average
returns only when the value it creates is greater that the costs incurred to create that value. The
value chain is a template that firms use to analyze their cost position and to identify the multiple
means that can be used to facilitate implementation of a chosen strategy. This is a model of the
value chain.
As depicted in the model, a firms value chain is segmented into value chain activities and
support function. Value chain activities are activities or tasks the firm completes in order to
produce products and then sell, distribute, and service those products 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 services 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 in any of the support functions. When it does so, it has established an ability to
create value for customers. When using their unique core competencies to create unique value for
customers that competitors cannot duplicate, firm have established one or more competitive
advantage. 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 provide value superior to that
provided by competitors
2. To perform a value creating activity
that competitors cannot perform.
Only under these conditions does a firm
create

value

for

customers

and

have

opportunities to capture that value.

Outsourcing
Outsourcing is the purchase of value-creating
activity or a support function activity or a
support function activity from an external
supplier.

Firms

engaging

in

effective

outsourcing increase their flexibility, mitigate risks, and reduce their capital investments. In
multiple global industries, the trend toward outsourcing continues at a rapid pace. Moreover, in
some industries virtually all firms seek the value that can be captured through effective
outsourcing. As with other strategic management process decisions, careful analysis is required
before the firm decides to outsource. And if outsourcing is to be used, firms must recognize that
only activities where they cannot create value or where they are at substantial disadvantage
compared to competitors should be outsourced.
Outsourcing can be effective because few, if any, organizations possess the resources and
capabilities required to achieve competitive superiority in all value chain activities and support
function. In addition, by outsourcing activities in which it lacks competence, the firm can fully
concentrate on those areas in which it can create value. The consequences of outsourcing caused
additional concern.
Competencies, Strengths, Weaknesses, and Strategic Decisions
By analyzing the internal organization, firms are able to identify their strengths and weaknesses
in resources, capabilities, and core competencies. In considering the results of examining the
firms internal organization, managers should understand that having a significant quantity of

resources is not the same as having the right resources are those with the potential to be
formed into core competencies as the foundation for creating value for customers and developing
competitive advantages as a result of doing so. Interestingly, decision makers sometimes become
more focused and productive when seeking to find the right resources when the firms total set of
resources is constrained. Tools such as outsourcing help the firm focus on its core competencies
as the sources of its competitive advantage. Typically, events occurring in the firms external
environment create conditions through which core competencies can become core rigidities,
generate inertia, and stifle innovation. Often the flip side, the dark side, of core capabilities is
revealed due to external events when new competitors figure out a better way to serve the firms
customers, when new technologies emerge, or when political or social events shift the ground
underneath.

CASE
A resource-based view of competitive advantage at the Port of Singapore
The key resources including operations and information technology (IT) that have contributed to
the competitive position of the Port of Singapore. The port of Singapore has achieved a
sustainable competitive advantage relative to other locations by carefully building a set of
resources that other Ports would find very difficult to match. Some of these resources are natural
( a superb sheltered harbor), some can be replicated at a significant cost (infrastructure, welleducated and hard working labor force), and some are particularly valuable in Singapore, but less
useful in other Ports (scheduling systems for multiple cranes to handle the complexity of multitier stacking of containers).
Singapores mist important natural resources include its large, protected harbor, its
location on major trade routes, and the skills of its well-educated work force. The location
advantage is clear, Singapore is located where ship traffic between Europe and Southeast Asia
and the US West Coast and Southeast Asia must pass, it is a natural entry for products shipped to
and from neighboring countries.
However, more than 200 shipping lines with connections to 600 Ports in 123 countries
still choose to call at PSA. On an average day, there are two sailings to the United States, five to
Japan, nine to China, Hong Kong, Taiwan, four to Europe and 70 to South Asia and South-East
Asia Ports. This kind of high volume traffic require efficient Port operations. Key customer

requirements in Port operation include freight rates, frequency of services, shipping options,
turnaround time, Port charges (about 20% of freight charges), support services (ship
maintenance, ship supplies), and feeder operations. The port customers are essentially the
shipping lines, however, it must be noted that shipping lines often take their cue from
manufacturers, exporters, and the large buyers (MNCs) of goods and raw materials.
As Singapore is a transshipment hub for shippers, Port operations are very demanding.
Arriving containers destined for other Port destinations have too be transferred to other ships or
stacked (for later shipment), while containers destined for Singapore are placed on trailers for
local delivery. These operations have to be well coordinated to minimize ship turnaround times.
PSA anticipated global containerization in the late 1960s and built the first container Port in the
region. It also made early preparation to harness IT on a major scale and used it strategically in
its Port operations in the 1980s. PSA is expanding its terminal facilities in meeting the advent of
globalization in the next millennium and the anticipated cross-border trade growth that
accompanies it. Although, loading and unloading containers is the key operation in shaping the
success of PSA, there are a number of support feature or enablers hat make the Port operations
highly effective and help sustain its competitive edge.
1. Singapore has a large merchant fleet, 3037 ships with 25.572 million gross tons at the end of
2003.
2. PSA is the largest owner of warehouse space in Singapore, managing over 500.000 m 2 of
space. With the warehouse business, PSA attempts to provide value added services to its
traditional Port operations, including the storage of goods and empty containers, labeling,
repackaging, tagging, sampling and testing, quality control and billing. The aim is to
establish an integrated global logistics hub, such supporting attributes bring value-added
services to shippers and carriers and sustain stable long-term revenue for PSA.
3. PSAs workforce is trained to focus on customers. A quality culture is prevalent in the
organization. The Port has programs such as the Key Customer Managers and Chat Time. To
promote a quality culture in the workforce, PSA has wide spread quality circles (QC) and
encourages staff suggestions.
4. PSA has also activity integrated its own operations as well as customer operations through
the Internet. Portnet.com, a subsidiary, has developed several web solution to further enhance
its own operations and also link customers operations to its own, thus creating a long-term
strategic tie-in with customer. PSA has been able to harness these enablers and integrate them

into its overall information and operation technology strategy to transform itself into a major
regional transshipment hub for container shipping. More importantly, through a system of
resources integrated by IT, PSA is able to reduce time, increase quality, cut costs, and create a
high degree of flexibility that gives it a sustainable advantage.
PSA has invested heavily in information and operation technology, both to solve immediate
operating problems and to remove constraints on the growth of container traffic. TradeNet,
one of the first trade-related technological innovations in Singapore and sponsored the design
of thus EDI system to facilitate the processing of trade documents. CITOS, The Computer
Integrated Terminal Operation System, supports planning for and managing all operations of
the Port. The Container Number Recognition System uses a video camera for each letter and
number of the 11-character container ID. The ship Planning Subsystem deals with loading
and unloading of containers, positioning the containers inside a vessel, the allocation of quay
cranes alongside the vessel, and the sequence in which the cranes will operate. The Yard
Planning expert subsystem sorts containers to support fast turnaround, to use space efficiently
and keep yard activities orderly. The Resource Allocation Subsystem assigns all operations
staff and container handling equipment with the exception of the quay cranes. CIMOS, The
Computer-Integrated Marine Operations System helps to manage shipping traffic and the
activities of the Port.
Analyzing PSAs strategy

PSAs effort to build and sustain a

competitive advantage. Table 2 present
two natural and three additional manmade resources which have contributed
to success of the Port and PSA
Corporation. The table also shows how
these five resources combined to form
an integrated resources that allows
PSAs to sustain a resources-based
competitive

advantage.

No

single

resource is totally responsible for the

Ports success. Rather a combination of
resources

works

to

produce

competitive advantage.

The initial (natural) resources are Singapores location and its harbor. Singapores
location positions it well for shipments between Asia and Europe and between Asia and the
West Coast of the United States. The natural harbor is well protected and provides an
extremely large anchorage for over 800 ships. While rare and valuable, Singapores location
fails to be inimitable or non-substitutable; there are other competing Ports in the area,
especially Malaysia. A natural harbor is rare and valuable, but there are other, possibly
smaller harbors that can compete with Singapore.
To develop and exploit these natural resources, Singapore has developed man-made
resources of capital, information and operations technologies, and has developed IT
management skills. The government built an infrastructure of housing, roads and quasigovernmental organizations to promote trade. It has encouraged foreign investment in order
to provide jobs and capital. A policy that encourages trade as a way to build the economy
means that the country has to provide a world-class Port. Through its emphasis on education
and encouragement of the IT profession, public and private organizations have developed
significant IT management skills. However, capital, IT and operations capabilities and IT

management skills are all imitable. A smaller Port can steal business from Singapore without
needing, the same investment in IT because its operations will be simpler. While difficult, it
is not impossible for another Port to find capital and to develop or outsource IT management.
The unique combination of resources interacting with each other has proven to be a key
to PSAs long-standing competitive edge. Singapore built an infrastructure to attract foreign
capital, and this capital in turn generated economic activity that paid for further infrastructure
development. Moreover, a strong norm against corruption has given Singapore a reputation
as one the least corrupt places in the world to do business, making it more attractive for
companies. The government has consciously tried to raise living standards with government
housing and a pension plan, which benefits citizens and makes the country more attractive
for investment. These external resources also serve to the advantage of PSA. Combined with
PSAs internal resources, the excellent reputation of business in Singapore reinforces PSAs
competitive position and helps produce the funds to invest in maintaining a world-class Port.
The combination of Singapores infrastructure, IT, operations and specialized Port
equipment also contributes to the Ports competitive position. Singapores infrastructure;
including the International Enterprise Singapore, the national IT initiatives that spawned
Tradenet, distriparks, and the highway system, together make the Port attractive to shippers.
The efficiency of the Port is enhanced by IT and operational systems and by the
infrastructure Singapore provide in general. While one could develop parts of this system
easily, it is their combination that makes it difficult for another Port to compete.
IT management skills and Port operations and information technology combine to make it
difficult for other Ports to replicate its facilities. CITOS is another example of PSAs ability
to successfully design and implement a major technology initiative. PSA has the IT
management skills to undertake a variety of development projects for a major Port, and these
skills have contributed a series of key systems.

In

these
the

figure,
role

of

different
resources and government policies
in the success of the Port and the location also harbor provide the Port with the physical
resources needed to be successful. Government development policies attracted foreign
investment, which in turn provided capital for trade. Government educational and industrial
policies developed IT technical and managerial skills; these skills contributed to the successful
design and implementation of the various operation and IT system at the Port. Operation and
information technology, in turn, contributed to highly efficient Port operations, which attracted
shipping lines. The technology also helped expand the capacity of the Port to handle cargo
without a concomitant increase in scarce physical space.
The Singapore experience shows how IT can reduce the consequences of disadvantages;
Singapore cannot dramatically increase its land are, but it can and has used IT to increase the
capacity of its constrained physical resources to run a large Port. Singapores strategy of
supplementing its location and harbor with man-made resources has overcome the limitations of
the natural resources to create a Port whose location, harbor, infrastructure, and operations and
information technology combined are rare, valuable, inimitable and non-substitutable. This
flexibility allows PSA to enlarge the capacity of the Port to handle more ships and cargo. For
Singapore, given limitations on land, technology was a natural choice for maximizing the
throughput of the Port.
Singapore began with two natural resources: its location and a large, protected, deepwater Port. These resources, while rare and valuable, were imitable and substitutable. The figure
illustrate the Ports set resources. Singapore combined capital with its location and natural harbor
to invest in Port operations. Foreign investment helped generate the needed capital; in addition
the government built ancillary infrastructure like roads, housing, sanitation, water and electrical
systems. The management of PSA saw operations and information technologies as way to solve

problems and expand the capacity of the Port. PSA supplemented limited natural resources with
man-made resources, including operations and information technology, to build one of the
leading Ports in the world. These man-made resources compensated for some of the countrys
natural limitations. Managers should look at resources provided by nature and build resources to
supplement them. Not all important resources
are under the control of an organization, son
one must (1) identify external resources that
can be used to ones advantage and (2) build
internal resources capable of enhancing those
external resources. The case points out an
important characteristic of operations and
information technology; it can be used to
expand capacity without adding investment in
plant and equipment or physical space.
Technology helps the firms utilize assets more
effectively.