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Michael Dwayne Hahijary

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Chapter 4
INTERNAL ANALYSIS:
RESOURCES, CAPABILITIES, & CORE COMPETENCIES

CORE COMPETENCIES

Core competencies are unique strengths that are embedded deep within a firm, allowing it
to differentiate its products from the competition, creating a higher customer value and
driving competitive advantage. They can be visible or invisible, and are developed through
an interplay of resources and capabilities. The types of competencies are:

• Resources: assets that can be tangible or intangible


• Capabilities: organizational and managerial skills that are intangible
• Activities: distinctive and fine-grained business processes

Resources reinforce core competencies, while capabilities allow managers to orchestrate


their core competencies. Strategic choices are expressed through activities, which in turn
leveraged core competencies for competitive advantage.

When not nourished continuously, core competencies may lose their ability to yield any
competitive advantage.

THE RESOURCE-BASED VIEW

Resource based-view: a framework used to identify core competencies that views


resources as the key to superior firm performance. A resource includes assets, as well as
capabilities and competencies. It explains and predicts competitive advantage, basing it on
two critical assumptions of the nature of resources, which are:

• Resource homogeneity: bundles of resources, capabilities, and competencies that


differ across firms
• Resource immobility: resources do not move easily from one firm to another, thus their
differences are difficult to replicate and may last for a long time.

Tangible resources have physical attributes and are visible.

Intangible resources have no physical attributes and thus are invisible. Competitive
advantages are more likely to stem from them.

• The VRIO framework identifies certain types of resources as the key to competitive
advantage, of which a firm can sustain superior performance if its resources fulfill all
criteria. The resources should be:

• Valuable: enables the firm to exploit an external opportunity or offset a threat

• Rare: only one or few firms possess it


• Costly to Imitate: firms that do not have it are unable to develop or acquire the resource
at a reasonable price. This can be a core competency, and rivals can use:

- Direct imitation
- Substitution
- Combination of both

• Organized to capture the value of the resource/firm: through effective organizational
structure and coordinating systems in order to have a more sustainable advantage.

Isolating mechanisms are barriers to imitation that prevent rivals from competing directly
with the advantage. They consist of:

• Better expectations of future resource value: low-cost resource acquisition lays a


foundation for competitive advantage later when the expectations about the resource’s
future turn out to be more accurate.
• Path dependency: situation in which the options faced are limited by decisions made in
the past.
• Causal ambiguity: situation in which the cause and effect are not readily apparent.
• Social complexity: situation in which different social and business systems interact.
• Intellectual property protection: critical intangible resources that can be protected by
patents, designs, copyrights, trademarks, and trade secrets.

THE DYNAMIC CAPABILITIES PERSPECTIVE

The environment is highly dynamic and thus changes fast and ferocious. Core
competencies need to be adapted to maintain competitive advantage.

If a firm relies too long on a competency without adapting it to changes, the asset will
become a liability. To ensure strategic fit, reinvesting, honing, and upgrading resources and
capabilities are essential.

Dynamic capabilities describe a firm’s capability to create, deploy, reconfigure, upgrade,


or leverage its resources over time in order to keep its competitive advantage. Proactive
firms even create market changes that are beneficial to strengthening their position.

In a dynamic capabilities perspective, competitive advantage is the outflow of a firm’s


capacity to modify and leverage its resources in such to enable it to gain or sustain its
competitive advantage in a constantly changing environment.

THE VALUE CHAIN ANALYSIS

Value chain describes the internal activities done by firm when transforming inputs into
outputs.

Each horizontal activity provides value and adds costs.

• Activities are the key internal drivers of performance differences

• Activities are narrower than functional areas, because areas are made up of activities.

• When the activities generate greater value than the costs to create them, the firm
obtains a profit margin

A generic value chain needs to be modified to the specific business. The chain is divided
into primary and support activities.

• Primary activities add value as inputs are transformed into outputs. They consist of
supply chain management, operations, distribution, marketing & sales, and after-sales
service.

• Support activities add value indirectly, they consist of research & development,
information systems, human resources, accounting & finance, and firm infrastructure.

The value chain perspective enables managers to see how competitive advantage flows
from the firm’s distinct set of activities.

IMPLICATIONS FOR THE STRATEGIST

SWOT analysis is a framework that allows managers to synthesize insights obtained from
an internal analysis of the company’s strengths and weaknesses with external opportunities
and threats to derive strategic implications. It combines external analyses (PESTEL and five
forces) with the internal analysis.

SWOT analysis consists of:

• Focus on strengths-opportunities by using internal strength to exploit an external


opportunity.

• Focus on weaknesses-threats by eliminating or minimizing an internal weakness to


mitigate an external threat

• Focus on strengths-threats to use an internal strength to minimize the effect of an


external threat

• Focus on weaknesses-opportunities to shore up an internal weakness to improve its


ability to take advantage of an external opportunity

A problem with this analysis is that a strength may double as a weakness, as a threat may
also double as an opportunity.

CREATING A STRATEGY THAT WORKS
In a global survey conducted by Strategy&, more than 2,000 respondents think they lack a
winning strategy, and in another survey, more than 80% of 500 senior executives said their
overall strategy did not translate well within their company. These problems are the
outcome of the way most companies are managed. In numerous businesses, there is a
significant, but unnecessary gap between strategy and execution: a lack of connection
between where the enterprise aims to go and what it can accomplish.

To sustain success, a company must have capabilities that are truly superior, and distinctive
enough to prevent duplications. When several such capabilities possessed are reinforcing
one another, the company will be able to both differentiate itself from and consistently
execute better than the competition. Distinctive capabilities are complex and expensive,
with high fixed costs in human capital, tools, and systems.

Most conventional management practices have developed through trial and error, often
without a direct link to a company’s strategy. However, there are unconventional acts that
embody the attitudes and actions that help them accomplish success, which are:

• Commit to an identity: focusing on growth may get a company trapped on chasing


marketing opportunities with little to no chance of succeeding in the name of growth.
Instead, a company could differentiate and grow by being clear-minded about what can
be best done.

• Translate the strategic into the everyday: pursuing functional excellence may result in
the treatment of external benchmarking as a success path, embodying the phrase
“trade of all jacks, master of none.” Instead, a company should build and connect its
cross-functional capabilities that best delivers its strategic intent.

• Put your culture to work: reorganizing to drive change may trap a company in trying in
vain to change behaviors and create success by restructuring alone. Instead, a
company should celebrate and leverage its cultural strengths, which would result in a
high level of trust and enthusiasm in these cultures in the very specific pride had about
the companies.

• Cut costs to grow stronger: cutting costs equally across the board may weaken key
capabilities within the company while over-investing in non-essential businesses and
functions. Instead, a company should be more selective in trimming what does not
matter and then investing more in what does. Cost management moves a company to a
higher financial discipline, redirecting resources to the core capabilities that are
strategically important.

• Shape your future: over time, companies that focus on being agile and resilient may
shift their direction in the misguided notion that they will survive on being adaptable
alone. Instead, companies should reimagine their capabilities, create demand, and
realign the industry they’re participating in.

The five acts of unconventional leadership contradict what many believe is the right way to
run a business. Companies that focus on growth are universally applauded, even if the new
offerings don’t fit well together. Functional excellence, organizing for success, going lean
across the board, and agility are all regarded favorably in business circles. But those are the
approaches that often lead to a gap between strategy and execution. The five
unconventional acts provide a long-term, sustainable success that will boost a company’s
energy and morale.

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