CHAPTER 3

THE INTERNAL ENVIRONMENT:

RESOURCES, CAPABILITIES AND
CORE COMPETENCIES

Michael
Michael A.
A. Hitt
Hitt
R.
R. Duane
Duane Ireland
Ireland
Robert
Robert E.
E. Hoskisson
Hoskisson
©2000 South-Western College Publishing
 Chapter 2
Strategic External
Environment
The Strategic
Management
Inputs
Strategic Intent
Strategic Mission
Chapter 3
Internal
Environment
Process

Strategy Formulation Strategy Implementation

Chapter 4 Chapter 5 Chapter 6 Chapter 10 Chapter 11

Business-Level Competitive Corporate-Level Corporate Structure
Strategic
Actions

Strategy Dynamics Strategy Governance & Control

Chapter 7 Chapter 8 Chapter 9 Chapter 12 Chapter 13

Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Strategic
Competitiveness
Feedback Above Average
Returns
Chapter 2
External Environment
What the Firm Might Do

Sustainable
Competitive
Advantage
Chapter 3
Internal Environment
What the Firm Can Do
 Competitive
Discovering Core Advantage
Gained through
Competencies Core Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns
Competencies
Core
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Tangible
* Valuable * Outsource
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable
 Key Questions for Managers
in Internal Analysis
How do we assemble bundles of Resources,
Capabilities and Core Competencies to create
VALUE for customers?
And...
Will environmental changes make our core
competencies obsolete?

Are substitutes available for our core

competencies?
Are our core competencies easily imitated?
Conditions Affecting Managerial Decisions About
Resources, Capabilities and Core Competencies

Uncertainty
regarding characteristics of the general and the
industry environments, competitor’s actions, and
customer’s preferences.

Complexity
regarding the interrelated causes shaping a firm’s
environments and perceptions of the environments

Intraorganizational Conflicts
among people making managerial decisions and
those affected by them
Discovering Core
Competencies

Resources
* Tangible
* Intangible
Resources What a firm Has...

What a firm has to work with:

its assets, including its people and
the value of its brand name
Resources What a firm Has...
What a firm has to work with:

its assets, including its people and the value

of its brand name

Resources represent inputs into a

firm’s production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers
Resources What a firm Has...
What a firm has to work with:

its assets, including its people and the value

of its brand name

Resources represent inputs into a firm’s

production process...

such as capital equipment, skills of

employees, brand names, finances and
talented managers

“Some genius invented the Oreo. We’re just

living off the inheritance.” F. Ross Johnson,
Former President & CEO,
RJR Nabisco
Resources What a firm Has...
What a firm has to work with:
Tangible Resources its assets, including its people
and the value of its brand name
* Financial
* Physical Resources represent inputs into a
* Human Resources firm’s production process...
* Organizational
such as capital equipment, skills
of employees, brand names,
Intangible Resources
finances and talented managers

* Technological
“Some genius invented the Oreo.
* Innovation We’re just living off the inheritance.”
* Reputation F. Ross Johnson,
Former President & CEO, RJR Nabisco
Discovering Core
Competencies

Capabilities
Teams of
Resources

Resources
* Tangible
* Intangible
Capabilities What a firm Does...

Capabilities represent:
the firm’s capacity or ability to integrate
individual firm resources to achieve a desired
objective.
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.

Capabilities develop over time as a result of complex

interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that
are based on the development, transmission and
exchange or sharing of information and knowledge as
carried out by the firm's employees.
Capabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex
interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that are
based on the development, transmission and exchange or
sharing of information and knowledge as carried out by the
firm's employees.
Capabilities become important when they are combined
in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage.
Discovering Core
Competencies
Discovering
Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage

Capabilities
Teams of
Resources

Resources
* Tangible
* Intangible
Core Competencies What a firm Does...
that is Strategically
Valuable

“…are the essence of what makes an organization

unique in its ability to provide value to
customers.”
Leonard-Barton, Bowen, Clark, Holloway & Wheelwright

McKinsey & Co. recommends identifying three to four

competencies to use in framing strategic actions.
Discovering Core
Competencies
Discovering
Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of
Teams of Sustainable
Resources Advantages
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource
Core Competencies What a firm Does...
that is Strategically
For a strategic capability to be a
Valuable
Core Competency, it must be:

Valuable

Rare

Costly to Imitate

Nonsubstitutable
Core Competencies What a firm Does...
that is Strategically
Valuable

Valuable
Capabilities that help a firm neutralize threats or exploit
opportunities

Rare
Capabilities that are not possessed by many others

Costly to Imitate
Capabilities that other firms cannot develop easily,
usually due to unique historical conditions, causal
ambiguity or social complexity
 What Criteria Make Core
Competencies Costly to Imitate?
Unique Historical Conditions
An unusual evolutionary pattern of growth may contribute to the development of
competencies in a manner that is unique to those particular circumstances

Example: Disney created Mickey Mouse at a time when animated motion

pictures were new

Causal Ambiguity
This occurs when competitors are unable to detect how a firm uses its competencies as a
foundation for competitive advantage

Social Complexity
Occurs when the firm’s capabilities are the result of complex social phenomena, such as
interpersonal relationships, trust and friendships among managers or a firm’s reputation
with suppliers and customers
Core Competencies What a firm Does...
Core Competencies must be: that is Strategically
Valuable
Valuable
Capabilities that either help a firm to exploit opportunities to create value for customers
or to neutralize threats in the environment

Rare
Capabilities that are possessed by few, if any, current or potential competitors

Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to unique historical
conditions, causal ambiguity or social complexity

Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firm-specific knowledge or
trust-based relationships
 Core Competencies

Resources
Core Competence
• Inputs to a firm’s
• A strategic capability
production process

Does the capability satisfy

the criteria of sustainable YES
The source of Capability competitive advantage?
• Integration of a
team of resources
NO

Capability
• A nonstrategic team
of resources
 Outcomes from Combinations of the Criteria for
Sustainable Competitive Advantage
Costly to Nonsub- Competitive Performance
Valuable Rare
Imitate stitutable Consequences Implications
Below
NO NO NO NO Competitive
Average
Disadvantage
Returns

YES NO NO YES/NO Competitive Average

Parity Returns

Temporary Aver./Above
YES YES NO YES/NO Competitive Average
Advantage Returns
Sustainable Above
YES
YES YES
YES YES YES
YES Competitive Average
Advantage Returns
Discovering Core
Competencies
Discovering
Core
Competencies
Core
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate
* Nonsubstitutable * Outsource
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities
Logistics
Inbound

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Operations
Logistics
Inbound

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Operations

Outbound
Logistics

Logistics
Inbound

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities

Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure

Support
Human Resource Management
Activities
Technological Development
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

Primary Activities
 Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

Firm Infrastructure
Human Resource Management M
Support A
R
Activities G
Technological Development IN
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
RG
A
M
Primary Activities
 Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Human Resource Management M
Support A
R
Activities G
Technological Development IN
Procurement

Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
RG
A
M
Primary Activities
 Outsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

Firm Infrastructure
Human Resource Management

Human Resource Management M

Support A
Firms often purchase a portion
Technological Development R activities
Activities G
of their value-creating
Technological Development IN suppliers
from specialty external
Procurement
who can perform these functions
Procurement more efficiently

Service
Operations

Outbound

Marketing
Service
Logistics
Inbound

& Sales
Logistics

IN
RG
Outbound
Inbound Operations Logistics Marketing

A
& Sales

M
Logistics

Primary Activities
 Strategic Rationales for Outsourcing
Improve Business Focus
Lets company focus on broader business issues by having outside experts handle various
operational details

Provide Access to World-Class Capabilities

The specialized resources of outsourcing providers makes world-class capabilities
available to firms in a wide range of applications

Accelerate Business Re-Engineering Benefits

Achieves re-engineering benefits more quickly by having outsiders--who have already
achieved world-class standards--take over process

Share Risks
Reduces investment requirements and makes firm more flexible, dynamic and better able to
adapt to changing opportunities

Free Resources for Other Purposes

Permits firm to redirect efforts from non-core activities toward those that serve customers
more effectively
To capitalize on the usefulness of the
Value Chain concept...

it is important to recognize that...

Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain
Value Chains are part of a Total Value System

Firm Value Chain Channel Value Chain Buyer Value Chain

Supplier Value Chain

Upstream Value

Perform valuable activities that

complement the firm’s activities
Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Buyer Value Chain

Upstream Value Channel Value Chain

Perform valuable activities that

complement the firm’s activities

Each firm must eventually find a way to

become a part of some buyer’s value chain
Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain

Upstream Value Each firm must eventually Buyer Value Chain

find a way to become a part of
Perform valuable activities that some buyer’s value chain
complement the firm’s activities

Ultimate basis for differentiation is the ability

to play a role in a buyer’s value chain

This creates VALUE!!

Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain Channel Value Chain Buyer Value Chain

Upstream Value Each firm must eventually find a way to

become a part of some buyer’s value chain
Perform valuable activities that
complement the firm’s activities Ultimate basis for differentiation is the
ability to play a role in a buyer’s value chain

This creates VALUE!!

Value chains vary for firms in an industry,

reflecting each firm’s unique qualities:
• History
• Strategy
• Success at Implementation
Core Competencies--Cautions and Reminders
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 sow
the seeds of organizational inertia and prevent the firm
from responding appropriately to changes in the
external environment
Strategic myopia and inflexibility can strangle the firm’s
ability to grow and adapt to environmental change or
competitive threats
Discovering Core
Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns
Competencies
Core
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate * Outsource
* Nonsubstitutable
 Chapter 2
External The Strategic
Environment
Strategic
Strategic Intent
Intent Management
Chapter 3
Strategic Mission
Process
Internal
Environment
 Chapter 2
External
Environment
The Strategic
Strategic Intent
Chapter 3
Strategic Mission
Management
Process
Internal
Environment

Strategic Intent
 Chapter 2
External
Environment Strategic Intent
The Strategic
Chapter 3 Strategic Mission Management
Process
Internal
Environment

Leveraging
Leveraging of of a firm’s
firm’s resources,
resources, capabilities
capabilities
and
and core
core competencies
competencies toto accomplish
accomplish what
what may
may
appear
appear toto be
be unattainable
unattainable goals in
in the
the compe-
compe-
Strategic Intent titive
titive environment
environment

A
A statement
statement of
of the
the firm’s
firm’s unique
unique purpose
and
and the
the scope
scope of its operations
operations in product
Strategic Mission market
market terms
 Competitive
Discovering Core Advantage
Gained through
Competencies Core Competencies
Strategic
Competitiveness
Discovering Above-Average
Core Returns
Competencies
Core
Competencies
Sources of
Competitive
Advantage

Capabilities Criteria of Value

Teams of Sustainable Chain
Resources Advantages Analysis
Resources
* Valuable
* Tangible
* Intangible * Rare
* Costly to Imitate * Outsource
* Nonsubstitutable