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Topic 3: The Internal Environment

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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

Review

Mission and Vision 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

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Internal Analysis

How do we use firm resources to achieve competitive advantage? 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

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Conditions Affecting Managerial Decisions

Uncertainty: regarding characteristics of the general and the industry environments, competitors actions, and consumer preferences

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

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The Challenge of Internal Analysis Strategic decisions in terms of the firms

resources, capabilities, and core competencies Are non-routine Have ethical implications Significantly influence the firms ability to earn

above-average returns

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The Challenge of Internal Analysis (contd)

To develop and use core competencies, managers must have Courage Self-confidence Integrity The capacity to deal with uncertainty and

complexity A willingness to hold people (and themselves)

accountable for their work

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Strengths and Weaknesses

Difficult to understand Complex and unpredictable

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

Firms achieve strategic competitiveness and earn above-average returns when their core competencies are effectively 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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Competitive Advantage (contd) 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

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Creating Value By exploiting their core competencies firms create

value Value is measured by

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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Resources and Capabilities of Organizations

Resources 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 notbe

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

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 Capital equipment Skills of employees Brand names Financial resources Talented managers

Classification of Resources Tangible resources Intangible resources

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Resource Examples Tangible resources

Financial resources The firms borrowing capacity The firms ability to generate internal

funds Physical 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

Intangible resources Human resources

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

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.

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Capabilities

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

Capabilities 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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Core Competencies

Core Competencies Resources and capabilities that

serve as a source of a firms competitive advantage:

Distinguish a company competitively and reflect its personality

Activities that a firm performs especially well compared to competitors

Activities through which the firm adds unique value to its goods or services over a long period of time

Implications

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

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Four Key Criteria of Resources and Capabilities

Valuable 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 Resources and capabilities are nonsubstitutable when they

have no structural equivalents

4Special Situations

Intangible resources are hard to imitate Tangible resources are easy to imitate

Tangible resources are almost never core competencies, except when the following exist: Unique historical conditions Causal ambiguity Social complexity

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Core Competencies When the four key criteria of resources and

capabilities are met, they become core competencies 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 Core rigidities are weaknesses and a source of

competitive disadvantage

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Outcomes from Combinations of the Criteria for Sustainable Competitive

Advantage

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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 Allows the firm to understand the parts of its

operations that create value and those that do not

A template that firms use to: Understand their cost position Identify multiple means that might be used to

facilitate implementation of a chosen business-level strategy

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Value Chain Analysis (contd) Primary activities involved with:

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

Support activities Provide the support necessary for the primary

activities to take place

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Value Chain Analysis (contd) Value chain

Illustrates how a product moves from raw-material stage to the final customer

To be a source of competitive advantage, a resource or capability must allow the firm: 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 cannot26

The Basic Value Chain

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

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

Things that Cannot be Core Competencies

Firm outputs (goods: products and services) 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

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Things that Could be Core Competencies

Firm abilities and activities used to produce valuable goods and services for customers 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 Organizational routines and processes 28

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Outsourcing The purchase of a value-creating activity from an

external supplier Few organizations possess the resources and capabilities

required to achieve competitive superiority in all primary and support activities

By forming and emphasizing fewer capabilities A firm can concentrate on those areas in which it can

create value Specialty suppliers can perform outsourced capabilities

more efficiently

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Operations

Marketing and Sales

Firm

In

fra

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

Outsourced activity

Inbound Logistics

Service

Outbound Logistics

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

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Strategic Rationales for Outsourcing

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 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 outsiderswho have already achieved world-class standardstake over process

Sharing risks - Reduces investment requirements and makes firm more flexible, dynamic and better able to adapt to changing opportunities

Frees resources for other purposes - Redirects efforts from non-core activities toward those that serve customers more effectively

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Outsourcing Issues 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 outsource primary and support activities that are used to neutralize environmental threats or to complete necessary ongoing organizational tasks

Greatest value - Outsource only to firms possessing a core competence in terms of performing the primary or supporting the outsourced activity

Nonstrategic team of resources - Do not outsource capabilities that are critical to the firms success, even though the capabilities are not actual sources of competitive advantage

Firms knowledge base - Do not outsource activities that stimulate the development of new capabilities and competencies

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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 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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Last Slide

Today

Admin Blackboard assignments Assignments package

Change in deadline for Team Paper 1 All three Exams

Case notes, essay questions, peer eval, in-class exam

Announcements Chapter 3

Analyzing the Internal Environment35

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