the internal environment chapter three ba 495.005

The Internal EnvironmentThe Internal Environment

Chapter ThreeChapter Three

BA 495.005BA 495.005

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AgendaAgenda

• Introduction of Internal AnalysisIntroduction of Internal Analysis• Resources & CapabilitiesResources & Capabilities• Building Core CompetenciesBuilding Core Competencies• Value Chain AnalysisValue Chain Analysis• Outsourcing Outsourcing • Wrap-upWrap-up

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Introduction to Internal Analysis

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External Analyses’ OutcomesExternal Analyses’ Outcomes

By studying the external environment, firms By studying the external environment, firms identify what they identify what they might choose to do.might choose to do.

OpportunitieOpportunities and s and threatsthreats

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Internal Analyses’ Outcomes Internal Analyses’ Outcomes

By studying the internal environment, By studying the internal environment, firms identify what they firms identify what they can docan do

Unique resources, Unique resources, capabilities, and capabilities, and competenciescompetencies((required forrequired for sustainable sustainable competitive competitive advantageadvantage))

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SWOT AnalysisSWOT Analysis

Strategic alternativesStrategic alternatives

StrengthsStrengths

WeaknessesWeaknesses

InternalInternalanalysesanalyses

OpportunitiesOpportunities

ThreatsThreats

ExternalExternalanalysesanalyses

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Components of Internal AnalysisComponents of Internal Analysis

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Competitive AdvantageCompetitive Advantage• Internal analysis should result in definition (and Internal analysis should result in definition (and

continued redefinition) of a firm’s competitive continued redefinition) of a firm’s competitive advantagesadvantages

• Sustainability of a competitive advantage is a Sustainability of a competitive advantage is a function of:function of: The rate of core competence obsolescence due to The rate of core competence obsolescence due to

environmental changes.environmental changes.

The availability of substitutes for the core The availability of substitutes for the core competence.competence.

The difficulty competitors have in duplicating or The difficulty competitors have in duplicating or imitating the core competence.imitating the core competence.

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Creating ValueCreating Value

• By exploiting their core competencies or By exploiting their core competencies or competitive advantages, firms create value.competitive advantages, firms create value.

• Value is measured by:Value is measured by:

Product performance characteristicsProduct performance characteristics

Product attributes for which customers are willing to Product attributes for which customers are willing to paypay

• Firms create value by innovatively bundling and Firms create value by innovatively bundling and leveraging their resources and capabilities.leveraging their resources and capabilities.

• Superior value Superior value Above-average returnsAbove-average returns

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The Challenge of Internal AnalysisThe Challenge of Internal Analysis

• Strategic decisions in terms of the firm’s Strategic decisions in terms of the firm’s resources, capabilities, and core competencies resources, capabilities, and core competencies are absolutely critical to the firm’s success. are absolutely critical to the firm’s success.

• Rate of failure is high.Rate of failure is high.

• More difficult to remain objective in internal More difficult to remain objective in internal analysis.analysis.

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Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic Management Journal, 14: 33.

The Challenge of Internal AnalysisThe Challenge of Internal Analysis

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Resources & Capabilities

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Resources, Capabilities and Core Resources, Capabilities and Core CompetenciesCompetencies

• ResourcesResources Are the source of a firm’s Are the source of a firm’s

capabilities.capabilities. Cover a spectrum of Cover a spectrum of

individual, social and individual, social and organizational organizational phenomena.phenomena.

Do not yield a competitive Do not yield a competitive advantage by themselves.advantage by themselves.

Discovering CoreDiscovering CoreCompetenciesCompetencies

ResourcesResources•TangibleTangible•IntangibleIntangible

CapabilitiesCapabilities

CoreCoreCompetenciesCompetencies

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Types of ResourcesTypes of Resources

• Tangible resources: can be seen and quantifiedTangible resources: can be seen and quantified Financial resourcesFinancial resources

Physical resourcesPhysical resources

Technological resourcesTechnological resources

Organizational resourcesOrganizational resources

• Intangible resources: assets typically rooted in Intangible resources: assets typically rooted in firm’s history and have accumulated over timefirm’s history and have accumulated over time Human resourcesHuman resources

Innovation resourcesInnovation resources

Reputation resourcesReputation resources

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Financial Resources •The firm’s borrowing capacity•The firm’s ability to generate internal funds

•The firm’s formal reporting structure and its formal planning, controlling,and coordinating systems

Physical Resources •Sophistication and location of a firm’s plant and equipment

•Access to raw materials

Technological Resources •Stock of technology, such as patents, trade-marks, copyrights, and trade

secrets

Tangible ResourcesTangible Resources

Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage. Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, UK: Blackwell Business, 100-102.

Organizational Resources

Physical Resources

Technological Resources

Financial Resources

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Intangible ResourcesIntangible Resources

Human Resources • Knowledge• Trust• Managerial capabilities• Organizational routines

Innovation Resources • Ideas

• Scientific capabilities • Capacity to innovate

Reputational Resources • Reputation with customers

• Brand name • Perceptions of product quality,

durability, and reliability • Reputation with suppliers

Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 136-139;R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, UK: Blackwell Business, 100-102.

Innovative Resources

Reputational Resources

Human Resources

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Resources, Capabilities and Core Resources, Capabilities and Core CompetenciesCompetencies • CapabilitiesCapabilities

Represent the capacity to deploy Represent the capacity to deploy resources that have been resources that have been integrated to achieve a desired integrated to achieve a desired end stateend state

Emerge over time through complex Emerge over time through complex interactions among resourcesinteractions among resources

The foundation of many The foundation of many capabilities lies in:capabilities lies in:

• The unique skills and knowledge of a The unique skills and knowledge of a firm’s employeesfirm’s employees

• The functional expertise of those The functional expertise of those employeesemployees





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Functional areasFunctional areas CapabilitiesCapabilities Examples of firmsExamples of firms

DistributionDistribution Effective use of logistics management techniquesEffective use of logistics management techniques Wal-MartWal-Mart

Human resourcesHuman resources Motivating, empowering, and retaining employeesMotivating, empowering, and retaining employees MicrosoftMicrosoft

Management information Management information systemssystems

Effective and efficient control of inventories through point-of-Effective and efficient control of inventories through point-of-purchase data collection methodspurchase data collection methods

GilletteGillette

MarketingMarketing Effective promotion of brand-name productsEffective promotion of brand-name products Polo Ralph LaurenPolo Ralph Lauren

Effective customer serviceEffective customer service NordstromNordstrom

Innovative merchandisingInnovative merchandising Crate & BarrelCrate & Barrel

ManagementManagement Ability to envision the future of clothingAbility to envision the future of clothing GapGap

Effective organizational structureEffective organizational structure PepsiCoPepsiCo

ManufacturingManufacturing Design and production skills yielding reliable productsDesign and production skills yielding reliable products KomatsuKomatsu

Product and design qualityProduct and design quality GapGap

Miniaturization of components and productsMiniaturization of components and products SonySony

Research & developmentResearch & development Innovative technologyInnovative technology CaterpillarCaterpillar

Development of sophisticated elevator control solutionsDevelopment of sophisticated elevator control solutions Otis ElevatorOtis Elevator

Rapid transformation of technology into new products and Rapid transformation of technology into new products and processesprocesses

Chaparral SteelChaparral Steel

Digital technologyDigital technology Thomson Computer Thomson Computer ElectronicsElectronics

Examples of Firms’ CapabilitiesExamples of Firms’ Capabilities

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Building Core Competencies

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• Core CompetenciesCore Competencies Resources and capabilities Resources and capabilities

that are the sources of a that are the sources of a firm’s competitive firm’s competitive advantageadvantage

Distinguish a company Distinguish a company competitively and reflect its competitively and reflect its personalitypersonality





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• Core CompetenciesCore Competencies Activities that a firm performs Activities that a firm performs

especially well compared to especially well compared to competitors.competitors.

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

• Four Criteria for Core Four Criteria for Core Competencies: Valuable, Competencies: Valuable, Rare, Costly to Imitate, & Rare, Costly to Imitate, & Nonsubstitutable Nonsubstitutable





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Building Sustainable Competitive Building Sustainable Competitive AdvantageAdvantage • Valuable capabilitiesValuable capabilities

Help a firm neutralize Help a firm neutralize threats or exploit threats or exploit opportunities.opportunities.

• Rare capabilitiesRare capabilities Are not possessed by Are not possessed by

many others.many others.


• ValuableValuable• RareRare• Costly to imitateCostly to imitate• NonsubstitutableNonsubstitutable

Four Criteria of Four Criteria of Sustainable Sustainable AdvantagesAdvantages

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Building Sustainable Competitive Building Sustainable Competitive AdvantageAdvantage • Costly-to-Imitate CapabilitiesCostly-to-Imitate Capabilities

HistoricalHistorical• A unique and a valuable A unique and a valuable

organizational culture or brand organizational culture or brand namename

Ambiguous causeAmbiguous cause• The causes and uses of a The causes and uses of a

competence are unclearcompetence are unclear

Social complexitySocial complexity• Interpersonal relationships, Interpersonal relationships,

trust, and friendship among trust, and friendship among managers, suppliers, and managers, suppliers, and customerscustomers


• ValuableValuable• RareRare• Costly to ImitateCostly to Imitate• NonsubstitutableNonsubstitutable


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Building Sustainable Competitive Building Sustainable Competitive AdvantageAdvantage

• Nonsubstitutable Nonsubstitutable CapabilitiesCapabilities No strategic equivalentNo strategic equivalent

• Firm-specific knowledgeFirm-specific knowledge

• Organizational cultureOrganizational culture

• Superior execution of the Superior execution of the chosen business modelchosen business model


• ValuableValuable• RareRare• Costly to imitateCostly to imitate• NonsubstitutableNonsubstitutable


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Outcomes from CombinationsOutcomes from Combinationsof the Four Criteriaof the Four Criteria

Valuab

le?

Rare?

Costly

to Im

itate

?

Nonsubst

ituta

ble?

CompetitiveConsequences

PerformanceImplications

NoNo NoNo NoNo NoNo CompetitiveDisadvantageCompetitiveDisadvantage

Below AverageReturnsBelow AverageReturns

YesYes NoNo NoNo Yes/NoYes/No

CompetitiveParityCompetitiveParity

Average ReturnsAverage Returns

YesYes YesYes NoNo Yes/NoYes/No

Temporary Com-petitive AdvantageTemporary Com-petitive Advantage

Above Average to Average ReturnsAbove Average to Average Returns

YesYes YesYes YesYes YesYes Sustainable Com-petitive AdvantageSustainable Com-petitive Advantage

Above AverageReturnsAbove AverageReturns

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Core RigiditiesCore Rigidities• Never take for granted that core competencies Never take for granted that core competencies

will continue to provide a source of competitive will continue to provide a source of competitive advantageadvantage

• All core competencies have the potential to All core competencies have the potential to become core rigiditiesbecome core rigidities

• Core rigiditiesCore rigidities are former core competencies that are former core competencies that now generate inertia and stifle innovationnow generate inertia and stifle innovation

• Determining what the firm can do through Determining what the firm can do through continuous and effective analyses of its internal continuous and effective analyses of its internal environment increases the likelihood of long-term environment increases the likelihood of long-term competitive successcompetitive success

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Value Chain Analysis

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Value Chain AnalysisValue Chain Analysis

• Allows the firm to understand the parts of its Allows the firm to understand the parts of its operations that create value and those that do operations that create value and those that do not.not.

• A template that firms use to:A template that firms use to:

Understand their cost position.Understand their cost position.

Identify multiple means that might be used to facilitate Identify multiple means that might be used to facilitate implementation of a chosen business-level strategy.implementation of a chosen business-level strategy.

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• To be a source of competitive advantage, a To be a source of competitive advantage, a resource or capability must allow the firm:resource or capability must allow the firm: To perform an activity in a manner that creates To perform an activity in a manner that creates

superior value as compared to what competitors can superior value as compared to what competitors can offer, oroffer, or

To perform a value-creating activity that competitors To perform a value-creating activity that competitors cannot duplicatecannot duplicate

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Value-Creating Potential of Primary Value-Creating Potential of Primary ActivitiesActivities• Inbound LogisticsInbound Logistics

Activities used to receive, store, and disseminate Activities used to receive, store, and disseminate inputs to a product.inputs to a product.

• OperationsOperations Activities necessary to convert the inputs provided by Activities necessary to convert the inputs provided by

inbound logistics into final product form.inbound logistics into final product form.

• Outbound LogisticsOutbound Logistics Activities involved with collecting, storing, and Activities involved with collecting, storing, and

physically distributing the product to customers.physically distributing the product to customers.

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Value-Creating Potential of Primary Value-Creating Potential of Primary ActivitiesActivities• Marketing and SalesMarketing and Sales

Activities completed to provide the means through which Activities completed to provide the means through which customers can purchase products and to induce them to do so.customers can purchase products and to induce them to do so.

• ServiceService Activities designed to enhance or maintain a product’s valueActivities designed to enhance or maintain a product’s value

• ProcurementProcurement Activities completed to purchase the inputs needed to produce a Activities completed to purchase the inputs needed to produce a

firm’s products.firm’s products.

• Technological DevelopmentTechnological Development Activities completed to improve a firm’s product and the Activities completed to improve a firm’s product and the

processes used to manufacture it.processes used to manufacture it.

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Value-Creating Potential of Support Value-Creating Potential of Support ActivitiesActivities• Human Resource ManagementHuman Resource Management

Activities involved with recruiting, hiring, training, Activities involved with recruiting, hiring, training, developing, and compensating all personnel.developing, and compensating all personnel.

• Firm InfrastructureFirm Infrastructure Activities that support the work of the entire value Activities that support the work of the entire value

chain (general management, planning, finance, chain (general management, planning, finance, accounting, legal, government relations, etc.)accounting, legal, government relations, etc.)• Effectively and consistently identify external Effectively and consistently identify external

opportunities and threatsopportunities and threats• Identify resources and capabilitiesIdentify resources and capabilities• Support core competenciesSupport core competencies

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Outsourcing

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OutsourcingOutsourcing

• The purchase of a value-creating activity from an The purchase of a value-creating activity from an external supplierexternal supplier Few organizations possess the resources and Few organizations possess the resources and

capabilities required to achieve competitive superiority capabilities required to achieve competitive superiority in all primary and support activities.in all primary and support activities.

• By performing fewer capabilities:By performing fewer capabilities: A firm can concentrate on those areas in which it can A firm can concentrate on those areas in which it can

create value.create value. Specialty suppliers can perform outsourced Specialty suppliers can perform outsourced

capabilities more efficiently.capabilities more efficiently.

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Outsourcing DecisionsOutsourcing 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.

Margin

Margin

Primary Activities

Su

pp

ort

Act

ivit

ies Service

Fir

m I

nfr

astr

uct

ure

Fir

m I

nfr

astr

uct

ure

Pro

cure

men

t

Hu

man

Res

ou

rce

Mg

mt.

Tec

hn

olo

gic

al D

evel

op

men

t

Marketing and Sales

Outbound Logistics

Operations

Inbound Logistics

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Outsourcing: Key Management SkillsOutsourcing: Key Management Skills

• Strategic thinkingStrategic thinking

• Deal-makingDeal-making

• Partnership governancePartnership governance

• Change managementChange management

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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing

• Improving business focusImproving business focus Helps a company focus on broader business issues Helps a company focus on broader business issues

by having outside experts handle various operational by having outside experts handle various operational details.details.

• Providing access to world-class capabilitiesProviding access to world-class capabilities The specialized resources of outsourcing providers The specialized resources of outsourcing providers

makes world-class capabilities available to firms in a makes world-class capabilities available to firms in a wide range of applications.wide range of applications.

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Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing

• Accelerating re-engineering benefitsAccelerating re-engineering benefits Achieves re-engineering benefits more quickly by Achieves re-engineering benefits more quickly by

having outsiders—who have already achieved world-having outsiders—who have already achieved world-class standards—take over process.class standards—take over process.

• Sharing risksSharing risks Reduces investment requirements and makes firm Reduces investment requirements and makes firm

more flexible, dynamic and better able to adapt to more flexible, dynamic and better able to adapt to changing opportunities.changing opportunities.

• Freeing resources for other purposesFreeing resources for other purposes Redirects efforts from non-core activities toward those Redirects efforts from non-core activities toward those

that serve customers more effectively.that serve customers more effectively.

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Outsourcing RisksOutsourcing Risks• Seeking greatest valueSeeking greatest value

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

• Evaluating resources and capabilitiesEvaluating resources and capabilitiesDo notDo not outsource activities in which the firm itself outsource activities in which the firm itself

can create and capture value.can create and capture value.

• Environmental threats and ongoing tasksEnvironmental threats and ongoing tasksDo notDo not outsource primary and support activities that outsource primary and support activities that

are used to neutralize environmental threats or to are used to neutralize environmental threats or to complete necessary ongoing organizational tasks.complete necessary ongoing organizational tasks.

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Outsourcing RisksOutsourcing Risks

• Nonstrategic team resourcesNonstrategic team resourcesDo notDo not outsource capabilities critical to the firm’s outsource capabilities critical to the firm’s

success, even though the capabilities are not actual success, even though the capabilities are not actual sources of competitive advantage.sources of competitive advantage.

• Firm’s knowledge baseFirm’s knowledge baseDo notDo not outsource activities that stimulate the outsource activities that stimulate the

development of new capabilities and competencies.development of new capabilities and competencies.

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Wrap-up

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Wrap-upWrap-up

• Key Aspects of Internal AnalysisKey Aspects of Internal Analysis• Resources & CapabilitiesResources & Capabilities• Building Core CompetenciesBuilding Core Competencies• Value Chain AnalysisValue Chain Analysis• Outsourcing Outsourcing • QuestionsQuestions

the internal environment chapter three ba 495.005

Documents

firms resources

firms capabilities

firms success

unique resources

quantifiedtangible resources

internal analyses outcomes

average returns slide

internal environment