Chapter 3 The Internal Organization (Resources, Capabilities, Core Competencies, and Competitive Advantages) PDF

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Chapter 3: Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages  All competitive advantages have a limited life. Question of duplication of competitive advantage is not if it will happen, but when.  Competitive advantage’s sustainability is a function of three factors: o Rate of core competencies obsolescence b/c of environmental changes o Availability of substitutes for core competence o Imitability of core competence  Challenge for firms is to effectively manager current core competencies while simultaneously developing new ones. Only when firms do this can they expect to achieve strategic competitiveness, earn above-average returns, and remain ahead of competitors in both short/long term. o By analyzing its internal organization, a firm determines what it can do. Matching what a firm can do with what it might do is a process that yields insights that firm requires to select strategies 3.1 Analyzing the Internal Organization  Context of Internal Analysis o In today’s global economy, some resources that were traditionally critical to firms’ efforts to produce, sell, and distribute goods/services, access to financial resources and raw materials, and protected/regulated markets are now less likely to be source of competitive advantages.  More firms are using resources to form core competencies through which they successfully implement an international strategy as means of overcoming advantages created by most traditional resources. o Global mind-set: ability to analyze, understand, and manage an internal organization in ways that are not dependent on assumptions of single country, culture, or context.  Recognize that firms must possess resources and capabilities that allow understanding of and appropriate responses to competitive situations that are influenced by countryspecific factors and unique cultures.  Helps firm in its efforts to outperform rivals. o Analyzing internal organization requires evaluators examining firm’s entire portfolio of resources and capabilities.  Individual firms possess at least some resources/capabilities that other companies do not.  Resources are sources of capabilities, some that lead to development of core competencies that lead to competitive advantage for firm.  Understanding how to leverage firm’s unique bundle of resources/capabilities is key outcome decision makers seek when analyzing internal organization.  Creating Value o Firms use resources as foundation for producing goods/services that create value for customers. o Value: measured by product’s performance characteristics and its attributes for which customers are willing to pay.  Created by innovatively bundling and leveraging their resources to form capabilities and core competencies.  Firms w/ competitive advantage create more value for customers than competitors  Stronger the core competencies, the greater the amount of value they’re able to create for customers. o Creating value for customers is source of above-average returns for firm. What firm intends regarding value creation affects its choice of business-level strategy & organizational structure  Business-level strategy is effective only when it’s grounded in exploiting firm’s capabilities and core competencies.

Successful firm examines effectiveness of current capabilities and core competencies while thinking about capabilities/competencies it will require for future success. o Core competencies in combo with product-market positions, are firm’s most important sources of competitive advantage.  Firm’s core competencies, integrated with understanding of results of studying conditions in external environment, should drive selection of strategies.  By emphasizing core competencies when selecting/implementing strategies, companies learn to compete primarily on basis of firm-specific differences and by aware of changes in firm’s external environment too. Challenge of Analyzing Internal Organization o Strategic decisions about internal organization made are nonroutine, have ethical implications, and significantly influence firm’s ability to earn above-average returns.  Decisions involve choices about resources firm needs to collect and how to best manage and leverage them. o Making decisions involving firm’s assets-identifying, developing, deploying, and protecting resources, capabilities, and core competencies-appear easy.  Task is challenging and difficult; task is increasingly internationalized.  Pressure of managers to pursue only decisions to help firm meet anticipated quarterly earnings makes it difficult to accurately examine firm’s internal organization. o Mistakes are made as firm analyzes conditions in its internal conditions. A firm can improve by studying/correcting mistakes to help efforts to create new capabilities and core competencies. o Three condition affect managers as they analyze internal organization and make decisions about resources: uncertainty, complexity, and intraorganizational conflict.  Managers face uncertainty b/c of # of issues like new proprietary tech, rapidly changing economic and political trends, transformation in societal values, shifts in customers’ demands, and environmental changes.  Bias about how to cope w/ uncertainty affects decisions made about how to manage firm’s resources and capabilities to form core competencies.  Intraorganizational conflict may surface when decisions are made about core competencies a firm should develop/nurture.  In making decisions affected by three conditions, judgment is required.  Judgment: capability of making successful decisions when no obviously correct model or rule is available or when relevant data are unreliable or incomplete. o Be aware of cognitive biases like overconfidence. o When exercising judgment, decision makers take intelligent risks. o Executive judgment is valuable capability.  Over time, effective judgment that decision makers demonstrate allows firm to build strong reputation and retain loyalty of stakeholders whose support is linked to above-average returns.  Finding individuals who make most successful decisions about using organization’s resources is challenging.  Quality of leaders’ decisions regarding resources and their mgmt. affects firm’s ability to achieve strategic competitiveness. Individuals holding key decisionmaking positions are called strategic leaders: individuals with ability to make 

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effective decisions when examining firm’s resources, capabilities, and core competencies for purpose of making choices of their use. 3.2 Resources, Capabilities, and Core Competencies (Foundation of competitive advantage)  Resources are bundled to create organizational capabilities; capabilities are source of firm’s core competencies, which is basis of establishing competitive advantages  Resources o Cover spectrum of individual, scope, and organizational phenomena; don’t allow firms to create value for customers as foundation for earning above-average returns. o Some of firm’s resources are tangible, while others are intangible.  Tangible resources: assets that can be observed and quantified.  Four categories: financial, organizational, physical, and technological.  Firm’s borrowing capacity and status of physical facilities are visible.  Value of tangible resources is established through financial statements but don’t account for value of all of firm’s assets b/c they disregard intangible resources. o Constrained also b/c they are hard to leverage it-difficult to derive additional business or value from tangible resource. o Although production assets are tangible, many processes necessary to use them are intangible.  Intangible resources: assets that are rooted deeply in firm’s history, accumulate over time, and are difficult for competitors to analyze and imitate.  Require nurturing to maintain ability to help firms engage in competitive battles  Categories: human, innovation, and reputational  Superior sources of capabilities and core competencies. o Being able to effectively manage intellectual capital is increasingly important skill for today’s leaders to develop.  Firms rely on them as foundation for their capabilities. The more unobservable a resource is, the more valuable that resource is to create capabilities.  Their use can be leveraged like sharing knowledge.  Reputational resources are sources of firm’s capabilities and core competencies. o Value-creating reputation is product of years of superior marketplace competencies as perceived by stakeholders. o Reputation: level of awareness firm has been able to develop among stakeholders and degree to which they hold firm in high esteem  Well-known and high valued brand name is specific reputational resource. o Continuing commitment to innovation & aggressive advertising facilitates firms’ efforts to take advantage of reputation associated w/ their brands. o Some firms use social media as means of influencing their reputation.  Capabilities (Combo of individual tangible and intangible resources) o Used to complete organizational tasks required to produce, distribute and service goods or services firm provides to customers for purpose of creating value for them. o Based on developing, carrying, & exchanging info and knowledge through firm’s human capital.  Value of human capital in developing/using capabilities and core competencies cannot be overstated. (“makes or breaks companies”) o Developed in specific functional areas or part of functional areas  Core Competencies (capabilities that serve as source of competitive advantage for firm over its rivals). o Distinguish company competitively and reflect its personality.

o Emerge over time through organizational process of accumulating and learning how to deploy different resources and capabilities. o At capacity to take action, core competencies are “crown jewels of company,” activities company performs compared to competitors and through which firm adds unique value to goods/services it sells to customers. Ex: Apple’s are innovation and excellent customer service. 3.3 Building Core Competencies  Two tools help firms identify core competencies: o 1) Four specific criteria for sustainable competitive advantages used to determine which capabilities are core competencies. 2) Value chain analysis to select value-creating competencies that should be maintained, upgraded, or developed and those that should be outsourced.  Four Criteria of Sustainable Competitive Advantage o Capabilities that are valuable, rare, costly to imitate and non-substitutable are core competencies. Core competencies lead to competitive advantages for firm over its firms.  Although every core competence is capability, not every capability is a core competence.  For capability to be core competence, it must be valuable and unique from customer’s point of view. For core competence to be potential source of competitive advantage, it must be inimitable and non-substitutable by competitors. o Sustainable competitive advantage exists only when competitors are unable to duplicate benefits of firm’s strategy or when they lack resources to attempt imitation.  For some time, firm many have core competence by using capabilities that are valuable and rare, but imitable.  Length of time firm can expect to create value by using its core competencies is function of how quickly competitors can successfully imitate good, service, or process.  Value-creating core competencies may last for relatively long period of time only when all four of criteria are satisfied. o 1) Valuable capabilities: allow firm to exploit opportunities or neutralize threats in its external environment to create value for customers. o 2) Rare capabilities: capabilities that few, if any, competitors possess.  Capabilities possessed by many rivals are unlikely to become core competencies for any of the involved firms.  Valuable but common capabilities are sources of competitive parity.  Competitive advantage results only when firms develop and exploit valuable capabilities that become core competencies and differ from those shared w/ competitors. o 3) Costly-to-Imitate capabilities: capabilities that other firms can’t easily develop - (3 conditions)  1) Firm sometimes develop capabilities b/c of unique historical conditions. As firms evolve, they acquire/develop capabilities that are unique to them.  Firm w/ unique and valuable organizational culture that emerged in early stages of company’s history may have imperfectly imitable advantage over firms founded in another time, one in which less valuable or less competitively useful values/beliefs strongly influenced the development of firm’s culture.  Organizational culture is set of values that are shared by members in organization and a source of advantage when employees are held together tightly by their belief in it and leaders who helped to create it.  2) Link b/w the firm’s core competencies & its competitive advantage is causally ambiguous.  Competitors can’t clearly understand how firm uses its capabilities that are core competencies as foundation for competitive advantage.

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o Firms are uncertain about capabilities they should develop to duplicate benefits of a competitor’s value-creating strategy.  3) Social complexity: at least some, and frequently many, of firm’s capabilities are product of complex social phenomena.  Interpersonal relationships, trust, friendships among managers and b/w managers and employees, and firm’s reputation with suppliers/customers are examples of socially complex capabilities. o 4) Non-substitutable capabilities: capabilities that do not have strategic equivalents.  There must be no strategically equivalent valuable resources that are themselves either not rare or imitable. Two valuable firm resources are strategically equivalent when they each can be separately exploited to implement same strategies.  Strategic value of capabilities increases as they become more difficult to substitute. The more intangible and invisible capabilities are, the more difficult it is for firms to find substitutes and greater challenge is to competitors trying to imitate firm’s value-creating strategy. o Only using valuable, rare, costly-to-imitate, and non-substitutable capabilities has potential for firm to create sustainable competitive advantages.  Capabilities yielding competitive parity and temporary or sustainable competitive advantage should be supported. Value Chain Analysis o Allows firms to understand parts of its operations that create value and those that don’t.  Firms earning above-average returns only when value it creates is greater than costs incurred to create that value. o Template that firms use to analyze their cost position and to identify multiple means that can be used to facilitate implementation of chosen strategy.  Today’s competitive landscape demands firms examine value chains in global context. o Firm’s value chain is segmented into value chain activities and support functions.  Value chain activities: activities/tasks that firm completes in order to product products and then sell, distribute, and service products in ways that create value for customers.  Support functions: activities/tasks that firm complete in order to support work being done to produce, sell, distribute, and service products that firm is producing.  Firm can develop a capability and/or core competence in any of value chain activities and in any of the support functions. o Customers are the ones firms seek to serve when using value chain analysis to identify capabilities and core competencies; when using unique core competences to create unique value for customers that competitors cannot duplicate, firms established one or more competitive advantages. o To be core competence & source of competitive advantage, capability must allow firm to either:  1) Perform activity in manner that provides value superior to that provided by competitors. 2) Perform value-creating activity that competitors can’t perform.  Only under these conditions does firm create value for customers and have opportunities to capture that value. o Creating value for customers by completing activities part of value chain requires building effective alliances with suppliers and developing strong positive relationships w/ customers.  When firms have strong, positive relationships with suppliers and customers, they have social capital. Relationships have value b/c they lead to transfer of knowledge and access to resources that firm may not hold internally.

Partners must trust each other to allow resources to be used so both parties will benefit over time while neither party will take advantage of the other. o Evaluating firm’s capability to execute its value chain activities and support functions is challenging. Judgment is equally necessary when using value chain activities b/c no correct model or rule is universally available to help in process.  If value chain activities and support functions have resources/capabilities that aren’t a source of core competence, outsourcing is a solution. 

3.4 Outsourcing: purchase of value-creating activity or support function activity from external supplier  Non-profit agencies actively engage in outsourcing. Firms engaged in outsourcing increase flexibility, mitigate risks, and reduce capital investments. It’s an increasing trend in multiple global industries. o In some industries, virtually all firms seek value that can be captured through effective outsourcing. Careful analysis is required before firm decides to outsource.  Firms must recognize that only activities where they can’t create value or where they are at substantial disadvantage compared to competitors should be outsourced.  Virtually any activity associated with value chain functions or support functions may fall into this category.  Can be effective b/c few, if any, organizations possess resources and capabilities required to achieve competitive superiority in each value chain activity and support function. o By nurturing smaller # of capabilities, firm increases probability of developing core competencies and achieving competitive advantage b/c it doesn’t become overextended. o By outsourcing activities in which it lacks competence, firm can fully concentrate on areas in which it has potential to create value.  Concerns: 1) potential loss in firm’s ability to innovate and 2) loss of jobs within focal firm. o Firms should anticipate possible effects on ability to innovate in future and impact of losing some of human capital when evaluating possibility of outsourcing. o Firms can enhance their own innovation capabilities by studying how companies to which they’ve outsourced complete those activities.  Deciding to outsource to foreign supplier is called offshoring. 3.5 Competencies, Strengths, Weaknesses, and Strategic Decisions  If firm has weak capabilities or doesn’t have core competencies in areas required to achieve competitive advantage, it must acquire resources and build needed capabilities and competencies. o Firm could decide to outsource function or activity where it is weak to improve activity to use its remaining resources to create value. o Having a significant quantity of resources is not the same as having “right” resources; “right” resources are those with potential to be formed into core competencies as foundation for creating value for customers and developing competitive advantages as result of doing so.  Decision makers become more focused and productive when seeking to find right resources when firm’s total set of resources is constrained. o Tools can help firm focus on its core competencies as source of its competitive advantages.  Value-creating ability should never be taken for granted. Ability of core competence to be permanent competitive advantage can’t be assumed.  All core competencies have potential to become core rigidities.  Events occurring in firm’s external environment create conditions through which core competencies can become core rigidities, generate inertia, and stifle innovation (could also be a dark side).

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After studying external environment to determine what it might choose to do and its internal organization to understand what it can do, firm has info required to select business-level...