Competing for ADVANTAGE PART II STRATEGIC ANALYSIS Chapter 4 The Internal Organization: Resources, Capabilities, and Core Competencies 1

The Strategic Management Process The Internal Organization Firms rely on a unique bundle of resources to create a sustainable competitive advantage.

Factors that Determine Sustainability Rate of core competence obsolescence Availability of substitutes Imitability of core competence Outcomes from Internal Organizational Analysis Resource Decision Pitfalls Neglecting international

considerations Pursuing only short-term earnings goals Failing to recognize core competencies

Emphasizing resources and Conditions That Influence Internal Analysis Key Terms Global mind-set

Ability to study an internal environment in ways that do not depend on the assumptions of a single country, culture, or context Conditions That Influence Internal Analysis Global interconnectedness

Pace of environmental change Economic volatility Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core

Competencies Resource Perspective The perspective that a firm is a bundle of heterogeneous resources, capabilities, and core competencies that can be used to create a unique market position is a critical characteristic of effective resource analysis. Resources, Capabilities,

and Core Competencies Resources are the source of a firm's capabilities. Capabilities, in turn, are the source of a firm's core competencies.

A firm's core competencies are the basis for its competitive advantages in the marketplace. Components of Internal Analysis Leading to Competitive Advantage and Value Creation Creating Value Key Terms

Value Measured by a product's performance characteristics and by its attributes for which customers are willing to pay Resources Key Terms Tangible

resources Assets that can be observed and quantified Intangible resources Assets that typically are rooted deeply in the firm's history and have accumulated over time Organizational

routines Complex patterns of social interactions that allow firms to accomplish much of what they do Tangible Resources Intangible Resources Resources

Key Terms Social capital Relationships with other organizations that contribute to the creation of value Strategic value of resources

Degree to which resources can contribute to the development of capabilities, core competencies, and ultimately, competitive advantage Capabilities Key Terms Capabilities

Firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state Examples of Firms Capabilities Core Competencies Key Terms Core

competencies Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals How Many? Supporting and nurturing more than four core competencies may prevent a firm from developing the focus needed to

fully exploit its competencies in the marketplace. Tools for Building Core Competencies Four Criteria of Sustainable Competitive Advantage

Value Chain Analysis Four Criteria of Sustainable Competitive Advantage Valuable Capabilities

Rare Capabilities Costly-to-Imitate Capabilities Nonsubstitutable Capabilities

Four Criteria of Sustainable Competitive Advantage Key Terms Valuable capabilities Allow the firm to exploit opportunities or neutralize threats in its external environment Rare

capabilities Possessed by few, if any, current or potential competitors Costly-to-imitate capabilities Cost for other firms to develop is prohibitive, cannot easily be developed by other firms Nonsubstitutable

capabilities Do not have strategic equivalents Four Criteria for Determining Core Competencies Costly-to-Imitate Capabilities

Unique historical conditions Causal ambiguity Socially complexity Core Competencies as a

Strategic Capability Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage Value Chain Analysis Key Terms Value

chain activities Activities or tasks involved with the production of a firms product, the sale and distribution of products to buyers, and after-sales services in ways that create value for the customer Support functions Activities or tasks which support the firms work required to make, sell, distribute, and

service its products Value Chain Model Creating Value Through Value Chain Activities Creating Value Through Support Functions Sources of Competitive Advantage

The resource or capability must allow the firm to perform a value chain activity or a support function in a manner superior to the way competitors perform it. The resource or capability must allow the firm to perform a valuecreating value chain activity or a

support function that competitors cannot perform. Outsourcing Key Terms Outsourcing The purchase of a value-creating activity from an external supplier

Benefits of Outsourcing Increased flexibility Risk mitigation Reduced capital

investments Outsourcing Viability When a firm does not have the

capabilities in the areas needed to succeed When a firm lacks a resource or possesses inadequate skills essential to successfully implement a strategy When few organizations possess the resources and capabilities required to achieve competitive superiority in all value chain activities and support functions When extensive internal capabilities exist to effectively coordinate external sourcing

Essential Skills for Outsourcing Strategic thinking Deal making

Partnership governance Managing change Core Competencies: Cautions

Never take for granted that core competencies will continue to provide a permanent 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. Manager inflexibility stemming from the strength of shared beliefs (strategic Stakeholder Objectives and Power Key Terms Economic power

Comes from the ability to withhold economic support from the firm Political power Results from the ability to influence others to withhold economic support or to change the rules of the game Formal power

Involves laws or regulations that specify the legal relationship existing between a firm and a particular stakeholder group Returns and Stakeholders High economic returns firm has the capability and flexibility to satisfy multiple stakeholders simultaneously

Average economic returns firm is unable to maximize the interests of all stakeholders Below-average returns firm does not have the capacity to satisfy all stakeholders

Measures of Firm Performance Capital market performance Product market performance

Organizational stakeholder performance Firm Performance from a Capital Market Perspective Measures of Firm Performance

Key Terms Risk Investor uncertainty about the economic gains or losses that will result from a particular investment Other Measures of Firm Performance Sustainable Development

Key Terms Sustainable development Business growth that does not deplete the natural environment or damage society ETHICAL QUESTION Could efforts to develop sustainable

competitive advantages result in employees using unethical practices? If so, what unethical practices might be used to compare a firms core competencies with those held by rivals? ETHICAL QUESTION Do ethical practices affect a firms ability to develop a brand name as a source of competitive advantage? If so, how does this happen? Identify some brands that are a source of competitive advantage in part

because of the firms ethical practices. ETHICAL QUESTION What is the difference between exploiting a firms human capital and using that capital as a source of competitive advantage? Are there situations in which the exploitation of human capital can be a source of advantage? If so, can you name such a situation? If the exploitation of human capital can be a source of competitive

advantage, is this a sustainable advantage? Why or why not? ETHICAL QUESTION Are there any ethical dilemmas associated with outsourcing? If so, what are they? How would you deal with those dilemmas? ETHICAL QUESTION What ethical responsibilities do managers have if they determine that a

set of employees has skills that are valuable only to a core competence that is becoming a core rigidity for the firm? ETHICAL QUESTION Through postings to the Internet, firms sometimes make a vast array of data, information, and knowledge available to competitors as well as to customers and suppliers. What ethical issues, if any, are involved when the firm finds

competitively relevant information on a competitors Website? ETHICAL QUESTION To what extent does a firm have a moral obligation to distribute value back to stakeholders based on their relative contributions to its creation? Does a firm have any legal obligations to do so?

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