Lecture 4 Internal Analysis: Resources, Capabilities and Core Competencies

Resources, Capabilities and Core Competencies

Capabilities: • represent the 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 firm's human capital. • composed of the unique skills and knowledge of a firm's employees. • include functional expertise of employees. • often developed in specific functional areas or as part of a functional area.

Resources, Capabilities and Core Competencies

Core Competencies • Resources and capabilities that are the sources of a firm's competitive advantage that: • distinguish a firm competitively and reflect its personality. • emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. • 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.

Resources: Human Capital

Human Capital • Intellectual property is produced by human capital. • Human capital includes the knowledge and skills of those working for the firm. Employees' knowledge and skills are critical for all organizations. • Effective strategic leaders base their strategies on the human capital in the firm Social Capital • Social capital includes all internal and external relationships that help the firm provide value to customers and ultimately to its other stakeholders. • Internal social capital • External social capital • Social capital is most effective when partners trust each other (strong ties).

Michael Phelps source of competitive advantage

Larger wingspan After retirement in 2016 he stated, "The only reason I ever got in the water was my mom just wanted me to learn how to swim. My sisters and myself fell in love with the sport, and we decided to swim."

Resources, Capabilities, and Core Competencies

Resources: • are the source of a firm's capabilities. • A firm's assets, including people and the value of its brand name, that represent inputs into a firm's production process: •• capital equipment •• skills of employees •• brand names •• financial resources •• talented managers Excon mobile has a lot of tangible resources (cash in balance sheet) Costco has a lot of intangible resources

Building Core Competencies

The four criteria of sustainable competitive advantages: • Valuable capabilities • Rare capabilities • Inimitable/ costly to imitate • Non-substitutable

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: a firms assets, and the source of a firm's capabilities. • Tangible resources: can be observed and quantified • Intangible resources: typically are rooted in the firm's history and have accumulated over time Capabilities: Firm's capacity to deploy resources that have been purposely integrated to achieve a desired end state, and are the source of core competencies Core competencies: Resources and capabilities that serve as a source of competitive advantage for a firm over its rivals • A firm's core competencies are the basis for its competitive advantages in the marketplace.

Strategy Highlight, The rise and fall of Groupon

• A daily deal website, offering group coupons Grew quickly • 260, million subscribers, 500,000 merchants • $6 billion buyout (Google 2011) was declined • Current market cap approx $.85 billion • It was valuable, rare, but not costly to imitate • More specialized local start ups began

Competitive Advantage -> Value

• By exploiting their core competencies or competitive advantages, firms create value. Value is measured by: • product performance characteristics. • product attributes for which customers will pay. • Firms create value by innovatively bundling and leveraging their resources and capabilities. • Superior value leads to above-average returns.

Creating Competitive Advantage

• Core competencies, in combination with product-market positions, are the firm's most important sources of competitive advantage. • Core competencies of a firm, in addition to the analysis of its general, industry, and competitor environments, should drive its selection of strategies.

A Resource Is Costly to Imitate If...

• Firms that do not possess the resource are unable to develop or buy the resource at a reasonable price. • Example: Southwest Airlines corporate culture (funny flight attendant)

Examples of Core Competencies

• IKEA • Superior in designing modern functional home furnishings at low cost • Beats Electronics • Superior marketing: perception of coolness • Facebook • Superior algorithms to offer targeted online ads

A Resource is Valuable If...

• It enables the firm to exploit an opportunity. • It enables the firm to offset a threat. • It enables a firm to increase its economic value creation (V - C). Example: Beats Electronics: • Design and marketing of premium headphones • Production = ~$15 • Retail = $150 - $450

A Resource Is Non-substitutable If...

• It is not able to be replaced by some other non-rare resource • It is not be able to be replaced by any other strategically equivalent resource • Example: patent protection of life-saving drugs

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 myopia) is the primary reason core rigidities develop.

A Resource is Rare If...

• Only one or a few firms possess it • Example: Coca Cola formula

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.

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 value-creating value chain activity or a support function that competitors cannot perform.