Chapter III: The Internal Organization - Resources, Capabilities, Core Competencies, & Competitive Advantages

Value Chain Activities & Support Functions Relative to Core Competencies

A firm can develop a capability and/or core competency in any of the value chain activities and in any of the support functions

What a firm might do (what is this a function of?)

A function of opportunities and threats in the external environment

Resources & Competitive Advantage

A significant quantity of resources is not the same as having the "right resources" Right are those with potential to be formed into core competencies as foundation for creating value for customers and developing competitive advantage as a result

Difficulty of Decisions

About 1/2 of organizational decisions fail Ex. believe a capability is a core competence when it really isn't

Value Chain Activities

Activities or tasks the firm completes in order to produce products and then sell, distribute, and service those products in ways that create value for customers

Limited Life of Competitive Advantages

All competitive advantages have a limited lifespan because competitors will learn how to duplicate the benefits of any strategy

Core Rigidities

All core competencies have the potential to become core rigidities Events in the external environment create conditions through which core competencies can become core rigidities, generate intertia, and stifle innovation

Value Chain Analysis

Allows the firm to understand the parts of its operations that create value and those that do not. This is important because the firm earns above-average returns only when the value it creates is greater than the costs incurred to create that value Look at each value chain activity and support function to find differentiators

Nonsubstitutable Capabilities

Are 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 the same strategy The more intangible and hence invisible capabilities are, the more difficult it is to find substitutes

Rare Capabilities

Are capabilities that few, if any, competitors possess. A key question here is : how many rivals possess these valuable capabilities? Valuable, but common (not rare) capabilities are sources of competitive parity. Competitive advantage results only when firms develop and exploit valuable capabilities that become core competencies and differ them from those shared with competitors

Intangible Resources

Assets that are rooted deeply in the firm's history and have accumulated over time. They are embedded in unique patterns of routines, and are thus difficult for competitors to analyze and imitate. Ex. knowledge, trust between managers and employees, managerial capabilities, organizational routines, brand name, reputation, and how the firm interacts with people are examples

Tangible Resources

Assets that can be observed and quantified Production equipment, manufacturing facilities, distribution centers and formal reporting structures are examples

Technological Resources

Availability of technology-related resources such as copyrights, patents, trademarks, and trade secrets

How Capabilities Are Built

Based on developing, carrying, and exchanging information and knowledge through the firm's human capital Often created in a specific functional area or in a part of a functional area

Reputational Resources

Brand name Perceptions of product quality, durability and reliability Positive reputation with stakeholders such as suppliers and customers

Costly-to-Imitate Capabilities: Social Complexity

Capabilities are the product of some complex social phenomena such as interpersonal relationships, trust, friendships between managers and employees, and firm's reputation with suppliers.

Four Criteria of Sustainable Competitive Advantage

Capabilities that are valuable, rare, costly to imitate, and nonsubstitutable are core competencies Every core competency is a capability, but not every capability is a core competency

Costly-to-Imitate Capabilities

Capabilities that other firms cannot easily develop. Capabilities that are costly to imitate are created because of one reason or a combination of reasions

Core Competencies

Capabilities that serve as a source of competitive advantage for a firm over its rivals. These distinguish a company competitively and reflect its personality They emerge over time via an organizational process of accumulating and learning how to deploy different resources and capabilities "Crown jewels of a company"

Sustainability of Competitive Advantage

Competitive advantage only exists when competitors cannot duplicate the benefits of a firm's strategy or they lack the resources to attempt imitation Length of time a firm can expect to create value by using its core competencies is a function of how quickly competitors can successfully imitate a good, service, or process

Complexity

Complexity results from the interrelationships among conditions shaping a firm

Resources

Cover a spectrum of individual, social, and organizational phenomena. Are combined to form capabilities; resources alone do not create value. Ex. Subway takes fresh ingredients and combines with other resources for a winning strategy

Social Capital

Derived from strong relationships with suppliers and customers (can lead to/aid in value creation)

Why Can Outsourcing be Effective

Few, if any, companies possess the resources and capabilities to achieve competitive superiority in all value chain activities and support functions

Value Chain Support Functions Listed

Finance Human Resources Management Information Systems

Tangible Resources: Key Buckets

Financial Resources Organizational Resources Physical Resources Technological Resources

Financial Resources

Firm's capacity to borrow Firm's ability to generate funds via internal operations

Organizational Resources

Formal reporting structures

Capabilities Ex.

Functional Area: Distribution Capability: Effective use of logistics management techniques Example: Walmart

Costly-to-Imitate Capabilities: How to Create Them

Historical reasons Ambiguous reasons Social Complexity

Intangible Resources Buckets

Human Resources Innovation Resources Reputational Resources

Tools to Identify Core Competencies

I) Four specific criteria of sustainable competitive advantage that be used to determine which capabilities are core competencies II) Value chain analysis. Used to select the value creating competencies that should be maintained, upgraded or developed and those that should outsourced

Innovation Resources

Ideas, scientific capabilities, capacity to innovate

Costly-to-Imitate Capabilities: Ambiguous

In these instances, competitors can't clearly understand how a firm uses its capabilities that that are core competencies as the foundation for competitive advantage Thus, firms are uncertain as to the capabilities they should develop to duplicate the value creating strategy Ex. Southwest Airlines culture

Capabilities

Individual tangible and intangible resources are combined to create capabilities Capabilities are then used to complete the organizational tasks required to produce, distribute, and service the goods or services the firm provides to customers for the purpose of creating value for them

Strategic Leaders

Individuals holding the key decision making positions Must be able to exercise judgement

Intraorganizational

Intraorganizational conflicts may exist among managers making decisions as well among those affected by the decisions

Human Resources

Knowledge, trust, skills, and abilities to collaborate with others

Old Resources Decreasing in Importance

Labor costs, access to financial resources, raw materials, and protected/regulated markets are still important but less likely to lead to competitive advantages

Value

Measured by a product's performance characteristics and by its attributes for which customers are willing to pay Value is created by innovatively bundling and leveraging their resources to form capabilities and core competencies

Brand

Nothing more than the sum of conversations being had about you

Analyzing the Internal Organization

Requires that individuals examine the firm's entire portfolio of resources and capabilities.

Foundation of Competitive Advantage

Resources, capabilities, and core competencies form the foundation of competitive advantage

Successful Strategies

Strategies are only successful/effective when it is grounded in exploiting the firm's capabilities and core competencies Thus continuous examination of a firm's capabilities is required

Value Chain Activities Listed

Supply-Chain Management Operations Distribution Marketing (Including Sales) Followup Service

Past Value Efforts

Tended to be focused on industry understanding which underestimated the role of the firm's resources and capabilities in developing core competencies as the source of competitive advantages. Must compete on the firm specific differences (core competencies) but also be away of how things are changing in the external environment

Global Mind-Set

The ability to analyze, understand, and manage an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context

Support Functions

The activities or tasks the firm completes in order to support the work being done to produce, sell, distribute, and service the products the firm is producing.

Judgment

The capability of making successful decisions when no obviously correct model or rule is available or when relevant data are unreliable or incomplete Required when making decisions affected by the 3 aforementioned conditions

Outsourcing

The purchase of a value creating activity or support function activity from an external supplier. If done effectively, outsourcing can increase a company's flexibility, mitigate risks, and reduce capital investments Outsourcing should only be used for activities where firms cannot create value or where they are at a substantial disadvantage compared to competitors.

Physical Resources

The sophistication of a firm's plant and equipment and the attractiveness of of its location Distribution facilities Product inventory

Core Competencies & Value

The stronger a firm's core competencies, the more value that can be created for their customers This generates above-average returns for the companies (producers)

Intangible Resources Notes

These are a superior source of capabilities than are tangible resources. Accordingly, this leads to a better core competencies. Success of a corp. lies more in its intellectual and systems capabilities than in physical assets Difficult for competitors to understand, purchase, imitate, or substitute. They can be leveraged ex. sharing knowledge

Globalization & Internet Effects

These developments have made it more difficult to develop sustainable competitive advantages. Innovation appears to be the vital path to develop competitive advantage

Internal Organization Analysis

This allows firms to ID their strengths and weaknesses in resources, capabilities, and core competencies

Competitive Advantage Sustainability

This is a function of 3 things I) rate of core competence obsolescence because of environmental changes II) Availability of substitutes for the core competence III) The imitability of the core competence Need to effectively manage current core competencies while also developing new ones

Why Examine the Internal Organization?

This process allows us to discover what a firm can do. This is function of its resources, capabilities, and core competencies in the internal organization

How a Capability becomes a Core Competence

To become a core competence and a source of competitive advantage, a capability must allow the firm to I) perform an activity in a manner that provides value superior to that provided by competitors or II) to perform a value-creating activity that competitors cannot perform Only in such fashion does a firm create value for customers and have opportunity to capture that value

Uncertainty

Uncertainty about the characteristics of the firm's general and industry environments and customer's needs Biases with how to cope with this also come into play

Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies

Uncertainty, complexity, & intraorganizational conflicts

Costly-to-Imitate Capabilities: Historical

Unique historical conditions may, as firms evolve, allow them to acquire or develop capabilities that are unique to them. Unique and valuable organizational cultures that emerged in the early stages of a company may be "imperfectly imitable" Organizational culture can be an advantage if it holds employees tightly together and helps them believe in their leaders who created it

Tangible Resources Notes

Value of tangible resources is constrained bc they are hard to leverage - it is hard to derive additional business or value from a tangible resource (can only use a plane for one route)

Valuable Capabilities

allow the firm to exploit opportunities or neutralize threats in its external environment Ex. Groupon's "daily deal". Many imitators have appeared