1. Ch3-
The Internal Environment:The Internal Environment:
Resources, Capabilities andResources, Capabilities and
Core CompetenciesCore Competencies
Michael A. HittMichael A. Hitt
R. Duane IrelandR. Duane Ireland
Robert E. HoskissonRobert E. Hoskisson
©2000 South-Western College Publishing

2. Ch3-
External Environment
What the Firm Might Do
Internal Environment
What the Firm Can Do
SustainableSustainable
CompetitiveCompetitive
AdvantageAdvantage

3. Ch3-
Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Sources of
Core
Competencies
Competitive
Advantage
Strategic
Competitiveness
Above-Average
Returns
Competitive
Advantage
Gained through
Core Competencies
Discovering
Core
Competencies
Discovering Core
Competencies
Criteria of
Sustainable
Advantages
Value
Chain
Analysis
Valuable
Rare
Costly to Imitate
Nonsubstitutable
*
*
*
*
* Outsource

4. Ch3-
How do we assembleHow do we assemble bundlesbundles of Resources,of Resources,
Capabilities and Core Competencies to createCapabilities and Core Competencies to create
VALUEVALUE for customers?for customers?
Will environmental changes make our coreWill environmental changes make our core
competencies obsolete?competencies obsolete?
And...And...
Are substitutes available for our coreAre substitutes available for our core
competencies?competencies?
Are our core competencies easily imitated?Are our core competencies easily imitated?
Key Questions for Managers
in Internal Analysis

5. Ch3-
Conditions Affecting Managerial Decisions About
Resources, Capabilities and Core Competencies
Uncertainty
regarding characteristics of the general and the
industry environments, competitor’s actions, and
customer’s preferences.
Complexity
regarding the interrelated causes shaping a firm’s
environments and perceptions of the environments
Intraorganizational Conflicts
among people making managerial decisions and
those affected by them

6. Ch3-
Resources
* Tangible
* Intangible
Discovering Core
Competencies

7. Ch3-
What a firm has to work with:What a firm has to work with:
itsits assetsassets, including its, including its peoplepeople andand
the value of itsthe value of its brand namebrand name
What a firmWhat a firm HasHas......Resources

8. Ch3-
Resources representResources represent inputs into ainputs into a
firm’s production processfirm’s production process......
such as capital equipment, skills ofsuch as capital equipment, skills of
employees, brand names, financesemployees, brand names, finances
and talented managersand talented managers
What a firmWhat a firm HasHas......
What a firm has to work with:What a firm has to work with:
its assets, including its peopleits assets, including its people
and the value of its brand nameand the value of its brand name
Resources

9. Ch3-
What a firm has to work with:What a firm has to work with:
its assets, including its peopleits assets, including its people
and the value of its brand nameand the value of its brand name
Resources represent inputs into aResources represent inputs into a
firm’s production process...firm’s production process...
such as capital equipment, skillssuch as capital equipment, skills
of employees, brand names,of employees, brand names,
finances and talented managersfinances and talented managers
““Some genius invented the Oreo. We’re justSome genius invented the Oreo. We’re just
living off the inheritance.”living off the inheritance.”
F. Ross Johnson,F. Ross Johnson,
Former President & CEO,Former President & CEO,
RJR NabiscoRJR Nabisco
What a firmWhat a firm HasHas......Resources

10. Ch3-1
Tangible Resources
Financial*
Physical*
Human Resources*
Organizational*
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers
Intangible Resources
Technological*
Innovation*
Reputation*
“Some genius invented the Oreo.
We’re just living off the inheritance.”
F. Ross Johnson,
Former President & CEO, RJR Nabisco
Resources

11. Ch3-1
Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Discovering Core
Competencies

12. Ch3-1
What a firm Does...
Capabilities represent:Capabilities represent:
the firm’s capacity or ability tothe firm’s capacity or ability to integrateintegrate
individual firm resourcesindividual firm resources to achieve a desiredto achieve a desired
objective.objective.
Capabilities

13. Ch3-1
What a firm Does...
Capabilities develop over time as a result of
complex interactions that take advantage of the
interrelationships between a firm’s tangible and
intangible resources that are based on the
development, transmission and exchange or
sharing of information and knowledge as carried
out by the firm's employees.
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities

14. Ch3-1
What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex
interactions that take advantage of the interrelationships
between a firm’s tangible and intangible resources that are
based on the development, transmission and exchange or
sharing of information and knowledge as carried out by the
firm's employees.
Capabilities become important when they areCapabilities become important when they are
combined incombined in unique combinationsunique combinations which createwhich create
core competencies which havecore competencies which have strategic valuestrategic value andand
can lead tocan lead to competitive advantagecompetitive advantage..
Capabilities

15. Ch3-1
Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Discovering Core
Competencies
Sources of
Core
Competencies
Competitive
Advantage
Discovering
Core
Competencies

16. Ch3-1
What a firm Does...
that is Strategically
Valuable
“…“…are the essence of what makes an organizationare the essence of what makes an organization
unique in its ability to provide value tounique in its ability to provide value to
customers.”customers.”
Leonard-Barton, Bowen, Clark, Holloway & WheelwrightLeonard-Barton, Bowen, Clark, Holloway & Wheelwright
McKinsey & Co. recommends identifying three to fourMcKinsey & Co. recommends identifying three to four
competencies to use in framing strategic actions.competencies to use in framing strategic actions.
Core Competencies

17. Ch3-1
Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Sources of
Core
Competencies
Competitive
Advantage
Discovering
Core
Competencies
Criteria of
Sustainable
Advantages
Valuable
Rare
Costly to Imitate
Nonsubstitutable
*
*
*
*
Discovering Core
Competencies
* Outsource

18. Ch3-1
For a strategic capability to be aFor a strategic capability to be a
Core Competency, it must be:Core Competency, it must be:
Core Competencies
Valuable
Rare
Costly to Imitate
Nonsubstitutable
What a firm Does...
that is Strategically
Valuable

19. Ch3-1
Valuable
Rare
Costly to Imitate
Capabilities that other firms cannot develop easily,
usually due to unique historical conditions, causal
ambiguity or social complexity
Capabilities that are not possessed by many others
Capabilities that help a firm neutralize threats or exploit
opportunities
Core Competencies What a firm Does...
that is Strategically
Valuable

20. Ch3-2
What Criteria Make Core
Competencies Costly to Imitate?
Unique Historical Conditions
Causal Ambiguity
Social Complexity
This occurs when competitors are unable to detect how a firm uses
its competencies as a foundation for competitive advantage
Occurs when the firm’s capabilities are the result of complex social
phenomena, such as interpersonal relationships, trust and friendships
among managers or a firm’s reputation with suppliers and customers
Example:Example: Disney created Mickey Mouse at a time whenDisney created Mickey Mouse at a time when
animated motion pictures were newanimated motion pictures were new
An unusual evolutionary pattern of growth may contribute to the
development of competencies in a manner that is unique to those
particular circumstances

21. Ch3-2
Core Competencies must be:
Nonsubstitutable
Capabilities that do not have strategic equivalents, such as firm-
specific knowledge or trust-based relationships
What a firm Does...
that is Strategically
Valuable
Core Competencies
Valuable
Rare
Costly to Imitate
Capabilities that other firms cannot develop easily, usually due to
unique historical conditions, causal ambiguity or social complexity
Capabilities that are possessed by few, if any, current or potential
competitors
Capabilities that either help a firm to exploit opportunities to
create value for customers or to neutralize threats in the
environment

22. Ch3-2
Core Competencies
ResourcesResources
• Inputs to a firm’sInputs to a firm’s
production processproduction process
Core CompetenceCore Competence
• A strategic capabilityA strategic capability
The source ofThe source of CapabilityCapability
• Integration of aIntegration of a
team of resourcesteam of resources
Does the capability satisfyDoes the capability satisfy
the criteria of sustainablethe criteria of sustainable
competitive advantage?competitive advantage?
YESYES
NONO
CapabilityCapability
• A nonstrategic teamA nonstrategic team
of resourcesof resources

23. Ch3-2
ValuableValuable RareRare
Costly toCostly to
ImitateImitate
Nonsub-Nonsub-
stitutablestitutable
CompetitiveCompetitive
ConsequencesConsequences
PerformancePerformance
ImplicationsImplications
NONO NONO NONO NONO
CompetitiveCompetitive
DisadvantageDisadvantage
BelowBelow
AverageAverage
ReturnsReturns
YESYES NONO NONO YES/NOYES/NO
CompetitiveCompetitive
ParityParity
AverageAverage
ReturnsReturns
YESYES NONO YES/NOYES/NOYESYES
TemporaryTemporary
CompetitiveCompetitive
AdvantageAdvantage
Aver./AboveAver./Above
AverageAverage
ReturnsReturns
AboveAbove
AverageAverage
ReturnsReturns
YESYESYESYES YESYESYESYES
SustainableSustainable
CompetitiveCompetitive
AdvantageAdvantage
Outcomes from Combinations of the Criteria forOutcomes from Combinations of the Criteria for
Sustainable Competitive AdvantageSustainable Competitive Advantage

24. Ch3-2
Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Sources of
Core
Competencies
Competitive
Advantage
Discovering
Core
Competencies
Value
Chain
Analysis
* Outsource
Valuable
Rare
Costly to Imitate
Nonsubstitutable
*
*
*
*
Criteria of
Sustainable
Advantages
Discovering Core
Competencies

25. Ch3-2
Support
Activities
Primary Activities
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

26. Ch3-2
Support
Activities
Primary Activities
InboundInbound
LogisticsLogistics
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

27. Ch3-2
Support
Activities
Primary Activities
InboundInbound
LogisticsLogistics
OperationsOperations
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

28. Ch3-2
Support
Activities
Primary Activities
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

29. Ch3-2
Support
Activities
Primary Activities
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

30. Ch3-3
Support
Activities
Primary Activities
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

31. Ch3-3
Support
Activities
Primary Activities
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
ProcurementProcurement
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

32. Ch3-3
Support
Activities
Primary Activities
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
ProcurementProcurement
Technological DevelopmentTechnological Development
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

33. Ch3-3
Support
Activities
Primary Activities
Technological DevelopmentTechnological Development
ProcurementProcurement
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
Human Resource ManagementHuman Resource Management
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

34. Ch3-3
Support
Activities
Primary Activities
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm InfrastructureFirm Infrastructure
ProcurementProcurement
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

35. Ch3-3
Support
Activities
Primary Activities
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm InfrastructureFirm Infrastructure
ProcurementProcurement
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
M
A
R
G
IN
M
A
R
G
IN
M
A
R
G
IN
M
A
R
G
IN
Value Chain Analysis
Identifying Resources and Capabilities That Can Add Value

36. Ch3-3
Support
Activities
Primary Activities
OutsourcingOutsourcing
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm InfrastructureFirm Infrastructure
ProcurementProcurement
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
M
A
R
G
IN
M
A
R
G
IN
M
A
R
G
IN
M
A
R
G
IN
Strategic Choice to Purchase Some Activities From Outside Suppliers

37. Ch3-3
Support
Activities
Primary Activities
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
Firm InfrastructureFirm Infrastructure
ProcurementProcurement
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
MarketingMarketing
&Sales&Sales
ServiceService
M
A
R
G
IN
M
A
R
G
IN
InboundInbound
LogisticsLogistics
OperationsOperations
OutboundOutbound
LogisticsLogistics
ServiceService
MarketingMarketing
& Sales& Sales
Technological DevelopmentTechnological Development
Human Resource ManagementHuman Resource Management
ProcurementProcurement
M
A
R
G
IN
M
A
R
G
IN
Firms often purchase a portionportion
of their value-creating activities
from specialty external suppliers
who can perform these functions
more efficientlymore efficiently
OutsourcingOutsourcing
Strategic Choice to Purchase Some Activities From Outside Suppliers

38. Ch3-3
Lets company focus on broader business issues by having outside
experts handle various operational details
Strategic Rationales for OutsourcingStrategic Rationales for Outsourcing
Improve Business Focus
Permits firm to redirect efforts from non-core activities toward those
that serve customers more effectively
Free Resources for Other Purposes
Provide Access to World-Class Capabilities
Accelerate Business Re-Engineering Benefits
Share Risks
The specialized resources of outsourcing providers makes world-
class capabilities available to firms in a wide range of applications
Achieves re-engineering benefits more quickly by having outsiders--
who have already achieved world-class standards--take over process
Reduces investment requirements and makes firm more flexible,
dynamic and better able to adapt to changing opportunities

39. Ch3-3
To capitalize on the usefulness of theTo capitalize on the usefulness of the
Value ChainValue Chain concept...concept...
it is important to recognize that...it is important to recognize that...

40. Ch3-4
Value Chains are part of a Total Value System
Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain Buyer Value ChainBuyer Value Chain

41. Ch3-4
Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain Buyer Value ChainBuyer Value Chain
Supplier Value ChainSupplier Value Chain
Upstream ValueUpstream Value
Perform valuable activities that
complementcomplement the firm’s activities
Value Chains are part of a Total Value System

42. Ch3-4
Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Buyer Value ChainBuyer Value Chain
Upstream Value
Perform valuable activities that
complement the firm’s activities
Channel Value ChainChannel Value Chain
Each firm must eventually find a way toEach firm must eventually find a way to
become a part ofbecome a part of somesome buyer’s value chainbuyer’s value chain
Value Chains are part of a Total Value System

43. Ch3-4
Supplier Value ChainSupplier Value Chain Firm Value ChainFirm Value Chain Channel Value ChainChannel Value Chain
Upstream Value
Perform valuable activities that
complement the firm’s activities
Buyer Value ChainBuyer Value Chain
Ultimate basis forUltimate basis for differentiationdifferentiation is the abilityis the ability
to play a role in ato play a role in a buyer’s value chainbuyer’s value chain
This createsThis creates VALUE!!VALUE!!
Each firm must eventually find
a way to become a part of
some buyer’s value chain
Value Chains are part of a Total Value System

44. Ch3-4
Supplier Value Chain Firm Value Chain Channel Value Chain
Upstream Value
Perform valuable activities that
complement the firm’s activities
Buyer Value Chain
Each firm must eventually find a way to
become a part of some buyer’s value chain
Ultimate basis for differentiation is the
ability to play a role in a buyer’s value chain
This creates VALUE!!
Value chains vary for firms in an industry,
reflecting each firm’s unique qualities:
• History
• Strategy
• Success at Implementation
Value Chains are part of a Total Value System

45. Ch3-4
Core Competencies--Cautions and Reminders
Never take for granted that core competencies will
continue to provide a source of competitive advantage
All core competencies have the potential to become
Core Rigidities
Core Rigidities are former core competencies that sow
the seeds of organizational inertia and prevent the firm
from responding appropriately to changes in the
external environment
Strategic myopia and inflexibility can strangle the firm’s
ability to grow and adapt to environmental change or
competitive threats

46. Ch3-4
Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Sources of
Core
Competencies
Competitive
Advantage
Strategic
Competitiveness
Above-Average
Returns
Discovering
Core
Competencies
Value
Chain
Analysis
* Outsource
Valuable
Rare
Costly to Imitate
Nonsubstitutable
*
*
*
*
Criteria of
Sustainable
Advantages
Discovering Core
Competencies

47. Ch3-4
External
Environment
Internal
Environment
Strategic IntentStrategic Intent
Strategic Mission
The StrategicThe Strategic
ManagementManagement
ProcessProcess

48. Ch3-4
External
Environment
Internal
Environment
Strategic IntentStrategic Intent
Strategic MissionStrategic Mission
Strategic IntentStrategic Intent
The StrategicThe Strategic
ManagementManagement
ProcessProcess

49. Ch3-4
ExternalExternal
EnvironmentEnvironment
InternalInternal
EnvironmentEnvironment
The StrategicThe Strategic
ManagementManagement
ProcessProcess
Strategic MissionStrategic Mission
A statement of the firm’s uniqueA statement of the firm’s unique
purpose and the scope of itspurpose and the scope of its
operations in product marketoperations in product market
termsterms
Strategic IntentStrategic Intent
Strategic MissionStrategic Mission
Strategic IntentStrategic Intent
Leveraging of a firm’s resources,Leveraging of a firm’s resources,
capabilities and core competenciescapabilities and core competencies
to accomplish what may appear toto accomplish what may appear to
be unattainable goals in the compe-be unattainable goals in the compe-
titive environmenttitive environment

50. Ch3-5
Resources
* Tangible
* Intangible
Capabilities
Teams of
Resources
Sources of
Core
Competencies
Competitive
Advantage
Strategic
Competitiveness
Above-Average
Returns
Competitive
Advantage
Gained through
Core Competencies
Discovering
Core
Competencies
Value
Chain
Analysis
Valuable
Rare
Costly to Imitate
Nonsubstitutable
*
*
*
*
* Outsource
Criteria of
Sustainable
Advantages
Discovering Core
Competencies