Core Competencies

1. Internal Analysis: Resources, Capabilities, and
Core Competencies

2. Outline
4.1 Core Competencies
4.2 The Resource-Based View
– Two Critical Assumptions
– The VRIO Framework
– Isolating Mechanisms: How to Sustain a Competitive
Advantage
4.3 The Dynamic Capabilities Perspective
4.4 The Value Chain Analysis
4.5 Implications for the Strategist
– Using SWOT Analysis to Generate Insights from External
and Internal Analysis

3. Core Competencies

4. What Are Core Competencies?
• Unique strengths
• Embedded deep within a firm
• Allow a firm to differentiate its products and services
from those of its rivals
• Results in:
– Creating higher value for the customer or
– Offering products and services at lower cost

5. Competitive Advantage based on Core
Competencies, Resources, Capabilities
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description

6. 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
• General Electric
– Superior expertise in industrial engineering, designing and
implementing efficient management processes, and developing and
training leaders

7. 7
Project-Based Evolution at Honda Motor Company

8. 8
Canon: Products & Core Technical Capabilities
Fine
Optics
Micro-
Electronics
Precision
Mechanics
35mm SLR camera
Compact fashion camera
EOS autofocus camera
Digital camera
Video still camera
Video security systems
Camcorders
Plain-paper copier
Color copier
Color laser copier
Laser copier
Basic fax
Laser fax
Scanners
Mask aligners
Excimer laser aligners
Stepper aligners
Inkjet printer
Laser printer
Color video printer
Digital commercial
printer
Calculator
Notebook computer
Binoculars

9. © 2013 Robert M. Grant
www.contemporarystrategyanalysis.com 9
3M: Evolution of Products & Capabilities
Carborundum
mining
Sandpaper
Scotch tape
Road signs
& markings
Post-it notes
Audio tape
Surgical tapes
& dressings
Videotape
Acetate
film
Floppy disks &
data storage
products
Pharmaceuticals
Housewares/kit-
chen products
Abrasives Adhesives
New-product
development &
introduction
Thin-film
technologies
PRODUCTS
CAPABILITIES
Materials sciences
Health sciences
Microreplication
Flexible
circuitry

10. Resources, Capabilities and Activities Help Deliver
Core Competencies
• Resources:
– Any assets that a firm can draw on
• Capabilities:
– Organizational and managerial skills
• Activities:
– Distinct and fine-grained business processes

11. Links to Competitive Advantage and Superior Firm
Performance
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description

12. The Resource-Based View

13. What is the Resource Based View (RBV)?
• A model that sees certain types of resources (VRIO)
as key to superior firm performance
– Valuable
– Rare
– Costly to Imitate
– Organized to Capture Value
• Resources fall into two categories:
– Tangible
– Intangible

14. 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).
• Beats Electronics:
– Example: Design and marketing of premium headphones
• Production = ~$15
• Retail = $150 - $450
• Swiss watches

15. A Resource is Rare If…
• Only one or a few firms possess it
• Example: Beats Electronics:
– Product placement
– Vast celebrity endorsement
Google:
- Algorithm
- Repository of prior searches

16. 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: Beats Electronics:
– Dr. Dre relies on gut instinct in making decisions rather
than market research.
– The social capital of Dr. Dre and Jimmy Lovine might be
impossible to replicate.
Organization culture: Arvind Eye Care Systems, service
oriented culture

17. Substitution Effect…
• Amazon online book model was substitute to buy
books through physical stores
• Combining imitation & substitute
- Samsung Galaxy an example of imitating features and using
Google operating system as substitute to Apple
- Xiaomi put pressure on both Samsung and Apple (using
Google operating system, add features on low cost

18. A Resource Is Organized to Capture Value If…
• It has an effective organizational structure.
• It has coordinating systems.
• Example: Xerox Palo Alto Research Center:
– Developed the first word-processing application Graphical
User Interface (GUI), Ethernet, Mouse, Personal Computer
– These innovations did not fit within the Xerox focus.
– Management was busy pursuing innovations in the
photocopier business.
Southwest Airlines, Walmart

19. • Unique historical condition
- Coca Cola
• Social complexity
- organization culture, values, management
tradition
• Legal restrictions
- patent, trademark, copyright (Pharma)
• Causal ambiguity
- superior outcome due to integration of multiple
activity (Southwest Airlines faster turnaround time)
How to Sustain Competitive Advantage

20. • Superior access to inputs and customers
- Control on input supply, distribution channels
(Walmart)
• Network Effect
- Large consumer base (Facebook)
• Early mover advantage and learning curve effect
- Walmart presence in rural markets in beginning
• Resource non substitutable

21. Tangible and Intangible Resources
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description

22. Example Google Headquarters
• Tangible Resource
– Googleplex: land + futuristic building
• Intangible Resource
– Location: heart of Silicon Valley
• Large & computer savvy workforce
• Largest concentration of venture capitalists in the U.S.

23. Two Critical Assumptions of the RBV
• Resource Heterogeneity
– A firm is bundle of resources and capabilities that differ
across firms
• Resource Immobility
– A firm has resources that tend to be “sticky” and that do
not move easily from firm to firm

24. The VRIO Decision Tree
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description

25. © 2013 Robert M. Grant
www.contemporarystrategyanalysis.com
25
Identifying Organizational Capabilities:
A Functional Classification
Functional Area Capability Exemplars
CORPORATE FUNCTIONS
Financial control ExxonMobil, PepsiCo
Management development General Electric, Shell
Strategic innovation Google, Haier
Multidivisional coordination Unilever, Shell
Acquisition management Cisco Systems, Luxottica
International management Shell, Banco Santander
Corporate Social Responsibility Johnson & Johnson, Danone
INFORMATION
MANAGEMENT
Integration of IT with decision
making
Wal-Mart, Capital One, Cemex
RESEARCH &
DEVELOPMENT
Research capability IBM, Merck
New product development Apple, 3M
Fast-cycle new product development Canon, Inditex (Zara)
OPERATIONS
Operational efficiency Briggs & Stratton, UPS
Continuous improvement Toyota, Wal-Mart
Flexibility and speed of response Four Seasons Hotels
DESIGN Product design capability Apple, Alessi
MARKETING
Brand management Procter & Gamble, Altria
Building reputation for quality Johnson & Johnson
Responding to consumer
requirements
L'Oréal, Amazon
SALES AND DISTRIBUTION
Effective sales promotion and
execution
PepsiCo, Pfizer
Efficient, fast order processing L. L. Bean, Dell Computer
Speed of distribution Amazon.com
SERVICE Customer service Singapore Airlines, Caterpillar

26. 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 offer (Google 2011), was declined
• It was valuable, and rare, but not costly to imitate.
– More specialized local startups began

27. The Dynamic Capabilities Perspective

28. Dynamic Capabilities
• A firm’s ability to:
– Create, deploy, modify, reconfigure, upgrade, and leverage
its resources over time
• Helps prevent a core rigidity
– A former core competency that turned into a liability as
the environment changed

29. Strategy Highlight
Dynamic Capabilities at IBM
• IBM is a solutions company
– Solves data-based problems for clients
– The data / the problems change over time
• Has successfully transformed itself several times over
its 100-year history

30. Strategy Highlight
Dynamic Capabilities at IBM
• Current disruptions:
– Cloud computing
– Systems of engagement
– Big data and analytics

31. The Dynamic Capabilities Perspective
• A model that emphasizes a firm’s ability to:
– Modify and leverage its resource base
– Gain and sustain competitive advantage in a constantly
changing environment

32. Resource Stocks and Flows
• Resource stocks
– The firm’s current level of intangible resources
• Resource flows
– The firm’s level of investments to maintain or build a
resource

33. The Bathtub Metaphor
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description
SOURCE: Figure based on metaphor
used in I. Dierickx and K. Cool (1989),
“Asset stock accumulation and
sustainability of competitive
advantage,” Management Science
35: 1504–1513.

34. Implications for the Strategist

35. SWOT Analysis
• A framework that allows managers to synthesize
insights obtained from an internal and external
analysis to derive strategic implications
• Internal Analysis
– Strengths
– Weaknesses
• External Analysis
– Opportunities
– Threats

36. Strategic SWOT Questions
• How can the firm use strengths to take advantage of
opportunities?
• How can the firm use strengths to reduce the
likelihood and impact of threats?
• How can the firm overcome weaknesses that prevent
the firm from taking advantage of opportunities?
• How can the firm overcome weaknesses that will
make threats a reality?

37. How to Generate Additional Insights
• SWOT analysis combines external and internal
analysis:
– External analysis
– Internal analysis
– Purpose:
– Leverage internal strengths to exploit external
opportunities
– Mitigate internal weaknesses and external threats

38. The Final Step…
• Evaluate the pros and cons of each strategic
alternative.
• Select one or more alternatives to implement.
• Carefully explain decision rationale.
– Including why other strategic alternatives were rejected

39. The TOWS matrix

40. SWOT Limitations
• Long lists with no attempt at prioritisation.
• Over generalisation – sweeping statements often
based on biased and unsupported opinions.
• SWOT is used as a substitute for analysis – it should
result from detailed analysis.
• SWOT is not used to guide strategy – it is seen as an
end in itself.

41. A Word of Caution
• A strength can also be a weakness.
• An opportunity can also be a threat.
• Example:
– Google is located in Silicon Valley.
• Strength: near Universities
• Weakness: high cost of living

42. The Value Chain Analysis

43. What Is the Value Chain?
• Internal activities a firm engages in when
transforming inputs into outputs
• Each activity adds incremental value
– Primary activities directly add value
– Support activities add value indirectly
• Example: Beats Electronics:
– Headphones designed by Dr. Dre
– Packaging: premium unboxing experience
– Superb displays in Apple stores

44. The Value Chain
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description

45. Primary Activities
• Firm activities that add value directly
• Transform inputs into outputs as the firm moves a
product or service horizontally along the internal
value chain.
• Examples:
– Supply chain management
– Operations
– Distribution
– Marketing and sales
– After-sales service

46. Support Activities
• Firm activities that add value indirectly
• Necessary to sustain primary activities
– Research and development (R&D)
– Information systems
– Human resources
– Accounting and finance
– Firm infrastructure including processes, policies, and
procedures

47. Value Chain Ugandan Chilled Fish
www.ufpea.co.ug

48. Case Dr Dre

49. • Did Apple purchase Beats for its talent?
– Talents of Beats co-founders (Iovine & Dr. Dre)
• They have creative talent.
• They have a successful track record.
• They have deep & far reaching networks.
– Apple has lacked visionary leadership since Jobs’
death.
• Both Iovine and Dr. Dre are taking on leadership roles at
Apple.
– Bringing in flashy celebrities might have been
unthinkable for Jobs.

50. • Do you agree that Beats Electronics’ core
competencies are its marketing savvy and Dr. Dre’s
coolness factor?
• What are the potential downsides of this multi-
billion- dollar “acqui-hire?”
• Do you think these competencies will remain as
valuable under Apple?
• Why do you think Apple purchased Beats?

51. • Dr. Dre (Andrew Young)
– First hip-hop billionaire
– Successful music producer, rapper, and entrepreneur
– Strong work ethic, expects perfection
– One of the best-connected businesspeople in music
– Founded Beats Electronics: premium headphones
• Apple acquired Beats Electronics for $3 billion
– Largest acquisition in Apple’s history
– Hoping that some of Beats’ coolness will spill over to
its brand

52. • Beats Coolness Factor
– Celebrity endorsements
• Music celebrities wore them in their music videos.
• Famous athletes wear them in public.
– Custom Beats created for stars
• Disruption in Content Delivery
– Changing from downloads to streaming
– Apple is lagging behind Pandora
• iTunes radio was created in 2013, has been falling flat

53. Videos

54. • Jay Barney
• Resource Based View of the Firm
• Link:
– https://www.youtube.com/watch?v=-KN81_oYl1s
• 4:23 Minutes

55. • Honda: The Power of Dreams
• Competencies are honed over long periods of
time through learning from failure
• Link:
– http://www.youtube.com/watch?v=1bPzCZCmMfQ
• 8:22 Minutes

56. • Steve Jobs and Bill Gates
• 2007 Interview, Core Competencies discussed
• Link:
– https://www.youtube.com/watch?v=85PMSYAguZ8
• 15:05 Minutes

57. • Steve Jobs
• Rare footage from 1980, discussing Competitive
Advantage and Capabilities
• Link:
– https://www.youtube.com/watch?v=0lvMgMrNDlg
• 22:54 Minutes

58. • Beats Electronics by Dr. Dre
• Commercial: Hear What You Want
• Link:
– https://www.youtube.com/watch?v=4Ttsx5squWg
• 2:47 minutes

59. • Caroline Cummings, VP of Business Development at
Palo Alto Software
• What is a SWOT Analysis?
• Link:
– https://www.youtube.com/watch?v=4aFB9xrkdiU
• 3:43 minutes