Chapter 3

The Internal Environment:

Resources, Capabilities and
Core Competence

Michael A. Hitt
R. Duane Ireland
Robert E. Hoskisson

©2003 South-Western Publishing Company 1

Strategic Inputs
Chapter 2
The External
The Strategic
Environment
Strategic Intent
Strategic Mission
Management
Chapter 3
The Internal
Environment
Process
Strategy Formulation Strategy Implementation
Chapter 5 Chapter 11
Chapter 4 Chapter 6 Chapter 10
Competitive Rivalry Organizational
Strategic Actions

Business-Level Corporate- Corporate

and Competitive Structure and
Strategy Level Strategy Governance
Dynamics Controls

Chapter 7
Chapter 8 Chapter 9 Chapter 12 Chapter 13
Acquisition and
International Cooperative Strategic Strategic
Restructuring
Strategy Strategy Leadership Entrepreneurship
Strategies
Strategic Outcomes

Strategic
Competitiveness
Above-Average
Returns
2
Feedback
Sustainability of a Competitive
Advantage
 Sustainability of a competitive advantage
is a function of:
– the rate of core-competence obsolescence due
to environmental changes
– the availability of substitutes for the core
competence
– the imitability of the core competence

3
 External and Internal Analyses
Environment By studying the external
Sociocultural environment, firms identify
mo eral
c

what they might choose to do

Ge
phi

Ec
Industry

ner c
n
gra

ono
Ge

Environment

al
mi
De

me al
Opportunities and threats
g
nt
/L e
En
Gl

Competitor
vir

cal
ob

Environment
on
al

l it i
on

vir
me

Po
En

Technological
nt

General

4
External and Internal Analyses
By studying the internal
environment, firms identify
what they can do

Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)

5
Challenge of Internal Analysis
 How do we effectively manage current core
competencies while simultaneously
developing new ones?
 How do we assemble bundles of resources,
capabilities and core competencies to
create value for customers?
 How do we learn to change rapidly?

6
Three Conditions Affecting Managerial
Decisions About Resources, Capabilities,
and Core Competencies
 Uncertainty regarding characteristics of the
general and the industry environments,
competitors’ actions, and customers’ 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

7
Components of Strategic
Competitiveness
Internal Analysis
Competitive
Core Discovering Core Advantage
Competencies Competencies

Capabilities

Four Criteria Value

Resources of Sustainable Chain
• Tangible
• Intangible Advantages Analysis

• Valuable • Outsource
• Rare
• Costly to Imitate
• Nonsubstitutable
8
 Discovering Core
Competencies

Resources
• Tangible
• Intangible

Resources are what a firm has Resources represent inputs into

to work with--its assets-- a firm’s production process...
including its people and the such as capital equipment, skills
value of its brand name of employees, brand names,
finances and talented managers

9
Discovering Core
Competencies

Resources
• Tangible
• Intangible

Tangible Resources Intangible Resources

• Financial • Technological
• Physical • Innovation
• Human resources • Reputation
• Organizational

10
Discovering Core
Competencies

Capabilities

Capabilities become important when they are combined

in unique combinations which create core competencies
which have strategic value and can lead to competitive
advantage

11
Discovering Core
Competencies

Capabilities

Capabilities are what a firm does, and represent the firm’s

capacity or ability to integrate individual firm resources to
achieve a desired objective

12
Discovering Core
Competencies

Core
Competencies

Core competencies are resources and capabilities that serve

as a source of competitive advantage over rivals
Core competencies distinguish a company competitively
and make it distinctive
McKinsey and Co. recommends using three to four
competencies when framing strategic actions 13
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Valuable: Capabilities that help a firm neutralize threats or

exploit opportunities

14
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Rare: Capabilities that are not possessed by many others

15
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Costly to imitate: capabilities that other firms cannot

develop easily, usually due to
• Unique historical conditions
• Causal ambiguity
• Social complexity
16
 Discovering Core
Competencies
Four Criteria
of Sustainable
Advantages

• Valuable
• Rare
• Costly to Imitate
• Nonsubstitutable

Nonsubstitutable: capabilities that do not have strategic

equivalents
• Invisible to competitors
• Firm specific knowledge
• Trust-based working relationships between managers
and nonmanagerial personnel 17
 Core Competence as a Strategic
Capability
Resources Core Competence
• Inputs to a firm’s • A strategic
production process capability

Does it satisfy the Yes

Capability
criteria of sustainable
• An integration of a
The source of competitive
team of resources advantage? No

Capability
• A nonstrategic
team or resource18
Performance Implications

ut ?
le
bs itate
ab
on o Im
t it
e?

t
bl

Competitive Performance
y
su
ua

e?
st l
r
l

Co
Consequences Implications
Ra
Va

N Competitive Below Average

No No No No Disadvantage Returns

Yes/ Competitive
Yes No No No Parity Average Returns

Yes/ Temporary Com- Above Average to

Yes Yes No No petitive Advantage Average Returns

Sustainable Com- Above Average

Yes Yes Yes Yes petitive Advantage Returns
19
The Basic
Value Chain M
gin ar
ar gin
M

Technological Development
Human Resource Mgmt. Service
Firm Infrastructure
Support Activities

Marketing & Sales

Procurement
Outbound Logistics
Operations
Inbound Logistics

Primary Activities 20
 Outsourcing
Outsourcing is the M
g in ar
purchase of some or ar g in
M

Technological Development
all of a value-
creating activity

Human Resource Mgmt.

from an external
Service
Support Activities

Firm Infrastructure
supplier
Marketing & Sales
Usually this is

Procurement
because the specialty Outbound Logistics
supplier can provide Operations
these functions more
Inbound Logistics
efficiently
Primary Activities
21
Strategic Rationales for Outsourcing
 Improve Business Focus
– lets company focus on broader business
issues by having outside experts handle
various operational details
 Provide Access to World-Class
Capabilities
– the specialized resources of outsourcing
providers makes world-class capabilities
available to firms in a wide range of
applications

22
Strategic Rationales for Outsourcing
 Accelerate Business Re-Engineering
Benefits
– achieves re-engineering benefits more quickly
by having outsiders--who have already
achieved world-class standards--take over
process
 Share Risks
– reduces investment requirements and makes
firm more flexible, dynamic and better able to
adapt to changing opportunities

23
Strategic Rationales for Outsourcing
 Free Resources for Other Purposes
– permits firm to redirect efforts from non-core
activities toward those that serve customers
more effectively

24
Outsourcing Issues
 Greatest Value
– outsource only to firms possessing a core
competence in terms of performing the primary
or support activity being outsourced
 Evaluating Resources and Capabilities
– don’t outsource activities in which the firm itself
can create and capture value
 Environmental Threats and Ongoing Tasks
– do not outsource primary and support activities
that are used to neutralize environmental
threats or complete necessary ongoing
organizational tasks 25
Outsourcing Issues
 Nonstrategic Team of Resources
– do not outsource capabilities that are critical to
their success, even though the capabilities are
not actual sources of competitive advantage
 Firm’s Knowledge Base
– do not outsource activities that stimulate the
development of new capabilities and
competencies

26
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 now generate inertia
and stifle innovation

27