Chapter Three:
The Internal Environment: Resources,
Capabilities,
and Core Competencies
Introduction
• The probability of developing a sustainable competitive
advantage increases when firms use their own unique resources,
capabilities, and core competencies on which to base and
implement their strategies.
• Competitive advantages and the differences they create in firm
performance are often strongly related to the resources firms
hold and how they are managed.
• “Resources are the foundation for strategy and unique bundles
of resources generate competitive advantages leading to wealth
creation.”
….cont’d
• Firms achieve strategic competitiveness and earn above-
average returns when their core competencies are effectively,
acquired, bundled, leveraged to take advantage of
opportunities in the external environment
• Over time, the benefits of any value-creating strategy can be
duplicated by competitors. In other words, competitive
advantages have a limited life
….cont’d
• 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
Outcomes from External and Internal
Environmental Analyses
Examine opportunities Examine unique
and threats resources, capabilities,
and competencies
(sustainable competitive
advantage)
The Context of Internal Analysis
Effective analysis of a firm’s internal environment (learning
what the firm can do ) requires:
• Fostering an organizational setting in which
experimentation and learning are expected and
promoted
• Using a global mind-set: A global mind-set is the ability to
study an internal environment in ways that are not dependent on
the assumptions of a single country, culture, or context.
• Thinking of the firm as a bundle of heterogeneous
resources and capabilities that can be used to create an
exclusive market position
Components of Internal Analysis
The Challenge of Internal Analysis
• Strategic decisions in terms of the firm’s resources, capabilities,
and core competencies are non-routine, have ethical
implications, significantly influence the firm’s ability to earn
above-average returns.
• Making these Strategic decisions—identifying, developing,
deploying, and protecting resources, capabilities, and core
competencies— may appear to be relatively easy.
• However, this task is as challenging and difficult as any other
with which managers are involved
The Challenge of Internal Analysis (cont’d)
To develop and use core competencies, managers
must have:-
• Courage
• Self-confidence
• Integrity
• The capacity to deal with uncertainty and
complexity
• A willingness to hold people (and themselves)
accountable for their work
Conditions Affecting Managerial Decisions about
Resources, Capabilities and Core Competencies
Resources, Capabilities and Core Competencies
• Resources
• Are the source of a firm’s
capabilities
• Cover a range of individual,
social and organizational
phenomena
• Alone, do not yield a
competitive advantage
Resources, Capabilities and Core Competencies
• Resources
• Are a firm’s assets,
including people and the
value of its brand name
• Represent inputs into a
firm’s production process,
such as:
• Capital equipment
• Skills of employees
• Brand names
• Financial resources
• Talented managers
Resources, Capabilities and Core Competencies
• Resources
• Tangible resources
• Financial resources
• Physical resources
• Technological resources
• Organizational resources
• Intangible resources
• Human resources
• innovation resources
• Reputation resources
Resources, Capabilities and Core Competencies
• Capabilities
• Are the firm’s 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
Resources, Capabilities and Core Competencies
• Capabilities
• The foundation of many
capabilities lies in:
• The unique skills and knowledge of a firm’s
employees
• The functional expertise of those employees
• Capabilities are often
developed in specific
functional areas or as part
of a functional area
Resources, Capabilities and Core Competencies
• Core Competencies
• Resources and capabilities
that serve as a source of a
firm’s competitive advantage:
• Distinguish a company competitively and reflect its
personality
• Emerge over time through an organizational process
of accumulating and learning how to deploy different
resources and capabilities
Building Sustainable Competitive Advantage
• Four Criteria of Sustainable
Competitive Advantage
• Valuable
• Rare
• Costly to imitate
• Nonsubstituable
The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities • Help a firm neutralize threats or
exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable
organizational culture or brand name
• Ambiguous cause: The causes and
uses of a competence are unclear
• Social complexity: Interpersonal
relationships, trust, and friendship
among managers, suppliers, and
customers
Nonsubstitutable Capabilities • No strategic equivalent
Outsourcing
• The purchase of a value-creating activity from an external supplier
• Few organizations possess the resources and
capabilities required to achieve competitive
superiority in all primary and support activities
• By forming and emphasizing fewer capabilities
• A firm can concentrate on those areas in which it
can create value
• Specialty suppliers can perform outsourced
capabilities more efficiently
