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The Internal Environment:

Resources, Capabilities, and


Core Competencies

Chapter Four

2006 by Nelson, a division of Thomson Canada Limited. 4-1


Chapter 3
External The Strategic
Strategic
.

Inputs
Environment Strat. Intent
Chapter 4 Strat. Mission Management .

Internal
Environment Process
Strategy Formulation Strategy Implementation
Strategic Actions

Chapter 5 Chapter 6 Chapter 7 Chapter 11 Chapter 12


Bus. - Level Competitive Corp. - Level Corporate Structure
Strategy Dynamics Strategy Governance & Control

Chapter 8 Chapter 9 Chapter 10 Chapter 13 Chapter 14


Acquisitions & International Cooperative Strategic Entrepreneurship
Restructuring Strategy Strategies Leadership & Innovation
Outcomes
Strategic

Chapter 2 Chapter 1 Feedback


Above Average Strategic
Returns Competitiveness

2006 by Nelson, a division of Thomson Canada Limited. 4-2


The Internal Environment: Resources,
Capabilities and Core Competencies

Knowledge Objectives:
1. Explain the need for firms to study &
understand their internal environment.
2. Define value & discuss its importance.
3. Describe the differences between tangible &
intangible resources.
4. Define capabilities & discuss how they are
developed.

2006 by Nelson, a division of Thomson Canada Limited. 4-3


The Internal Environment: Resources,
Capabilities and Core Competencies
Knowledge objectives continued
5. Describe four criteria used to determine whether
resources & capabilities are core competencies.
6. Explain how value chain analysis is used to
identify and evaluate resources and capabilities.
7. Define outsourcing & discuss the reasons for its
use.
8. Discuss the importance of preventing core
competencies from becoming core rigidities.

2006 by Nelson, a division of Thomson Canada Limited. 4-4


Canadas most admired companies

2006 by Nelson, a division of Thomson Canada Limited. 4-5


The Resource-Based model of Above
Average Returns

Capabilities evolve and must be managed


dynamically in pursuit of above-average returns.
Firms acquire different resources and develop
unique capabilities. These resources may not be
mobile across firms and that the differences in
resources are the basis of competitive
advantage.

2006 by Nelson, a division of Thomson Canada Limited. 4-6


The Resource-Based model of Above
Average Returns

The resource based view suggests that a


firms unique resources and capabilities
provide the basis for a strategy.

2006 by Nelson, a division of Thomson Canada Limited. 4-7


The Resource-Based Model of
Superior Returns Action required:
Identify firm resources.
Study strengths &
Resources weaknesses relative to
rivals.
Inputs to a firms
production
process.

2006 by Nelson, a division of Thomson Canada Limited. 4-8


*
an
The Resource-Based Model of
Superior Returns Action required:
Determine what firm
capabilities allow it to
Resources do better than rivals.
Capability
Inputs to a firms
Capacity
production for integrated
process.
set of resources to
integratively perform
a task or activity.

2006 by Nelson, a division of Thomson Canada Limited. 4-9


*
an
The Resource-Based Model of
Superior Returns Action required:
Determine how firms
resources & capabilities
Resources may create competitive
Capability advantage.
Inputs to a firms Competitive
Capacity
production for an
Advantage
process.
integrated set of
resources Ability
to of a firm to
integratively perform its rivals
outperform
a task or activity.

2006 by Nelson, a division of Thomson Canada Limited. 4-10


*
an
The Resource-Based Model of
Superior Returns Action required:
Locate an attractive
industry.
Resources
Capability
Competitive
Inputs to a firms
Capacity
production Advantage
for
process. an An Attractive
integrated set of
resources toAbility of aIndustry
firm to
integratively Location
outperform
perform of an industry
its rivals
a task or activity. with opportunities that
can be exploited by
firms resources &
capabilities

2006 by Nelson, a division of Thomson Canada Limited. 4-11


*an
The Resource-Based Model of
Superior Returns Action required:
Select strategy that best
exploits res.& capabilities
Resources relative to opportunities
Capability in environments.
Competitive
Inputs to a firms
Capacity
production Advantage
for
process. an An Attractive
integrated set of Industry Strategy
resourcesAbility
to of a firm to
Formulation and
outperformLocation
integratively perform a its of
rivals an ind.
task or activity. Implementation
with opportunities
that can be exploited
by firmsStrategic
resourcesactions taken
to earn above-average
& capabilities
returns

2006 by Nelson, a division of Thomson Canada Limited. 4-12


*
an
The Resource-Based Model of
Superior Returns Action required:
Maintain selected strat.
in order to outperform
Resources industry rivals.
Capability
Competitive
Inputs to a firms
Capacity
production Advantage
for
process. an An Attractive
integrated set of Industry Strategy
resourcesAbility
to of a firm to
Formulation and
outperformLocation
integratively perform a its of
rivals an ind. Superior
Implementation
with opportunities Returns
task or activity.
that can be exploited
Strategic Earningtaken
actions of above-
by firms resources
to earn average returns
above-average
& capabilities
returns

2006 by Nelson, a division of Thomson Canada Limited. 4-13


*
an
Discovering Core Competitive
Advantage
Competencies Gained through
Core Competencies

Strategic
Core Competitiveness
Competencies
Discovering
Core Above-Average
Sources of Returns
Competitive Competencies
Advantage
Criteria of Value
Capabilities
Sustainable Chain
Teams of Advantages Analysis
Resources

Resources * Valuable * Rare * Outsource


* Costly to Imitate
* Tangible
* Intangible * Organized to be exploited

2006 by Nelson, a division of Thomson Canada Limited. 4-14


The Components of Internal
Analysis

2006 by Nelson, a division of Thomson Canada Limited. 4-15


Value
Value is measured by a products performance
characteristics and its attributes for which
clients are willing to pay.

Core competencies in combination with product-


market positions are the firms most important
sources of competitive advantage and should
drive its selection of strategies.

2006 by Nelson, a division of Thomson Canada Limited. 4-16


Resources, Capabilities & Core
Competencies

2006 by Nelson, a division of Thomson Canada Limited. 4-17


Resources, Capabilities & Core
Competencies

2006 by Nelson, a division of Thomson Canada Limited. 4-18


Discovering Core
Competencies

Capabilities
Teams of
Resources

Resources
* Tangible
* Intangible

2006 by Nelson, a division of Thomson Canada Limited. 4-19


Discovering Core
Competencies

Core
Competencies
Discovering
Sources of Core
Competitive Competencies
Advantage

Capabilities
Teams of
Resources

Resources
* Tangible
* Intangible

2006 by Nelson, a division of Thomson Canada Limited. 4-20


Resources, Capabilities & Core
Competencies

2006 by Nelson, a division of Thomson Canada Limited. 4-21


Resources, Capabilities & Core
Competencies

2006 by Nelson, a division of Thomson Canada Limited. 4-22


Discovering Core
Competencies

Core
Competencies
Discovering
Sources of Core
Competitive Competencies
Advantage

Capabilities Criteria of
Sustainable
Teams of
Resources Advantages

Resources * Valuable * Rare * Outsource


* Tangible * Costly to Imitate
* Intangible * Organized to be exploited

2006 by Nelson, a division of Thomson Canada Limited. 4-23


Core Competencies For a strategic
capability to be a Core Competency, it must be:
Valuable Allow a firm to neutralize threats or exploit
opportunities in its external environment.

Rare Possessed by few, if any, current and


potential competitors.
Costly to When other firms either cannot obtain
Imitate $ them or must obtain them at a much higher
cost.

Organized The firm must be organized appropriately to


to be obtain full benefits of the resources in order to
Exploited realize a competitive advantage.

2006 by Nelson, a division of Thomson Canada Limited. 4-24


*
Core Competencies
Resources Core Competence
Inputs to a firms A strategic capability
production process
Does the capability
satisfy the criteria of
sustainable competitive YES
Capability advantage?
The source of
Integration of a
team of resources
NO

Capability
A non-strategic team
of resources
2006 by Nelson, a division of Thomson Canada Limited. 4-25
The VRIO Framework
Costly to Org. to be Competitive Performance
Valuable
Valuable Rare
Imitate Exploited Consequences Implications
Below
Competitive Average
NO NO NO NO Disadvantage Returns
Competitive Average
YES NO NO YES Parity Returns
Temporary Avg./Above
YES YES NO YES Competitive Average
Advantage Returns

Sustainable Above
YES YES YES YES Competitive Average
Advantage Returns

2006 by Nelson, a division of Thomson Canada Limited. 4-26


Discovering Core
Competencies

Core
Competencies
Discovering
Sources of Core
Competitive Competencies
Advantage

Capabilities Criteria of Value


Sustainable Chain
Teams of
Resources Advantages Analysis

Resources * Valuable * Rare * Outsource


* Tangible * Costly to Imitate
* Intangible * Organized to be exploited

2006 by Nelson, a division of Thomson Canada Limited. 4-27


Value Chain Analysis
Firm Infrastructure
Human Resource Management
Support
Activities Technological Development
Procurement

Service
Operations
Logistics

Outbound

Marketing
Logistics
Inbound

Primary Activities & Sales


2006 by Nelson, a division of Thomson Canada Limited. 4-28
Outsourcing Strategic choice to purchase some
activities from outside suppliers
Firm Infrastructure
Human Resource Management
Support
Activities Technological Development
Procurement

Service
Operations

Outbound
Logistics

Marketing
Logistics
Inbound

& Sales
Firms often buy a portion of their value-creating activities from specialty
Primary Activities
external suppliers who can perform these functions more efficiently.
2006 by Nelson, a division of Thomson Canada Limited. 4-29
Outsourcing Strategic choice to purchase some
activities from outside suppliers
Firm Infrastructure
Human Resource Management
Human Resource Management
Technological
Support Development
Activities Technological Development
Procurement
Procurement

Service
Operations

Outbound
Logistics

Marketing
Logistics
Inbound

& Sales
Service

Outbound
Inbound Operations Logistics Marketing
Logistics & Sales

Firms often buy a portion of their value-creating activities from specialty


external suppliers who can perform these functions more efficiently.
2006 by Nelson, a division of Thomson Canada Limited. 4-30
Outsourcing Strategic choice to purchase some
activities from outside suppliers
Firm Infrastructure
Human Resource Management
Human Resource Management
Technological
Support Development
Activities Technological Development
Procurement
Procurement

Service
Operations

Outbound
Logistics

Marketing
Logistics
Inbound

& Sales
Service

Outbound
Inbound Operations Logistics Marketing
Logistics & Sales

Firms often buy a portion of their value-creating activities from specialty


external suppliers who can perform these functions more efficiently.
2006 by Nelson, a division of Thomson Canada Limited. 4-31
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
They are former core competencies that sow
the seeds of organizational inertia.
Prevent the firm from responding appropriately to
changes in the external environment.
2006 by Nelson, a division of Thomson Canada Limited. 4-32
Discovering Core
Competencies

Strategic
Core Competitiveness
Competencies
Discovering
Core Above-Average
Sources of Returns
Competitive Competencies
Advantage

Capabilities Criteria of Value


Sustainable Chain
Teams of
Resources Advantages Analysis

Resources * Valuable * Rare * Outsource


* Tangible * Costly to Imitate
* Intangible * Organized to be exploited

2006 by Nelson, a division of Thomson Canada Limited. 4-33