The Internal Environment

Resources, Capabilities, Core Competencies and Competitive Advantage

The Internal Environment

1 2 3 4
What is it? Resources and Core Outsourcing
Why care so Capabilities Competencies
much about it?
Learning Objectives
1.Identify the components of the internal environment
2.Explain why it is important to study and understand the internal organization
3.Define value and discuss its importance
4.Differentiate between tangible and intangible resources
5.Understand how we can use our resources to create capabilities
6.Describe four criteria used to determine whether resources and capabilities are core
competencies.
7.Explain how firms analyze their value chain for the purpose of determining where
they are able to create value when using their resources, capabilities, and core
competencies.
8.Define outsourcing and discuss reasons for its use – and when it should NOT be used
9.Discuss the importance of identifying internal strengths and weaknesses.

3–3
References
• Hitt, Ireland and Hoskisson, Strategic Management, Competitiveness and
Globalization, 12e, Cengage Learning
• Porter, M.E. (1980) Competitive Strategy, Free Press, New York.
• Peng, Global Strategy 11th and 12th Ed., Cengage Learning
• Hill, Schilling and Jones, Strategic Management Theory, 12e, Cengage
Learning
• Gaspar et al, Introduction to Global Business, 2nd Ed., Cengage Learning
• Wheelen et al, Strategic Management and Business Policy 15e, Pearson
• 2013 Robert M. Grant, Contemporary Strategy Analysis, 8e
Revision
What is Strategy, Internal Environment
Quick Revision
• What is a Strategy:
• Why Strategy: to Survive and outperform the competition (above
average returns)
• How to develop a strategy
 Mintzberg’s 5 Ps of Strategy

• Strategic Plan: A strategic plan is a carefully crafted set of steps that a company intends to
follow in order to be successful.
• Business Model: A business model describes the process through which a company hopes to earn
profits.
• Economies of Scale: A cost advantage that is created when a company can produce a good or service at
a lower per unit price due to producing the good or service in large quantities.
• Strategic Ploy: A strategic ploy is a specific move designed to outwit or trick competitors.
• Strategy as pattern: Strategy as pattern focuses on the extent to which a company’s actions
over time are consistent.
• Strategy as position: Strategy as position refers to a company’s place in the industry relative
to its competitors.
• Strategy as perspective: Strategy as perspective refers to how executives interpret the
competitive landscape around them.
+
• Strategy as a dynamic process
• Strategy as a theory of how to compete, survive, grow and achieve above
average returns AAR
The Environment
• General Environment
• Industry Environment
• Competitive Environment
General Environment
• General: PLESTG

Domestic Global

Political
Legal
Economic
Social/Cultural
Technological
The External Environment

© 2017 Cengage Learning. Hitt et al.

 The General Environment: Segments and Elements

© 2017 Cengage Learning. Hitt et al.

 The Five Forces of Competition Model

© 2017 Cengage Learning. Hitt et al.

 Interpreting Industry Analyses
Low entry barriers

Suppliers and buyers

have strong positions
Unattractive
Strong threats from industry
substitute products

Intense rivalry (Low profit potential)

among competitors

© 2017 Cengage Learning. Hitt et al.

 Interpreting Industry Analyses (cont’d)
High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from industry
substitute products

Moderate rivalry (High profit potential)

among competitors

© 2017 Cengage Learning. Hitt et al.

 Core Ideology

Measure &
Where are we Realign
SWOT Analysis We are
Here

… in the
Strategic
Management
Implementation Objectives
Process?
Strategy
The Internal Environment
Know yourself
What is the Internal Environment?
• It includes our:
• Resources
• Capabilities
• Core Competencies
• People
• Structure
• Systems
• Skills
• Culture, shared values & organizational habits
• Strengths
• Weaknesses
McKinsey’s
7-S
Framework

Source: https://bscdesigner.com/7-s-framework.htm
Expanding on 7-S as they describe our internal
environment
Shared Values: Our Core Ideology, Vision, Mission, Values and Brand Promise

Style: Our Organization culture, how we do things and our habits

Strategy: Whom we serve, what we satisfy, how we provide unique value and gain and sustain our competitive advantage

Staff: Our people, teams, leaders, …

Structure: How we organize our people and teams to implement our strategy

Skills: What skills and core competencies do we need to Excel in Delivering our Brand Promise and implementing our Strategy successfully and profitably

Systems: What business systems, processes & procedures we use to ensure that we do things efficiently, effectively and consistently
Why study our internal environment
• Before we design a successful strategy, we need to know:
• What we can do
• What we can not do
• What we need to learn
• Our resources, finances, resources, …
• Past strategy, what worked and lessons learned
• Our skills, capabilities and core competences
• Our people and internal stakeholders
• Our weaknesses, limitations, blind spots, …
• Our culture
• Our strategy can only be successful if it matches and fits our internal
environment
 From Resources to Competitive Advantage
The Resource-Based Model of Above-Average Returns

Customers
Core
competence
Capability
A source of competitive
An integrated set of resources advantage. Capability which
Resources lined up to generate value, we utilize to deliver unique
Tangible & Intangible, Physical, for instance, equipment
human, and organizational capital organized in a production line value to our customers in
to manufacture a product! ways better than the
competition!
Adapted from: HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 Components of an Internal Analysis

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
What is “Value”?
• We “add value”, when we
• satisfy a need,
• solve a problem,
• provide a benefit,

which the customer “values”, and is willing to pay for!

• We provide a unique value, when we do the above in ways which are
substantially better than the competition.
Resources As Core Competencies
Costly to imitate

How resources
Rare become core Valuable
competencies

Nonsubstitutable

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 Resources, Capabilities and Core Competencies

Core Competencies
• Resources and capabilities that
Competitive are the sources of a firm’s
Advantage competitive advantage that:
• distinguish a firm
competitively and reflect its
Core
personality.
Competencies
• emerge over time through
Capabilities an organizational process of
accumulating and learning
how to deploy different
Resources resources and capabilities.
• Tangible
• Intangible

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Resources, Capabilities and Core Competencies

Competitive Core Competencies (cont’d):

Advantage • activities that a firm performs especially
well compared to competitors.
• activities through which the firm adds
Core unique value to its goods or services over
Competencies a long period of time.

Capabilities

Resources
• Tangible
• Intangible
HITT et al, Strategic Management, Competitiveness and
Globalization, 12e. © 2017 Cengage Learning.
 Building Sustainable Competitive Advantage

Sustainable • Valuable capabilities:

Competitive • help a firm neutralize threats or
Advantage exploit opportunities.
• Rare capabilities
Four Criteria of • are not possessed by many others.
Sustainable
Advantages

• Valuable
• Rare
• Costly to imitate
• Non-substitutable

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Competitive Advantage
• Firms achieve strategic competitiveness and earn above-average
returns when their core competencies are effectively:
• acquired
• bundled
• leveraged
• Over time, the benefits of any value-creating strategy can be
duplicated by competitors.

HITT et al, Strategic Management, Competitiveness and

Globalization, 12e. © 2017 Cengage Learning.
Competitive Advantage (cont’d)
• Sustainability of a competitive advantage is a function of the:
• rate of core competence obsolescence because of environmental changes.
• availability of substitutes for the core competence.
• imitability of the core competence.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 Analyzing the External Environment

Opportunities
and threats

By studying the external environment, firms identify what

they might choose to do.
HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 Analyzing the Internal Organization

Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

By studying the internal environment, firms identify what

they can do.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Creating Value
• By exploiting their core competencies or competitive advantages,
firms create value.
• Value is measured by:
• product performance characteristics.
• product attributes for which customers will pay.
• Firms create value by innovatively bundling and leveraging their
resources and capabilities.
• Superior value leads to above-average returns.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Creating Competitive Advantage
• Core competencies, in combination with product-market positions,
are the firm’s most important sources of competitive advantage.
• Core competencies of a firm, in addition to the analysis of its general,
industry, and competitor environments, should drive its selection of
strategies.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Resources
• Resources • Types of Resources
• A firm’s assets, including people • Tangible resources:
and the value of its brand name, • financial
that represent inputs into a firm’s • physical
production process: • technological
• capital equipment • organizational
• skills of employees • Intangible resources:
• brand names • human
• financial resources • innovation
• talented managers • reputation

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Tangible Resources

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Intangible Resources

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 Example of Firms’ Capabilities

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 The Four Criteria of Sustainable Advantage

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Outcomes from Combinations
of the Four Criteria

Competitive Performance
Consequences Implications
No No No No Competitive Below Average
Disadvantage Returns

Yes No No Yes/ Competitive Average Returns

No Parity

Yes Yes No Yes/ Temporary Com- Above Average to

No petitive Advantage Average Returns

Yes Yes Yes Yes Sustainable Com- Above Average

petitive Advantage Returns

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 Criteria for Sustainable Advantage

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Value Chain Analysis
• Value Chain Analysis:
• allows a firm to understand the parts of its operations that create value and
those that do not.
• is a template that firms use to:
• understand their cost position.
• identify multiple means that might be used to facilitate implementation of a chosen
business-level strategy.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Value Chain Analysis (cont’d)
• Primary Activities:
• are involved with:
• a product’s physical creation.
• a product’s sale and distribution to buyers.
• the product’s service after the sale.

• Support Activities:
• provide the assistance necessary for the primary activities to take place.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Value Chain Analysis (cont’d)
• Value Chain shows how a product moves from the raw-material stage
to the final customer.
• To be a source of competitive advantage, a resource or capability
must allow the firm to perform:
• an activity in a manner that is superior to the way competitors perform it, or
• a value-creating activity that competitors cannot complete

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
A Model of the Value Chain

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Creating Value
through Value
Chain Activities

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Creating Value
through Support
Functions

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
The Value-Creating Potential
of Primary Activities
• Inbound Logistics
• Activities used to receive, store, and disseminate inputs to a product.
• Operations
• Activities necessary to convert the inputs provided by inbound logistics into
final product form.
• Outbound Logistics
• Activities involved with collecting, storing, and physically distributing the
product to customers.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
The Value-Creating Potential
of Primary Activities (cont’d)
• Marketing and Sales
• Activities completed to provide the means through which customers can
purchase products and to induce them to do so.
• Service
• Activities designed to enhance or maintain a product’s value.
• Each activity should be examined relative to competitor’s abilities and
rated as superior, equivalent or inferior.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
The Value-Creating Potential
of Primary Activities: Support
• Procurement
• Activities completed to purchase the inputs needed to produce a firm’s
products.
• Technological Development
• Activities completed to improve a firm’s product and the processes used to
manufacture it.
• Human Resource Management
• Activities involved with recruiting, hiring, training, developing, and
compensating all personnel.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
The Value-Creating Potential of
Primary Activities: Support (cont’d)
• Firm Infrastructure
• Activities that support the work of the entire value chain (general
management, planning, finance, accounting, legal, government relations,
etc.).
• Effectively and consistently identify external opportunities and threats
• Identify resources and capabilities
• Support core competencies
• Each activity should be examined relative to competitor’s abilities and
rated as superior, equivalent or inferior.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Outsourcing
• Outsourcing is the purchase of a value-creating activity from an
external supplier.
• Why
• Finite Resources: Few organizations possess the resources and capabilities
required to achieve competitive superiority in all primary and support
activities.
• Focus resources and attention on core activities
• Specialization: get access to rare skills and scale
• By performing fewer capabilities:
• A firm can concentrate on those areas in which it can create value.
• Specialty suppliers can perform outsourced capabilities more efficiently.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
 Outsourcing Decisions
A firm may outsource all
or only part of one or
more primary and/or
support activities.

Technological Development
Human Resource Mgmt.
Service

Support Activities

Firm Infrastructure
Marketing and Sales

Procurement
Outbound Logistics

Operations

Inbound Logistics

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Primary Activities
Strategic Rationales for Outsourcing
• Improving business focus helps a firm focus on broader business
issues by having outside experts handle various operational details.
• Provides access to world-class capabilities
• Makes world-class capabilities available to firms in a wide range of
applications

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Strategic Rationales for Outsourcing (cont’d)
• Accelerating re-engineering benefits
• achieves re-engineering benefits more quickly by having outsiders - who have
already achieved world-class standards - take over processes.
• Sharing risks
• reduces investment requirements and makes firm more flexible, dynamic and
better able to adapt to changing opportunities.
• Freeing resources for other purposes
• redirects efforts from non-core activities toward those that serve customers
more effectively.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Outsourcing Issues
• Seeking greatest value
• Outsource only to firms possessing a core competence in terms of performing
the primary or supporting the outsourced activity.
• Evaluating resources and capabilities
• Do not 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 to complete necessary ongoing organizational tasks.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Outsourcing Issues (cont’d)
• Nonstrategic team resources
• Do not outsource capabilities critical to the firm’s 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.
• Do not create strategic competitors
• Do not outsource activities that would create strategic competitors.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Competencies, Strengths, Weaknesses, and
Strategic Decisions
• 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 – former
core competencies that now generate inertia and stifle innovation.
• Determining what the firm can do through continuous and effective analyses
of its internal environment will increase the likelihood of long-term
competitive success.

HITT et al, Strategic Management, Competitiveness and Globalization, 12e. © 2017 Cengage Learning.
Exercises
Brand Promise and Value Delivered
Have you ever seen a broken down Toyota?

Toyota Ad - https://www.youtube.com/watch?v=rzBdPr9Cbh8
What is the value which Toyota Promised?
• Durability.
• Reliability
• Reliance.
• Low maintenance.
• Problem free.
• Peace of mind.
• Convenience: seldom having to worry about fixing your car.
• Confidence.
• Resale value.
How?
• How to create such value?
Brand Promise /Position &
Core Competency
Brand Promise Core Competencies
Toyota
Volvo
BMW
Mercedes
TATA
Nissan
Tesla
Land Rover
Brand Promise /Position &
Core Competency
Brand Promise Core Competencies
Costco
RBC
No Frills
WalMart
Apple
DELL
What Value do these brand provide
• Wal-Mart:
• Cheaper Prices everyday, means that customers can get more value for their money?
• Apple:
• Invent. Be Different. They mean that customers will feel special. Their decision to buy
Apple products gives them a feeling of being unique.
• BMW:
• The ultimate driving machine. The need for speed. High performance which
customers are willing to pay for.
• Mercedes:
• The Best or Nothing. Reflect status and prestige. Customers are elite because they
buy an elite product.
• Toyota:
• Have you ever seen a broken down Toyota?
Core Competencies
When to outsource and what functions should NOT be outsourced
HeartStrong
• Heartstrong LLC is a designer and manufacturer of
replacement heart valves based in Peoria, Illinois. While it is a
relatively small company in the medical devices field, it has
established a worldwide reputation as a lead designer and
manufacturer of high-quality, leading-edge artificial heart
valves.
• Most of its products are sold to large regional hospital
systems and research hospitals. Specialty heart centers are
another emerging but fast-growing market for its valves.
While Heartstrong would like to grow quickly, just like any
other organization, it has finite resources.
• Heartstrong growth is constrained by the need to finance
larger production runs and then carry this additional
inventory. For products like those of Heartstrong, vendors
typically do not collect payment until the product (valve) is
actually used in surgery. Moreover, heart valves are usually
required on short notice, which means that they must be
either onsite or inventoried at a nearby location. If they are
nearby, then the transport of the unit to a hospital or heart
center occurs within a matter of hours, and sometimes
minutes.
• For this reason, accelerated growth would require
Heartstrong to finance increased production of its heart
valves and carry increased levels of inventory that are sitting
on their customers' shelves. In fact, inventory-carrying cost is
the company's single largest cost outside of research and
development. While profitable growth is necessary, if
Heartstrong is to continue extending its competitive
advantage through increasingly greater investments in basic
heart valve R&D and cutting edge manufacturing technology,
it is not clear that the company can internally support all
these increased financial commitments (R&D, manufacturing,
and inventory).
• Doc Watson, the CEO of Heartstrong, is considering an
outside contractor, FastEx, to handle the inventorying,
warehousing, and delivery of its valves. FastEx has secure,
high-tech warehouses in most major population centers
around the country and can ensure delivery of a product to
these markets from its warehouses in less than one hour.
• Some shareholders suggested that the company should
outsource manufacturing to cut costs and improve dividends
while others insisted that R&D was eating company resources
and should be done through research centers to reduce
expenses and improve profitability.
Discussion