Business Administration BUS 499
The Internal Organization: Resources, Capabilities, Core Competencies, and Competition Advantages
Welcome to the Business Administration Capstone.
In this lesson we will discuss The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
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Objectives
Upon completion of this lesson, you will be able to:
Analyze the internal environment of a company for strengths and weaknesses that impact the firm’s competitiveness.
Upon completion of this lesson, you will be able to:
Analyze the internal environment of a company for strengths and weaknesses that impact the firm’s competitiveness; and
Use technology and information resources to research issues in strategic management.
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Topics
Analyzing the Internal Organization
Resources, Capabilities, and Core Competencies
Building Core Competencies
Outsourcing
Competencies, Strengths, Weaknesses, and Strategic Decisions
In order to achieve this objective, the following supporting topics will be covered:
Analyzing the internal organization;
Resources, capabilities, and core competencies;
Building core competencies;
Outsourcing; and
Competencies, strengths, weaknesses, and strategic decisions.
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Internal Analysis
Traditional Factors
Global Mind-set
Bundles
In the global economy, traditional factors such as labor costs, access to financial resources and raw materials, and protected or regulated markets remain sources of competitive advantage, but to a lesser degree. On important reason is that competitors can apply their resources to successfully use an international strategy as a means of overcoming the advantages created by these more traditional sources.
Increasingly, those who analyze their firm’s internal organization should use a global mind-set to do so. A global mind-set is the ability to study an internal organization in ways that are not dependent on the assumptions of a single country, culture, or context. Because they are able to span artificial boundaries, those with a global mind-set recognize that their firms must possess resources and capabilities that allow understanding of and appropriate response to competitive situations that are influenced by country-specific factors and unique societal cultures.
Finally, analysis of the firm’s internal organization requires that evaluators examine the firm’s portfolio of resources and the bundles of heterogeneous resources and capabilities managers have created. This perspective suggests that individual firms possess at least some resources and capabilities that other companies do not.
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Creating Value
Value
Measured by characteristics and attributes
Offer Superior Value
Source of Above-Average Returns
By exploiting their core competencies or competitive advantages to at least meet if not exceed the demanding standards of global competition, firms create value for customers. Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay.
Firms with a competitive advantage offer value to customers that is superior to the value competitors provide. Firms create value by innovatively bundling and leveraging their resources and capabilities. Firms unable to creatively bundle and leverage their resources and capabilities in ways that create value for customers suffer performance declines. Sometimes, it seems that these declines may happen because firms fail to understand what customers value.
Ultimately, creating value for customers is the source of above-average returns for a firm. What the firm intends regarding value creation affects its choice of business-level strategy and its organizational structure.
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Resources, Capabilities, and Core Competencies
Resources
Tangible
Intangible
Capabilities
Competitive
Advantage
Strategic
Competiti
-veness
Core
Competencies
Discovering
Core
Competencies
Value
Chain
Analysis
Four Criteria
of Sustainable
Advantages
– Outsource
Valuable
Rare
Costly to Imitate
Nonsubstitutable
Resources, capabilities, and core competencies are the foundation of competitive advantage. Resources are bundled to create organizational capabilities. In turn, capabilities are the source of a firm’s core competencies, which are the basis of competitive advantages.
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Resources
Tangible Resources
Financial
Organizational
Physical
Technological
Intangible Resources
Human
Innovation
Reputational
Broad in scope, resources cover a spectrum of individual, social, and organizational phenomena. Typically, resources alone do not yield a competitive advantage. In fact, a competitive advantage is generally based on the unique bundling of several resources.
Some of a firm’s resources are tangible while others are intangible. Tangible resources are assets that can be seen and quantified. Production equipment, manufacturing facilities, distribution centers, and formal reporting structures are examples of tangible resources.
Intangible resources are assets that are rooted deeply in the firm’s history and have accumulated over time. Because they are embedded in unique patterns of routines, intangible resources are relatively difficult for competitors to analyze and imitate.
The four types of tangible resources are financial, organizational, physical, and technological. The three types of intangible resources are human, innovation, and reputational.
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Capabilities
Resources purposely integrated
Critical to the building of competitive advantage
Evolve and develop over time
Capabilities exist when resources have been purposely integrated to achieve a specific task or set of tasks. These tasks range from human resources selection to product marketing and research and development activities.
Critical to the building of competitive advantages, capabilities are often based on developing, carrying, and exchanging information and knowledge through the firm’s human capital. Client-specific capabilities often develop from repeated interactions with clients and the learning about their needs that occurs.
As a result, capabilities often evolve and develop over time. The foundation of many capabilities lies in the unique skills and knowledge of a firm’s employees and, often, their functional expertise. Hence, the value of human capital in developing and using capabilities and, ultimately, core competencies cannot be overstated.
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Core Competencies
Value Capabilities
Rare Capabilities
Costly-to-Imitate Capabilities
Unique historical conditions
Causally ambiguous
Social complexity
Nonsubstitutable Capabilities
Core competencies are capabilities that serve as a source of competitive advantage for a firm over it rivals. Core competencies distinguish a company competitively and reflect its personality. Core competencies emerge over time through an organizational process of accumulating and learning how to deploy different resources and capabilities. As the capacity to take action, core competencies are crown jewels of a company, the activities the company performs especially well compared with competitors and through which the firm adds unique value to its goods or services over a long period of time.
Capabilities that are valuable, rare, costly to imitate, and nonsubstitutable are core competencies.
Value capabilities allow the firm to exploit opportunities or neutralize threats in its external environment. By effectively using capabilities to exploit opportunities, a firm creates value for customers.
Rare capabilities are capabilities that few, if any, competitors possess. Capabilities possessed by many rivals are unlikely to be sources of competitive advantage for any one of them. Instead, valuable but common resources and capabilities are sources of competitive parity. Competitive advantage results only when firms develop and exploit valuable capabilities that differ from those shared with competitors.
Costly-to-imitate capabilities are capabilities that other firms cannot easily develop. Capabilities that are costly to imitate are created because of one reason or a combination of three reasons. First, a firm sometimes is able to develop capabilities because of unique historical conditions. A second condition occurs when the link between the firm’s capabilities and its competitive advantage is causally ambiguous. Social complexity is the third reason that capabilities can be costly to imitate.
Nonsubstitutable capabilities are capabilities that do not have strategic equivalents. This final criterion for a capability to be a source of competitive advantage is that there must be no strategically equivalent valuable resources that are themselves either not rare or imitable.
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Check Your Understanding
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Value Chain
Understand the Parts
Template
Primary Activities
Support Activities
Value chain analysis allows the firm to understand the parts of its operations that create value and those that do not. Understanding these issues is important because the firm earns above-average returns only when the value it creates is greater that the costs incurred to create that value.
The value chain is a template that firms use to understand their cost position and to identify the multiple means that might be used to facilitate implementation of a chose business-level strategy. Today’s competitive landscape demands that firms examine their value chains in global, rather than a domestic-only context. In particular, activities associated with supply chains should be studied within a global context.
A firm’s value chain is segmented into primary and support activities. Primary activities are involved with a product’s physical creation, its sale and distribution to buyers, and its service after the sale. Support activities provide the assistance necessary for the primary activities to take place.
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Outsourcing
What is Outsourcing
Purchase of a value-creating activity from an external supplier
Few organizations possess
Resources and capabilities
Concerned with how components, finished goods, or services will be obtained, outsourcing is the purchase of a value-creating activity from an external supplier. Not-for-profit agencies as well as for-profit organizations actively engage in outsourcing. Firms engaging in effective outsourcing increase their flexibility, mitigate risks, and reduce their capital investments. In multiple global industries, the trend toward outsourcing continues at a rapid pace.
Outsourcing can be effective because few, if any, organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities.
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Competencies, Strengths, Weaknesses, and Strategic Decisions
Why Analyze the Internal Organization
Identify strengths and weaknesses
Resources
Capabilities
Core Competencies
Having the Right Resources
Example of External Environment Affecting Competitive Advantage
Borders Group Incorporated
When firms analyze the internal organization, they are able to identify their strengths and weaknesses in resources, capabilities, and core competencies. An example of this would be when a firm has weak capabilities or does not have core competencies in areas required to achieve a competitive advantage. On the other hand, the firm could decide to outsource a function or activity where it is weak in order to improve its ability to use its remaining resources to create value.
After looking over the results of the examination dealing with a firm’s internal organization, managers should understand that having a significant quantity of resources is not the same as having the right resources. When we talk about the right resources, we refer to them as resources that have the potential to be formed into core competencies. These core competencies will then serve as the foundation for creating value for customers and developing competitive advantages.
Decision-makers sometimes become more focused and productive when looking to find the right resources, especially when the firm has constrained resources. Using tools like outsourcing can help a firm focus on its core competencies and use those as its source of competitive advantage. It is important to note that the value-creating abilities of core competencies should not be taken advantage of or relied on as a permanent competitive advantage. This is due to all core competencies having the potential to become core rigidities. Usually, events occurring in the firm’s external environment create conditions where core competencies can become core rigidities, generate inertia, and stifle innovation. The bad news about core capabilities deals with the external events that can take away the competitive advantage. This can occur when new competitors figure out a better way to serve the firm’s customers, when new technologies emerge, or when political or social events stir things up.
An example of external environment affecting a competitive advantage involves the Borders Group Incorporated. This company relied on its large storefronts that drew customers into their stores to browse through books and magazines in a pleasant atmosphere as sources of its competitive success. Over the years, however, digital technologies have rapidly changed customers’ shopping patterns for reading materials. We saw earlier that Amazon. com’s use of the Internet has significantly changed the competitive landscape for Borders and similar competitors. As a result, it is possible that Borders’ core competencies of store locations and a desirable physical environment for customers became core rigidities for this firm. This change eventually lead to Borders filing for bankruptcy in early 2011 and subsequent liquidation.
It is important that managers who are studying the firm’s internal organization take responsibility for making sure that core competencies do not become core rigidities.
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Summary
Analyzing the Internal Organization
Resources, Capabilities, and Core Competencies
Building Core Competencies
Outsourcing
Competencies, Strengths, Weaknesses, and Strategic Decisions
We have reached the end of this lesson. Let’s take a look at what we have covered.
First, we discussed value. Value is measured by a product’s performance characteristics and by its attributes for which customers are willing to pay.
Next, we went over resources. Tangible resources are assets that can be seen and quantified. Intangible resources are assets that are rooted deeply in the firm’s history and have accumulated over time.
We then talked about capabilities. Capabilities exist when resources have been purposely integrated to achieve a specific task or set of tasks.
Next, we discussed competencies. Core competencies are capabilities that serve as a source of competitive advantage for a firm over it rivals.
We then went over value chain. Value chain analysis allows the firm to understand the parts of its operations that create value and those that do not.
Later in the lesson with a discussion on outsourcing. Concerned with how components, finished goods, or services will be obtained, outsourcing is the purchase of a value-creating activity from an external supplier.
Finally, to conclude the lesson we discussed competencies, strengths, weaknesses, and strategic decisions. We talked about the importance of having the right resources and considering the external environment. We also looked at the concept of core competencies and used the example of Borders Group Incorporated to illustrate the big picture.
This completes this lesson.
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