CHAPTER 3
STRATEGIC
The Internal Environment: Resources, Capabilities, and Core Competencies
MANAGEMENT INPUTS
Strategic Management PowerPoint Presentation by Charlie Cook The University of West Alabama © 2007 Thomson/South-Western. All rights reserved.
Competitiveness and Globalization: Seventh edition Concepts and Cases Michael A. Hitt • R. Duane Ireland • Robert E. Hoskisson
NOWLEDGE OBJECTIVES K NOWLEDGE
Studying this chapter should provide you y ou with the strategic management knowledge needed to: 1. Explain Explain the need for firms to study and understand their internal environment. 2. Define value and discuss its importance. 3. Describe the differences between tangible and intangible resources. 4. Define capabilities and discuss how they are developed. 5. Describe four criteria used to determine whether resources and capabilities are core competencies.
“In preparing for battle I have always found that plans are useless, but planning is indispensable .” .” - Dwight D. Eisenhower
The Internal Environment • Owner: someone who has legal property rights to a business. • Board of directors: governing body elected by a corporation’s stockholders and charged with overseeing the general management of the firm. • Employees: those employed by the organization. • Ph Phys ysica icall work work enviro environm nment ent:: the firm’s firm’s faci facililitie ties. s.
The Organizational Environment Public pressure groups
Government
Suppliers
The Organization
Competitors
Customers
Labor unions
Additional Dimensions • Political-Legal dimension: the government regulation of business and the general relationship between business and government. • International dimension: the extent to which an organization is involved in or affected by business in other countries.
The Task Environment • Competitors: an organization that competes with other organizations. • Customer: whoever pays money to acquire an organization’s products or services. • Supplier: an organization that provides resources for other organizations. • Regulator: a unit that has the potential to control, legislate, or influence an organization’s policies and practices.
Task Environments Continued • Interest group: a group organized by its members to attempt to influence organizations. • Strategic partner: an organization working together with one or more organizations in a joint venture or other partnership.
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 value-cr eating strategy can be duplicated by competitors.
Competitive Advantage (cont’d) • Sustainability of a competitive advantage is a function of: The
rate of core competence obsolescence obsolescence due to environmental changes.
The
availability of substitutes for the core competence.
The
difficulty competitors have in duplicating or imitating the core competence.
Internal Analyses’ Outcomes
Unique resources, capabilities, and competencies (required for sustainable for sustainable competitive advantage )
By studying the internal environment, firms identify what they can do
The Context of Internal Analysis • Global Economy Traditional
sources of advantages can be overcome by competitors’ international international strategies and by the flow of resources throughout the global economy.
• Global Mind-Set The
ability to study an internal environment in ways that are not dependent on the assumptions of a single country, culture, or context.
• Analysis Outcome Understandin Understanding g
how to leverage the firm’s bundle of heterogeneous resources and capabilities.
Creation and Maintenance of Organizational Cultures Company Founder
Organizational Stories
5.1
Organizational Heroes
Successful Organizational Cultures Adaptability Consistency
Involvement
Clear Vision
Sales Growth Return on Assets 5.2
Employee Satisfaction Profits
Quality
Adapted from Exhibit 2.7 D.R. Denison & A.K. Mishra, Organization Science 6(1995): 204-223
Blast from the Past • Corporate history helps employees and managers understand the people, and events, and changes that shaped a company • Preserves culture and values • Gets people involved in the culture of a company
5.2
Changing Organizational Cultures
• Behavioral addition is
the process of having managers and employees perform a new behavior
• Behavioral substitution is
having managers and employees perform a new behavior in place of another behavior
• Change visible artifacts such
as the office design and layout, company dress codes, etc.
5.3
FIGURE 3.1
Components of Internal Analysis Leading to Competitive Advantage and Strategic Competitiveness
Creating Value • By exploiting their core competencies or competitive advantages, firms create value. • Value is measured by: Product
performance characteristi characteristics cs
Product
attributes for which customers are willing to
pay
• Firms create value by innovatively bundling and leveraging their resources and capabilities. • Superior value
Above-average
returns
Creating Competitive Advantage • Core competencies, in combination with productmarket positions, are the firm’s most important sources of competitive advantage. • Core competencies of a firm, in addition to its analysis of its general, industry, and competitor environments, should drive its selection of strategies.
The Challenge of Internal Analysis • Strate Strategic gic dec decisi isions ons in term terms s of the fir firm’s m’s resources, capabilities, and core competencies: Are
non-routine.
Have
ethical implications.
Significantly
influence the firm’s ability to earn above average returns.
The Challenge of Internal Analysis (cont’d) • To develop and use core competencies, managers must have: Courage Self-confidence Integrity The A
capacity to deal with uncertainty and complexity
willingness willin gness to hold people (and (and themselves) themselves) accountable accountabl e for their work
Innovation Innovation is the act act of creating new products or new processes Product
innovation
• Creates products that customersperceive as more valuable and • Increa Increases ses the the compan company’s y’s pric pricing ing opti options ons Process
innovation
• Creates value by lowering production costs
Successful innovation can be a major source of competitive advantage – by giving a company something unique, something its competitors lack.
FIGURE
3.2
Conditions Affecting Managerial Decisions about Resources, Capabilities, and Core Competencies
Source: Adapted from R. Amit & P. J. H. Schoemaker, 1993, Strategic assets and organizational rent, Strategic Management Journal, 14: 33.
Resources • Resources Are
a firm’s assets, 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
• Types of Resources Tangible
resources
• Financial resources • Physical resources • Technological resources • Organizational resources Intangible
resources
• Human resources • Innovation resources • Reputation resources
TABLE
3.1
Tangible Resources
Financial Resources
• The firm’s borrowing capacity • The firm’s ability to generate internal funds
Organizational Resources • The firm’s formal reporting structure and its formal planning, controlling, and coordinating systems • Sophistication and location of a firm’s Physical Resources plant and equipment • Access to raw materials technology, such as patents, Technological Resources • Stock of technology, trademarks, copyrights, and trade secrets
Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100 –102. –102.
TABLE
3.2
Intangible Resources
Human Resources
Innovation Resources
Reputational Resources
• • • • • • • • • •
Knowledge Trust Managerial capabilities Organizational routines Ideas Scientific capabilities Capacity to innovate Reputation with customers Brand name Perceptions of product quality, durability, and reliability • Reputation with suppliers • For efficient, effective, supportive, and mutually beneficial interactions and relationships
Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13: 136 –139; –139; R. M. Grant, 1991, Contemporary 101 –104. 104. Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101 –
The Resource-Based model of Above Average Returns
The resource based view suggests that a firm’s unique resources and capabilities provide the basis for a strategy.
The Resource-Based Model of Superior Returns
Resources
Inputs to a firm’s production process.
Action required: required: Identify firm resources. Study strengths & weaknesses relative to rivals.
The Resource-Based Model of Superior Returns
Resources Capability Inputs to a firm’ firm’s s Capacity for integrated production process. set of resources to integratively perform a task or activity.
Action required: Determine what firm capabilities allow it to do better than rivals.
The Resource-Based Model of Superior Returns
Resources Capability Inputs to a firm’ firm’s s Competitive Capacity for an Advantage production process.
integrated set of resources Ability to of a firm to integratively perform its rivals outperform a task or activity.
Action required: Determine how firm’s resources & capabilities may create competitive advantage.
The Resource-Based Model of Superior Returns Action required: Locate an attractive industry. Resources Capability Competitive Inputs to a firm’ firm’s s Advantage Capacity for an An Attractive production process.
integrated set of Industry Ability of a firm to resources to of an industry outperform its rivals integratively performLocation a task or activity. with opportunities that can be exploited by firm’s resources & capabilities
The Resource-Based Model of Superior Returns Action required: Select strategy that best exploits res.& capabilities relative to opportunities in environments.
Resources Capability Competitive Inputs to a firm’ firm’s s Advantage Capacity for an An Attractive production process. integrated set of Strategy Industry of a firm to resourcesAbility to Formulation and Location of an ind. outperform its rivals integratively perform a with opportunities Implementation task or activity.
that can be exploited actions taken by firm’sStrategic resources to earn above-average & capabilities returns
Value Chain Analysis
Firm Infrastructure Human Resource Management Support Activities
Technological Development Procurement d s c n i u t s o i b g n o I L
s n o i t a r e p O
d s n i c u t o i s b t g u o L O
Primary Activities
e c g s i n e v i r t l e a e k S S r a & M
Environmental Change, Complexity, and Uncertainty
Management Culture • The set of values, beliefs, behaviors, customs, and attitudes that helps the members of the organization understand what it stands for, how it does things, and what it considers important. • Organizational culture is important for it determines the “feel” of the organization. • Its starting point is often the founder.
Managing Organizational Culture • The manager must understand the current culture and then decide if it should be maintained or changed. • Managers must walk a fine line between maintaining a culture that still works effectively versus changing a culture that has become dysfunctional.
Organizational Environment Relationships • Uncertainty: a driving force that influences many organizational decisions. • Competitive forces: Threat
of new competitiv competitive e entrants.
Competitive Threat
rivalry.
of substitute products.
The
power of buyers.
The
power of suppliers suppliers..
Environmental Turbulence • Terrorist attacks. • Workplace violence. • Computer viruses. • Such crises affect organizations organizatio ns in different ways.
How Organizations Respond to Their Environments: General environment Task environment
Information management
Social responsibility The Organization
Mergers, takeovers acquisitions, alliances
Direct influence
Strategic responses Organization design and flexibility
How Organizations Adapt to Their Environments Each organization must asses its own unique situation then adapt according to the wisdom of senior management, for example: Information systems. Strategic
responses.
Mergers,
acquisitions, and alliances.
Organizational Direct
design and flexibility.
influence of the environment.
The Environment and Organizational Effectiveness • How well the organization understands, reacts to, and influences its environment. • The systems resources approach: extent to which the organization can acquire needed resources. • The internal processes approach: internal mechanisms of the organization and forces on minimizing strain. • The goal approach: how well the firm obtains goals. • Strategic constituencies: groups who have a stake in the organization.
