PART 1:

STRATEGIC
MANAGEMENT
CHAPTER 3
THE INTERNAL
ENVIRONMENT

Authored by:
Marta Szabo White. PhD.
Georgia State University
 THE STRATEGIC
MANAGEMENT PROCESS

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 KNOWLEDGE
OBJECTIVES
● Explain why firms need to study and
understand their internal organization.

● Define value and discuss its

importance.

● Describe the differences between

tangible and intangible resources.

● Define capabilities and discuss their

development.

● Describe four criteria used to

determine whether resources and
capabilities are core competencies.
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 KNOWLEDGE
OBJECTIVES
● 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.
● Define outsourcing and discuss
reasons for its use.

● Discuss the importance of

identifying internal strengths and
weaknesses.

● Discuss the importance of avoiding

core rigidities.

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 OPENING CASE
SUBWAY RESTAURANTS:
CORE COMPETENCIES AS THE FOUNDATION FOR
SUCCESS

• 1965: Subway opened its first shop

• Current portfolio of almost 35,000 units
located in 98 countries
• More store locations than McDonald’s
• Subway’s focus on “Eat Fresh,” high-
quality foods, continuous training,
customer service, and “non-traditional”
store locations illustrate Subway’s core
competencies and the foundation for
competitive advantage, underscoring key
chapter concepts

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 EXTERNAL ANALYSES’
OUTCOMES

Opportunitie
s and
Threats

By studying the external

environment, firms identify what
they MIGHT CHOOSE TO DO
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 INTERNAL ANALYSES’
OUTCOMES

Unique
Resources,
Capabilities,
and
Competencies
(required for
sustainable
competitive
advantage)

By studying the internal environment,

firms identify what they CAN DO
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STRATEGIC COMPETITIVENESS
AND ABOVE-AVERAGE RETURNS
RESULT WHEN:

INTERNAL What a firm can

do:
ORGANIZAT Function of resources,
capabilities, and
ION core competencies
MATCH
ES
What a firm might
EXTERNAL do:
ENVIRONM Function of opportunities
in the firm’s external
ENT environment

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 COMPETITIVE ADVANTAGE
KEY POINTS
■ NO COMPETITIVE ADVANTAGE
LASTS FOREVER
■ OVER TIME, RIVALS USE THEIR
OWN UNIQUE RESOURCES,
CAPABILITIES, AND CORE
COMPETENCIES TO DUPLICATE THE
FOCAL FIRM’S ABILITY TO CREATE
VALUE FOR CUSTOMERS
■ WITH GLOBALIZATION,
SUSTAINABLE COMPETITIVE
ADVANTAGE IS ESPECIALLY
CHALLENGING
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 COMPETITIVE ADVANTAGE
KEY POINTS

■ FIRMS MUST EXPLOIT THEIR CURRENT

ADVANTAGES WHILE SIMULTANEOUSLY
USING THEIR RESOURCES AND
CAPABILITIES TO FORM NEW ADVANTAGES
THAT CAN LEAD TO FUTURE COMPETITIVE
SUCCESS
■ INNOVATION AND PEOPLE ARE CRITICAL
RESOURCES FOR ORGANIZATIONS IN
THEIR QUEST FOR COMPETITIVE
ADVANTAGE

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 COMPETITIVE ADVANTAGE
SUSTAINABILITY

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
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
©2013 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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 ANALYZING THE INTERNAL
ORGANIZATION

The Context of Internal

Analysis
Global Economy
Traditional sources of advantages can be overcome by
competitors’ international strategies and by the flow
of resources throughout the global economy

Global Mindset
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
Understanding how to leverage the firm’s bundle of
heterogeneous resources and capabilities
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 COMPETITIVE
ADVANTAGE
Components of Internal Analysis Leading to Competitive
FIGURE 3.1
Advantage and Strategic Competitiveness
Components
of an
Internal
Analysis

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 ANALYZING THE INTERNAL
ORGANIZATION

Creating Value
By innovatively bundling and leveraging their resources
and capabilities; by exploiting their core competencies
or competitive advantages, firms create value.

Value is measured by:

• Product performance characteristics
• Product attributes for which customers are willing to
pay

Superior value  Above-average

returns
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 ANALYZING THE INTERNAL
ORGANIZATION

The Challenge of
Analyzing the Internal
Organization
Strategic decisions
● Are non-routine
● Have ethical implications
● Significantly influence the firm’s
ability to earn above-average returns
Strategic leaders make effective
decisions regarding the firm’s resources,
capabilities, and core competencies and
decide on their use
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 ANALYZING THE INTERNAL
ORGANIZATION

The Challenge of
Analyzing the Internal
Organization
Managers face uncertainty on many
fronts
● Proprietary technologies
● Changes in economic and political
trends, societal values and shifts in
customer demands
● Environment – increasing complexity
Intraorganizational conflict
● Results from decisions about core
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 ANALYZING THE INTERNAL
FIGURE 3.2 ORGANIZATION
Conditions
Affecting
Managerial
Decisions
About
Resources,
Capabilities,
and Core
Competence
s

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 ANALYZING THE INTERNAL
ORGANIZATION

The Challenge of
Analyzing the Internal
Organization
Learning
● Generated by making and correcting
mistakes; can be important in creating
new capabilities and core competencies
Judgment is required under these
conditions
● Decision makers often take intelligent
risks
● With good judgment, successful
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 RESOURCES,
CAPABILITIES, AND CORE
COMPETENCIES
Resources and superior
Core capabilities that are
Competencies sources of competitive
advantage over a firm’s
rivals
An integrated and
coordinated set of actions
Capabilities
taken to exploit core
competencies and gain
competitive advantage
Providing value to
Resources customers and gaining
•Tangible
•Intangible competitive advantage by
exploiting core
competencies in individual
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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 RESOURCES,
CAPABILITIES, AND CORE
COMPETENCIES
Core RESOURCES
Competen • Are the source of a firm’s capabilities
cies
• Are broad in scope
• Cover a spectrum of individual,
social, and organizational
Capabiliti phenomena
es
• Represent inputs into a firm’s
production process
Resource
• Alone, do not yield a competitive
s advantage, i.e., by themselves do
•Tangib not allow firms to create value that
le results in above-average returns
•Intang
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 RESOURCES,
CAPABILITIES, AND CORE
COMPETENCIES
TYPES OF RESOURCES
Tangible Resources
• Assets that can be seen, touched,
and quantified
Intangible Resources
Assets rooted deeply in the firm’s
•

history, accumulated over time

• In comparison to ‘tangible’
Compared
resources,to tangible
usually resources,
can’t be seen or
intangible resources are a superior
touched
source of core competencies
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RESOURCES, CAPABILITIES
AND, CORE
COMPETENCIES
TYPES OF RESOURCES

Tangible Resources
• FINANCIAL RESOURCES
• ORGANIZATIONAL RESOURCES
• PHYSICAL RESOURCES
• TECHNOLOGICAL RESOURCES

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 LET’S PLAY !
• Identify the following details in
their corresponding Tangible
Resources.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  1. Plants and Equipments
 2. Reporting Structure
 3. Cash
 4. Patents
 5. Distribution Facilities
 6. Trademark
 7. Copyrights
 8. Product Inventory
 9. Machineries
 10. Systems and Procedure
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RESOURCES, CAPABILITIES
AND, CORE
COMPETENCIES
TYPES OF RESOURCES
Tangible Resources
• FINANCIAL RESOURCES - the firm’s capacity
to borrow and generate internal funds
• ORGANIZATIONAL RESOURCES - formal
reporting structures
• PHYSICAL RESOURCES - sophistication and
location of a firm’s plant and equipment;
distribution facilities; product inventory
• TECHNOLOGICAL RESOURCES - stock of
technology, such as patents, trademarks,
copyrights, and trade secrets
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RESOURCES, CAPABILITIES
AND, CORE
COMPETENCIES
TYPES OF RESOURCES
Intangible Resources
• HUMAN RESOURCES
• INNOVATION RESOURCES
• REPUTATIONAL RESOURCES

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
 LET’S PLAY !
• Identify the following details in
their corresponding Intangible
Resources.

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
  1. Brand name
 2. Skills
 3. Product Quality
 4. Scientific Capability
 5. Collaborative Ability
 6. Durability
 7. Reliability
 8. Positive feedback to suppliers
 9. Knowledge
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RESOURCES, CAPABILITIES
AND, CORE
COMPETENCIES
TYPES OF RESOURCES
Intangible Resources
• HUMAN RESOURCES - knowledge;
trust; skills; collaborative abilities
• INNOVATION RESOURCES - scientific
capabilities; capacity to innovate
• REPUTATIONAL RESOURCES - brand
name; perceptions of product quality,
durability, and reliability; positive
reputation with stakeholders, e.g.,
suppliers/customers
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 RESOURCES,
CAPABILITIES, AND CORE
COMPETENCIES
CAPABILITIES
Core
Competen ■ Emerge over time through complex
cies
interactions among tangible and
intangible resources
■ Stem from employees
Capabiliti
es
• Unique skills and knowledge
• Functional expertise
■ Are activities that a firm performs
Resource
s
exceptionally well relative to rivals
•Tangib ■ Are activities through which the firm
le
•Intang adds unique value to its goods or services
ible over an extended period of time
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 RESOURCES,
CAPABILITIES, AND CORE
COMPETENCIES
Core CAPABILITIES (cont’d)
Competen
cies
■ Exist when resources have been
purposely integrated to achieve a
specific task or set of tasks
■ Are often developed in specific
Capabiliti
es
functional areas
• Distribution
• Human resources
Resource • Management information systems
s • Marketing
•Tangib • Management
le • Manufacturing
•Intang
ible • Research & Development
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 RESOURCES, CAPABILITIES
AND, CORE
COMPETENCIES
TABLE 3.3

Examples of
Firms’
Capabilities

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 BUILDING CORE
COMPETENCIES
Core
Competen TWO TOOLS FIRMS USE TO IDENTIFY
cies AND BUILD CORE COMPETENCIES:
• Four Specific Criteria of Sustainable
Competitive Advantage that can be used
Capabiliti
to determine which capabilities are core
es competencies
• Value Chain Analysis - this tool helps
select the value-creating competencies
Resource that should be maintained, upgraded, or
s
•Tangib developed and those that should be
le outsourced
•Intang
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 BUILDING CORE
COMPETENCIES
The Four Criteria of
Sustainable Competitive
Advantage
Capabilities must fulfill four specific
criteria in order to be
CORE COMPETENCIES
1. Valuable
2. Rare
3. Costly-to-imitate
4. Nonsubstitutable capabilities
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 BUILDING CORE
COMPETENCIES
The Four Criteria of
TABLE 3.4
Sustainable Competitive
The Four Advantage
Criteria of
Sustainable
Competitive VALUABLE CAPABILITIES
Advantage
• Help a firm neutralize threats or
exploit opportunities
RARE CAPABILITIES
• Are not possessed by many
others
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 BUILDING CORE
The COMPETENCIES
Four Criteria of Sustainable
Competitive Advantage
COSTLY-TO-IMITATE CAPABILITIES
TABLE 3.4 • Historical: A unique and a valuable organizational culture or
The Four brand name
Criteria of • Ambiguous cause: The causes and uses of a competence are
Sustainable unclear
Competitive • Social complexity: Interpersonal relationships, trust, and
Advantage
friendship among managers, suppliers, and customers.
• Political Complexity and Government Regulations: Political
connection in business operation is a competitive advantage as
the power to elect officials is also dictated by the business
community.

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 BUILDING CORE
COMPETENCIES
The Four Criteria of Sustainable
TABLE 3.4 Competitive Advantage
The Four NONSUBSTITUTABLE CAPABILITIES
Criteria of
Sustainable This refers to condition where there is no
Competitive
Advantage
strategic equivalent to the firm's existing
capabilities. The existing firm has capabilities and
resources where other terms cannot imitate due
its uniqueness. The firm's strategic value of
competitiveness increases as they become more
difficult to imitate or substitute.

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 BUILDING CORE
COMPETENCIES
The Four Criteria of Sustainable
Competitive Advantage
SUSTAINABLE COMPETITIVE ADVANTAGE
1. Exists only when competitors cannot duplicate
a firm’s strategy or when they lack the
resources to attempt imitation
2. Exists until competitors can successfully
imitate a good, service, or process
3. Lasts for a relatively long period of time if all
four of the criteria discussed are satisfied

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 BUILDING CORE
COMPETENCIES
The Four Criteria of Sustainable
Competitive Advantage
COMPETITIVE CONSEQUENCES
Focus on capabilities that yield competitive parity and
either temporary or sustainable competitive advantage

PERFORMANCE IMPLICATIONS
Parity = average returns
Temporary advantage = average to above average
returns
Sustainable advantage = above average returns using
valuable, rare, costly-to-imitate, and nonsubstitutable
capabilities

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 BUILDING CORE
COMPETENCIES

TABLE 3.5

Outcomes
from
Combination
s of the
Criteria for
Sustainable
Competitive
Advantage

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 BUILDING CORE
COMPETENCIES
VALUE CHAIN ANALYSIS
• Allows the firm to understand the
parts of its operations that create •

value and those that do not

• A template that firms use to:
• Understand their cost position
• Facilitate the implementation of a
chosen business-level strategy
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 BUILDING CORE
COMPETENCIES
VALUE CHAIN ANALYSIS
• Both value chain (primary) and
support activities should be
analyzed •

• Competitive landscape demands

that value chains and supply
chains be examined in a global
context
• Each activity should be
examined relative to
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 BUILDING CORE
COMPETENCIES
VALUE CHAIN ANALYSIS
To become a core competence
and a source of competitive
advantage, a capability must •

allow the firm:

1. to perform an activity in a manner
that provides superior value relative
to competitors, or
2. to perform a value-creating activity
that competitors cannot perform
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 BUILDING CORE
COMPETENCIES
VALUE CHAIN ANALYSIS
VALUE CHAIN ACTIVITIES: activities
the firm completes in order to produce •

products and then sell, distribute, and

service those products in ways that
create value for customers
SUPPORT FUNCTIONS: activities the
firm completes in order to support the
work being done to produce, sell,
distribute, and service the products
the firm is producing
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 BUILDING CORE
COMPETENCIES

FIGURE 3.3

A Model of
the Value
Chain

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 BUILDING CORE
COMPETENCIES
VALUE CHAIN ANALYSIS
FIGURE 3.4

Creating •

Value
through
Value Chain
Activities

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 BUILDING CORE
COMPETENCIES

FIGURE 3.5

Creating
Value
through
Support
Functions

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 BUILDING CORE
COMPETENCIES
VALUE CHAIN ANALYSIS
• SOCIAL CAPITAL - when firms have
strong positive alliances with
suppliers and customers •

• TRUST - is required to build social

capital whereby resources such as
knowledge are transferred across
organizations
• JUDGMENT - pivotal in evaluating a
firm’s capability to execute its value
chain activities and support
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 COMPETENCIES, STRENGTHS,
WEAKNESSES, AND STRATEGIC
DECISIONS

What a firm can

INTERNAL do:
ORGANIZAT Function of resources,
capabilities, and
ION core competencies
STRATE
GY
What a firm might
EXTERNAL do:
ENVIRONM Function of opportunities
in the firm’s external
ENT environment

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permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.