CHAPTER FIVE:

INTERNAL
ENVIRONMENT:
CAPABILITIES AND
COMPETENCIES

C H R I S T I N E J O Y V. A B C E D E
 CHAPTER OUTLINE:
 Resources and Capabilities
 Core Competencies
 Value Chain Analysis and
Outsourcing
 Strengths and Weaknesses Analysis
 Competitive Strength Assessment
 Corporate Capability Factors
 Diagnosing Corporate Capabilities

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 Resources
and
Capabilities
Organizations formulate strategies based

on corporate strengths and weaknesses.

Corporate strengths and weaknesses are

determined based on organizational

resources, capabilities and competencies.

. Resources
 Resources are all kinds of inputs like  Organizational resources are tangible
material, components, parts, machinery, and intangible resources. Tangible
equipment, capital, human resources resources can be seen and quantified like
including talented employees, competent buildings, machinery, equipment and
technical personnel and efficient vehicles. Intangible resources are those
managers. Though the resources are rooted deeply in the organization's
more essential to an organization, they history and that have accumulated over
alone do not yield a competitive time.
advantage.
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Factors that
determine what Competitive
Superiority
Appropriate the
Profits
constitutes a
Resource
valuable asset, Scarcity
Durability

capacity or
Inimitability Substitutability
competence.

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 Competitive Superiority
 Organizations with different resources
have different degrees of competitive Resource Scarcity
abilities.
 The firms possessing such a scare
 Similarly, companies with best resource possess distinctive
talented and competent human capability over other firms.
resources enjoy the competitive
superiority over other companies in  A resource determines the distinctive
terms of most efficient ideas, customer capability of a firm when a particular
service, low cost and best quality. resource contributing significantly to
the value of the product/service is in
 Similarly, patents determine the
short supply.
competitive advantage.

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 Inimitability
 A resource provides distinctive
capability to the firms in the long-run
if a particular resource possessed by
a firm can’t be imitated/copied easily Appropriate the Profits
by the competitors.  The contributors of these resources
 Firms should develop unique are expected to share the profits
resources based on the following created by the resource providers.
characteristics in order to sustain the The aforementioned contributors are
distinctive capability: Physically like owners/shareholders, human
Unique Resources, Path-dependent resources, input suppliers, output
Resources, Casual Ambiguity, and dealers.
Economic Deterrence.

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 Durability
 It deals with the extent of the time
span that the value of resources
remain. Substitutability
Value of some resources increase  Easy developmental of substitute
over time while the value of some products depreciates the value of the
other resources depreciates over the resource of the product and vice
period. versa.

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 Resource-Based and Organizational Analysis
guidelines that are helpful to analyze an organization’s resources:

Look at
Disaggregate Utilize a Functional
Organizational
Resources Perspective
Processes
• Organizations • After breaking the • After minute
should disaggregate resources into resource analysis,
their resources into minute areas, combine the
minute aspects and attribute each analysis in order to
scan each aspect of minute area to a present an unified
resources in order concerned view of the total
to assess functional organization. to
organization's perspective analyze an
capabilities. organization’s
resources

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 Resources and Competitive Advantage
five-step resource-based approach to internal analysis:

Appraise the
Combine the
corporate
firm’s
capabilities in Select the
Analyze the strengths into
terms of their strategy that
firm’s specific Identify
potential best exploits
resources in capabilities. resource gaps
contribution the firm’s
terms of Identify the and bridge
to profit resources and
strengths capabilities them for
earning capabilities
and that can help upgrading
capacity of the relative to
weaknesses the firm weaknesses.
firm as well as external
. significantly
their environment.
in achieving
sustainable
its mission.
contribution.

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Sustainability of
Resource Inimitability Transparency
Advantage
Transferability Replicability
Sustainability of resource advantage is

determined by two characteristics,

viz., durability and inimitability. Capabilities

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 Inimitability
 The rate at which a firm’s resources
are copied/duplicated by the
competitors.
Transparency
Competitor’s abilities to imitate
include copying the product design by  The degree of openness of a
reverse engineering, copying the company’s abilities, competencies
marketing strategies, scout the talent and talent’s that indicates the
employees, suppliers of inputs and vulnerability for copying.
market intermediaries of the
competitor and copying the
production processes.

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 Transparency
 The degree and speed at which the
competitors can acquire the
capabilities of a firm. Capabilities
 The firm’s capacity to deploy
resources that have been purposely
Replicability integrated to achieve a desired state.
 The competitor’s ability to use
copied resources for the success of
the firm.

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. Capabilities
Intellectual capabilities: Company builds
Capabilities are the organization's capabilities not based on technology, and other
capacity to deploy resources that have physical assets but from the knowledge, skills,
been purposely integrated to achieve
desired end state. talents, intellectual capital and commitment of

Capabilities are the outcomes of its human resources. Providing congenial work
interactions among tangible and environment, so that individual employee’s
intangible resources.
intellectual capital would be synergized into
Capabilities enable firms to create and
organization’s knowledge, skill and
exploit opportunities and develop
sustained advantages. commitment that forms the company’s
intellectual capability is needed.

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 Core
Competencies
Core competencies are a company’s resources

and capabilities that enable the firm to build

competitive advantage over the competitors. It

enable the companies to formulate strategies

and draw strategic actions by converting

competencies into business activities.

Building Core
Competencies
Valuable
Rare Capabilities
All capabilities need not be core Capabilities
competencies. Two tools help us to know

whether a particular capability is a core Costly-to-imitate Non-substitutable

competency or not. The first one consists of
Capabilities Capabilities
four specific criteria and the second one is

value chain analysis.

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 Valuable Capabilities
 It create and add value by exploiting Rare Capabilities
opportunities provided by external
environment to the company.  Those that are possessed by the
competitors rarely. Companies with
rare capabilities exploit external
opportunities to a significant extent,
compared to their competitors. The
following capabilities possessed by
the companies are viewed as rare
capabilities.

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 Costly-to-Intimate
 Those capabilities that pose Non-substitutable
complexity and thereby heavy cost to
competitors to imitate. These  Those that do not have strategic
capabilities include unique equivalents. Non-substitutable
organizational culture, brand name, capabilities include company’s
interpersonal relations, trust, specific capacities like trust,
network with customers, suppliers, relationships, product attributes,
creditors, etc. knowledge and expertise.

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Value Chain
Analysis
Value chain analysis examines the areas of

advantages of low cost and disadvantages of

high costs. It views the business as a process of

activities from the stage of raw material/inputs

to the final stage of delivering the product

including after sales service to the customer.

 Primary Activities
- those business activities that relate and contribute directly to the
manufacture, marketing of the product and creating and adding
value in the chain of operations.

Inbound Outbound Marketing

Operations Service
Logistics Logistics and Sales
activities aim at include
activities
transforming include collection promotional include pre-sales
concerned with
inputs into of finished goods, programmes like service to create
receiving, storing
products. These handling them, advertising, demand and sales
and issuing all
storing them, personal selling and post-sales
kinds of raw activities include transporting them and sales service to
materials and machining, to marketing promotion, sales enhance the value
spare parts to the assembling, intermediaries administration, of product or
manufacturing/se testing, packaging and customers. product delivery service.
rvice centers. and delivering. and the like.

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 How do primary activities add to the value?
Primary activities add to the value of the product by reducing
the cost as well as by improving the quality and convenience.
Now, we shall discuss these aspects.

Inbound Logistics Operations

 include quality verification of raw  Value is added or created when the input is
material at the source, transportation in converted into output. Operations aim at
good condition and efficiently, storage and creation and innovation which in turn
warehousing economically and efficiently enhances the value of the product.
controlled.  Product design directly contributes to the
value as customers that would pay higher
 These activities ensure the quality of raw
price for the product designed in accordance
material that can contribute to the quality with their unexhibited/unexpressed needs as
of the final product. well as conveniences.

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 How do primary activities add to the value?

Outbound Logistics
 the activities of outbound logistics include Marketing and Sales
storage/warehousing, transportation,
handling of products, negotiation with  include product development and mix,
market intermediaries and inventory pricing, place of markets including
management. channels of distribution like wholesalers,
 Efficient performance of these activities retailers, sales force and network
enables the firm to deliver on the marketing and promotional mix including
products in taste to the customer, reduce advertising, personal selling and sales
delivery time and storage. Thereby, it promotion.
reduces the cost of inventory.

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 How do primary activities add to the value?

Service Support Activities

 Pre-sales and post-sales services are quite  help the company enhance the customer
essential for consumer durable, value and reduce the cost by bringing
convenience and luxury goods. Customers coordination among primary activities and
would be willing to pay more when the providing necessary inputs for the primary
service and thereby the continuous and activities. Support activities include:
perfect functioning of the product is Technology development, Human resource
guaranteed and/or ensured. management, General administration, and
Infrastructure.

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Primary
Activities
Valuable
Rare Capabilities
All capabilities need not be core Capabilities
competencies. Two tools help us to know

whether a particular capability is a core Costly-to-imitate Non-substitutable

competency or not. The first one consists of
Capabilities Capabilities
four specific criteria and the second one is

value chain analysis.

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2/1/20XX PRESENTATION TITLE 25
 Table

Category 1 Category 2 Category 3 Category 4

Item 1 4.5 2.3 1.7 5

Item 2 3.2 5.1 4.4 3

Item 3 2.1 1.7 2.5 2.8

Item 4 4.5 2.2 1.7 7

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 The way to get
started is to quit
talking and
begin doing.

Walt Disney

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 Team

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 THANK
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