nce.

O f
a c o re compete
Aa s A.
velop BO on o f BO
th e y w ish to de fo r th e applicati s in the future.
a need if g suppo
rt
utical firm peutic
ie s th a t big pharm e ptovldes stron al for pharmace ru g s a nd thera evel-
ilit n c tic ric d In d
76 o f capab l intellige uld be cri ell gene by big pharma
g artificia competence co ed and s :al firms

I rs e, u s in A iu m -s iz v e s te d e u tic
cou
a s tro n9 BD s a re med e a m ount In e p h~ tm_ac •
Havin g tica l firm
armaceu t only about 259 elop large, com
6 of th peti tiv h~rma.
l in e s e p h a e n ts w as b1op d in g A l.
Most Ch in R&D to de v vestm , Inclu
f s, in ve s tin g ha s a p ll n
tc la s s o f In
n s y s te m s
medicine er,"thtna rtd largef formatio
s. Howev ple, Ch/na3 sect1 at ~ a r was In In ,

l oped
by 2 0
c
2
Interestin
o
5.
u
In
n

g
tr

ly
ie
2017, fo
, th e la
r e
rgest
x am
C h in e s e Investm
rld le
e wo en earning m
a
e
d
n
e
t th
l.
r In A ediocre return s
tives
o f a
fe
b
e l
but 3
p re
/Je
ssure
tc e
e
rl
s
t-ROI,
peclal/y
reduce
to b ecome th h a s b e a rm a execu il l b e able to
s ag o a l arm a , big p h oon w s.. Until
thina hacent years, big ph ade earlier. Thus
c o p ef.u lly, they s nt o f new drug the
. In re 10 perceht a de OA anq A
l. H me
deye/op nd acquisitions
in
down fro
m
o f d e v eloping B of success In the e rg e rs a p h a rm ace • s
th e /n it/al costs h lg t,e r rates n u m b ers ofm
e d iu m -s ized ut,caJ
with
a n d e x perience d fc tln g re cord
s u c ce s sful m •

I
g
their costs r, analysts are pre pharma acquirin z'r. ' ', 2018,
h o w eve ith b ig ,Matdi ,~
th e n, du s try , w /tJ rt [Link] n a , 0 ,, ; al,;Ol'teJ s
eutical In n < !,
g, Fortu mid-sized p h a n h
pharmac hnology firms. better dru n w l/ ib e ~
io te c sing A l to make tt, 2018. Europea S ign s that ioJB arma a ri ~ d
and b J w big pharm
a Is u
h 14; E. C
orb e
. JeweL 2
01 8 ,
, Why big
ph
As.d bfOlech
/eo 201& ili [Link], M
arc
, March 9
;M
elson, 20
18 rs, 20f5,
S
Mukhe, edlp/om t1e,.com h 1: 8. N It m,tte 5,'2W1:W
f::;'rr:es: S. '"""'' big pflatrry, th www.1hepharmalermalette<Com, Marccs: What It Is & why March j 7; B. Atk;r1
"
::
"
and":" :: :: :: :: :: :. ';:'Z,""""'
' otm dletter.
pha
[Link] rch 1: B!fl data an
alyrl
[Link] form
,
4
t
[Link] , P~rmacelJtk.a , d1ata
tt
S,

ews, Ma y, l11formatlca, ww . F. DeAngells, 20 olfram, 21i,14; ~o;-ii~ - [Link]

1 "f1
)' N r r,,~
!>i9 on Al' 7".nbc.n
. , . beltln tl/ 2; Big 11
9p
d,~;::;:,
:Ji arma~
tr us
~~cal ind . ~J;cpm, Aprll._
w
5 16;
n,.com
5; T. W
, Juneem
Dec b •
•••
er 22.
- ,
•
_, •
.[Link], A the board,:Wat/St::: oorna 'fl ~ne~ ww!:"':••'1''1asowlu.f,W o~b [Link],

/fc'':!'f;,:':'(
nd 0 '"f""?J ." , ww
Big data a mises a healthi rv~sp'!!~(le • • •
analytics
pro
a rethin king . .. ~ e:,,nc,' e'.,~s,,~:··? r.. :, ~}.:/
rm
has bi9 pha - - '

•
glo b a l econom ding
e i n :::~lu _are
e v er a l fa ctors in th a li z a ti o n a J,
h s b
th e first two c apt~rs, ~ b ilitie s and glo ncreasingly, in
ro:::::::::
e d in
s deisracusids develo et's ca ~ es., I nration
!:~:tern mpetit1ve advantag antages, parti~ul r y SUs-
A th
J:mcult i r t pdc
o
making it e a vital patli to eff s to e~elop comp harma companie ' and they need
etitive ad
v
s a
b p
appears to .' Innovative action: are required by big ts while improvin the success of
tainable o n e s . er c o s • g cial
p n ew d rugs more ~u~ckly and_ at low shows, they are tr yifulng to usebartifi
to develo at they develo A 'e• Openmg Case nalytics that h ope lycan ecome a
th b a
_tlie drugs to help develop. a il1t1es in big data
e p ca p
intelligencetence. . o • • • to most firms' s
ue-
e c o m p o v a ti l
cor A · ph nies, in n : critica . We
ase for big arma compa evelop i n n o v ; i
,s 1s the cns that d c ; r e c fiompetence h
to e;p~:i: ow 1rms u
mea rms seek _ apter and
cess. This discuss c o r ; : ; fi m th is c h
J 0 ;
:
efin e a n d :: ; c ;h es a c o n h : ;
d
a pa b ilit ie s :p em . As
t ; s i ; : ; : :/io re-
~ and c B . , : c
;;;:urc~t1 to h o w : : e : ~ : ~ e ~ ar 1· kngd otn m •
. cn cal ~od:~ s that e in e o ma1or
t : : e ;~v:~:~i te chnologie
; ~ : e : g h w li livery
:::i;n:e; y spawn , sue as th e 787 Dream a : : The first de g
i:::::;i~: D he projects the M ein
.,
•,

th e 78 7-10 reamlin was made to

.
o r e A ir lines on b / 2 6 , 2018. Bo -
f p a s
... ' o
. es its in er
v a tio m ena:i:nr: rm to deliver reli he products to cu
o fi
bel1ev more ;~;~ntalinn ost, Ae in th.1 s c apt er, £itrms and
tome~s a n d a t a lower c h. s we discuss d
a ti
y
ons-such those we mention e r e -.a ch ,e • ve strateg· titiveness an
o r g a niz g:~ :~ : ~ e
as
e~average returns by acquiring b !Jm?, and levera es for
eharn abov ~ n i' e n ,,· e 1 r resout r,c
ki ppo~u nal .-ironme
t e purpose of ta
h ~ v a n tage of o I ies m
the exter n ,n wny
.s
r ! :
value fo
t a~create fi
pers. 4
rm deve;om sand nages reso rces .In ays tfwt ~:rt•· i.'.Ore compt•·
id f th e
tencie:enan co . ma u J ' w • 11·11 Iate tr
m p e t1 tive adva ntages , c. ompetitors wtli/ t Vt>ntu,11/i', h. \ ,• al Odiv to duplicaw
n e fl t. fi e -c '" )' ' ,tiv e s hll
e
the b ' s of an y Irms va lu a tt
reatmg str Ct HI ••~ ,1 [Link] I
// c •t
Ynntug
 Chapter J: The Internal Organlz.1tlon: Resources, Capabtlitles, Core Competencies, and Competitive Adv~ntages 77

a Hmitcd life.\ Because of this, the question of duplication of a competitive advantage is

not if it will happen, but when. In general, a competitiv e advantage's sustainability is a
function of three factors:
1. The rate of core competenc e obsolescence because of environme ntal changes
2. The availability of substitutes for the core competence
J. The imitability of the core competenc e6
For all firms, the challenge is to effectively manage current core competencies while
simultaneously develqping new ones. 7 Only when firms are able to do this can they expect
to achieve strategic competitiveness, earn above-average returns, and remain ahead of
competito rs in both the short and long term.
We studied the general, industry, and competito r environme nts in Chapter 2. Armed
with knowledge about the realities and conditions of their external environment, firms
have a better w1derstanding of marketplace opportunit ies and the characteristics of the
competitiv e environm ent in which those opportunit ies exist. In this chapter, we focus
on the firm. By analyzing its internal organization, a firm determine s what it can do.
Matching what a firm can do (a function of its resources, capabilities, and core competen-
cies in the internal organization) with what it might do (a function of opportunities and
threats in the external environme nt) yields insights for the firm to select strategies from
among those we discuss in Chapters 4 through 9.
We begin this chapter by briefly describing conditions associated with analyzing the
i firm's internal organizati on. We then discuss the roles of resources and capabilities in
developing core competencies, which are the sources of the (irm's competitive advantages.

' Included in this discussion are the techniques firms use to identify and evaluate resources
and capabilities and the criteria for identifying core· competencies from among them.
Resources alone typically do not provide competitive advantages. Instead, resources cre-
ate value when the firm uses them to form capabilities, some of which become core
competencies, and hopefully competitive advantages. Because of the relationship among
resources, capabilities, and core competencies, we also discuss the value chain and exam-
ine four criteria that firms use to determine if their capabilities are core competencies
and, as such, sources of competitive advantage. 8 The chapter closes with comments about
outsourcin g as well as the need for firms to prevent their core competencies from becom-
ing core rigidities. The existence of core rigidities indicates that the firm is too anchored
to its past, a situation that prevents it from continuously developing new capab~lities and
core competencies.

3-1 Analyzing the Internal Organization

3-1 ~ The Context of Internal Analysis
One of the conditions associated with analyzing a firm's internal organization is the real-
ity that in today's global economy, some of the resources that were traditionally crit-
ical to firms' efforts to produce, sell, and distribute their goods or services-s uch as
labor costs, access to financial resources and raw materials, and protected or regulated
markets-a lthough still important, are now less likely to be the source of competit_ive
a<[Link]. 9 An importru1t reason for this is that an increasing number of firms are usmg A global mind-set is the
their resources to form core competencies through which they successfully implemen t an ability to analyze, unJerstand,
intcrnati1mal strategy (discussed in Chapter 8) as a means of overcoming the advantages and manage an internal
organization ,n wJy"> th,1t
created hy more traditional resources. . . , are not de~w11tknt 1)11 th~
Given the increasing importance of the global economy, those analyzmg their ~rms ,IS':>lii-,,pl1tm~ ul ., 'llt1qlt'
intrrnJI urg,111izatiun should use a global mind-set to do so. A global mind-set 1s the LOUnliY, \ llllllll', \)I 1,mr~,l
78 Part I: Strattgi( M
ariag,
"''ri,
'~~11
ways th
bT manage an Internal organization in
a 11ty to analyze, understand, and ,10 at are
end ent on the ass um ptions of a single couJttry, culture, or context 8
dep e thn1
ficial bou ndaries, those with II global mind-set recogniz:ca~s
th
are able to span arti
allow understanding of and a at th
~r
firms must pos sess resources and capabilities that -specific , PProPr'qte,t
pet itiv e situ ations tha t are influenced by country al ,aq0rs a e
responses to com .
• cuItures. Using a global mind-set to analyze the intern organizar100
umque rts to outpe~form rivals." has 1~d
ific ant ly hel p the firm in Its effo
pote~tial to sign to e
l organization requtres that evalua
Finally, anaJyzing the firm's interna This perspective sugrs e;(a 'tiih
th e firm's entire portfolio of resources and capabilities. b'l' • th Oth con-.&est s th''e
ind'lvt'd ual firms possess at least some resources and cap
a I ities at er ·•1Pan 1· qt
Of Jir es d
t not in the sam e com bin atio n. Resources are the source capabi Jes 8 o
not-at leas . • tu e core com ' %e
of wh',chIcad to the development of core competenC1es; in rn,d'somh Pete
the firm . 12 Understan mg ow to leverag0cies
ge for . .
may ,Iead to a competitive advanta itie
d
s is 8 key outcome ecision ll'lak
e the
fi dle of reso urc es and cap abil
urns unique bun st t th tion shi p/;s seek
en ana lyz ing the inte rna l org anization.U Figure 3.1 il~u. ra es e rela 1llon g
wh sho
cap abi litie s, cor e com pete ncie s, and compet1t1ve advantages and
resources, next, fir:s hol\-
tegic competitiveness. As we tdiscuss
their integrat~d use can lead to stra value for cuS omers. ~se
the resources mtheir internal organization to create

3-1 b Creating Value t Will

their reso urce s as the fou nda tion for producing goods or services tha te
Firms use formance characterist'icscrea
tom ers.'• V1l u1 is mea sure d by a product's per
p· a
value for cus .
. tes for which customers are w1l. lmg to pay. irms create value by i nnov
1ld
[Link] attribu bil' • d e com pet . a.
Value is measured by a • IYbundling
tive • and leveraging their resources to fonn [Link] ities anthcord enc1es·,,.
petj
com
product's performance
F•trms Wit. h a competitive advantage crea te more value ,or cusbtom•ers (an o tors,~
~haracteristics and by . ,
roach to dom. g usm ess an app roach th :
e' app
vvilJmart uses its every day low pnc
• "
its attributes for which ,u~1
distnb a_t is
customers are willing to pay. finn 's core com petencie s, such as infonnation technology and Ution
grounded in the
F' Internal Analysis
igure 3.1 Components of an

Strategic
Competi-
tiveness

Competitive
Advantage

Core
....,Competencies
t
.... Capabilities -
Resources
,...
• Tangible
• Intangible

• Outsource
• Rare
• Costly to Imitate
• Nonsubstitutable
O,,ptff 3: The lntffl\11 ()rganlratlon: Rmurces, Capabllltles. CM Competencies. and Competitive Advantages 19
I
channels) to create value for those seeking to buy products at a low price compared to
competitors' prices for thdse products. The stronger these firms' core competencies, the
greater the amoutit of value they're able to create for their customers.17
Ultimately, creating value for customers is the source of above-average returns for a
firm. What the flrm intends regarding value creation affects its choice of business-level
strategy (see Chapter 4} and its organizational structure (see Chapter ll). 18 In Chapter 4's
discussion of business-level strategies, we note that value is created by a product's. low
cost, by its highly differentiated features, or by a combination of low cost and high differ-
entiation compared to competitors' offerings. A business-level strategy is effective only
when it is grounded in exploiting the firm's capabilities and core competencies. Thus, the
successful firm continuously examines the effectiveness of current capabilities and core
competencies while thinking about the capabilities and competencies it will require for
future success.19
At one time, firms' efforts to create value were largely oriented toward understand-
ing the characteristics of the industry in which they competed and, in light of those
characteristics, determining how they should be positioned relative to competitors. This
emphasis on industry characteristics and competitive strategy underestimated the role
of the firm's resources and capabilities in developing core competencies as the source of
competitive advantages. In fact, core competencies, in combination with product-market
positions, are the firm's most important sources of competitive advantage. 20 A firm's core
competencies, integrated with an understanding of the results of studying the condi-
tions in the external environment, should drive the selection of strategies. 21 As Clayton
Christensen noted, "successful strategists need to cultivate a deep understanding of the
processes of competition and progress and of the factors that undergird each advantage.
Only thus will they be able to see when old advantages are poised to disappear and how
new advantages can be built in their stead:'22 By emphasizing core competencies when
selecting and implementing strategies, companies learn to compete primarily on the basis
of firm-specific differences. However, while doing so they must be simultaneously aware
of changes in the firm's external environment. 23 •

3-1 c The Challenge of Analyzing the Internal Organization

The strategic decisions managers make about the internal organization are nonrou-
tine,24 have ethical implications,25 and significantly influence the firm's ability to earn
above-average returns.26 These decisions involve choices about the resources the firm
needs to collect and how to best manage and leverage them.
Making decisions involving the firm's assets-identifying, developing, deploying,
and protecting resources, capabilities, and core competencies-may appear to be rel-
atively easy. However, this task is as challenging and difficult as any other with which
managers are involved; moreover, the task is increasingly internationalized.27 Some
believe that the pressure on managers to pursue only decisions that help the firm meet
anticipated quarterly earnings makes it difficult to accurately examine the firm's inter-
nal organization.28
The challenge and difficulty of making effective decisions are implied by preliminary
evidence suggesting that one-half of organizational decisions fail. 29 Sometimes, mistakes
are made as the firm analyzes conditions in its internal organization.30 Managers might,
for example, think a capability is a core competence when it is not. This may have been
the case at Polaroid Corporation, as decision makers continued to believe that the capa-
bilities it used to build its instant film cameras were highly relevant at the time its com-
petitors were preparing to introduce digital cameras. In this instance, Polaroid's decision
makers may have concluded that superior manufacturing was a core competence, as was
the firm's ability to innovate in terms of creating value-adding features for its instant
 Part I: Strategic Ma nag ,~11
"P1Jt1

en analyzing and managing

cameras. ff a mistake is made wh st have the confidence a
s mu
firm's resources, decision, maker• JI to
take corrective acu ons .
admit it and its ~iSlak~s; in fact, the
A firm can improve by studying
corre~t.a~g miSlakes can be
learning generated by making and abdiaes and core con-i_
cap
important in the creation of new
t can be le~rned from fail lire
petencies. -'2 One capability tha have obviously changed Its .
.as when to qua·t. Polaroid should
I stra teg y ear . than 1•1did •so it could have
1er
demise. An'other potential exa
Amplify unit (founded 2011), wh
bee n abl
mple concerns News Cor
e to

ich ~as created t~ change

avo·Id
p.'s

of_ mid-~015, the .firm had

the way children are taught. As
unit, :'hich ~akes tablets,
invested over $1 billion in the
ers testmg s~rVJces. In 2014
sells online curricula, and off
lion loss, facmg competition'
Amplify generated a $193 mil
publishers enhancing their
from well-established textbook
products. In September 20is,
own ability to sell similar digital
pl~ ~o a team ~[ managers
News Corp. decided to sell Am 51
a ~~ificant loss. .
and private investors, incurring 1ons-uncertamty, coll)_
As we discuss next, three condit
conflict-affect managers as
plexity, and intraorganizational
anization and make decisions
they analyze the internal org
).
about resources (see Figure 3.2
When studyi ng the interna l organization, managers face
ber of issues, including thos
uncertainty because of a num nging econonii;
• of new pro prietary technologies, rapidly cha
ameras creatld a ietaJ values, and
and pol itical trends, transformations in soc
t ofvalue for customtrs. 34 on~ental uncertainty
~ shi fts in customers' demands. Envir
trlbuttd to the_ ~;,,, es to examine
fllllY havt con
initial inc rea ses the complexity and ~ange of issu
[Link] create value and its . Consider how
35

wh en stu dyi ng the internal environment n.

filing for bankruptcyin 1001. to use resources at coal cor
uncertainty affects the ways rra y En erg y
y Corp. and Mu
panies such as Peabody Energ nifica nt
or more with sig
n suffering in the last decade
Corp. Coal companies have bee such as natural gas. They
the com petitio n from cleaner forms of energy
reg ulation s and administration
ed som e by the red uct ion of regulations by the Trump
have been aid they sti!i
m cle ane r and che aper forms of energy remains. Thus,
but the competition fro
uncertain environment.
have to deal with a complex and
Resources, Capabilities,
g Managerial Decisions about
Figure 3.2 Conditions Affectin
and Core Competencies

racteristics of
·Uncertainty Uncert,lnty exists about the cha
environments
the firm's general and industry
and customers' needs.

! Complexlty results from the

interrtlatlon,tuPI
, ·condlti~ns • Complexity pin g a firm.
~mong conditions sha J f • •

exist among
lntraorganizational Conflicts lntraorganizational conflicts may
well as among
managers making decisions as
s.
those affected by the dtcJsion

-. · • I ... •
 81
~ nd Compettt~ Advan~
0,1ptrf 3: TM Internal Organization: R~rus, <:apablltt~. Cort Comptttnc a

Biases regarding how to cope with uncertainty affect decisions made a~o~
to manage the firm's resources and capabilities to form core competencies.
h0 W , h d • •ons are 'gh made about
Additionally, intraorganizati onal conflict may sunace w en ecisi . f
the core competencies a firm should develop and nurture. Confl~ct mi t sur ace
in the energy companies mentioned above about the degree to which resourc:s and
capabilities should be used to form new core competencies to support newer clean
technologies." . . .
In making decisions affected by these three conditions, Judgment 1s requrred.
Judgment is the capability of making successfuJ decisions when n_o obviously correct
model or rule is available or when relevant data are unreliable or incomplete. In such
situations, decision makers must be aware of possible cognitive biases, such as over-
confidence. Individuals who are too confident in the decisions they make about how
to use the firm's resources may fail to fully evaluate contingencies that could affect
those decisions. 37
When exercising judgment, decision makers often take intelligent risks. In the current
competitive landscape, executive judgment can become a valuable capability. One reason
is that, over time, effective judgment that decision makers demonstrate allows a firm to
build a strong reputation and retain the loyalty of stakeholders whose support is linked
to above-average returns. 38
Finding individuals who can make the most successful decisions about using the
organization's resources is challenging, and important. The quality of decisions regarding
resources and their management affect a firm's ability to achieve strategic competitive-
ness. Individuals holding such key decision-making positions are called strategic leaders.
Discussed fully in Chapter 12 and for our purposes in this chapter, we can think of strate-
gic leaders as individuals with an ability to examine the firm's resources, capabilities, and
core competencies and make effective choices about their use.
Next, we consider the relationships among a firm's resources, capabilities, and core
competencies. While reading these sections, keep in mind that organizations have more
resources than capabilities and more capabilities than core competencies.

3-2 Resources, Capabilities,

and Core Competencies
Resources, capabilities, and core competencies are the foundation of competitive advan-
tage. Resources are bundled to create organizational capabilities. In turn, capabilities are
the source of a firm's core competencies, which are the basis of establishing competitive
advantages.39 We show these relationships in Figure 3.1 and discuss them next.

3-2a Resources
Broad in scope, resources cover a spectrum of individual, social, and organizational phe-
nomena. By themselves, resources do not allow firms to create value for customers as the
foundation for earning above-average returns. Indeed, resources are combined to form
capabilities. 4°For example, Subway links its fresh ingredients with several other resources,
including the continuous training it provides to those running the firm's fast food restau-
rants, as the foundation for customer service as a capability; customer service is also a
core competence for Subway.
As jLc; sole distribution channel, the Internet is a resource for [Link]. The firm
use11 the Internet to sell goods at prices that typically are lower than those offered by
compet,tors selling the same goods through more costly brick-and-mor tar storefronts.
By [Link] otha re-,ources (such as access to a wide product inventory), Amazon has
 Part I: Str,tf91c Mlnaqem
tnr In
lllit1

azon$ capabilir in terms

1 Of
cu sto me r ser vic e. Am
for excellent que value ft
developed a ~putation nc e as we ll in that the firm creates uru
re co mp ete or
customer service Is a co es to them. • ,
ser vic es it pro vid pr od uq ; ~
cu5fomers through the fin ed in Ch ap ter I as inputs to the fir
ms 0
rce s (de s that
Some of a firm's resou an gib le. T1 ng lbl1 resourc~• are ~~s~t
ile others are int
process) are tangible wh uip ment, manufactur ing. facilities, di s,
an tif ied . Pr od uc tio n eq l O arb£ tan le resource
can be observed and qu ex amp es o·
• es are key tangibJs.
tin g str uc tur es are a
t 'b utt·on centers, and formal repor • e1in
n oil an d ga s pip m's h·18 e
Fo r energy gia · Kinder Morgan, its stock of
nt d dee pIY1·n the fir tor
res ou rce s are ass ets that are roote ~ly ze an d in-/
resource. Intangible
an d are rel ati ve ly dif fic ult for competitots _to an ou rce
accumulate over time, nes, intangible res
be dd ed in unique patterns of routi t
tate. Because the y are em
an d im ita te. Kn ow led ge,. truS betwe~n tnana/
tors to analyze ique ways
are difficult for competi bil itie s, org an iza tional ro_uanes ~tbe un
geria l ca pa ati_on, brand nallle
ers and employees, mana ca pa bil itie s, the capacity for mnov th ?ple (such'
er) , sci en tifi c
people work togeth w it interacts Wl pe
for its goods or services and ho gib/e
the firm 's rep utatio n
pp lie rs) , an d or ga niz ational culture are mtan
and su
as employees, customers,
s engage
resources.•1 nu rtu rin g to ma int ain their ability t~ help ~m
uir e resourc
. Intangible resources req ple, brand has long been a valuable intangible
m competitive battles. Fo
r exam d Superdry," a cas:
e sam e is tru e for "logo-laden British bran 0
for Coca-Cola Comp an y. Th
wi ll rea d, Su pe rG rou p. PL~, the wner of
the chapter. As you enhance
highlighted at the end of few ye ars ag o in its efforts to mamtam and
blems a ach are attempting
Superdry, encountered pro Ne w ma nagement and a new appro
pe rdr y bra nd .
the value of the S,u
nd. 42 importa
to renew the Superdry bra Focus, intangible resources may be even more
As noted in the Strategic d in tt
ete nc ies . Of co urs e, thr ee of the firms describe
comp Secllri e
in the development of core se Brown & Susma,nn, Genpact, and Document
Strategic Foctis-:-Fainsbert
Ma etencies on th ~
e firm s, wh ich co mm on ly base their core comp estme:ir
Systems-were servic
n He da M ini ng Co ~p _an y, which has significant inv co ts
human capital. Howeyer, eve core
nt, mu st als o ha ve va lua ble human capital for its m-
me
in specialized mining equip in un de rgr ou nd mi nin g."
rrow- ve o categories. Th
petence in "high grade, na an gib le resources are grouped int physical, e
tan gib le an d int
For_ each analysis~ l, organizational,
pn m~ ry cat eg on es of tan gible resources are financia of intangible resourc and
four categories es are
cal (se. e Table 3.1). The three primary
technolog1 d ).
. nal (see Table 3.2
human, mnovat10n, an reputatio

ources
Table 3.1 Tangible Res
borrow
Ananclal Resources • The firm's capacity to ernal operations
lity to generate funds through Int
• The firm's abi
ures
Organizational Resources • Formal reporting struct
ent and th
Tangible resources are a firm's plant and equipm
ed Physical Resources • The sophistication of ation e
assets that can be observ attractiveness of Its loc
and quantified.
• Distribution facilities
lntanglblt resources • Product Inventory
are assets that are rooted I
I ht5i
deeply in the firm's hist
ory,
Technological Resources • Availability of technrks,oa:t;::d:t:::urces such as copyrlg
and patents, tra de ma
accumulate over time,
are relatively difficult for
and J. B. Barney 1991 Firm resources and sustained competitive
adv a9,mt>11t I J 101
compe111ors ro analyze Sources: Adapted fromtem antage, Journal ofMan •
Grant, 1991 Con • ,
Analysis, Cambridge· UK. Bfa k ff Buslness, 100-JOl.
1m1td((.l
R. M. porary Strategy • • .. c we
,

1
 Table 3.2 Intan gible Resources

Human [Link] f • Knowfedge

• Trust
• SkiHs
• Abftftles to collaborate with othe rs

lnno vatto n Resources • Ideas

•• Scientific capabilities
• capa city ,o innovate

• Brand nam e durability, artd rellabHlty

Reputational Resources
eptio ns of prod uct quaf Ity, h as suppllers and customers
• Perc ers sue
• Positive repu tatio n with stake hold
M agem enr Journ al, 13: 136-1 39.
•
"ble resources. srraregic an
lntan 9 ' kwell Business, 101-1 04.
The strat~ ic analysis of
Sources: Adap ted from R Hall, 1992. . b ·dge· U.K.: 91ac
gy Ana/yJ,s, Cam " •
R. M. Grant, 1991, Conremporory Srrate

. d the status of its physical facilities

Tangible Resources h fi c1a1 .
, b orro wing capacity an be estabhshe t h rou g man
. d
,
As tangible resources, a fimns fi
'ble resourcesc. canthe value of all of th e In11 S .assets
le. The value of man y tang i
are visib d not account 431or The value of tangible resources is. also
statements, but these statemen ts ~ urce s. deli • 1 b . ess
d som e
• tangible
m
reso 't • ..Jifficult to derive a tion a b usin "
because they• disregarth h ard to leve rag e- I IS w
lane is a tang ible resource, ut You
airp
constrained because ey are• I put the
p/;: Ute s at the sam e time. You can't
or value from a tangible resou~ce. Fo~ am l
time And the sam e goes for the financia
can't use the same airplane on fiveat th eeren same •
same crew on. five different hroutes . l "44 s nec essa ry to use
investment you've madeonint e airp ane. 'bl man y of the proc esse . . th
. Alth h prod ucti assets are tang1 e, ing Com pan y des cnb ed m e Strategi c
oug . . h •f H la Min . .th .
rietary processes associated ':1 a tang as
th are intangible as m t e case o ec ible
F em Th the learning and potential prop ngib
can have uniq ue inta hn l • th d le attn bute s, such
ocus. us,h manui,[Link] facilities' evelop
reso urce, sue as turing processes, and tee o og1es at
quality control processes, unique manufac
45
over time.

. . ..
Intangible Resources le resources are a sup eno r sou rce of c~~a b1ht ies
Compared to tangible resources, intangib s mte llec-
fact, in the global economy, a firm
and subsequently, core competencies. In
46
assets.47
in corp orat e success than do physical
• tual capital often plays a more critical role is an incr easi ngly
man age intellectual cap ital
Because of this, being able to effectively 48
lop.
important skill for today's leaders to deve tors to
Because intangible resources are less visible and mor e diff icul t for com peti
rath er than
te for, firms pref er to rely on them
understand, purchase, imitate, or substitu e unob-
tang ible reso urce s as the foun dati on for thei r capabilities. In fact, the mor
on· te capa-
mor e valuable that reso urce is to crea
servable (i.e., intangible) a .resource is, the urces,
sources is that , unli ke mos t tang ible reso
bilities.49 Another benefit of [Link] doe s not
sha ring kno wle dge amo ng emp loye es
their use can be leveraged. For instance, thei r indi-
To the con trar y, two peo ple sha ring
diminish its value for any one pers on. dge th.u,
leveraged to crea te add itio nal kno wle
vidualized knowledge sets often c~n be cmt 'nts
utes pote ntia lly to per form anc e imp rov
although new to each individual, con trib
for the firm. 's (apabil
3.2) are imp orta nt sou rces of a firm
. . Reputational resources (see Table c, c.·n
e argu e that a pos itiv e n:pu t,Hi on l.',IO
1t1es and core competencies. Indeed, som wdl .,,
50
Ear ned thro ugh the.• flrm's ,\(li ons ,\S
be a source of competitive advantage.
Ch,pt., J· Thf tnttmll ~ ~en. upabititle-s. COf, Comptt!OC~ and Com~itlw Advanta~ 8S

its words, a value-creating reputation is a

product of years of superior marketplace
competence as perceived by stakeholders. s1
A reputation indicates the level of aware-
ness a firm has been able to develop among
stakeholders and the ·degree to which they
hold the firm in high esteem.52
A well-known and highly valued brand
name is a specific reputation al resource. 53 A
continuing commitmen t to innovation and
aggressive advertising facilitates firms' efforts r
to take advantage of the reputation associ- wii
ated with their brands. 54 Harley-Davidson
has a reputation for producing and servic-
ing high-qualit y motorcycles with unique 8
designs. Because of the desirability of its rep- 0
utation, the company also produces a wide copablllties In specific functional areas can give
range of accessory items that it sells based on lf$ o co~petitlve edge. The effective use ofsocial media to
its reputation for offering unique products ng to specific market segments has given some firms
with high quality. Sunglasses, jewelry, belts, toge over their rivals.
wallets, shirts, slacks, and hats are just a few
of the large variety of accessories customers
can purchase from a Harley-Davidson dealer or from its online store.55
T~g advantage of today's technologies, some firms are using social media as a
means of influencing their reputation. Recognizing that thousands of conversations
occur daily throughout the world and that what is being said can affect its reputation,
Coca-Cola company encourages its employees to be a part of these social media-based
discussions as a means of positively influencing the company's reputation. Driving the
nature of these conversations is a set of social media principles that Coca-Cola employ-
ees use as a foundation for how they will engage with various social media. Being
transparent and protecting consumers' privacy are examples of the commitments the
firm established.56

3-2b Capabilities
The firm combines individual tangible and intangible resources to create capabilities.
In turn, capabilities are used to complete the organizational tasks required to produce,
distribute, and service the goods qr services the firm provides to customers for the pur-
pose of creating value for them. As a foundation for building core competencies and
hopefully competitive advantages, capabilities are often based on developing, carrying,
and exchanging information and knowledge through the firm's human capital.57 Hence,
the value of human capital in developing and using capabilities and, ultimately, core com-
petencies cannot be overstated. 58 In fact, it seems to be "well known that human capital
makes or breaks companies:•s9 At pizza-maker Domino's, human capital is critical to the
firm's efforts to change how it competes. Describing this, CEO Patrick Doyle says that, in
many ways, Domino's is becoming "a technology company ... that has adapted the art of
pizza-making to the digital age:'60
As illustrated in Table 3.3, capabilities are often developed in specific functional
areas (such as manufacturing, R&D, and marketing) or in a part of a functional area
(e.g., advertising). Table 3.3 shows a grouping of organizational functions and the capa-
bilities that some companies are thought to possess in terms of all or parts of those
functions.
 nr ,,,,,.
Part I: Srra~lc Manag,m,
8& "llf1

''1\ C.nrnb11 t1e\

T1bt1 l.l rx,,mrl" of r" res of fir ms
Eiramp
Funrt1on1I Artas C1p1bllltl11
• Wafmart
Dlstr1butfon '
I • Effective use of logistics ma
nagement t«hnlques
• Microsoft
Human Resources
n
I. Mottmlng, empcwm1ng,
and ,.timing ffltplo)'fts

trol of lnwntorfes throu

gh p0int-
, wa1m1rt

Management Informatio ' Effective and efficient con

Systems methods p~ er a, Gamble
of-purchase data collection .
Ralph Lauren Corp.
Mariftttng name products
• Etfectlw promotion of brand- McKlnsey & Co.
Eff«tive customer servic
e Nordstrom Inc.
•
Innova tive merch and ising Crate·& Sarref •
•

Hugo Boss
. Zara
future of clothing
Management • Ablllty to envision the
. Komatsu
ducts . Witt Gas Technology
~l gn and production
sldlls yielding reliable pro Sony
Manufacturing ts .
•
Product and design quality , nd produc
Mlnlaturizltlon of com~ ne nts Caterpillar
. Otis Elevator Co.
trol solutions
y
, Innovative t«hnologhisticated elevator con . ChaparratSteel
Research & Development oducts and er Electron1es
Development of sop y in~o new p~ • Thomson Consum
~.-...,,----· ~ I
hno log
Rapid transformation of tec
processes
Digital technology

3_2, Core Competencies ~ ~ a ~ource of C01lJ.

mp ete nc ies are capabilities that_serv
Defined in Chap ter 1, co re co gws~ a company
a firm ov er its riv als . Core compe~enc1es distm e through
etitive advantage for lity . Co re co m~ etenc1es emerge o: er tim
pe rso na fer"ent resou rces
{ompetitively and reflect its ula tin g an d lea rnm g how to de· ploy dif
th ·
• ational process of acc um Jewels
nlZ . etencies are e crown
an orga ilities. 61 As the capacity to take action, core comp ar~ d to_ compet.
and capab
itie s the co mp an y pe rfo rms especially well comp It ls to
sel
of a company," the activ ds un iqu e va lue to the goods or se_mces
firm ad analytics
itors and through which the co mp an y (su ch as Pf izer) developed b1g data
pharm a pabilities through
customers. Thus, if a big
62

uld co nc lud e tha t the firm had formed ca

as a core competence, on e co mpetitively
d eff ec tiv ely use hu ge amounts of data in a co
ze an
which it was able to analy
superior ma nn er. ity, R&D activj.
a co re co mp ete nce at Apple. As a capabil
Innovation is thoug ht to be has combined
e co mp ete nc e. M ore sp ecifically, the way Apple
ties are the source of this cor atories) and intangible
an cia l res ou rces and research labor
some of its tangib le (e.g ., fin complete research
II
eer s an d org an iza tio na l routines) resources to ability,
(e.g., scientists and engin D. By emphasizing its R&D cap
r and develo~ment ta~ks cre
ates a ca pa bil ity in R&
in the form of th
ique value for customers
I. Apple can innovate m wa ys
g
tha
tha t
t
inn
cre
ov
ate
ati
un
on is a core competence for Ap
ple. e
products it sells, sugge stin 's core competen-
its ret ail stores is another of Apple
. Excell~nt_ custo me r se_ rvi ce in tangible resou rce)
iqu e an d co nte mp orary store designs (a
cies. In this dinstan ce, un le resource) t
b. • h k wledgeable and skjlled employees (an intangib }' ~
are ~om me wit no rs. A nu mb er of ca refully developed trainin
to custome
provide superior service wh ich Ap ple's core competen,e of
cx,~,j~:1
are ca pa bil itie s on
::;~opment procedures e spcdtkJtiun of
pro ce du res tha t are capabilities includ
how merl service is bas ~d . Th e tnJnuuls to
ct wi th cu sto me rs, ca refully written trui11i11g
emp oyees are to intera
 Com~tenc~s, and Com~tltlw Advantages 17
Ch,plfr 3: ~ lnt!mll Organization: Rtsourc~. Capabt1itles, Core

customers, and deep thinlting

describe on-site tech support that is to be provided to
that is played. Apple has a spe-
about every aspect of the store's design including music
ledge of Apple products and
cial training program designed to build associates' know
63
how to sell them.

3-3 Building Core Competencies

first consists of four specific
Two tools help firms identify their core compet~ncies. The
used to determine which capa-
criteria of sustainable competitive advantage that can be
in Table 3.3 have satisfied
bilities are core competencies. Because the capabilities shown
tool is the value cbain analysis.
these four criteria, they are core competencies. The second
es that should be maintained,
Firms use this tool to select the value-creating competenci
upgraded, or developed and those that should be outsourced.

Advantage
3-3a The Four Criteria of Sustainable Competitive
nonsubstitutable are core
Capabilities that are valuable, rare, costly to imitate, and
help firms to gain competitive
competencies (see Table 3.4). In turn, core competencies
the four criteria are not core
advantages over their rivals. Capabilities failing to satisfy
is a capability, not every
competencies, meaning that although every core competence
, for a capability to be a
capability is a core competence. In slightly different words
custom er's point of view. For
core competence, it must be valuable and unique from a
advantage, it must be inimi-
a core competence to be a potential source64of competitive
table and nonsubstitutable by competitors.
etitors are unable to
A sustainable competitive advantage exists only when comp
they lack the resour ces to attempt
duplicate the benefits of a firm's strategy or when
a core comp etence by using
imitation. For some period of time, the firm may have are trying
le, some firms
capabilities that are valuable and rare, but imitable. For examp eenin g
advantage by out-gr
to develop a core competence and potentially, a competitive
competence can contribute
their competitors. (Interestingly, developing a "green" core
benef itting the broader society.)
to the firm's efforts to earn above-average returns while
resources in ways that sup-
For many years, Walmart has been committed to using its
etitive advantage in the pro-
port environmental sustainability while pursuing a comp
to create zero waste, operate
cess. In this regard, Walmart has three major end goals:
sustain our resources and the
with 100 percent renewable energy, and sell products that
labeled over 10,000 products
environment. To facilitate these efforts, Walmart recently
Susta inability Leader." lniti~ly,
on its e-commerce site as products that are "Made by a
ries. In addition to seeking
these items were batched into roughly 80 product catego

titive Advant age

Table 3.4 The Four Criteria of Sustainable Compe I
~
• •

• Help a firm neutralize threats or exploit opportu11ltles

Valuable Capabilltles •

.
(I' t ' I

, , 'Are not possessed'by many others

Rare Capab ilities ' . or
• H1'storlcal: Aunique and a valuable organlzatlonal culture
Costly-to-Imitate Capabilities f petenct art
brand name
Ambiguous cause: Th' causes and uses o acom
unclear shl trust and
Social ·complexity: Interpersonal relation ps,
friendship. among managers, suppliers, and customers

,.0 11;ubstltutable Capabllltles • No strategic equivalent

\
811 PJrl I StrJll'qlr Ma11an.,..
'J "'~" '' n~,.,

d m.t ke ·it ea~,

a competitive ad vantage Ih rough these .1c1ions, Walnrnrt hope to W I er ~
0 mnrr ;, 111
cus tom ers t k " " whe n purcha sing pro duc rs.
, . ·r al~, '
O
ma e sustain;1ble choices . [Link] O redl1c,~ .
wor,ung to Icad thc •industry in deploying clean technologies as u·
1.i
h as ·rar ~
fuct con • course, Walmart competitors Suc
sumptton and air pollutfon."~ Of rt's grt '
g in sim ilar acti ons . Tim e will reveal the degree to which Walma e,1
arc e~gagin
practic es can be imi tate d.
e cornpetenc·
len gth of tim e a firm can exp ect to create value by using its cor
, The d, service te~
15
ctio n of how qui ckly com petitors can successfully imitate a goo g per ' or
' d of titri
a fun • eIY lon
for a re Iativ
10
Process. Value-creating core competencies may last s, Wal~art w lll l'
y whe n all fou r of the criteria we discuss next are satisfied. Thuantage 1n te 0 d
onl 'bl ,petitive adv . rn, 5
know th at •1t has a core competence and poss1 y, a con t om ple te the se pra ctices [Link]
• es if the ways the firm uses rts . resources O c
green practtc y
the four criteria.
.
~I Q b~ or neutralize thre • it
. . ats in
Vafuabft capabilities allow the firm to expI01t opp
• orturn·ties .
1 ies tO exploit opportu
b1·1·t·
mttes or nelJ_~
By effe ctiv ely using cap a
external environment. 66 f 0r example' Gro
upon created th
valu e for cus tom ers.
trah•ze threats a firm creates billion in revenu dn any Oth ere
d e faster tha
"da1·1y deal" mar ' ke1mg- space,. the firm reached $1 Was ~o ere.
in hist ory . In esse nce , the opp ortu nity Gr~upon's foun ~rs pursue
company th ~oods or serVJces 10
businesses could mt~oduce eir
ate a marketplace through which ~estaurants, hair
erience them at a discounte~ pnce.
customers who would be able to exp makmg frequent Us
and hot els are exa mples of the types of comparnes
and nail salo ns, experience th:
upo n's serv ices . You ng, urb an professionals desiring to affordabl>;'
of Gro ncial pe~
ch they live are the firm 's targ et customers. But, Groupons fina
cities in whi b of competition 6,
ired by investors primarily ecause
formance has been lower than des can be i~itated a~d
offe ring valu e to cus tom ers, the capabilities to offer i~s serv_ices
Wh ile websites such
cess invi ted riva ls to ent er the market. Competmg daily-deal• d as
its initial suc
d and offe red sim • and often Iess expensive eals. In fac
• ilar
LivingSocia l quic kly surf ace
ai![Link], Tan :•
market, to include Yipit, Woot, Ret
many competitors have entered the 68 g'
l.
and Ebate in addition to LivingSocia

Rare ses_s. A key questio

Rare capabilities are capabilitie
s that few, if any, competitors pos
w many rival firms possess the n
to be answered whe n evaluating this criterion is "ho unlikely to beco se
s possessed by many rivals are
valuable capabilities?" Capabilitie common (i:.:
n~~ e~ for any of the invo lved_ ~rms. I_nstead, valuable but
core com pete age resu/
_ are sources of com pet1 t1ve panty. 69 Competitive advant
not rare) capa

tenc ies and

bil~

tha t
t1es
only when firms develop and exp
differ from tho se
loit valuable capabilities that bec
shared with competitors. Th~ cen
che
ome core com ts
tral problem
d competitive p . ~
0
r·
pro duc e the "daily dea l" rea
Valuable capabilities Gr?upon is that its capabilities to ant}
abilities that it uses to engag
allow the firm to exploit quickly. Similar• ly, Wa lmart has developed valuable cap tainab·i ·
e
b . get see ks to dev elop sus
opportunities or neutralize
•
m green practICe s; ut, as ment10ned previously, Tar I tty
practices. 1:-nget's sue.
threats in irs external .l.. h h h' h • dup licate Wa lma rr's gre en
capab11t1es t rou'fg h.w h1c 1t can ctices are valuabl e
environment. • d • suggests that Walmart's green pra
cess m omg so, 1 t 1s appens,
Rare capabilities are but not rare.
capabilities that few, if any,
competitors possess.
Costly to Imitate develo
not easily
Costly-to-imitate
imitate cap abi lities are capabilities that other firms can
cap11bllitles are capabilities Costly~t_o~ or a c p.
costly to imi tate are created because of one reason ' om-
that other firms cannot easily ~apa?iltties that are ) . to develop
bmatJon of three reas ons (see t a e 3.4 • First, a firm sometimes is able
develop. bl
 ..... , t-al Omantzatlon: Resources, Capabilities, Core Competencies. and Competitive Advantages 89
(hlpttf 3! II"" n ""' '"

capabilities because of unique historical

nditions. As firms evolve, they often
cocquire or develop capab'I' • t hat are
1 1t1es
70
:nique to them. A firm with a unique
and valuable organizational culture that
emerged in the early stages of the com-
pany's history "may have an imperfectly
imitable advantage over firms founded in
another historical period;'11 one in which
less valuable or less competitively useful
values and beliefs strongly influenced the
, development of the firm's culture. Briefly
discussed in Chapter I, organizational cul-
ture is a set of values that are shared by
members in the organization. An organi-
zational culture is a source of advantage ~
'
when employees are held together tightly So,uthwest Airlif!es crew hold puppies who became homeless after
.~. '
by their belief in it and the leaders who f!l!'!/cane Maria damaged the island of Puerto Rico. The (light,
..
helped to create it.72 Historically, empha- w~[Link] was donated f,y Southwest Airlines, carried 14,000 pounds
sizing cleanliness, consistency, and service • bf./hppli'es~ ,: • , • . -
and the training that reinforces the value ..,_.,. .--[Link]..~L....~4\.!.. . . ,...: . . ·- __..!...• .._..i;,_,........,,..._..-_ _ _ _ _ ___.__,

of these characteristics created a culture at

McDonald's that some thought was a core competence and a competitive advantage for
the firm. However, as explained in Chapter 2's Opening Case, McDonald's has experi-
enced problems with a number of strategic actions taken by competitors. McDonald's
hired a new CEO in 2015 and is now making a number of menu changes to make its
food offerings healthier and more attractive overall to customers. 73 McDonald's hopes
these changes along with others will help it to reinvigorate its historically unique cul-
ture as a core competence.
A second condition of being costly to imitate occurs when the link between the
firm's core competencies and its competitive advantage is causally ambiguous. 74 In these
instances, competitors can't clearly understand how a firm uses its capabilities that are
core competencies as the foundation for competitive advantage. As a result, firms are
uncertain about the capabilities they should develop to duplicate the benefits of a compet-
itor's value-creating strategy. For years, firms tried to imitate Southwest Airlines'. low-cost
strategy, but most have been unable to do so, primarily because they can't duplicate this
firm's unique culture.
Social complexity is the third reason that capabilities can be costly to imitate. Social
complexity means that at least some, and frequently many, of the firm's capabilities are
the product of complex social phenomena. Interpersonal relationships, trust, friend-
ships among managers and between managers and employees, and a firm's reputation
with suppliers and customers are examples of socially complex capabilities.75 Southwest
Airlines is careful to hire people who fit with its culture. This complex interrelationship
between the culture and human capital adds value in ways that other airlines cannot,
such as jokes on flights by the flight attendants or the cooperation between gate per-
sonnel and pilots.

Nonsubstitutable Nonsubstltutabl•
Nonsubstltutabl• capabilities are capabilities that do not have strategic equivalents. This capabllltles are cap3b1ht1~,
final criterion "is that there must be no strategically equivalent valuable resources that that do not h,we ~trJh.'<.ll\.'
are themselves either not rare or imitable. Two valuable firm resources (or two bundles equlvJlenb.
90 Part 1: Str,teglc Management Il'lplit1

r, )Ill ( 'm
\ I ~11\tt1ln,[Link] Competitive Adv
antage
Tablt 3.S t)utc M1f '\ i1n ll1t111\ ,it 111,, ( ,1tr-r1i1 for

• hfow-average
No No NtU fflS
No No

• A\lerage returns
Yes No No Yes/no
~ ~,r age returns
Yes Yt1 No Yes/no

•
.......
• Tf!mporllY
compeffllvt

sustainable corn-
•
to ibo'le-average
,wtufflS

Above-average
returns
Yes/no
v•• Yts Yes petltlve advantage

h an be separately expJo·
h c f b'l' t' . Iterj
reso urce s) are stra tegi call y equ ival ent when t ey • alue O capa 111es mcrea ses
eac
of firm · d h e mvi .
· 76 In general, the strategic v enc s'bJ
to implement the same strategies." • t gible an d h I
re m an ' e,
substitu te. The mo
as they become more difficult to s~tutes an t ;. gre ater the
it is for firms to find s~b
capabilities are, the more difficult st
's value-creating [Link] -specific
peti tors trying to imi tate a firm manage r1a/ •
challenge is to com · relat10n · b
· sh1ps etween ma nagers and
knowIedge and trust-based wor king ex~ ple s of capa.
years at Southwest Airlines, ar~t
personnel, such as has existed for ch find ing a
15
subS ttute challenging.
tify and for whi
bilities that are difficult to iden rn afl<l may stifie
sal amb igu ity may mak e it difficult for the firm to leath
However, cau at are not easilr
know how to improve processes
progress because the firm may not
77
codified and thus are ambiguous. ~~nsubstitutable
In summary, only usin g va1 uable, rare, costly-to-imitate, and
advantages.
has the pot enti al for the firm to create sustainable competitive
capabil ities tions resulting
sequences and performance implica
Table 3.5 shows the competitive con s suggested by the
eria of sustainability. The analyst
from combinations of the four crit s. The firm should
e help s man age rs dete rmi ne the strategic value of a firm's capabilitie
tabl in the table (i.e.,
criteria described in the first row
not emphasize capabilities that fit the t are imitable and
neither valuable nor rare and tha
resources and capabilities that are e parity and either
ch ~trategi c sub stitu tes exis t). Capabilities yielding competitiv
for whi ted. Some
~us tain able com peti tive adv antage, however, should be suppor
tempor~ry or y have capabilities
PepsiCo and Boeing and Airbus ma
competitors such as Coca-Cola and these capabilitie~
lt in com peti tive pari ty. In such cases, the firms wiJJ nurture
tha_ t re~u er ~ temporar or
elop capabilities that can yield eith
w~1l~ s1111ultaneou~l~ trying to dev78 y
sustarnable com pet1 t1ve adv anta ge.

3-3b Value Chain Analysis ons that ere

cha in ana lysis allows the firm to understand the parts of its operati
Value ortant because: tl1.
Understanding these issues is imp
atremvalue anbd those that do not,7Y I h h . the
• l
fi earns a ove-werage ret creates is greater than rth h
to create \ha / value.~rns on y w en t e value it
incurred
•
The value chain is a tem plate that firms use to _a_naJy~e their cost position ,111d t,1
b . d
identify the multiple means th 3t can e use to fac1J1tate 1mple mentat1on • ot· n '- hthl 'll
~, land . d . h
strategy.· Today's competitive scape emand81s that firm .
s •
examrne t eir vahtt' "h.111h
•
er than a dom estic-o n!
in a g obal rath
1 th:1 ,ltl\ l ,, II i
ins sho uld be studied w'th · y colntbext,. In par111ticular, activities USj
supply cha 1 111 ag o a context.
 . Th Internal Organization: Resources, Capabllltles, Core Competencies, and Competitive Advantages 91
Chapter 3. e

Figure 3.3 A Model of the Value Ch_a_ in----- ------- ---==- ------- ....,
-- -- - ..
IFln~nce I
t
I Humar Resources I
Support ~
Functions
Managem ent Information Systems

Customer
Value I
,,

Supply-Chain _,. Marketing J

Managem ent Operation s _,. ---+ (Including ---+ Follow-Up
Sales) Service

Value Chain
Activities

We show a modei of the value chain in Figure 3.3. As depicted in the model, a firm's
value chain is segmented into value chain activities and support functions. Value chain
activitie s are activities or tasks the firm completes in order to produce products and
then sell, distribute, and service those products in ways that create value for customers.
Support function s include the activities or tasks the firm completes in order to support
the work being done to produce,_ sell, distribute, and service the products the firm is
producing. A firm can develop a capability and/or a core competence in any of the value
chain activities and in any of the support functions. When it does so, it has established
an ability to create value for customers. In fact, as shown in Figure 3.3, customers are the
ones firms seek to serve when using value chain analysis to identify their capabilities and
core competencies. When using their unique core competencies to create unique value
for customers that competitors cannot duplicate, firms have established one or more
competitive advantages. Deutsche Bank believes that its application development and
84

information security technologies are proprietary core competencies that are a source
of competitive differentiation for the firm. As explained in a Strategic Focus about out-
85

sourcing later in the chapter, Deutsche Bank will not outsource these two technologies
given that the firm concentrates on them as a means of creating value for customers. Value chain activities
are activities or tasks the
The activities associated with each part of the value chain are shown in Figure 3.4, nrm completes in order to
while the activities that are part of the tasks firms complete when dealing with support produce products and then
functions appear in Figure 3.5. All items in both figures should be evaluated relative to sell. distribute, and service
those products In ways that
competitors' capabilities and core competencies. To become a core competence and a create value for customers.
source of competitive advantage, a capability must allow the firm to either:
Support functions include
1. Perform an activity in a manner that provides value superior to that provided
by the activities or tasks the firm
competitors, or completes In order to support
the work being done to
2. Perform a value-creating activity that competitors cannot perform. produce, [Link], distribute, ,1nd
Only under these conditions does a firm create value for custome rs and have oppor- service the p,oduLt<; the tm"
1s p1oduc1nq
tunitits to capture that value.
92 Part 1: Strat~ic Management lnp\Jt,

figure 3.4 (, '

I d1 l'ltj \ ,11,,, th,
iunh V,11i,,, Ch 1111 i\ct,vrtirs

FoffoW-UP ~
~,,.asea
Supply-Chain M.,19.,,,.nt •~-
to 1customers,
.. ...,vltles taken fo
,_..
product's value r feedback
Act111mes indod•ng soun:tng, Surveys to receive sat1sfacti()(I,
procoremerit, conversion, and aboUt the customer's rt after
logistics management that are offering technical supPo ·ng
necessary for the f,rm to receM! the sale, and fully comP'Y~,e
raw materials and convert them .th a product's warrano/.
into final producu :..mples of these actlvrtie'·

0peratlo M
essary 10 efficiently
Activities nee aterials into finished
change ra~lop ing employees'
products. . -,,,,
Distribution rlc schedules. des1gni, .,, . I
wo . processes and phys,ca
Act1v111es related togetting the final produ'7:j, operations' faolities,
product to the customer. Efficiently layout~ .,;:...,.,,Auctioo capacity
• c1eterrr11nt..,, ~ - d
handhng customer orders, choosing
s'
Marlcetfng (Including Sain) , eeds an'd se/ec"tinQ an
the optimal deltve,y channel, and . n . '. in ,oduction equipment
' ma,nta,n g p Of ific operations
working with the finance support Activities taken for the purpose of are examples spec
function to arrange for customers' segmenting target customers Of!
payments for delivered goods are activities.
the basis of their unique needs,
examples of these activities. satisfying custor,:iers' needs, . '
retaining customers, and l~t'.ng
additional customers. Advertrsmg
campaigns, developing and
managing product brands,'
determining appropriate pricing
strategies, and training and '
supporting a sales force are
specific examples of these
activit~- - ,

are part ~f the value

Creating value for customers by completing activities that
chain often requires building effective alliances with
suppliers (and sometimes others
next section) and devel-
to which• the firm outsources activities, as discussed in the
oping strong positive relationships with customers.
When firms have strong positive
80
have social capital. The
relationships with suppliers· and customers, they are said to
ers of knowledge as well
relationships themselves have value because they lead to transf8
; To build social capital
as to access to resources that a firm may, not hold internally.
s organizations requires
whereby resources such as knowledge· are transferred acros
to allow their resources
trust between partners. Indeed, partners must trust each other
while neither party will
to be used in such a way that both parties will benefit over time
88 •
take advantage of the other.
ties and support fun(-
. E~aluating a firm's capability to execute its value chain activi
fying and assessing tht'
tions is challe~ging. Earlier in the chapter, we noted that identi
value of a firm~ resources and capabilities requires judgm ent. Judgment is equally 111.\··
• because no obv10us
analys1s, • ly correct model or ruk 1s
. when usmg
essary . value chain
universally available to help in the process.
chain activities d . . . .
What should a firm do about value t an suppo rt fun,tt ons tll wlud1
its resources and capabi·11·t1·es are no a source of core ?
n to consider. comp etenc e. Outsourdng 1, 1lltt'
solutio
 Com~tltlve Advantages
Chapter 3 The Internal Organization: Resource\, Capabllities. Core Com~tencles. and 93

rlgure 3.S < If 1tinr, Vill,r• throuqh Support Functions

Human Resour~es
Actlvitie, associated with managing

I I
the firm's human capital. Selecting,
training, retainlng, and comP911Mt1ng
human resourCM 11T ways that [Link]
a capability and hopefully a core
competence are specific example,

I of these activities.

Finance
Management
Activities associated [Link] ly Information Systems
acquring and managing financ,al
resources. Securing adequate
financial capital, investing in
~ctivitie, takffl to obtain and manage
information and knowledge throughout
I
organizational functions in ways the fi_rm. Identifying and utilizing
that will support the firm's efforts sop~osticated technologies, determining
to produce and distribute its products optimal ways to collect and distrobute
in the short ano long term, and knowledge, and finkmg relevant
managing relationships with those information and knowledge 10
providing financial capital to the firm organizational functions are act1vit1es
are specific examples of these activities. associated with this support function.

3-4 Outsourcing
d,
Concer ned with how components, finished goods, or services will be obtaine
outsourcing is the purchase of a value-creating activity or a support function activity
tions
from an external supplier. Not-for-profit agencies as well as for-profit organiza
their
actively engage in outsourcing. Firms engaging in· effective outsourcing increase
89

flexibility, mitigate risks, and reduce their capital [Link] Moreover, in some
out-
industries virtually all firms seek the value that can be captured through effective
ment process decision s,
sourcing. However, as is the case with other strategic manage 91
cing
careful analysis is required before the firm decides to outsource. And if outsour
value
is to be used, firms must recognize that only activities where they cannot create
ntage compare d to competi tors should be
or where they are at a substantial disadva
associated with the value
outsourced. Experience suggests that virtually any activity
92

chain functions or the support functions may fall into this category. We discuss differ-
core
ent activities that some firms outsource in the Strategic Focus. We also consider
outsour ce activitie s may try to develop to
competencies that firms to whom others
r;atisfr customers' future outsourcing needs.
s
Outsourcing can be effective because few, if any, organizations possess the resource

I
Outsourcing is the purchase
and capabilities required to achieve competitive superiority in each value chain activity of a value-creating activity or
to
a11d i;upport function. For example, research suggests that few companies can afford
a support function activity
tive advanta ge. 93
By from an external supplier.
i, tcrnallr develop all the technologies that might lead to competi
 P,rt I: Strategic Mfnl9'fflfnt lnPuts

nurturh\S" ,n,nllt11' number of cRpRbilltlcs, a firm increases the probabiJity of developing

core ,nm,,ch'ncles und achieving n competltlve·ndvantage because It does not become
owrt:-:tcttdrtl. In addition, by outsourcing activities in which it locks competence, the
firm t\ln fully concentrate on tho~e arells in which it has the potential to create value.
There are concerns as_ciocloted with outsourcing.94 Two slgnlOcant ones are the poten.
tial loss in a Orm'~ ability to innovate and the loss of jobs within the focal firm. When
evaluating the possibility of outsourcing, firms should anllclpotc possible effects on their
ability to innovate in the future as well as the impact of losing some of their human
capital. On the other handi firms are sometimes ablt to e11hance their own innovation
capabilities by studying how the companies to which they've outsourced complete those
activities.95 Because a focal firm likely knows less about a foreign company to which it
chooses to outsource,_concerns about potential negative outsourcing effects in these cases
may be particularly acute, requiring careful study and analysis as a result.96 Deciding to
outsource to a foreign supplier is commonly called offshoring.

3-5 Competencies, Strengths, Weaknesses,

and Strategic Decisions
By analyzing the internal organization, firms identify their strengths and weaknesses
as reflected by their resources, capabilities, and core competencies. If a firm has weak
capabilities or does not have core competencies in areas required to achieve a compet-
itive advantage, it must acquire those resources and build the needed capabilities and
competencies.
As noted in the Strategic Focus, some firms 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. Many financial institutions are outsourcing functions that support cashless trans-
action because their IT systems cannot handle these activities efficiently. Some govern-
ments are outsourcing services to increase the quality and efficiency with which the ser-
vices are delivered (e.g., U.K. outsourcing some surgeries to French healthcare providers).
Outsourcing decisions must be made carefully, considering all of the options. However,
when done effectively, outsourcing can provide access to needed resources.
In considering the results of examining the firm's internal organization, managers
should understand that having a significant quantity of resources is not the same as hav-
ing the "right" resources. The "right" resources are those with the potential to be formed
into core competencies as the foundation for creating value for customers and developing
competitive advantages because of doing so. Interestingly, decision makers sometimes
become more focused and productive when seeking to find the right resources when the
firm's total set of resources is constrained.97
Tools such as outsourcing help the firm focus on its core competencies as the source of
its competitive_ advantages. However, evidence shows that the value-creating ability of core
competencies should never be taken for granted. Moreover, the ability of a core compe-
tence to be a permanent competitive advantage can't be assumed. The reason for these cau-
tions is that all core competencies have the potential to become core rigidities. 98 Typically,
events occurring in the firm's external environment create conditions through which core
competencies can become core rigidities, generate inertia, and stifle innovation.99
After studying its external environment to determine what it might choose to do (as
explained in Chapter 2) and its internal organization to understand what it can do (as
explained in this chapter), the firm has the information required to select a business-levd
strategy that it will use to compete against rivals. We describe different business-kvd
strategies in the next chapter.

--