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Strategic Management

MODULE 3
The Internal Organization:
Resources, Capabilities, Core Competencies,
and Competitive Advantages

FOR CLASS DISCUSSION PURPOSES ONLY


Introduction
 All organizations have strengths and weaknesses in
the functional areas of business. No enterprise is
equally strong or weak in all areas. Internal
strengths and weaknesses, coupled with external
opportunities and threats and clear vision and
mission statements, provide the basis for
establishing objectives and strategies.

FOR CLASS DISCUSSION PURPOSES ONLY


Introduction
 Increasingly, those who analyze their firm’s internal
organization should use a global mind-set to do so.
 A global mind-set - is the ability to study an
internal organization in ways that are not
dependent on the assumptions of a single country,
culture, or context.

FOR CLASS DISCUSSION PURPOSES ONLY


Analyzing External Environment

Opportunities
and threats

By studying the external environment, firms identify what


they might choose to do.

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Analyzing Internal Environment

Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

By studying the internal environment, firms identify what


they can do.

FOR CLASS DISCUSSION PURPOSES ONLY


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 Mind-Set
– The ability to study an internal environment in ways that are
not dependent on the assumptions of a single country,
culture, or context.
• Analysis Outcome
– Understanding how to leverage the firm’s bundle of
heterogeneous resources and capabilities.
FOR CLASS DISCUSSION PURPOSES ONLY
Resources, Capabilities, and Core Competencies

Strategic Management Concepts & Cases 12th Edition by Hitt, Ireland & Hoskisson

FOR CLASS DISCUSSION PURPOSES ONLY


Creating Value
 By exploiting their core competencies or competitive
advantages to at least meet if not exceed the
demanding standards of global competition, firms
create value for customers.
 Value - is measured by a product’s performance
characteristics and by its attributes for which
customers are willing to pay.

FOR CLASS DISCUSSION PURPOSES ONLY


Resources, Capabilities, and Core
Competencies
• Resources:
Competitive – are the source of a
Advantage firm’s capabilities.
– are broad in scope.
Core – cover a spectrum of
Competencies individual, social and
organizational
Capabilities phenomena.
– alone, do not yield a
Resources competitive
• Tangible
• Intangible
advantage.

FOR CLASS DISCUSSION PURPOSES ONLY


Resources, Capabilities, and Core
Competencies
 Resources – are any assets such as cash, buildings,
machinery, or intellectual property that a firm can
draw on when crafting and executing a strategy.
Resources can be either tangible or intangible.
 Tangible resources - are assets that can be seen and
quantified.
 Intangible resources - include assets that are rooted
deeply in the firm’s history and have accumulated
over time. FOR CLASS DISCUSSION PURPOSES ONLY
Tangible Resources

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Intangible Resources

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Resources, Capabilities, and Core
Competencies
 Capabilities – are the organizational and managerial
skills necessary to orchestrate a diverse set of
resources and to deploy them strategically.
Capabilities are by nature intangible, it their
expression in company’s structure, and routine and
culture.

FOR CLASS DISCUSSION PURPOSES ONLY


Resources, Capabilities, and Core
Competencies
 Core Competencies – these are unique strength
embedded deep within a firm, it allows a firm to
differentiate its products and services from those of
its rivals, creating higher value for the customer or
offering comparable value at lower cost.

FOR CLASS DISCUSSION PURPOSES ONLY


Four Criteria of Sustainable
Competitive Advantage
 Valuable capabilities - allow the firm to exploit
opportunities or neutralize threats in its external
environment.
 Rare capabilities - are capabilities that few, if any,
competitors possess.
 Costly-to-imitate capabilities - are capabilities that
other firms cannot easily develop.
 Non-substitution capabilities - are capabilities that
do not have strategic equivalents.
FOR CLASS DISCUSSION PURPOSES ONLY
Outcomes from Combinations of the Four Criteria

Competitive Performance
Consequences Implications
No No No No Competitive Below Average
Disadvantage Returns

Yes No No Yes/ Competitive Average Returns


No Parity

Yes Yes No Yes/ Temporary Com- Above Average to


No petitive Advantage Average Returns

Yes Yes Yes Yes Sustainable Com- Above Average


petitive Advantage Returns

FOR CLASS DISCUSSION PURPOSES ONLY


Value Chain Analysis
• Value Chain Analysis:
–allows a firm to understand the parts of its operations
that create value and those that do not.
–is a template that firms use to:
• understand their cost position.
• identify multiple means that might be used to
facilitate implementation of a chosen business -
level strategy.

FOR CLASS DISCUSSION PURPOSES ONLY


Value Chain Analysis

Technological Development
Human Resource Mgmt.
Service
Firm Infrastructure
Support Activities

Marketing and Sales

Procurement
Outbound Logistics

Operations

Inbound Logistics

Primary Activities
FOR CLASS DISCUSSION PURPOSES ONLY
Value Chain Analysis
• Primary Activities:
– are involved with:
• a product’s physical creation.
• a product’s sale and distribution to buyers.
• the product’s service after the sale.
• Support Activities:
– provide the assistance necessary for the primary
activities to take place.
FOR CLASS DISCUSSION PURPOSES ONLY
Examining the Value-Creating Potential of
Primary Activities
 Inbound Logistics - activities, such as materials
handling, warehousing, and inventory control, used
to receive, store, and disseminate inputs to a
product.
 Operations - activities necessary to convert the
inputs provided by inbound logistics into final
product form. Machining, packaging, assembly, and
equipment maintenance are examples of operations
activities. FOR CLASS DISCUSSION PURPOSES ONLY
Examining the Value-Creating Potential of
Primary Activities
 Outbound Logistics - activities involved with collecting,
storing, and physically distributing the final product to
customers. Examples of these activities include finished-
goods warehousing, materials handling, and order
processing.
 Marketing and Sales - activities completed to provide
means through which customers can purchase products
and to induce them to do so. To effectively market and
sell products, firms develop advertising and promotional
campaigns, select appropriate distribution channels, and
select, develop, and support their sales force.
FOR CLASS DISCUSSION PURPOSES ONLY
Examining the Value-Creating Potential of
Primary Activities
 Service - activities designed to enhance or maintain
a product’s value. Firms engage in a range of service
related activities, including installation, repair,
training, and adjustment. Each activity should be
examined relative to competitors’ abilities.
Accordingly, firms rate each activity as superior,
equivalent, or inferior.

FOR CLASS DISCUSSION PURPOSES ONLY


Examining the Value-Creating Potential of
Support Activities
 Procurement - activities completed to purchase the
inputs needed to produce a firm’s products.
Purchased inputs include items fully consumed
during the manufacture of products (e.g., raw
materials and supplies, as well as fixed assets—
machinery, laboratory equipment, office equipment,
and buildings).

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Examining the Value-Creating Potential of
Support Activities
 Technological Development - activities completed
to improve a firm’s product and the processes used
to manufacture it. Technological development takes
many forms, such as process equipment, basic
research and product design, and servicing
procedures.

FOR CLASS DISCUSSION PURPOSES ONLY


Examining the Value-Creating Potential of
Support Activities
 Human Resource Management - activities involved with
recruiting, hiring, training, developing, and
compensating all personnel.
 Firm Infrastructure Firm - includes activities such as
general management, planning, finance, accounting,
legal support, and governmental relations that are
required to support the work of the entire value chain.
Through its infrastructure, the firm strives to effectively
and consistently identify external opportunities and
threats, identify resources and capabilities, and support
core competencies.FOR CLASS DISCUSSION PURPOSES ONLY
Outsourcing
 Outsourcing is the purchase of a value-creating
activity from an external supplier.
 Few organizations possess the resources and
capabilities required to achieve competitive
superiority in all primary and support activities.
 By performing fewer capabilities:
 a firm can concentrate on those areas in which it can
create value.
 specialty suppliers can perform outsourced
capabilities more efficiently.
FOR CLASS DISCUSSION PURPOSES ONLY
Outsourcing Issues
 Seeking greatest value:
Outsource only to firms possessing a core
competence in terms of performing the primary or
supporting the outsourced activity.
 Evaluating resources and capabilities
Do not outsource activities in which the firm itself
can create and capture value.
 Environmental threats and ongoing tasks
Do not outsource primary and support activities that
are used to neutralize environmental threats or to
complete necessary ongoing organizational tasks.
FOR CLASS DISCUSSION PURPOSES ONLY
Competencies, Strengths, Weaknesses, and
Strategic Decisions
 At the conclusion of the internal analysis, firms
must identify their strengths and weaknesses in
resources, capabilities, and core competencies.
 If they have weak capabilities or do not have core
competencies in areas required to achieve a
competitive advantage, they must acquire those
resources and build the capabilities and
competencies needed.

FOR CLASS DISCUSSION PURPOSES ONLY


Competencies, Strengths, Weaknesses, and
Strategic Decisions
 Alternatively, they could decide to outsource a
function or activity where they are weak in order to
improve the value that they provide to customers.
 Tools such as outsourcing help the firm focus on its
core competencies as the source of its competitive
advantages.

FOR CLASS DISCUSSION PURPOSES ONLY


Strategic Management
MODULE 4

Business-Level Strategy

FOR CLASS DISCUSSION PURPOSES ONLY


Introduction
 Each business should have its own business strategy. A
business strategy is basically a competitive strategy and is
concerned more with how a business competes
successfully in the chosen market. The strategic decisions
at business-level revolve around choice of products and
markets, meeting the needs of customers, protecting
market share, gaining advantage over competitors, and
exploiting or creating new opportunities and earning
profit at the business unit level. In short, a business
strategy outlines the competitive posture of its operations
in the industry. th
Strategic Management 12 Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
Business Level Strategy
 Business-Level Strategy - an integrated and
coordinated set of commitments and actions the
firm uses to gain a competitive advantage by
exploiting core competencies in specific product
markets.
 Business-level strategy indicates the choices the
firm has made about how it intends to compete in
individual product markets

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
Customers: Their Relationship
with Business-Level Strategies
Who will be
served?

Key Issues
in What needs will
Business-level be satisfied?
Strategy

How will those


needs be satisfied?

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
Customers: Their Relationship
with Business-Level Strategies
 In terms of customers, when selecting a business-
level strategy the firm determines (1) who will be
served, (2) what needs those target customers have
that it will satisfy, and (3) how those needs will be
satisfied. Selecting customers and deciding which of
their needs the firm will try to satisfy, as well as how
it will do so, are challenging tasks

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
Dimension of Relationships with
Customers
 Reach Dimension - a relationships with customers is
concerned with the firm’s access and connection to
customers.
 Richness Dimension - is concerned with the depth
and detail of the two way flow of information
between the firm and the customer.
 Affiliation Dimension, is concerned with facilitating
useful interactions with customers
Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
Who: Determining the Customers
to Serve
 Market Segmentation - process used to cluster
people with similar needs into individual and
identifiable groups.
 Deciding who the target customer is that the firm
intends to serve with its business-level strategy is an
important decision. Companies divide customers
into groups based on differences in the customers’
needs to make this decision.
Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
FOR CLASS DISCUSSION PURPOSES ONLY
Market Segmentation
 Market Targeting – the process of evaluating each
market segment’s attractiveness and selecting one
or more segments to enter.
 Market Positioning – formulating competitive
positioning for a product and a detailed marketing
mix.

FOR CLASS DISCUSSION PURPOSES ONLY


Market Segmentation

All Customers

Consumer Industrial
Markets Markets

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
Market Segmentation
• Consumer Markets • Industrial Markets
– Demographic factors – End-use segments
– Socioeconomic factors – Product segments
– Geographic factors – Geographic segments
– Psychological factors – Common buying factor
– Consumption patterns segments
– Perceptual factors – Customer size segments

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
Bases for Segmenting Consumer
Markets
1. Geographic Segmentation – dividing a market into
different geographic units such as nation, states,
regions, countries, cities, or neighborhoods.
2. Demographic Segmentation – dividing the market
into groups based on demographic variables such as
age, gender, family size, family life cycle, income,
occupation, education, religion, race and
nationality.
FOR CLASS DISCUSSION PURPOSES ONLY
Bases for Segmenting Consumer
Markets
3. Psychographic Segmentation – dividing a market
into different groups based on social class, lifestyle,
or personality characteristics.
4. Behavioral Segmentation – dividing markets based
on consumer knowledge, attitude, use or response
to a product.

FOR CLASS DISCUSSION PURPOSES ONLY


Requirements for Effective
Segmentation
1. Measurable – Certain segmentation variables are
measureable but others are difficult to measure.
2. Accessible – market segments can be effectively
reached and served.
3. Substantial – market segments are large or
profitable enough to serve.
Requirements for Effective
Segmentation
4. Differentiable – the segments are conceptually
distinguishable and respond differently to
different marketing mix elements and programs.
5. Actionable – effective programs can be designed
for attracting and serving the segments.
What: Determining Which
Customer Needs to Satisfy
 After the firm decides who it will serve, it must
identify the targeted customer group’s needs that its
goods or services can satisfy. Successful firms learn
how to deliver to customers what they want and
when they want it.
 In a general sense, needs (what) are related to a
product’s benefits and features.

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
How: Satisfy Customer Needs
 Firms must decide:
 Who to serve, what customer needs to meet, and how
to use core competencies to implement value creating
strategies that satisfy target customers’ needs.
 Only firms with capacity to continuously improve,
innovate and upgrade their competencies can expect
to meet and/or exceed customer expectations across
time.
Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
Purpose of a
Business-Level Strategy
 To create differences between the firm’s position and
those of its competitors.
 To position itself, the firm must decide whether it
intends to:
1. Perform activities differently or
2.Perform different activities as compared to its
rivals.
Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
Business Level Strategies

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
Scope of Target Market
 Broad Scope -the firm competes in many customer
segments.
 Narrow Scope - the firm selects a segment or group
of segments in the industry and tailors its strategy
to serving them at the exclusion of others.

Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson


FOR CLASS DISCUSSION PURPOSES ONLY
Five Business-Level Strategies
 Cost leadership strategy - is an integrated set of
actions taken to produce goods or services with
features that are acceptable to customers at the
lowest cost, relative to that of competitors.
 Differentiation strategy - is an integrated set of
actions taken to produce goods or services (at an
acceptable cost) that customers perceive as being
different in ways that are important to them.
Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
Five Business-Level Strategies
 Focus strategy - is an integrated set of actions
taken to produce goods or services that serve the
needs of a particular competitive segment.
 1. Focused Cost Leadership Strategy
 2. Focused Differentiation Strategy
 Integrated cost leadership/differentiation strategy
- involves engaging in primary and support
activities that allow a firm to simultaneously
pursue Strategic
low cost and differentiation.
th
Management 12 Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
Integrated Cost Leadership/
Differentiation Strategy
 Flexible Manufacturing System (FMS) - increases the
“flexibilities of human, physical, and information
resources” that the firm integrates to create relatively
differentiated products at relatively low costs.
 Information Networks - linking companies with their
suppliers, distributors, and customers, that provide
another source of flexibility. These networks, when
used effectively, help the firm to satisfy customer
expectations in terms of product quality and delivery
speed. th
Strategic Management 12 Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY
Integrated Cost Leadership/
Differentiation Strategy
 Total quality management (TQM) is a managerial
innovation that emphasizes an organization’s total
commitment to the customer and to continuous
improvement of every process through the use of
data-driven, problem solving approaches based on
empowerment of employee groups and teams
 Benefits
1. Increased customer satisfaction
2. Lower input and operating process costs
3. Reduced time-to-market for innovative products
Strategic Management 12th Edition by: Hitt, Ireland & Hoskisson
FOR CLASS DISCUSSION PURPOSES ONLY

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