STRATEGIC MANAGEMENT

Competitiveness and Globalization : Concepts and Cases

CHAPTER 1
Strategic Management and Strategic
Competitiveness
 KNOWLEDGE OBJECTIVES
Studying this chapter should provide you with the strategic
management knowledge needed to:
1. Define strategic competitiveness, strategy, competitive
advantage, above-average returns, and the strategic
management process.
2. Describe the 21st-century competitive landscape and
explain how globalization and technological changes shape
it.
3. Use the industrial organization (I/O) model to explain how
firms can earn above-average returns.
4. Use the resource-based model to explain how firms can earn
above-average returns.
 KNOWLEDGE OBJECTIVES (cont’d)
Studying this chapter should provide you with the strategic
management knowledge needed to:

5. Describe vision and mission and discuss their value.

6. Define stakeholders and describe their ability to influence
organizations.
7. Describe the work of strategic leaders.
8. Explain the strategic management process.
 Important Definitions
• Strategic Competitiveness
– When a firm successfully formulates and implements a value-creating strategy.
• Strategy
– An integrated and coordinated set of commitments and actions designed to
exploit core competencies and gain a competitive advantage.
• Competitive Advantage
– When a firm implements a strategy that its competitors are unable to
duplicate or find too costly to try to imitate.
 Important Definitions
• Risk
– An investor’s uncertainty about the economic gains or losses
that will result from a particular investment.
• Average Returns
– Returns equal to those an investor expects to earn from other
investments with a similar amount of risk.
• Above-average Returns
– Returns in excess of what an investor expects to earn from
other investments with a similar amount of risk.
 Important Definitions (cont’d)
• Strategic Management Process
– The full set of commitments, decisions, and actions required for a
firm to achieve strategic competitiveness and earn above-average
returns.
 FIGURE 1.1

The Strategic
Management Process
 The 21st-Century Competitive Landscape
• A Perilous Business World
– Rapid changes in industry boundaries and markets
– Conventional sources of competitive advantage losing effectiveness
– Enormous investments required to compete globally
– Severe consequences for failure
• Developing and Implementing Strategy
– Allows for planned actions rather than reactions
– Helps coordinate business unit strategies
The Competitive Landscape
Hypercompetition
A condition of rapidly escalating competition
based on: • Price-quality positioning
• Competition to create
new know-how and
establish first-mover
advantage
• Competition to protect or
invade established
product or geographic
markets
 Global Economy
• The Global Economy
– Goods, people, skills, and ideas move freely across geographic
borders.
– Movement is relatively unfettered by artificial constraints.
– Expansion into global arena complicates a firm’s competitive
environment.
• Short-term: Where is the fastest growth likely to occur?
• Long-term: Where will sustainable growth occur?
 Global Economy
• The March of Globalization
– Increased economic interdependence among countries—the flow of goods and
services, financial capital, and knowledge across country borders
• Higher performance levels—quality, cost, productivity, product introduction time, and
operational efficiency

– Increased range of opportunities for companies competing in the 21st-century

competitive landscape
• Liability of foreignness—the risks of participating outside of a firm’s domestic country in the
global economy
• The amount of time required for firms to learn how to compete in markets that are new to
them.
 Technology and Technological Changes
• Technology Diffusion
– The speed at which new technologies become available
• Disruptive Technologies
– Technologies that destroy the value of existing technology and create
new markets
• Perpetual Innovation
– The rapidity and consistency with which new, information-intensive
technologies replace older ones
 Technological Changes
• The Information Age
– The ability to effectively and efficiently access and use information
has become an important source of competitive advantage.
– Technology includes personal computers, cellular phones, artificial
intelligence, virtual reality, massive databases, electronic networks,
internet trade.
 Technological Changes
• Increasing Knowledge Intensity
– Knowledge as a critical organizational resource for creating an
intangible competitive advantage
– Strategic flexibility: the set of capabilities used to respond to various
demands and opportunities in dynamic and uncertain competitive
environments
– Organizational slack: slack resources that allow the firm flexibility to
respond to environmental changes
– Organizational capacity to learn
 I/O Model of Above-Average Returns
• Dominance of the External Environment
– The industry in which a firm competes has a stronger influence on the firm’s
performance than do the choices managers make inside their organizations.
• Industry Properties Determining Performance
– Economies of scale
– Barriers to market entry
– Diversification
– Product differentiation
– Degree of concentration of firms in the industry
Four Assumptions of the I/O Model
1 External environment imposes pressures and constraints that
determine strategies leading to above-average returns.

2 Most firms competing in an industry control similar

strategically relevant resources and pursue similar strategies.

3 Resources used to implement strategies are highly

mobile across firms.

Organizational decision makers are assumed to be rational

4 and committed to acting in the firm’s best interests (profit-
maximizing).
 FIGURE 1.2

The I/O Model of

Above-Average Returns
I/O Model of Above-Average
External Environments
Returns
Gener 1. Strategy is dictated by the
al
Glob external environment of
al the firm—what

g a l / Le

De
opportunities exist in these
ca Industry

m ic
l environments?

og
liti

Environme

h
ra
Po

nt

p
2. Firm develops internal
skills required by external
So ra l

Competito

ic m
environment—what can
ci o

o
r

on
cu

Environme
Ec
the firm do about the
ltu

nt opportunities?
Technologi
cal
Environme
nt
 Industrial Organization Model
The External Environment 1. Study the external environment,
especially the industry
environment:
• Economies of scale
• Barriers to market entry
• Diversification
• Product differentiation
• Degree of concentration of
firms in the industry
 Industrial Organization Model
The External Environment

Attractive Industry 2. Locate an attractive

industry with a high potential
for above-average returns.

Attractive industry:
One whose structural
characteristics suggest
above-average returns.
 Industrial Organization Model
The External Environment

Attractive Industry
3. Identify the strategy called for
Strategy Formulation by the attractive industry to earn
above-average returns.

Strategy formulation: Selection

of a strategy linked with above-
average returns in a particular
industry.
 Industrial Organization Model
The External Environment

Attractive Industry

Strategy Formulation

Assets and Skills 4. Develop or acquire assets and

skills needed to implement a chosen
strategy.

Assets and skills: those assets

and skills required to
implement a chosen strategy.
 Industrial Organization Model
The External Environment

Attractive Industry

Strategy Formulation

Assets and Skills

Strategy Implementation 5. Use the firm’s strengths (its developed or

acquired assets and skills) to implement the
strategy.
Strategy implementation: select strategic
actions linked with effective implementation
of the chosen strategy.
 Industrial Organization (I/O) Model
The External Environment

Attractive Industry

Strategy Formulation

Assets and Skills

Strategy Implementation

Superior Returns

Superior returns: earning

above-average returns
 Five Forces Model of Competition
• Industry Profitability
– The industry’s rate of return on invested capital relative to its cost of
capital
• An industry’s profitability results from interaction among:
– Suppliers
– Buyers
– Competitive rivalry among firms currently in the industry
– Product substitutes
– Potential entrants to the industry
Five Forces Model of Competition (cont’d)
• Firms earn above-average returns by:
– Cost leadership
• Producing standardized products or services
– Differentiation
• Manufacturing differentiated products for which
customers are willing to pay a price premium
 The Resource-Based Model of Above-
Average Returns
• Model Assumptions
– Each organization is a collection of unique resources and capabilities that
provides the basis for its strategy and that is the primary source of its returns.
– Capabilities evolve and must be managed dynamically.
– Differences in firms’ performances are due primarily to their unique resources
and capabilities rather than structural characteristics of the industry.
– Firms acquire different resources and develop unique capabilities.
 FIGURE 1.3

The Resource-Based
Model of Above-
Average Returns
Resource-Based Model of Above-Average Returns

Resources
1. Strategy is dictated by the
Capabilities
Competitive Advantage
firm’s unique resources and
Strategy: capabilities.
Core Competencies
2. Find an environment in
which to exploit these assets
Environment (where are the best
opportunities?)
 Resources and Capabilities
• Resources • Capabilities
Click to edit the outline text format
– Inputs into a firm’s – Capacity of a set of
Second Outline Level
production process: resources to perform in


 Third Outline Level

• Capital equipment an integrative manner
 Fourth Outline Level

• Skills of individual – A capability should

 Fifth notLevel
Outline
employees be:  Sixth Outline Level

• Patents  Seventh Outline Level

• So simple that it is highly
 Eighth Outline Level
• Finances imitable.
 Ninth Outline Level
• Talented managers • So complex that it defies
internal steering and
control.
 Resource-Based Model (cont’d)
1. Identify the firm’s resources—
Resources strengths and weaknesses compared
with competitors
Resources: inputs into a firm’s
production process
 Resource-Based Model (cont’d)
Resources
2. Determine the firm’s
Capability
capabilities—what it can do better
than its competitors.
Capability: capacity of an
integrated set of resources to
integratively perform a task or
activity.
 Resource-Based Model (cont’d)
Resources

Capability
3. Determine the potential
Competitive Advantage of the firm’s resources and
capabilities in terms of a
Competitive advantage:
competitive advantage.
ability of a firm to
outperform its rivals.
 Resource-Based Model (cont’d)
Resources

Capability

Competitive Advantage

Attractive Industry 4. Locate an attractive industry.

Attractive industry: an industry

with opportunities that can be
exploited by the firm’s resources
and capabilities.
 Resource-Based Model (cont’d)
Resources

Capability

Competitive Advantage

Attractive Industry

Strategy Formulation 5. Select a strategy that best

and Implementation allows the firm to utilize its
resources and capabilities relative
Strategy formulation and implementation: strategic to opportunities in the external
actions taken to earn above average returns. environment.
 Resource-Based Model (cont’d)
Resources

Capability

Competitive Advantage

Attractive Industry

Strategy Formulation
and Implementation

Superior Returns

Superior returns: earning above-average returns

Criteria for Resources and Capabilities That Become
Core Competencies

Valuable Rare

Core
Competencies

Nonsubstitutabl Costly to Imitate

e
How Resources and Capabilities Provide Competitive
Advantage
Valuable Allow the firm to exploit opportunities or
neutralize threats in its external environment

Rare Possessed by few, if any, current and

potential competitors

Costly to When other firms cannot obtain them or

imitate must obtain them at a much higher cost

Nonsubstitutabl The firm is organized appropriately to obtain

e the full benefits of the resources in order to
realize a competitive advantage
 Core Competencies
• When the four key criteria of resources and capabilities are
met, they become core competencies.
• Managerial competencies are especially important.
• Core competencies serve as a source of competitive advantage,
create value, and provide the opportunity for above-average
returns.
 Why Two Models?
• Industrial Organization • Resource-Based Model
(I/O) Model Click to edit the outline text format
– Focuses on the inside of
Second Outline Level
the firm


– Focuses on the  Third Outline Level

environment outside the  Fourth Outline Level

firm.  Fifth Outline Level

 Sixth Outline Level
 Seventh Outline Level
Successful strategy formulation and implementation  Eighthactions
Outline Level
result only when the firm properly uses both models. Ninth Outline Level
 Vision and Mission
• Vision
– A enduring picture of what the firm wants to be and, in broad terms,
what it wants to ultimately achieve.
• Stretches and challenges people and evokes emotions and dreams.
• Effective vision statements are:
– Developed by a host of people from across the organization.
– Clearly tied to external and internal environmental conditions.
– Consistent with strategic leaders’ decisions and actions.
 Vision and Mission (cont’d)
• Mission
– Specifies the business or businesses in which the firm intends to
compete and the customers it intends to serve.
– Is more concrete than the firm’s vision.
– Is more effective when it fosters strong ethical standards.
• Above-average returns are the fruits of the firm’s efforts to
achieve its vision and mission.
 Stakeholders
• Individuals and groups who can affect, and are affected by, the
strategic outcomes achieved and who have enforceable claims on a
firm’s performance.
– Claims on the firm’s performance are enforced by the stakeholder’s ability to
withhold participation essential to the firm’s survival.
– The more critical and valued a stakeholder’s participation, the greater a
firm’s dependency on it.
– Managers must find ways to either accommodate or insulate the
organization from the demands of stakeholders controlling critical resources.
 Stakeholder Involvement
• Two issues affect the extent of stakeholder involvement in the
firm:
– How to divide returns
to keep stakeholders
involved?
– How to increase
returns so everyone
has more to share?
FIGURE 1.4 The Three Stakeholder Groups
 Stakeholders
Capital Market Capital Market Stakeholders
Stakeholders Shareholders
Major suppliers of capital
• Banks
• Private lenders
• Venture capitalists
 Capital Market Stakeholders
• Shareholders and lenders expect the firm to preserve and enhance
the wealth they have entrusted to it.
– Want the return on their investment (and, hence, their wealth) to be
maximized.
– Expect returns to be commensurate with the degree of risk to the
shareholder.
• Management must balance the interests of shareholders and
lenders with its concerns for the firm’s future competitive ability.
 Stakeholders (cont’d)
Capital Market
Stakeholders

Product Market Product Market Stakeholders

Stakeholders • Customers
• Suppliers
• Host communities
• Unions
 Product Market Stakeholders
• Customers
– Demand reliable products at low prices
• Suppliers
– Seek loyal customers willing to pay highest sustainable prices for goods and services
• Host communities
– Want companies willing to be long-term employers and providers of tax revenues
while minimizing demands on public support services
• Union officials
– Want secure jobs and desirable working conditions
 Stakeholders (cont’d)
Capital Market
Stakeholders

Product Market
Stakeholders

Organizational Organizational
Stakeholders Stakeholders
• Employees
• Managers
• Nonmanagers
 Organizational Stakeholders
• Employees
– Expect a dynamic, stimulating and rewarding work
environment.
– Are satisfied by a company that is growing and
actively developing their skills.
 Strategic Leaders
• Strategic Leaders
– People located in different parts of the firm who are using the
strategic management process to help the firm reach its vision and
mission.
• Prerequisites for Effective Strategic Leadership
– Hard work
– Thorough analyses
– Honesty
– Desire for accomplishment
– Common sense
• Organizational Culture
Strategic Leaders
– The complex set of ideologies, symbols, and core values that are shared
throughout the firm and that influence how the firm conducts business.
• The Value of a Functional Organizational Culture
– Supports effective delegation of strategic responsibilities
– Provides support for strategic leaders
– Encourages social energy
– Fosters of respect for others
 Predicting Outcomes of Strategic Decisions: Profit Pools
• Profit Pool
– The total profits earned in an industry at all points along the value chain
• Identifying the components of a profit pool:
– Define the pool’s boundaries.
– Estimate the pool’s overall size.
– Estimate size of each value-chain activity in the pool.
– Reconcile the calculations—which activity provides the most profit potential?
 Strategic Management Process
• Study the external and internal environments.
• Identify marketplace opportunities and threats.
• Determine how to use core competencies.
• Use strategic intent to leverage resources, capabilities and core
competencies and win competitive battles.
• Integrate formulation and implementation of strategies.
• Seek feedback to improve strategies.
STRATEGIC MANAGEMENT
Competitiveness and Globalization : Concepts and Cases

CHAPTER 2
The External Environment:
Opportunities, Threats,
Industry Competition,
and Competitor Analysis
ü Scan the business environment where your
organization operates
ü What industry do you belong?
( eg: Fast food, Clothing, Real Estate)
ü Who do you compete with?
 Analysis of the External Environments
• General environment (PESTLE)
– Focused on the future
• Industry environment (Porter’s 5 Forces)
– Focused on factors and conditions influencing a firm’s profitability
within an industry
• Competitor environment
– Focused on predicting the dynamics of competitors’ actions,
responses and intentions
 Opportunities and Threats
• Opportunity
– A condition in the general environment
that, if exploited, helps a company
achieve strategic competitiveness.
• Threat
– A condition in the general environment
that may hinder a company’s efforts to
achieve strategic competitiveness.
 Environmental Analysis: PESTLE
A PESTLE analysis is a framework to analyse the key factors (Political, Economic, Sociological, Technological, Legal and
Environmental) influencing an organisation from the outside.

It offers people professionals insight into the external factors impacting their organisation.
 POLITICAL

These factors are all about how and to what degree a government intervenes in the economy or a certain industry. Basically all the
influences that a government has on your business could be classified here.
ü Stability of governments
ü Political leaning
ü Regulation and deregulation
ü Government influence
ü Political system
ü Political activism
ü Lobbying
ü Corruption
ü Government subsides
ü Preferred industries
ü Political aims
ü Bilateral relationships
ECONOMIC

Economic factors are determinants of a certain economy’s

performance.
ü Currency strength
ü Interest rates
ü Inflation rates
ü Growth rates (GNP, GDP)
ü Access to debt
ü Consumer confidence
ü Unemployment levels
ü Disposable income
ü Stock exchange and markets
ü Cryptocurrency impact
SOCIO-CULTURAL
This dimension of the general environment represents the demographic characteristics, norms, customs
and values of the population within which the organization operates.

ü Age range
ü Attitude to health
ü Social classes
ü Birth and death rates
ü Social Preferences / Trends
ü Immigration and emigration
ü Cultural values
TECHNOLOGICAL
These factors pertain to innovations in technology that may affect the operations of
the industry and the market favorably or unfavorably.

ü Artificial Intelligence
ü Automation
ü R&D focus
ü Data analysis
ü Internet infrastructure
ü Access to connectivity
ü Adoption of technology

ü Communication advances
ü Augmented and Virtual Reality
LEGAL
Although these factors may have some overlap with the political factors, they include more specific laws – enacted
laws by the Congress, jurisprudence of the Supreme Court, or Ordinances of provincial boards or LGUs.

ü Constitution
ü Republic Acts
ü Jurisprudences
ü Ordinances
ü Health and safety laws
ü Employment laws
ü Privacy laws
ü Consumer protection laws
ü Copyright and patent laws
ü Education laws
ü Discrimination laws
ü Safeguarding laws
ENVIRONMENTAL
These factors include ecological and environmental aspects such as weather, climate, environmental
offsets and climate change which may especially affect industries such as tourism, farming, agriculture
and insurance.

ü Climate and weather

ü Climate change
ü Attitude to green technology
ü Pollution levels
ü Carbon footprint
ü Deforestation
ü Typhoons and Flooding
ü Volcanic Eruption
ü Extinction of Flora and Fauna
 Porter’s 5 Forces [Industry
Environment]
• The set of factors directly influencing a firm and its competitive
actions and competitive responses
– Threat of new entrants
– Power of suppliers
– Power of buyers
– Threat of product substitutes
– Intensity of rivalry among competitors
 Threat of New Entrants: Barriers to Entry
• Economies of scale
• Product differentiation
• Capital requirements
• Switching costs
• Access to distribution channels
• Cost disadvantages independent of scale
• Government policy
• Expected retaliation
 Bargaining Power of Suppliers
• Supplier power increases when:
– Suppliers are large and few in number.
– Suitable substitute products are not available.
– Individual buyers are not large customers of suppliers and there are
many of them.
– Suppliers’ goods are critical to the buyers’ marketplace success.
– Suppliers’ products create high switching costs.
– Suppliers pose a threat to integrate forward into buyers’ industry.
 Bargaining Power of Buyers
• Buyer power increases when:
– Buyers are large and few in number.
– Buyers purchase a large portion of an industry’s total output.
– Buyers’ purchases are a significant portion of a supplier’s annual
revenues.
– Buyers’ switching costs are low.
– Buyers can pose threat to integrate backward into the sellers’
industry.
 Threat of Substitute Products
• The threat of substitute products increases when:
– Buyers face few switching costs.
– The substitute product’s price is lower.
– Substitute product’s quality and performance are equal to or greater
than the existing product.
• Differentiated industry products that are valued by customers
reduce this threat.
 Intensity of Rivalry Among Competitors
• Industry rivalry increases when:
– There are numerous or equally balanced competitors.
– Industry growth slows or declines.
– There are high fixed costs or high storage costs.
– There is a lack of differentiation opportunities or low switching costs.
– When the strategic stakes are high.
– When high exit barriers prevent competitors from leaving the
industry.
 Interpreting Industry Analyses
Low entry barriers

Suppliers and buyers

have strong positions
Unattractive
Strong threats from Industry
substitute products

Intense rivalry
Low profit potential
among competitors
Interpreting Industry Analyses (cont’d)
High entry barriers

Suppliers and buyers

have weak positions
Attractive
Few threats from Industry
substitute products

Moderate rivalry
High profit potential
among competitors
 Competitor Analysis
• Gathering and interpreting information
about all of the companies that the firm
competes against.
• Understanding the firm’s competitor
environment complements the insights
provided by studying the general and
industry environments.
 Strategic Groups
• Strategic Group Defined
– A set of firms emphasizing similar strategic dimensions and using
similar strategies
• Internal competition between strategic group firms is greater than between
firms outside that strategic group.
• There is more heterogeneity in the performance of firms within strategic
groups.
– Similar market positions
– Similar products
– Similar strategic actions
 Strategic Groups
• Strategic Dimensions
– Extent of technological leadership
– Product quality
– Pricing Policies
– Distribution channels
– Customer service
 Competitor Analysis
• Competitor Intelligence
– The ethical gathering of needed information and data that provides
insight into:
• A competitor’s direction (future objectives)
• A competitor’s capabilities and intentions (current strategy)
• A competitor’s beliefs about the industry (its assumptions)
• A competitor’s capabilities
 Complementors
– The network of companies that sell complementary products or
services or are compatible with the focal firm’s own product or
service.
• If a complementor’s product or service adds value to the sale of the
focal firm’s product or service, it is likely to create value for the focal
firm.
• However, if a complementor’s product or service is in a market into
which the focal firm intends to expand, the complementor can
represent a formidable competitor.
 Ethical Considerations
• Practices considered both legal and ethical:
– Obtaining publicly available information
– Attending trade fairs and shows to obtain competitors’ brochures, view
their exhibits, and listen to discussions about their products
• Practices considered both unethical and illegal:
– Blackmail
– Trespassing
– Eavesdropping
– Stealing drawings, samples, or documents
Thank You
 CHAPTER 3
The Internal Organization: Resources, Capabilities, Core
Competencies, and Competitive Advantages
Analyzing the External Environment

Opportunities
and threats

By studying the external environment, firms identify what

they might choose to do.
 Analyzing the Internal Organization
Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

Strengths &
Weaknesses

By studying the internal environment, firms identify what they can and cannot do.
Components of an Internal Analysis
 Competitive Advantage
• Firms achieve strategic competitiveness and earn above-average
returns when their core competencies are effectively:
o acquired
o bundled
o leveraged
• Over time, the benefits of any value-creating strategy can be
duplicated by competitors.
• Sustainability of a competitive advantage is a
function of the:
– rate of core competence obsolescence because of
environmental changes.
– availability of substitutes for the core competence.
– imitability of the core competence.
 Creating Value
• By exploiting their core competencies or competitive advantages, firms
create value.
• Value is measured by:
– product performance characteristics.
– product attributes for which customers will pay.
• Firms create value by innovatively bundling and leveraging their
resources and capabilities.
• Superior value leads to above-average returns.
 Creating Competitive Advantage
• Core competencies, in combination with product-market
positions, are the firm’s most important sources of competitive
advantage.
• Core competencies of a firm, in addition to the analysis of its
general, industry, and competitor environments, should drive
its selection of strategies.
 The Challenge of Analyzing the Internal
Organization
• Strategic decisions in terms of the firm’s resources,
capabilities, and core competencies:
– are non-routine.
– have ethical implications.
– significantly influence the firm’s ability to earn above-
average returns.
• When making strategic decisions, managers as strategic
leaders must:
– know when a capability is not a competence.
– learn quickly from failures and mistakes.
– have the maturity of judgment to deal effectively with
uncertainty, complexity, and intra-organizational conflicts in an
unbiased manner.
– be willing to take intelligent risks.
Conditions Affecting Managerial Decisions
Resources, Capabilities, and Core Competencies
• Resources:
– are the source of a firm’s capabilities.
– are broad in scope.
– cover a spectrum of individual, social and organizational
phenomena.
– alone, do not yield a competitive advantage.
 Resources
• Resources • Types of Resources
– A firm’s assets, including people – Tangible resources:
and the value of its brand name, • financial
that represent inputs into a • physical
firm’s production process: • technological
• capital equipment • organizational
• skills of employees
– Intangible resources:
• brand names
• human
• financial resources
• innovation
• talented managers
• reputation
Tangible Resources
Intangible Resources
Capabilities:
• represent the capacity to deploy resources that have
been purposely integrated to achieve a desired end state.
• emerge over time through complex interactions among
tangible and intangible resources.
Capabilities (cont’d):
• often are based on developing, carrying and exchanging
information and knowledge through the firm’s human
capital.
• composed of the unique skills and knowledge of a firm’s
employees.
• include functional expertise of employees.

• often developed in specific functional areas or as part of a

functional area.
Example of Firms’ Capabilities
The four criteria for determining strategic
capabilities:
• value

• rarity

• costly-to-imitate

• non-substitutability
Core Competencies
• Resources and capabilities that are the sources of a firm’s
competitive advantage that:
– distinguish a firm competitively and reflect its
personality.
– emerge over time through an organizational process of
accumulating and learning how to deploy different
resources and capabilities.
Core Competencies (cont’d):
• activities that a firm performs especially

well compared to competitors.

• activities through which the firm adds

unique value to its goods or services over a

long period of time.
 Building Core Competencies
The four criteria of sustainable Sustainable
Competitive
competitive advantages: Advantage

• valuable capabilities Four Criteria of

• rare capabilities
Sustainable
Advantages

• costly to imitate
• Valuable
• non-substitutable • Rare
• Costly to imitate
• Nonsubstitutable
The Four Criteria of Sustainable Competitive Advantage
 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.
 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.
• Value Chain shows how a product moves from the
raw-material stage to the final customer.
• To be a source of competitive advantage, a resource or
capability must allow the firm to perform:
– an activity in a manner that is superior to the way
competitors perform it, or
– a value-creating activity that competitors cannot complete
 The Value-Creating Potential of Primary Activities
• Inbound Logistics
– Activities 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.
• Outbound Logistics
– Activities involved with collecting, storing, and physically distributing
the product to customers.
• Marketing and Sales
– Activities completed to provide the means through which customers
can purchase products and to induce them to do so.
• Service
– Activities designed to enhance or maintain a product’s value.
• Each activity should be examined relative to competitor’s
abilities and rated as superior, equivalent or inferior.
 The Value-Creating Potential of Primary Activities: Support
• Procurement
– Activities completed to purchase the inputs needed to produce a
firm’s products.
• Technological Development
– Activities completed to improve a firm’s product and the processes
used to manufacture it.
• Human Resource Management
– Activities involved with recruiting, hiring, training, developing, and
compensating all personnel.
• Firm Infrastructure
– Activities that support the work of the entire value chain (general
management, planning, finance, accounting, legal, government
relations, etc.).
• Effectively and consistently identify external opportunities and threats
• Identify resources and capabilities
• Support core competencies
• Each activity should be examined relative to competitor’s
abilities and rated as superior, equivalent or inferior.
 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.
Outsourcing Decisions
A firm may outsource all M
ar
rgin gin
or only part of one or M
a
more primary and/or
support activities.

Technological Development
Service

Human Resource Mgmt.

Support Activities
Marketing and Sales

Firm Infrastructure
Outbound Logistics

Procurement
Operations

Inbound Logistics

Primary Activities
 Strategic Rationales for Outsourcing
• Improving business focus helps a firm focus on broader
business issues by having outside experts handle various
operational details.
– Provides access to world-class capabilities
– Makes world-class capabilities available to firms in a wide range of
applications
• Accelerating re-engineering benefits
– achieves re-engineering benefits more quickly by having outsiders - who
have already achieved world-class standards - take over processes.
• Sharing risks
– reduces investment requirements and makes firm more flexible,
dynamic and better able to adapt to changing opportunities.
• Freeing resources for other purposes
– redirects efforts from non-core activities toward those that serve
customers more effectively.
 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.
 Outsourcing Issues

• Nonstrategic team resources

– Do not outsource capabilities critical to the firm’s success, even
though the capabilities are not actual sources of competitive
advantage.
• Firm’s knowledge base
– Do not outsource activities that stimulate the development of new
capabilities and competencies.
 Competencies, Strengths, Weaknesses, and Strategic
Decisions
• Cautions and Reminders
– Never take for granted that core competencies will continue to
provide a source of competitive advantage.
– All core competencies have the potential to become core rigidities –
former core competencies that now generate inertia and stifle
innovation.
– Determining what the firm can do through continuous and effective
analyses of its internal environment will increase the likelihood of
long-term competitive success.