Chapter 3

Faculty: Adnan Anwar

Resource, Capabilities, Value Chain Analysis

Resources, capabilities and core competencies are used to create brand as a source of competitive
advantage.

 Organizations that rely on brand as a competitive advantage want that advantage to be

sustainable.

Resources and capabilities allows firm to take advantage of opportunities due to changing
environmental conditions.

 Hence sustainable competitive advantage is achieved when firm implements a value creating
strategy that is grounded in their own unique resources and capabilities.

A firm is a bundle of heterogeneous resources, capabilities, and core competencies that can be used to
create an exclusive market position.

Firms must constantly thinking about their strategic management process and how to continuously
increase value it creates as it is used throughout the company.

 Thus firms achieve strategic competitiveness and earn above average return when their unique
core competencies are leveraged effectively to take advantage of opportunities in the external
environment.

The sustainability of competitive advantage is the function of three factors

1. The rate of core competency obsolesce due to environmental change

2. The availability of substitutes for the core competencies
3. Imitability of core competence
 Developing new core competencies is the key.
 Through internal analysis, a firm identifies what it can do

The proper matching of what it can do with what it might do allows the development of strategic intent,
strategic mission and formulation of strategies. Outcomes from internal and external environment
analysis are the key.

These capabilities must make firm capable in solving customers’ need in superior way than its
competitors. Therefore resources, capabilities and core competencies are not inherently valuable.

Strategic competitiveness is achieved according to Michael Porter, when the firm satisfies the
operational efficiency demands of its external environment while at the same time, using its unique
capabilities to establish a viable competitive position. For example implementing a cost leadership or
differentiation strategy.

 Managers are being evaluated in terms of their ability to identify and nurture their firm’s core
competencies. Learning how to learn is done by firms through acquisition and development of
competencies. The process is called metal earning.

Value consists of the performance characteristics and attributes provided by companies in the form of
goods or services for which customers are willing to pay.

 Customer value is the source of a firm’s potential to earn above average return. What firm
intends to do to create value affects its choice of business level strategy and corporate
structure.

A firm’s core competencies in addition to the results of its general, industry and competitive analysis
should drive the selection of strategies. Firm specific differences is the key in creating competitive
advantage and resources play a major role in understanding how to achieve the difference.

Resources: they are inputs into firm’s production process such as capital equipment, skills of employees,
patents, finances but alone they do not generate competitive advantage.

 A competitive advantage is created through the unique bundling of several resources. Dell with
combination of human resources with technology for highly efficient business model.

Resources are tangible and intangible.

Tangible resources can be seen and quantified such as Physical resources (production equipment,
manufacturing plants), financial resources (ability to generate funds), organizational resources such as
reporting structure and coordinating and controlling systems, and technological resources such as
patents, trademarks, copyrights and formulas.

Intangible resources are Human resource (knowledge, skills, trust) Innovation resources (ideas, capacity
to innovate), and reputational resources (brand name, perception of product quality), and reputation
with others such as suppliers.

Capabilities: are the firm’s capacity to deploy resources that have been purposely integrated to achieve
a desired end stage.

 Capabilities emerge over time through complex interaction among tangibles and intangible
resources.
 Capabilities enable the firm to create and exploit external opportunities and develop sustained
advantages

Many experts think that people’s skills and commitment are best route to competitive advantage. The
foundation of many capabilities lies in the skills and knowledge of a firm’s employees and often their
functional expertise.
  Capabilities are often deployed in specific functional areas (manufacturing, R&D, Marketing,
Advertising)

Core competencies emerge over time through an organizational process of accumulating and learning
how to deploy different resources and capabilities

 Not all of a firm’s resources and capabilities are strategic assets- assets that have competitive
value and potential to serve as a source of competitive advantage

With in-depth understanding of internal strengths, firms must locate external environment
opportunities that can be exploited through their capabilities while avoiding competition in areas of
weakness.

 How many core competencies to be formed to get the competitive advantage?

 Experts say 3 to 4. Too many competencies and firm may lose its focus.

Building Core Competencies

 Two tools help the firm identifies and build core competencies.

The first tool consists of four specific criteria that firms use to determine which of their resources and
capabilities are core competencies. The second tool is the value chain analysis. Firms use this tool to
select the value-creating competencies that should be maintained, upgraded or developed and those
should be outsourced.

Capabilities that are valuable, rare costly to imitate, and no substitutable are strategic capabilities
(core competencies). Every core competency is a capability but every capability is not core competency.

Valuable capabilities are those that create value for a firm by exploiting opportunities and neutralizing
threats in the firm’s external environment. Valuable capabilities enable a firm to formulate and
implements strategies that create value for specific customers. For example Sony corp. used its valuable
capabilities dealing with designing, manufacturing, and selling of miniaturized electronic technology to
exploit a range of marketplace opportunities such as disc players and video cameras.

Rare capabilities are those possessed by few or none of the current or potential competitors. For
example Dell’s model of selling directly and efficiently to customers appear to be rare and therefore Dell
grew to become no.1 PC maker

Costly to imitate are those capabilities that other firms cannot easily develop.

This may be due to unique historical conditions reflecting a firm’s particular path through history.

Unique organizational culture is another source of competitive advantage when employees are held
together tightly by their belief in it.
  Social complexities are another reason that capabilities can be costly to imitate. This includes
interpersonal relationships, trust, friendship among managers and employees, reputation with
suppliers and customers. For example the organizational culture of Sun Microsystems or Axact
in Pakistan.

No substitutable capabilities are those that do not have strategic equivalent. The more invisible
capabilities are, the more difficult it is for firms to find substitutes and for competitors to identify
substitutes and imitate value creating strategies.

Value Chain Analysis

Value Chain Analysis allows the firm to understand the parts of its operations that create value and
those that do not.

 Value chain analysis is the template that the firm uses to understand its cost position and
identify the means that might be used to facilitate the implementation of its business levels
strategy.
 Firm’s value chain is segmented into primary and support activities

Primary activities: are involved with a product’s physical creation, its sale and distribution to buyers,
and its service after the sale.

It includes:

Inbound logistics: activities such as material handling, warehousing, inventory control.

Operations: actions to convert input provided by inbound logistics into final production.

Outbound logistics: activities involved with collecting, storing distributing the final product to customers.

Marketing and Sales: advertising and promotional campaign, selection of distribution channel,
Salesforce.

Service: installation, repair, training….activities to enhance value orientation.

Secondary activities are the Support activities provide the support necessary for primary activities to
take place.

 Support activities include procurement (activities completed to purchase the input such as raw
material, supplies, machinery), Technological development (product design, process
equipment), Human Resource Management (activities involved with recruiting, hiring, training
all personnel) and firm infrastructure (activities such as general management, planning, finance,
legal support, accounting etic)
It’s a process where a firm identify its primary and support activities that add value to its final product.
And then analysis these activities to reduce cost or increase differentiation.