2/7/2
2
1
Capabilities & competitive
advantage
The internal environment of the organization
1
Today’s class focuses on
understanding how the internal
environment affects competitive
advantage
2
Inputs
Resources
Capabilities
Competencies
Outcomes
Accounting,
Shareholder,
Stakeholder returns,
etc.
Internal
processes
Strategy
formulation &
implementation
3
What is competitive advantage?
• It’s fickle (transitory): hard to gain and harder to sustain
• Above average returns, based on performance:
• Accounting profitability
• Shareholder value creation
• Economic value creation
• Balanced scorecard
• Triple bottom line
4
What is the R&D spending paradox
• Apple vs Microsoft
• Which company spends more on R&D?
• What was Jobs’s R&D spending philosophy?
5
Apple R&D spending philosophy
• “Innovation has nothing to do with how many R&D dollars you have.
When Apple came up with the Mac, IBM was spending at least 100
times more on R&D. It’s not about the money. It’s about the people
you have, how you’re led, and how much you get it.” —S. Jobs
6
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22
2
What are KPIs?
• measurable value that reports progress against a result
• Inspired action (progress towards objective)
7
The resource-
based view
The resource-based view suggests that a firm’s
unique resources and capabilities provide the
basis for a strategy.
Capabilities evolve and must be managed
dynamically in pursuit of above-average returns.
Firms acquire different resources and develop
unique capabilities. These resources may not be
mobile across firms and that the differences in
resources are the basis of competitive advantage.
8
Value
Value is measured by a product’s
performance characteristics and its
attributes for which clients are
willing to pay.
9
Sony’s next big hit in the 1990s was a flop
Introducing the minidisc
10
I would love to love this product…
11
Glossary of terms Managerial actions
1. Resource: input into a firm’s
production process
2. Capability: capacity for integrated
set of resources to performs a
task/activity
3. Competitive advantage: ability to
outperform rivals based on above
ave. returns
4. Attractive industry: presents
opportunities that can be exploited
with firm’s capabilities
1. Identify firm resources. Study
strengths & weaknesses relative to
rivals
2. Determine what capabilities allow
you to outperform rivals
3. Determine how resources &
capabilities may create competitive
adv.
4. Locate an attractive industry
5. Select strategy that best exploits
capabilities relative to opportunities
in environment
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3
Source: Porter, 1985
13 14
15 16
17
Building capabilities for performance
main results from a recent McKinsey survey of CEOs
• Capability building is a high strategic priority for executives
• Half of responders say that capability building is at least a top-three
priority for their companies
• Defined as: learning, skill development
• Sustain capabilities through alignment and measurement
18
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The Core Competence of the Corporation
An old, but important paper by Hamel & Prahalad
• Core competencies are the collective learning in the organization,
especially how to coordinate diverse production skills and integrate
multiple streams of technologies.
• …harmonizing streams of technology, the organization of work and delivery
of value
• …communication, involvement, deep commitment to working across
organizational boundaries
• …the skills that together constitute core competence must coalesce around
individuals {…} blending their functional expertise […] in new and
interesting ways.
• …unlike physical assets which deteriorate over time, competencies are
enhanced as they are applied and shared.
19 20
21
Source: Barney, 1995
22
2/7/2
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1
Firm performance
& Competitive advantage
1
But first, some management lingo:
Key Performance Indicators (KPI)
• a quantifiable measure used to evaluate the success of an
organization, employee, etc. in meeting objectives for performance.
• Or: measurable value that reports progress against a result
• Inspires action (progress towards objective)
• Measurement must be well defined
• Action to be taken
• Responsibility
• Timeframe
2
Typical KPIs for marketing
• Sales revenue
• Organic traffic
• Social media traffic
(engagement, responses,
followers)
• Impressions, click-thru rate
• Online mktg ROI
• Cost/lead
• Number of new customers
acquired.
• Customer lifetime value.
• Cost per customer/acquisition.
• Return on Investment for ad-
spend.
• Customer attrition
rates.
• Social media/brand awareness
rates.
3
Typical KPIs for HR
• Training costs
• Turnover rate (retention)
• Conversion rate (finding talent)
• Absentee rate
• Employee engagement
• Overtime hours
• Job satisfaction
• Revenue per Employee.
• Cost per Hire.
• Employee Turnover.
• Overtime Percentage.
• Absenteeism.
• Length of Service.
• Job Satisfaction Rate.
• Profit per Employee.
4
Typical KPIs for Finance
• ROI
• D/E
• Co credit rating
• Working capital
• Cash flows: Net Present Value
• Profit margins
• Inventory turnover
• Stock price
• Net present value
• Etc…
5
Typical KPIs for Accounting
• EBIT
• Net cash flow
• Gross profit
• Quick ratio
• P/L
• Sales by region
• COGS
• Days of sales outstanding
• Expenses / budget
• Debt to equity
• Sales revenue
• All the ratios J
6
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22
2
Typical KPIs for Management
• Employee turnover
• Employee Satisfaction
• Time management
• Order fulfillment time
• % product defects
• Planned vs actual hours worked
• % cancelled projects
• Goal-meeting
• Balanced Scorecard
• Triple Bottom Line
• Corporate Social Responsibility
7
Typical KPIs for Supply Chain Management
• Perfect order measurement
• Cash to cash cycle time
• Customer order cycle time
• Fill rate
• Supply chain cycle time
• Inventory day of supply
• Freight bill accuracy
• Freight cost per unit
• Inventory turnover
• Days of sale outstanding
• Average pmt period for
production materials
• On time shipping rate
• Inventory turnover ratio
• Turn-era index
• GM ROI
• Days of supply
• Inventory velocity
8
Apple vs Microsoft
• What are examples of performance measurements used in the mini
case in the chapter posted on CC?
9
How to measure firm performance?
Traditional frameworks
• Accounting profitability
• Shareholders value creation
•
Economic value creation
Integrative frameworks
• The balanced scorecard
• The triple bottom line
10
Accounting
profitability
PROS
• Data easily available and
dependable, due to GAAP &
FASB standards and legal
reporting requirements
• Easy to determine
competitive advantage by
comparing public firms on
key ratios
CONS
• All data are historical, i.e.,
backward looking
• Off-balance sheet items
not considered (e.g.,
pension obligations)
• Focus mainly on tangible
assets
11
Intangibles and value
• Intangibles not already captured in
accounting data à important to
firms’ stock market valuation
• Book value = historical cost of firm’s
assets
• Market valuation = future
expectations of a firm’s growth
potential and performance
12
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3
Price-to-book value
• P/B is the ratio of the market value of a company’s shares (share
price) over its book value of equity (value of assets on the balance
sheet)
• P/B is an important metric used by investors to gauge if a stock is
valued properly.
• Low P/B ratio (below 1) could signal that a stock may be undervalued
• Low P/B could also mean that co is earning poor ROA
• Value investors look for opportunities where they believe the market
has inaccurately priced a stock
• A good indicator, but not to be used alone!
13
Shareholder
value creation
Shareholders: individuals or organizations that own one or
more shares of stock in a public company. They are the legal
owners of public companies.
Most important measure of competitive adv. to shareholders:
return on risk capital (money they provide in return for an
equity share, which can’t be recovered in bankruptcy)
Total return to shareholders – stock price appreciation +
dividends received over a specific period.
Forward looking performance metric
Indicates how the stock market views all available public
information about a firm
14
Shareholder value creation & competitive advantage
15
MVC by market cap?
• What are the most valuable companies by market capitalization
(2022)?
16
Shareholder
Value creation
– limitations
• Stock prices can be highly volatile
• Overall macroeconomic factors, such as
economic growth, unemployment,
interest and exchange rates, all have a
direct bearing on the stock prices
• Psychological mood of investors is
frequently reflected in stock prices,
which can be irrational
17
Economic value creation
• Difference between a buyer’s willingness to pay for a product or
service, and the firm’s total cost to produce
• Reservation price = maximum price a consumer is willing to pay for a
product/service based on the total perceived consumer benefits
18
2/7/22
4
2 ways to obtain economic value advantage?
19
A few important terms
• Value = dollar amount a consumer attaches to a good or service; the
consumer’s maximum willingness to pay (i.e., reservation price)
• Profit = difference between price charged and the cost to produce
(i.e., producer surplus)
• Consumer surplus = difference between the value a consumer
attaches to a good or service and what he or she paid for it
20
Economic value creation
PROS
• Fundamental in formulating cost
vs differentiation strategies
• Conceptually powerful measure
of competitive advantage
• Considers all costs, including
opportunity costs
CONS
• Not easy to determine the value
of a good in the eyes of
consumers
• Value of a good changes based
on demographics, sociocultural
elements
• Difficult to measure competitive
advantage at firm level (must
measure ec. v. for all products
and services
21
Balanced scorecard
• Relies on multiple internal
and external performance
metrics in order to balance
both financial and strategic
goals
22
Balanced
scorecard
PROS
• Communicate and link
strategic vision to
responsible parties in org
• Translate vision into
measurable operational
goals
• Design and plan business
processes
• Implement feedback and org
learning
CONS
• A tool for strategy
implementation not
formulation
• Failure to achieve
competitive advantage is a
reflection of a strategic
failure, not a bad
framework
23
The triple
bottom line
Mark Carney (governor of Bank
of England):
“Companies and industries that
are not moving towards zero-
carbon emissions will be
punished by investors and go
bankrupt.”
24
2/7/22
5
25
3
Studying this chapter should provide
you with the strategic management
knowledge needed to:
J.1 Explain why firms need to study
and understand their internal
organizatio
n.
J 2 Define value and discuss its
JJ
importance.
Describe the differences between
tangible and intangible resources.
J ~ Define capabilities and discuss
their development.
3 ‘5 Describe four criteria used to
determine if resources and
capabilities are core competencies.
3 6 Explain how firms analyze their
value chain to determine where
they are able to create value when
using their resources, capabilities,
and core competencies.
3 7 Define outsourcing and discuss
reasons for its use.
3 8 Discuss the importance of
identifying internal strengths
and weaknesses.
3 9 Describe the importance of
avoiding core rigidities.
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\ ‘ .
. .
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·;,
‘
LARGE PHARMACEUTICAL COMPANIES, BIG DATA ANALYTICS,
ARTIFICIAL INTELLIGENCE AND CORE COMPETENCIES:
A BRAVE NEW WORLD
To date, and perhaps surprisingly, the idea of using data strategically remains somewhat
novel in some organizations. However, the reality of “big data• and “big data analytics· (which
is “the process of examining big data to uncover hidden patterns, unknown correlations, and
other useful information that can be used to make better decisions”) is becoming increasingly
popular in business. Indeed, in the current competitive landscape, most businesses must use
big data analytics (BOA} across all customer channels (mobile, Web, e-mail, and physical stores}
throughout their supply chain to help them become more innovative.
This is the situation for large pharmaceutical companies (the firms often called ” big
pharma”} in that many have been working to develop a core competence in BOA. (We define
and discuss core
competencies in this
chapt er.) There are
several reasons t hey are
doing this. In addition
to the vast increases in
the amounts of data
that must be studied
and interpreted for
competitive purposes,
“health care reform and
the changing landscape
of health care delivery•
systems throughout the
world are influencing
these firms to think
about developing BOA
as a core competence.
Many benefits can
accrue to big pharma
firms that develop BOA
as a core competence.
For example, having BOA
as a core competence
can help a firm quickly
”
!~~~~—-~~
~
AI can help analyze data on clinical trials, health records, genetic
profiles, and preclinical studies. China has a goal to become the world
leader in AI.
identify trial candidates and accelerate their recruitment. develop improved inclusion and
exclusion criteria to use in clinical trials, and uncover unintended uses and indications for prod-
ucts. In terms of customer functionality, superior products can be provided at a faster pace as a
foundation for helping patients live better and healthier lives.
In developing their BOA capabilities, many of the big pharma companies are investing in ar-
tificial intelligence (AI). AI p rovides the capability to analyze many d ifferent sets of informat ion.
For example, AI can help analyze data on clinical trials, health records, genetic profiles, and
precl inica l studies. AI can analyze and integrate these data to identify patterns in the data and
suggest hypotheses about relationships. A new drug generall y requires a decade of research
and $2.6 billion of investment. And only about 5 percent of the drugs that enter experimental
research make it to the market and are successful. Eventually, it is expected that the use of A
I
could reduce the early research development time from 4-6 years to 1 year, not only greatly
reducing the time of development but also the costs.
As we discuss in this chapter, capabilities are the foundation for developing core com-
petencies. There are several capabilities big pharma companies need for BOA to be a core
competence. Supportive architecture, the proper mix of data scientists, and •t echnology that
integrates and manages new types and sources of data flexibility and scalability while main-
taining the highest standards of data governance, data quality, and data security” are examples
76
of capabilities that big pharma need if they wish to develop BOA as a core competence. Of
course, using artificial intelligence provides strong support for the application of BOA.
Having a strong BOA competence could be critical for pharmaceutical firms in the future.
Most Chinese pharmaceutical firms are medium-sized and sell generic drugs and therapeutic
medicines, investing in R&D at only about 25% of the amount invested by big pharma in devel-
oped countries. However, China has a plan to develop large, competitive pharmaceutical firms
by 2025. In 2017, for example, China’s second largest class of investments was biopharma.
Interestingly, the largest Chinese investment that year was in information systems, including AI.
China has a goal to become the world leader in AI.
In recent years, big pharma has been earning mediocre returns of about 3 percent ROI,
down from 10 percent a decade earlier. Thus, big pharma executives feel pressure especially
with the initial costs of developing BOA and AI. Hopefully, they soon will be able to reduce
their costs and experience higher rates of success in the development of new drugs. Until
then, however, analysts are predicting record numbers of mergers and acquisitions in the
pharmaceutical industry, with big pharma acquiring successful medium-sized pharmaceuticals
and biotechnology firms.
Sources: S. Mukherjee, 201 S. How big pnarma is using AI to make better drugs. Fortune, fortune.com, March 19: Z. Torrey, 2018.
China prepares for big pl\arrna. thediplomat.com. March 14; E. Corbett. 2018. European mid-sized pharrna companies·biotechs
and big pharma? The Pharrnaletter, www.thepharmaletter.com, March 9; M. Jewel. 2018. Signs that 2018 will be a record
year for pharma M&A, The Phormaletter, www.thepnarmaletter.com, March 1; B. Nelson, 2018. Why big pharma and biotech
are betting big on AI. NBC News, www.nbc.news. March 1; Big data analytks: What it is & why it matters. 2015, SAS, www
.sas.com, April2; Big data for the pharmaceutical industry, Informatica, www.informatka.com, March 17; B. Atkins, 201 5.
Big data and the board, Wall StreetlournaiOnline. www.wsj.com. April16; 5. F. DeAngelis. 2014, Pharmaceutical big data
analytks promises a healthier future, Enterrasolutions, www.enterrasolutions.com, June 5; T. Wolfram, 2014. Data analytks
has big pharma rethinking its core competencies, Forbes Online, www.forbes.com, December 2
2.
A s discussed in the first two chapters, several factors in the global economy, including the rapid development of the Internet’s capabilities and globalization in general, are
making it difficult for firms to develop competitive advantages.’ Increasingly, innovation
appears to be a vital path to efforts to develop competitive advantages, particularly sus-
tainable ones! Innovative actions are required by big pharma companies, and they need
to develop new drugs more quickly and at lower costs while improving the success of
the drugs that they develop. As the Opening Case shows, they are trying to use artificial
intelligence to help develop capabilities in big data analytics that hopefully can become a
core competence.
As is the case for big pharma companies, innovation is critical to most firms’ suc-
cess. This means that many firms seek to develop innovation as a core competence. We
define and discuss core competencies in this chapter and explain how firms use their
resources and capabilities to form them. As a core competence, innovation has long
been critical to Boeing’s success, too. Today, however, the firm is focusing on incre-
mental innovations as well as developing new technologies that are linked to major
innovations and the projects they spawn, such as the 7
87
Dreamliner. The first delivery
of the 787-10 Dreamliner was made to Singapore Airlines on March 26, 2018. Boeing
believes its incremental innovations enable the firm to deliver reliable products to cus-
tomers more quickly and at a lower cost.3 As we discuss in this chapter, firms and
organizations- such as those we mention here- achieve strategic competitiveness and
earn above-average returns by acquiring, bundling, and leveraging their resources for
the purpose of taking advantage of opportunities in the external environment in ways
that create value for customers.•
Even if the firm develops and manages resources in ways that create core compe-
tencies and competitive advantages, competitors will eventually learn how to duplicate
the benefits of any firm’s value-creating strategy; thus, all competitive advantages have
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&btorial rt:’\·kw has dtemt’d lb:.t sny SUppn’llie’d (.Ultelll doH not m:dtriaJJy atrcctlbt o~~ra!J Jeamina: uperim..-e. Cmgaj,~ Uamina: R’!iefl’tS lh;,o ri; hllo f\’mO,,.-t: additiOIUI (.ilatelll 1111 Illy timt ir s~ent ri£blll nostric.tioas noqu:in.- it.
Chapter 3: The Internal O a limited life.’ Because of this, the question of duplication of a competitive advantage is 1. The rate of core competence obsolescence because of environmental changes For all firms, the challenge is to effectively manage current core competencies while We studied the general, industry, and competitor environments in Chapter 2. Armed We begin this chapter by briefly describing conditions associated with analyzing the 3-1 Analyzing the Internal Organization Given the increasing importance of the global economy, those analyzing their firm’s 77
A global mind-set is the Copyri; hl 2020 Cmga;t: U:uninz:. All Ri£bts Rekt~led. t.by not bt ~oopied . .ilC*lntd. or duplie&lc’d. in wbc))e or in parl. Due 14 e la’.’Cron.k risflli. JOim’ lbinl pllrty (.ilatelll m:.y be ~~a~ppm:k’d from lbt e8ook a!:d’cx eCbapta(.s). I 78
Value is measured by a Partl: Strat~lc Management Inputs
ability to analyze, understand, and manage an internal organization in ways that are not Finally, analyzing the finn’s internal organization requires that evaluators examine 3-1 b Creating Value Firms with a competitive advantage create more value for customers than do competitors.16
Walmart uses its “every day low price” approach to doing business (an approach that is Figure 3.1 Components of an Internal Analys1s
Resources Core
• Rare Nonsubstitutable
Strategic C..,-naJ~t 2mOC…,……..,.An ..,… ~ed..)la1•k~–.t.cw~ .. .._.or•,.,.DwtoC’~n””‘_.._..,_.,. ~..,hc~h-*dtoot….wtor~•~ Chapter 3: The Internal Ofganlzation: Resources. C.pabil~ies. Core Competencies. and Competitive Advantages
channels) to create value for those seeking to buy products at a low price compared to Ultimately, creating value for customers is the source of above-average returns for a At one time, firms’ efforts to create value were largely oriented toward understand- 3-lc The Challenge of Analyzing the Internal Organization Making decisions involving the firm’s assets- identifying, developing, deploying, The challenge and difficulty of making effective decisions are implied by preliminary C..,-naJ~tMMC…,……..,. An …… ~-.)la1•keow-L–.t.c.~ .. .._.or•J*t. OwtoC’~n,lfiD.._a.d,_.,.~_,.,. ~h–dtool:….wtor~». 79 80
At OM rime, Polaroid’s mmeras aNted a P~rtl: Str~t~lc Management inputs
cameras. If a mistake is made when analyzing and managing a A firm can improve by studying its mistakes; in fact, the ~ As we discuss next, three conditions-uncertainty, com- Po« d«JsJans may haw contrlburH ro the firm’s of new proprietary technologies, rapidly changing economic Corp. Coal companies have been suffering in the last decade or more with significant Figure 3.2 Conditions Affecting Managerial Decisions about Resources, Capabilities, ,——- ——————————~
Conditions
Uncertainty
Complexity
Uncerta inty exists about the cha racteristics of Complexity results from the Interrelatio nships lntraorganizational Conflicts lnt raorganizational conflicts may exist among C..,-naJ~t2mO~ ………. AI …… ~ed..)la1•k~.-d.«~•wldtor•,…._O.toC’~n””‘_._..JIMYc.-…,.trc~.._*dtooL….wtor~t.._ Chapter 3: The Internal Ofganlzation: Resources. C.pabil~ies. Core Competencies. and Competitive Advantages Biases regarding how to cope with uncertainty affect decisions made about Additionally, intraorganizational conflict may surface when decisions are made about In making decisions affected by these three conditions, judgment is required. When exercising judgment, decision makers often take intelligent risks. In the current Finding individuals who can make the most successful decisions about using the Next, we consider the relationships among a firm’s resources, capabilities, and core 3-2 Resources, Capabilities, Resources, capabilities, and core competencies are the foundation of competitive advan- 3-2a Resources As its sole distribution charmel, the Internet is a resource for Amazon.com . The firm C..,-naJ~tMMC…,……..,.An..,…~-.)a..,•keow-L–.t.c.~ .. .._.or•J*t.DwtoC’~n,lfiD..-a.d,_.,.~_,.,.~._.,dtool:….wtor~». 81 82
Tangible resources are Intangible resources Parll: Slral~lc Management Inputs
developed a reputation for excellent customer service. Amazon’s capability in terms of Some of a fum’s resources (defined in Chapter I as inputs to the frrm’s production Intangible resources require nurturing to maintain their ability to help frrms engage As noted in the Strategic Focus, intangible resources may be even more important For each analysis, tangible and intangible resources are grouped into categories. The Ta ble 3.1 Tangible Resources
Fina ncia l Resources
Organizational Resources
Physical Resource s
Technological Resources
The firm’s capacity to borrow Formal reporting structures
The sophistication of a firm’s plant and eq uipme nt and th e Availability of technology-related resources such as copyrights, SourcH: Adapted from J. B. Barney, 1991, Firm resources and sustained competltille l>dvantM}e.JoumdofMor.ogmomt 17: 101;
R. M. Grant. 1991, Contmrpo«UyStrotegyAnalysi<, cambridge: U.Jt: BlackwollBu C..,-naJ~tMMC…,……..,. An …… ~-.)la1•keow-L–.t.c.~ .. .._.or•J*t. OwtoC’~n,lfiD.._a.d,_.,.~_,.,. ~h–dtool:….wtor~». Chapter 3: The Internal O Tangible and Intangible Resources as the Base for Core Competencies
While tangible resources are important, intangible resources
are perhaps even more important in the development of firms’
core competencies. Understandably, most professional service
firms have few tangible resources but can have high market
value primarily because of their intangible resources. For exam-
ple, Fainsbert Mase Brown & Susmann, llP is a premier law
firm located in los Angeles, California. Obviously, its goal is to
provide superior legal services to its clients. Within this broad
frame, however, there is a core competence. The firm provides
legal advice and support on significant real estate, business,
and corporate transactions for large institutions, high net-worth
individuals, and privately owned businesses. For example,
in 2018 the firm provided the legal services to conclude the
negotiations for the Industrial Realty Group’s purchase of the
3.1 million square foot IBM technology campus in Rochester,
Minnesota. This complex transaction required more than one
year to negotiate with a multi-level corporate legal team.
likewise, other major service firms are heavily dependent
on their intangible assets. For example, Genpact requires
highly knowledgeable human capital for its core competence.
Genpact provides solutions to major process problems for
its clients. Genpact describes its competence as providing
“digital-led innovation and digitally enabled intelligent oper-
ations· for cl ients. The firm solves clients’ problems using data
analytics, helping its clients transform their operations. Another
technology-based service firm is Document Security Systems,
Inc. (DSS). DSS has a core competence in the development of
anti-counterfeit, authentication, and diversion software that
protects organizations against Internet fraud and theft. And it
tries to remain a leader in this field through continued invest-
ment in research and new technology. In 2018, it announced
an agreement to partner with the Hong Kong R&D Center for protection products using blockchain technology.
Firms with larger amounts of tangible resources also need
valuable intangible resources. For example, Hecla Mining
Company has a core competence in “high grade, narrow-vein
underground mining~ Obviously, the company has significant
investments in specialized mining equipment in order to
employ this core competence. But significant engineering and
mining knowledge and expertise is required to successfully
engage in this type of mining. This knowledge and expertise
resides in the human capital (intangible assets) within the firm.
It is important to note that firms’ reputations are often
significant intangible assets. For example, professional
service firms must be considered not only highly knowl-
edgeable in the areas in which they compete, but also
must be considered honest and high ly trustworthy. In
meeting this challenge, Genpact was selected as one of the
·w orld’s Most Ethical Companies· in 2018. Companies can
also enhance intangible assets, such as their reputation,
through use of their core competencies. For exam pie, in the
aftermath of Hurricane Harvey in 2017, Johnson & Johnson
provided medical supplies, Fed Ex provided logistical sup- 40,000 pounds of canned turkey to help citizens in the
recovery. Companies that are ethical and good corporate
citizens often are highly respected and are called on to
use their core competencies to serve an increasing number
of customers.
Sources: Document Security Systems. Inc .. 2018, DSS Partners with Hong Kong for blcxkchain research, globenewswire.com, March 19:” Srreerlnsider, 2018, Hecla completes acquisition closing on 3.1 million sq. ft. IBM campus in Minnesota. Copyris:hl 2020 Cmga£t: Uamins:. All Ri£bts Rekr~•ed. ~by not bt copied . .ininntd. or duplic&kd. in wbole or in parl. Due toe.leccronk righl~~;. JOim’ lbinl p;:ut)’ (.’OOknl m:.y be !IUppruk’d from lbt e8ook aM’w eCbapta(J:). 84 Part I: Strat~lc Management Inputs
Table 3.2 Intangible Resou rces
Human Resources
Innovation Resources
Reputational Resources
Knowledge Ideas Brand name Sources: Adapted from R. Hall 1992. The strategic analysis of intangible resources. Srrar R. M. Gran~ 1991 , Contemporary Strategy Analysis, cambridge: U.K” Bladcwetl Business_ I 01-10 4.
Tangible Resources Although production assets are tangible, many of the processes necessary to use Intangible Resources Because intangible resources are less visible and more difficult for competitors to Reputational resources (see Table 3.2) are important sources of a firm’s capabil- C..,-naJ~tMMC…,……..,. An..,…~-.)a..,•keow-L–.t.c.~ .. .._.or•J*t.DwtoC’~n,lfiD..-a.d,_.,.~_,.,.~._.,dtool:….wtor~». Chapter 3: The Internal Ofganlzation: Resources. C.pabil~ies. Core Competencies. and Competitive Advantages its words, a value-creating reputation is a A reputation indicates the level of aware- A well-known and highly valued brand Developing capabilities In specific functional areas con give direct advertising to specific market segments has given some firms
on advantage over their rivals.
can purchase from a Harley-Davidson dealer or from its online store.55
Taking advantage of today’s technologies, some firms are using social media as a
means of influencing their reputation. Recognizing that thousands of conversations 3-lb Capabilities many ways, Domino’s is becoming”a technology company … that has adapted the art of As illustrated in Table 3.3, capabilities are often developed in specific functional O.,-naJ~t2mOC…,Lc….,. An …… ~ed..)laf•keow-L–.t.c.~ .. ..,.or.pt. OwtoC’~n ….. _a.nt,_.,.~..,.trc ~._.*dtoot-..or~,~ 85 86 Partl: Strat~lc Management Inputs
Tabla 3.3 Example of Firms’Capabiht ies
Functional Areas Capabilities Examples of Firms
Di.stribution
Human Resources Management Information Marbting
Management
Manufacturing
Research & Development
Effective u.se of logistics management techniques
Motivating. empowering. and retaining employees
Effective and efficient control of inventories through point· Effective promotion of br.lnd-name products • Ability to envision the future of clothing
Design and production skills yielding reliable products Innovative technology 3-2c Core Competencies
Walmart
Microsoft
Walmart Procter r. Gamble Hugo Boss Komatsu Caterpillar Defmed in Chapter 1, core competencies are capabilities that serve as a source of com- Innovation is thought to be a core competence at Apple. As a capability, R&D activi- Excellent customer service in its retail stores is another of Apple’s core competen – C..,-naJ~t2mOC…,……..,.An..,…~-.)la1•keow-L–.t.c.~ .. .._.or•J*t. OwtoC’~n,lfiD.._a.d,_.,.~_,hc ~h–dtool:….wtor~». Chapter 3: The Internal Ofganlzation: Resources. C.pabil~ies. Core Competencies. and Competitive Advantages describe on-site tech support that is to be provided to customers, and deep thinking 3-3 Building Core Competencies 3-3a The Four Criteria of Sustainable Competitive Advantage A sustainable competitive advantage exists only when competitors are unable to Table 3.4 The Four Criteria of Sustainable Competitive Advantage
Valuable Capabilities
R.re Capabilities
Costly-to-Imitate Capabilities
NonsubstltUUible Capabilities
Help a firm neutralize threats or exploit opportunities
Are not possessed by many others
Historical: A unique and a valuable organizational culture or No strategic equivalent
C..,-naJ~tMMC…,……..,. An …… ~-.)la1•keow-L–.t.c.~ .. .._.or•J*t. DwtoC’~”””‘_..,..,..,.~_,hc ~h-*dtool:….wtor~·~ 87 88
Valuable capabilities Rare capabilities are Costly-to-imitate Partl: Strat~lc Management Inputs a competitive advantage through these actions, Walmart hoped to make it easier for The length of time a firm can expect to create value by using its core competencies Valuable While offering value to customers, the capabilities to offer its services can be imitated and Rare Costly to Imitate C..,-naJ~tMMC…,……..,.An..,…~-.)a..,•keow-L–.t.c.~ .. .._.or •J*t.DwtoC’~n,lfiD..-a.d,_.,.~_,.,.~._.,dtool:….wtor~». Chapter 3: The Internal O Southwest Airlines crew hold puppies who became homeless after of supplies.
McDonald’s that some thought was a core competence and a competitive advantage for A second condition of being costly to imitate occurs when the link between the Social complexity is the third reason that capabilities can be costly to imitate. Social Nonsubstitutable 89
Nonsubstitutable capabilities are capabilities that do not have strategic equivalents. This Nonsubstitutable Copyris:hl 2020Cmga;t: ~:unins:. All Ri£bts Rekf~led. J.by oot bt ~oopied. SC’allntd. or duplie&lc’d. in wbc))e or in p:u-l. 01.11:’ lbelt’dron.krisflli. JOim’ lbinl pllrty(.ilaklll m:.y be ~~a~ppmsed from lbt eBoak a!:d’cx-eCbapla(.s). 90 Partl: Strat~lc Management Inputs
TAble 3. 5 Outcomes from Combinations of the Criteria fo r Susta inable Co m petitive Advantage
Is the Capability Is the C•p•bility Is the Capability Is the Capability Competitive PerformAnce No No
Yes No
Yes Yes
Yes Yes No No Competitive Below-~ No Yes/no Competitive j)llrity AverAge returns
No Yes/no Tempor.y AverAge returns Yes Yes/no Sust a inable com- Above-average
petitive advantAge re t urns
of firm resources) are strategically equivalent when they each can be separately exploited In summary, only using valuable, rare, costly-to-imitate, and nonsubstitutable 3-3b Value Chain Analysis The value chain is a template that firms use to analyze their cost position and to C..,-naJ~t MMC…,……..,. An …… ~-.)la1•keow-L–.t.c.~ .. .._.or • J*t. DwtoC’~”””‘_..,..,..,.~_,hc ~h-*dtool:….wtor~·~ Chapter 3: The Internal Organization: Resources, Capabilkies, Core Competencies, and Competitive Advantages
Figure 3.3 A Model of the Value Chain
I Finance I I Human Resources I Functions I Management Information Systems I
~ Supply-Chain Management Value Chain We show a model of the value chain in Figure 3.3. As depicted in the model, a firm’s The activities associated with each part of the value chain are shown in Figure 3.4, 1. Perform an activity in a manner that provides value superior to that provided by 2 . Perform a value-creating activity that competitors cannot perform.
Only under these conditions does a firm create value for customers and have oppor- _.
91
Customer Follow-Up Value chain activities Support functions include COp)’n&llllOlOc….a.~ Al aqtlb ~ Ml!y_. btcapwd, .-.l.cwdufk*d-• -“‘*« •P-‘- 0. -~ ,…_ .-r…, …,._.. _,..t.t….,…… ._ lkdoot _._~.,._ 92
Figure 3 .4 Creatong Value through Value Chain Activities
–onQ,dng sourong. Activmes r~ated to gett•ng the fiN I Activities taken for the purpose of P~rtl: Str~t~lc Management Inputs
AaMties ubn tO tnCrMM •
pocixt’s …… ‘”‘ cuot…-Surwys.,–~ Acti\lrtiH necMwy to eff’lc.tendy Creating value for customers by completing activities that are part of the value Evaluating a firm’s capability to execute its value chain activities and support func- What should a firm do about value chain activities and support functions in which C..,-naJ~t2mOC…,………, ABa.,…~ed..)bf•keow-L.-.Lc.~ .. .._.or•pt. OwtoC’~n….__..,..,_.,.ODM*..,.bt ~h-*dtoot….wtor~·~ Chapter 3: The Internal O 3-4 Outsourcing
Human Resources Activities associated with managing Management Activities taken to obtain and manage knowledge. and linking rek?vant Concerned with how components, finished goods, or services will be obtained, 93
Outsourcing can be effective because few, if any, organizations possess the resources Outsourcing is the purchase Copyri;hl 2020 Cmga;t: U:uninz:. All Ri£bts Rekt~led. J.by not bt ~oopied . .ilC*lntd. or duplie&lc’d. in wbc))e or in p:u-l. 01.11:’ 14ela’.’Cron.k risflli. JOme lbinl JXUlY’ (.ilatelll m:.y be ~~a~ppm:k’d from lbt eBoak :.!:d’cx eCb:.pla(.s). 94 Partl: Strat~lc Management Inputs
nurturing a smaller number of capabilities, a firm increases the probability of developing There are concerns associated with outsourcing … Two significant ones are the poten- 3-5 Competencies, Strengths, Weaknesses, By analyzing the internal organization, firms identify their strengths and weaknesses As noted in the Strategic Focus, some firms decide to outsource a function or activity In considering the results of examining the firm’s internal organization, managers Tools such as outsourcing help the firm focus on its core competencies as the source of After studying its external environment to determine what it might choose to do (as C..,-naJ~tMMC…,……..,. An …… ~-.)la1•keow-L–.t.c.~ .. .._.or•J*t. OwtoC’~n,lfiD.._a.d,_.,.~_,.,. ~h–dtool:….wtor~». Chapter 3: The Internal O The Extreme Specialization of Outsourcing: Who Is Doing It and Who Is Not?
Outsourcing activities and functions has been growing dramat-
ically over the last decade. With the election of Donald Trump,
companies in some industries- particularly manufacturing-
have reduced their outsourcing outside of the United States for
fear of government actions against them. However, outsourc-
ing remains strong in other sectors of the economy. panies are using some of their resources and capabil ities to
develop “big data analytics” as a core competence because of
the value of these analytics to these firms. In contrast, these
same firms are outsourcing drug safety processes and proce-
dures to other firms, many of which are located in India or have
offices located there. In fact, monitoring drug safety is ·one of
outsourcing’s newest frontiers, and the now $2 billion busi-
ness is booming as regulators require closer tracking of rare
side effects and interactions between medici nes~ Accenture,
Cognizant, and Tara Consultancy Services ltd. are some of
the firms to which big pharma companies AstraZeneca PLC,
Novartis AG, and Bristol-Myers Squibb Co. are outsourcing the
monitoring of drug safety. Thus, the big pharma firms have
decided that data analytics processes are an activity in which
they can capture value while monitoring drug safety is not. tries. Deutsche Bank has outsourced some data center services
to Hewlett-Packard; however, it is retaining control over certain
technology application areas it believes are proprietary and, as
such, are core competencies through which the firm creates value.
In fact, outsourcing information technology activities has been
growing in banking and the financial sector. This is due to the
rapid move to cashless transaction and mobile banking. Many of
the banks have “legacy” information technology systems that are
difficult to change over to handle these new functions. As such,
they are outsourcing many aaivities such as commercial credit
card payments to what is referred to as fintech firms. The number
of these specialized fintech firms is growing dramatically because
of the increasing amount of cashless transactions and the need for
help by banks and other financial institutions such as credit unions.
Interestingly, government has become a major outsourcer.
Governments are trying to outsource the provision of services
from government agencies to private and non-profit organizations
who can perform the services more efficiently and with higher
quality. In fact, even the British Health Service is outsourcing
some health services (e.g., surgeries) to healthcare organizations
in other European countries (e.g., France), trying to manage its
own backlog of requests for healthcare services.
Wipro and lnfosys have historically been successful as firms
to whom others outsource activities. However, this success
has been largely a product of being able to employ relatively
inexpensive programmers to complete tasks lacking significant
amounts of complexity. The technology service needs have
become more sophisticated and challenging. And, w ith the
reductions of outsourcing in some sectors, some of these firms
are struggling. For example, lnfosys and Cognizant have laid
off many employees in India and lnfosys is trying to establish
operations in the United States.
Therefore, the nature of outsourcing is changing and firms
are becoming more specialized. Additionally, some industries are
outsourcing less (e.g., manufacturing) and others are outsourcing
more (financial institutions). Nevertheless, outsourcing remains a
critical means for firms to gain access to valuable resources that
they need to seize and maintain a competitive advantage.
Sources: R Koczkar, 201 a Governmental outsourcing a boon for service prov;ders, Monitoring drug safety. Wall Street Joutnol Online, www.wsj.com, February 1.
Copyris;hl 2020 Cms;a£t: Uamins;. All Risb~ Rekt~;ed. J.by oot be ~oopied. ;;canned. or duplie&kd. in wbl))e or in parl. Due t6eJ«1ron.k tishl~. some tbinl pwtytilaklll may bt” S!Upprulk’d from the e8ook &!:d’W eCbapla(.s). 96
SUMMARY organizations recognize that strategiC competitiveness and (identified by studying the firm’s internal organization) are external environment).
No competitive advantage lasts forever. Over time, rivals use duplicate the focal firm’s ability to creat e value for cust omers. able, firms must exploit their current advantages while simul· advantages that can lead to future competitive success.
Effectively managing core competencies requires careful anal· g rated to achieve a specific task or set of tasks). The k nowledge cant of an organization’s capabilities and ul timately p rovides create an organizational culture that allows people to integrat e collectively, the firm has a sigmficant amount of value-creating Capabilities are a more l1kely source of core compet ence and resources. How a firm nurtures and supports it s capabilities
KEY TERMS REVIEW QUESTIONS nal organization?
2. What is value? Why is 11 critical for the firm to create value? 3. What are the d1fferences between tangible and intangi·
ble resources? Why is it Important for decision makers
Part I: Strategic Management Inputs
to become core competencies is less visible to rivals, making
efforts to understand and imitate the focal firm’s capabilities Only when a capability is valuable, rare, costly to imit at e, and
nonsubstitutable is it a core competence and a source of com- ties. Core competencies are a source of competitive advantage opportunities in its external env~tonment. When this is no ion· capabilities that satisfy the four criteria of sustainable compel· Value chain analysis is used to Identify and evaluate the com· their skills relative t o those associat ed w ith value chain act iv· st ructure and identify the activities through w hich they are When the firm cannot create value in either a value chain
activity or a support function, outsourcing is considered. Used of a value-creating activity from an external supplier. The firm support function under consideration. In addition, the firm through which it could create value.
support functions 91 to u nderstand these differences? Are tangible resources resources, or is the reverse true? Why?
4. What are capabilities? How do firms create capabilities?
S. What four criteria must capabilities sat1sfy for them to
become core competencies? Why is 1t important for firms to
c.,..,..lOl’O c…- W’–..AJIRa&lll•~)lll).albtC’IDfl”‘d,~cw~••idt«•JIIft.DwiO~nr/Jtth..-t._,.,_.) ~..,hr~’-llwtBool.aadllar~•).. Chapter 3: The Internal O use these criteria to evaluate their capabilities’ value-creating
potential?
6. What is value chain analysis? What does the firm gain by 7. What os outsourcing? Why do firms outsource?
Mini-Case
8. How do firms identify internal strengths and weaknesses? Why
is it vital that managers have a clear understanding of their 9. What are core rigiditoes? What does it mean to say that each
core competence could become a core rigidity?
Is Strengthening the Superdry Brand a Foundation to Strategic Success?
Brit ish -based SuperGroup, owner of Superdry and its 3.
Founded in 1985, the firm is recognized as a dis- As noted above, problems have affected the firm’s Officer left to explore other options. Some analysts Efforts arc now underway to address these problems. Direct actions are also being taken to enhance the C-.,-n&ftii20:!0CftiC\IIIItY–. AJIR.,..,.~..cl’b)•kC’CipWd..–.:l.c.clllpilnkd.• …. o.-•~O.IOc:~npr…-….,,_.),…,_..~bc~'”–c:Booe.’llallkrl~t.-
——” ……… =”-•;;_’-tu.~…_.,. …….-cdl’OIIdl~-~·«t•Ot-.m~~ac:…s~c~u….sm.tf'”ft*’tft&Mto,__.-~~~·..,.._.,~rqllb~~ .. 98 Part l : Strategic Management Inputs
to expand into additional markets, including China. In problems, Wall Street foumal On/me, www,WSJ.COm, ApnllS; Sources: About SuperGroup. 2015, SuperGroupPLC.com, “‘WW.supergroup Elba, Tl” Guardran On/me. www.theguard1.1.n.com, March 26; A. Petroff, Case Discussion Questions
1. What influences from the e xternal environment over the next
several years do you think might affect SuperDry’s ability to
compete?
3.. Will the actions that Superdry is taking solve its problems?
Why or why not?
4. What value does Superdry create for its customers?
2. Does Superdry have one or more capabilities t h at are valu able, they? If not, on which c riteria do they fall s hort?
S. What actions would you recommend the management of
Superdry take to resolve its problems and turn around t h e
performance of the f irm?
NOTES 2. A. Gambardella, C. Panico, & G. Valentom, 32:~57. S. from onnovatJon In dogotal platform-based
ecosystE.>ms, Research Policy, in prE.>ss; loolung •nsodE.> the black box. Academy of Reconceptualizing competitive dynam•c.s: 53: 1175-1193. via Internal organizatiOn, alhances, and 8. J. Ferre 9. R. Roy & M. B. Sarkar, 2016, KnowledgE.>, 10. D. Plaskowska & G. Trojanowski, 2014, Twice 11. M. Andresen & F. Bergdoll, 2017, A systematK CCip) …. 2020C….-W’–..AJIRap. .. ~)b)aolhtC’CII””‘l~cw~••idt«•JIIlt.DwiO~niJth..-t._,.,_.)~..,hr~’-11wt8ool…..tt.~•).. Chapter 3: The Internal Organization: Resources. Capabilrties. Core Competencies. and Competitive Advantages gg
global mindset and cultural1ntelhgence- 17. R. L Priem, M. Wenzel, & J. Koch, 2018, 23. C. Giachem & S. Tomsi, 2018, follow1ng 0<
merging two dofferent research streams. Demand-side strategy and busmess runmng away from the market leader? The
TM lntern 12 S. J. Moles & M van Cleat, 2017, Strategoc fit: markets. StrategK Management Journal, 31: 24 M. G. Butler & C. M. Callahan, 2014, 13. R. Vandale & A. Zaheer, 2015, Alliance J.-L Arregle, & J. T. Campbell, 2010, The D. P. forbes, 2007, Reconsidenng the 14. A. Waeraas & H. L. Sataoen, 2015, Being CEO temporal focus, environmental advantage, Academy of Management 15. C. Gnmpe & K. HusSJnger, 2014, Resource & G. T. M. Hult. 2015, Examon•ng a key resource-based VII!!W of the firm and the 73.
property nghts, Strategk Management performance. Strategic Management v . f. R. Cahen, M de M1randa 011veora. & 16. B. Clarysse, M. Wright, J. Bruneel, & and competitive interactions, Strategic ‘simple rules’ that strategists learn from CCip) …. 2020C…-W’–..AJIRap. .. ~)b).alhtC’CII””‘l~cw~••idt«•JIIlt.DwiO~niJth..-t._,.,_.)~..,hr~’-11wt8ool…..tt.~•).. 100
29.
30.
31.
32.
33.
34.
35.
Part I: Strategic Management Inputs E. Vidal & W. Mttchell, 2018, Virtuous or EnVIronment, 26: 125-141; S. R Hian & 40. C. A. Maritan & G. K. lee, 2017, Bnnging a CCip) …. 2020C…-W’–..AJIRap. .. ~)b).alhtC’CII””‘l~cw~••idtcw•part.DwiO~niJth..-t._,.,_.)~_,ht~’-11wt8ool……ttc.~,).. Chapter 3: The Internal Organization: Resources. Capabilrties. Core Competencies. and Competitive Advantages 101
Internal labor markets, firm·speCif ic human 53. C. B. Astrachan, I. Bolero, J. H. Astrachan, & strategtc cho1ce, learn1ng, and competrtton. 48. B. Y. Obeoda~ A. Tarhlno, R. Masa’deh, & Business Strategy, in press; P. Foroud~ ordonary capabolotoes on an (economiC) 49. A. Jaon & R.· A. Thoetart. 2014, Capabilities 54. R. Sellers-Rubio, F. Mas-Ruiz. & F. Sancho· performance: Dynamoc capabolotoes and so. D. Ravasl, J. Cornelissen, V. Rlndova, & N. Rosen busch & J. Brinckmann, 2011, Is Strategk Management Journal, 30: 1-23; Sl. E. G. love, J. Lim, & M. ll Bednar, 2017, moderating role of market condotoons. Journal, www.wsj. com. June 15. 52. R. Sroufe & V. Gopalakrlshna·Remani, revenue productivity in small firm~ An value chains, Walmart, corporatewalmart. CCip) …. 2020C…-W’–..AJIRap. .. ~)b).alhtC’CII””‘l~cw~••idt«•JIIlt.DwiO~niJth..-t._,.,_.)~_,hr~’-11wt8ool……ttc.~,).. 102
67.
68. 69.
70.
n. 72.
73. 74.
Part I: Strategic Management Inputs E. A Morse, & W. G. Rowe, 2013, Rethinking retrieval of knowledge after spillovers. 83. R. Garcla..Castro & R. V. Aguilera, CCip) …. 2020 C…-W’–..AJIRap. .. ~)b)aolhtC’CII””‘l~cw~••idtcw•part.DwiO~niJth..-t._,.,_.) ~_,hr~’-11wt8ool……ttc.~,).. Chapter 3: The Internal Organization: Resources. Capabilrties. Core Competencies. and Competitive Advantages
on sights: Going beyond resoring to under uncertainty: A novel mult•-cnterla 91. M. Kotabe & J Y. Murray, 2018, Global I. Geyskens, 2012. The market valuation o( 92. J. Pia-Barber, E. Linares, & P. N. Ghauri, 95. J. Alcacer & J. Oxley, 2014,learning by 93. lt-J. Wu. M.·L Tseng, AS. F. Ch1u, & global supply chain: Impact of the arrn’s 103
266: 88-98; ObloJ & P. Zemsky, 2015, Value 97. L I’ It Ade, A. Mufutau. & A l Tubosun, 2017, 98. U. Stettner & D. lavie, 2014, Ambidexterity 99. A Schneider, C. Wicke~ & E. Marto, CGp) …. 2020C….-W’–..AJIRap. .. ~)b).alhtC’CII””‘l~cw~••idt«•JIIlt.DwiO~niJth..-t._,.,_.)~..,hr~’-11wt8ool…..tt.~•)..
not if it will happen, but when. In general, a competitive advantage’s sustainability is a
function of three factors:
2. The availability of substitutes for the core competence
3. The imitability of the core competence6
simultaneously developing new ones? Only when firms are able to do this can they expect
to achieve strategic competitiveness, earn above-average returns, and remain ahead of
competitors in both the short and long term.
with knowledge about the realities and conditions of their external environment, firms
have a better understanding of marketplace opportunities and the characteristics of the
competitive environment in which those opportunities exist. In this chapter, we focus
on the firm. By analyzing its internal organization, a firm determines 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 environment) yields insights for the firm to select strategies from
among those we discuss in Chapters 4 through 9.
firm’s internal organization. We then discuss the roles of resources and capabilities in
developing core competencies, which are the sources of the firm’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
outsourcing 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 capabilities and
core competencies.
3-la 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 – such as
labor costs, access to financial resources and raw materials, and protected or regulated
markets- although still important, are now less likely to be the source of competitive
advantages.9 An important reason for this is that an increasing number of firms are using
their resources to form core competencies through which they successfully implement an
international strategy (discussed in Chapter 8} as a means of overcoming the advantages
created by more traditional resources.
internal organization should use a global mind-set to do so. A global mind-set is the
ability to analyze, understand.
and manage an internal
organization in ways that
are not dependent on the
assumptions o f a single
country, culture. or context.
&btorial rt:’\·kw has dtemt’d lb:.t sny SUppn’llie’d (.Ultelll doH not m:dtriaJJy atrcct lbt o~~ra!J Jeamina: uperim..-e. Cmgaj,~ Uamina: R’!iefl’tS lh;,o ri; hllo f\’mO,,.-t: additiOIUI (.ilatelll 1111 Illy timt ir s~ent ri£blll nostric.tioas noqu:in.- it.
product’s performance
characteristics and by
its attributes for which
customers are willing to pay.
dependent on the assuntptions of a single country, culture, or context.10 Because they
are able to span artificial boundaries, those with a global mind-set recognize that their
firms must possess resources and capabilities that allow understanding of and appropriate
responses to competitive situations that are influenced by country-specific factors and
unique cultures. Using a global mind-set to analyze the internal organization has the
potential to significantly help the finn in its efforts to outperform rivals.11
the firm’s entire portfolio of resources and capabilities. This perspective suggests that
individual firms possess at least some resources and capabilities that other companies do
not-at least not in the same combination. Resources are the source of capabilities, some
of which lead to the development of core competencies; in turn, some core competencies
may lead to a competitive advantage for the firm. 12 Understanding how to leverage the
firm’s unique bundle of resources and capabilities is a key outcome decision makers seek
when analyzing the internal organization.U Figure 3.1 illustrates the relationships among
resources, capabilities, core competencies, and competitive advantages and shows how
their integrated use can lead to strategic competitiveness. As we discuss next, firms use
the resources in their internal organization to create value for customers.
Firms use their resources as the foundation for producing goods or services that will create
value for customers.14 Value is measured by a product’s performance characteristics and
by its attributes for which customers are willing to pay. Firms create value by innova-
tively bundling and leveraging their resources to form capabilities and core competencies.15
grounded in the firm’s core competencies, such as information technology and distribution
• Tangible
• Intangible
• Costly to Imitate
•
Competi-
tiveness
F.dilorul'”wwluo.,_.._…,~~~- -.U~tyafl«t: *cOftdll–.~ee..z. Lan.&mill’n’ftdw na.ktD,_·C’ ~..,.._._,._ .t …._..,.._~,.._.._
competitors’ prices for those products. The stronger these firms’ core competencies, the
greater the amount of value they’re able to create for their customers.”
firm. What the firm intends regarding value creation affects its choice of business-level
strategy (see Chapter 4} and its organizational structure (see Chapter 11).’1 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
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 frrm’s external environment. 23
The strategic decisions managers make about the internal organization are nonrou-
tine,2′ have ethical implications,25 and significantly influence the firm’s ability to earn
above-average returns.M These decisions involve choices about the resources the firm
needs to collect and how to best manage and leverage them.
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 internationalizedY 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.23
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
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sigllifiarnt amount ol Wllw for customers.
finn’s resources, decision makers must have the confidence to
admit it and take corrective actions.Jt
learning generated by making and correcting mistakes can be
important in the creation of new capabilities and core com-
petencies.32 One capability that can be learned from failure
is when to quit. Polaroid should have obviously changed its
strategy earlier than it did, so it could have been able to avoid
demise. Another potential example concerns News Corp:s
Amplify unit (founded 2011), which was created to change
the way children are taught. As of mid-2015, the firm had
invested over $1 billion in the unit, which makes tablets,
sells online curricula, and offers testing services. In 2014,
Amplify generated a $193 million loss, facing competition
from well -established textbook publishers enhancing their
own ability to sell similar digital products. In September 2015,
News Corp. decided to sell Amplify to a team of managers
and private investors, incurring a sign ificant loss.JJ
~ plexity, and intraorganizational conflict-affect managers as
~ they analyze the internal organization and make decisions
-~ about resources (see Figure 3.2).
i When studying the internal organization, managers face
(,:) uncertainty because of a number of issues, including those
subseqwnt Inability ro cnar~ Wllw and Its initial
filing for banlaupky In 2001.
and political trends, transformations in societal values, and
shifts in customers’ demands.3 4 Environmental uncertainty
increases the complexity and range of issues to examine
when studying the internal environment. » Consider how
uncertainty affects the ways to use resources at coal com-
panies such as Peabody Energy Corp. and Murray Energy
regulations and the competition from cleaner forms of energy such as natural gas. They
have been aided some by the reduction of regulations by the Trump administration,
but the competition from cleaner and cheaper forms of energy remains. Thus, they still
have to deal with a complex an d uncertain environment.
and Core Competencies
the fi rm’s ge ne ral a nd ind ustry e nvironments
and customers’ needs.
among conditions shaping a firm.
mana gers making decisions as well as among
those affected by the decisions.
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how to manage the fLrm’s resources and capabilities to form core competencies.36
the core competencies a firm should develop and nurture. Conflict might surface
in the energy companies mentioned above about the degree to which resources and
capabilities should be used to form new core competencies to support newer “clean
technologies.”
judgment is the capability of making successful decisions when no 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
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
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 U and for our purposes in this chapter, we can think of strate-
gic leaders as individuals with an ability to examine the flrm’s resources, capabilities, and
core competencies and make effective choices about their use.
competencies. While reading these sections, keep in mind that organizations have more
resources than capabilities and more capabilities than core competencies.
and Core Competencies
tage. Resources are bundled to create organizational capabilities. In turn, capabilities are
the source of a flrm’s core competencies, which are the basis of establishing competitive
advantages.39 We show these relationships in Figure 3.1 and discuss them next.
Broad in scope, resources cover a spectrum of individual, social, and organizational phe-
nomena. By themselves, resources do not allow frrms 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.
uses the Internet to sell goods at prices that typically are lower than those offered by
competitors selling the same goods through more costly brick-and-mortar storefronts.
By combining other resources (such as access to a wide product inventory), Amazon has
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assets that can be observed
and quantified.
are assets that a re rooted
deeply in the firm’s history.
accumulate aver time, and
are relatively difficult for
competitors to analyze and
imitate.
customer service is a core competence as well in that the firm creates unique value for
customers through the services it provides to them.
process) are tangible while others are intangible. Tangible resources are assets that
can be observed and quantified. Production equipment, manufacturing facilities, dis-
tribution centers, and formal reporting structures are examples of tangible resources.
For energy giant Kinder Morgan, its stock of oil and gas pipelines are a key tangible
resource. Intangible resources are assets that are rooted deeply in the frrm’s history,
accumulate over time, and are relatively difficult for competitors to analyze and imi-
tate. Because they are embedded in unique patterns of routines, intangible resources
are difficult for competitors to analyze and imitate. Knowledge, trust between manag-
ers and employees, managerial capabilities, organizational routines (the unique ways
people work together), scientific capabilities, the capacity for innovation, brand name,
the firm’s reputation for its goo ds or services and how it interacts with people (such
as employees, customers, and suppliers), and organ izational culture are intangible
resources.”
in competitive battles. For example, brand has long been a valuable intangible resource
for Coca-Cola Company. The same is true for “logo-laden British brand Superdry;’ a case
highlighted at the end of the chapter. As you will read, SuperGroup PLC, the owner of
Superdry, encountered problems a few years ago in its efforts to maintain and enhance
the value of the Superdry brand. New management and a new approach are attempting
to renew the Superdry brand. 41
in the development of core competencies. Of course, three of the firms described in the
Strategic Focus- Fainsbert Mase Brown & Susmann, Genpact, and Document Security
Systems- were service firms, which commonly base their core competencies on their
human capital However, even Hecla Mining Company, which has significant investments
in specialized mining equipment, must also have valuable human capital for its core com-
petence in “high grade, narrow-vein underground mining.”
four primary categories of tangible resources are financial, organizational, physical, and
technological (see Table 3.1). The three primary categories of intangible resources are
human, innovation, and reputational (see Table 3.2).
The firm’s ability to generate fund s thro ugh Inte rnal ope ratio ns
attractiveness of its location
Distribution fa cilities
Product invento ry
patents, trademarks, and trade secrets
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logistics and Supply Chain to develop the next generation of
port to provide bonled water, and Bunerball provided
R&D Centre for logistics and supply chain management enabling technologies
Mining (HU Announces $462 million Acquisition of Klondes Mines, Ltd. (K), www
.streetinsider.com. March 19; Businesslnsider, 2018, Genpact named one of the 2018
worlds most ethical companies by the Ethisphere Institute. marketsbusinessinsider
.com, March 14; Cision PR Newswire. 2018, Fainsbert Mase Brown & Sussmann, LLP
www.prnewswire. February 23; P. N. Danziger, 2018, Fire, Roods. hurricanes: How
and why corpo
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Trust
Skills
Abilities t o collaborate w ith others
Scientific capabilities
Capacity to innovate
Perceptions of product q uality, d urability, and reliability
Positive reputation with stakeholders such as suppliers and customers
As tangible resources, a firm’s borrowing capacity and the status of its physical fac ilities
are visible. The value of many tangible resources can be established through financial
statements, but these statements do not account for the value of all of the firm’s assets
because they disregard some intangible resources!l The value of tangible resources is also
constrained because they are hard to leverage-it is difficult to derive additional business
or value from a tangible resource. For example, an airplane is a tangible resource, but “you
can’t use the same airplane on five different routes at the same time. You can’t put the
same crew on five different routes at the same time. And the same goes for the financial
investment you’ve made in the airplane.” ..
them are intangible as in the case of Hecla Mining Company described in the Strategic
Focus. Thus, the learning and potential proprietary processes associated with a tangible
resource, such as manufacturing facilities, can have unique intangible attributes, such as
quality control processes, unique manufacturing processes, and technologies that develop
over time.ol5
Compared to tangible resources, intangible resources are a superior source of capabilities
and subsequently, core competencies.46 In fact, in the global economy, a fll’m’s intellec-
tual capital often plays a more critical role in corporate success than do physical assetsY
Because of this, being able to effectively manage intellectual capital is an increasingly
important skill for today’s leaders to develop.<8
understand, pu rchase, imitate, or substitute for, firms prefer to rely on them rather than
on tangible resources as the fo undation for their capab ilities. In fact, the more unob-
servable (i.e., intangible) a resource is, the more valuable that resource is to create capa-
bilities!9 Another benefit of intangible resources is that, unli ke most tangible resources,
their use can be leveraged. For instance, sharing knowledge among employees does not
diminish its value for any one person. To the contrary, two people sharing their indi –
vidualized knowledge sets often can be leveraged to create additional knowledge that,
although new to each individual, contributes potentially to performance improvements
for the firm.
ities and core competencies. Indeed, some argue that a positive reputation can even
be a source of competitive advantage.50 Earned through the firm’s actions as well as
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product of years of superior marketplace
competence as perceived by stakeholders.51
ness a firm has been able to develop among
stakeholders and the degree to which they
hold the firm in high esteem. 52
name is a specific reputational resource. 53 A
continuing commitment to innovation and
aggressive advertising facilitates firms’ efforts
to take advantage of the reputation associ-
ated with their brands.54 Harley-Davidson
has a reputation for producing and servic-
ing high-quality motorcycles with unique
designs. Because of the desirability of its rep-
utation, the company also produces a wide
range of accessory items that it sells based on
its reputation for offering unique products
with high quality. Sunglasses, jewelry, belts,
wallets, shirts, slacks, and hats are just a few
of the large variety of accessories customers
companies a competitive edge. The effective use of social media to
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
The fi rm 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 or services the fum 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 capitai.S7 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.”59 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
pizza-making to the digital age:’60
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.
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Systems
of-purchase data collection methods
Effective customer service
Innovative merchandising
Product and design quality
Miniaturization of components and products
Development of sophisticated elevator control solutions
Rapid transformation of technology into new products and
processes
Digital technology
Ralph Lauren Corp.
McKinsey r. Co.
Nordstrom Inc.
Crate r. Barrel
Zara
Witt Gas Technology
Sony
Otis Elevator Co.
Chaparral Steel
Thomson Consumer Electronics
petitive advantage for a finn over its rivals. Core competencies distinguish a company
competitively and reflect its personality. Core competencies emerge over time through
an organizational process of accumulating and learning how to deploy different resources
and capabilities.” As the capacity to take action, core competencies are the “crown jewels
of a company,n the activities the company performs especially well compared to compet·
itors and through which the firm adds unique value to the goods or services it sells to
customers.61 Thus, if a big pharma company (such as Pfizer) developed big data analytics
as a core competence, one could conclude that the firm had formed capabilities through
which it was able to analyze and effectively use huge amounts of data in a competitively
superior marmer.
ties are the source of this core competence. More specifically, the way Apple has combined
some of its tangible (e.g., fmancial resources and research laboratories) and intangible
(e.g., scientists and engineers and organ izational routines) resources to complete research
and development tasks creates a capability in R&D. By emphasizing its R&D capability,
Apple can innovate in ways that create unique value for customers in the form of the
products it sells, suggesting that innovation is a core competence for Apple.
cies. In this instance, unique and contemporary store designs (a tangible resource)
are combined with knowledgeable and skilled employees (an intangible resource) to
provide superior service to customers. A number of carefully developed training and
development procedures are capabilities on which Apple’s core competence of excellent
customer service is based. The procedures that are capabilities include specification of
how employees are to interact with customers, carefully written training manuals to
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about every aspect of the store’s design including music that is played. Apple has a spe-
cial training program designed to build associates’ knowledge of Apple products and
how to sell them.63
Two tools help firms identify their core competencies. The first consists of four specific
criteria of sustainable competitive advantage that can be used to determine which capa-
bilities are core competencies. Because the capabilities shown in Table 3.3 have satisfied
these four criteria, they 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 that should be outsourced.
Capabilities that are valuable, rare, costly to imitate, an d nonsubstitutable are core
competencies (see Table 3.4). In turn, core competencies help fir ms to gain compet itive
advantages over their rivals. Capabilities failing to satisfy the four criteria are not core
competencies, meaning that although every core competence is a capabil ity, not every
capability is a core competence. In slightly diffe rent words, for a capability to be a
core competence, it must be valuable and unique from a customer’s point of view. For
a core competence to be a potential source of competitive advantage, it must be inimi-
table and nonsubstitutable by competitors.6<
duplicate the benefits of a firm’s strategy or when they lack the resources to attempt
imitation. For some period of time, the fum may have a core competence by using
capabilities that are valuable and rare, but imitable. For example, some firms are trying
to develop a core competence and potentially, a competitive advantage by out-greening
their competitors. (Interestingly, developing a “green” core competence can contribute
to the firm’s efforts to earn above-average returns while benefitting the broader society.)
For many years, Walmart has been committed to using its resources in ways that sup-
port environmental sustainability while pursuing a competitive advantage in the pro-
cess. In this regard, Walmart has three major end goals: to create zero waste, operate
with 100 percent renewable energy, and sell products that sustain our resources and the
environment. To facilitate these efforts, Walmart recently labeled over 10,000 products
on its e-commerce site as products that are “Made by a Sustainability Leader:’ Initially,
these items were hatched into roughly 80 product categories. In addition to seeking
brand name
Ambiguous cause: The causes and uses of a competence are
unclear
Social complexity: Interpersonal relationships, trust, and
friendship among managers, suppliers, and customers
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allow the firm to exploit
opportunities or neutralize
threats in its external
environment
capabilities that few, if any,
competitors possess.
capabilities are capabilities
that other firms cannot easily
develop.
customers to make “sustainable choices” when purchasing products. Walmart is also
working to lead the industry in deploying clean technologies as a means of reducing
fuel consumption and air pollution.65 Of course, Walmart competitors such as Target
are engaging in similar actions. Time will reveal the degree to which Walmart’s green
practices can be imitated.
is a function of how quickly competitors can successfully imitate a good, service, or
process. Value-creating core competencies may last for a relatively long period of time
only when all four of the criteria we discuss next are satisfied. Thus, Walmart would
know that it has a core competence and possibly, a competitive advantage in terms of
green practices if the ways the firm uses its resources to complete these practices satisfy
the four criteria.
Valuable capabilities allow the firm to exploit opportunities or neutralize threats in its
external environment. By effectively using capabilit ies to exploit opportunities or neu-
tralize threats, a firm creates value for customers.66 For example, Groupon created the
“daily deal” marketing space; the firm reached $1 billion in revenue faster than any other
company in history. In essence, the opportunity Groupon’s founders pursued was to cre-
ate a marketplace through which businesses could introduce their goods or services to
customers who would be able to experience them at a discounted price. Restaurants, hair
and nail salons, and hotels are examples of the types of companies making frequent use
of Groupon’s services. Young. urban professionals desiring to affordably experience the
cities in which they live are the firm’s target customers. But, Groupon’s fmancial per-
formance has been lower than desired by investors primarily because of competition.67
its initial success invited rivals to enter the market. Competing daily-deal websites such as
LivingSocial quickly surfaced and offered similar and often less expensive deals. In fact,
many competitors have entered the market, to include Yipit, Woot, RetaiiMeNot, Tanga,
and Ebate in addition to LivingSocial.68
Rare capabilities are capabilities that few, if any, competitors possess. A key question
to be answered when evaluating this criterion is “how many rival firms possess these
valuable capabilities?” Capabilities possessed by many rivals are unlikely to become
core competencies for any of the involved firms. Instead, valuable but common (i.e.,
not rare) capabilities are sources of competitive parity.69 Competitive advantage results
only when firms develop and exploit valuable capabilities that become core compe-
tencies and that differ from those shared with competitors. The central problem for
Groupon is that its capabilities to produce the “daily deal” reached competitive parity
quickly. Similarly, Walmart has developed valuable capabili ties that it uses to engage
in green practices; but, as mentioned previously, Target seeks to develop sustainability
capabilities through which it can duplicate Walm art’s green practices. Target’s suc-
cess in doing so, if this happens, suggests that Walmart’s green practices are valuable
but not rare.
Costly-to-Imitate capabilities are capabilities that other fi rms cannot easily develop.
Capabilities that are costly to imitate are created because of o ne reason or a com –
bination of three reasons (see Table 3.4). First, a firm sometimes is able to develop
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conditions. As firms evolve, they often
acquire or develop capabilities that are
unique to them. 70 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;’71 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 l, 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
by their belief in it and the leaders who
helped to create it.n Historically, empha-
sizing cleanliness, consistency, and service
and the training that reinforces the value
of these characteristics created a culture at
Hurricane Maria damaged the island of Puerto Rico. The flight,
which was donated by Southwest Airlines, carried 14,000 pounds
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.
firm’s core competencies and its competitive advantage is causally arnbiguous.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.
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.
final criterion “is that there must be no strategically equivalent valuable resources that
are themselves either not rare or imitable. Two valuable firm resources (or two bundles
capabilities are capabilities
that do not have strategic
equivalents.
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Valuable? R•re7 Costly to Imitate? Nonsubstitutable? Consequences lmplic•tions
diYCfvA!Qge returns
competitive to Above-AverAge
ACtv..nt.ge returns
to implement the same strategies~’76 In general, the strategic value of capabilities increases
as they become more difficult to substitute. The more intangible, and hence invisible,
capabilities are, the more difficult it is for firms to find subst itutes and the greater the
challenge is to competitors trying to imitate a firm’s value-creating strategy. Firm-specific
knowledge and trust-based working relationships between managers and nonmanagerial
personnel, such as has existed for years at Southwest Airlines, are examples of capa·
bilities that are difficult to identify and for which finding a substitute is challenging.
However, causal ambiguity may make it difficult for the firm to learn and may stifle
progress because the firm may not know how to improve processes that are not easily
codified and thus are arnbiguous.n
capabilities has the potential for the firm to create sustainable competitive advantages.
Table 3.5 shows the competitive consequences and performance implications resulting
from combinations of the four criteria of sustainability. The analysis suggested by the
table helps managers determine the strategic value of a firm’s capabilities. The firm should
not emphasize capabilities that fit the criteria described in the first row in the table (i.e.,
resources and capabilities that are neither valuable nor rare and that are imitable and
for which strategic substitutes exist). Capabilities yielding competitive parity and either
temporary or sustainable competitive advantage, however, should be supported. Some
competitors such as Coca-Cola and PepsiCo and Boeing and Airbus may have capabilities
that result in competitive parity. In such cases, the firms will nurture these capabilities
while simultaneously trying to develop capabilities that can yield either a temporary or
sustainable competitive advantage.78
Value chain analysis allows the firm to understand the parts of its operations that cre-
ate value and those that do not.79 Understanding these issues is important because the
fLtm earns above-average returns only when the value it creates is greater than the costs
incurred to create that value. 80
identify the multiple means that can be used to facilitate implementation of a chosen
strategy.” Today’s competitive landscape demands that firms examine their value chains
in a global rather than a domestic-only context.82 In particular, activities associated with
supply chains should be studied within a global context.IJ
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~
Support ~
Marl
Sales)
Activities
value chain is segmented into value chain activities and support functions. Value chain
activities are activities or tasks the firm completes in order to produce products and
then seU, distribute, and service those products in ways that create value for customers.
Support functions include the activities or tasks the firm completes in order to support
the work being done to produce, seU, distribute, and service the products the f1tm 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
information security technologies are proprietary core competencies that are a source
of competitive differentiation for the firm. 85 As explained in a Strategic Focus about out-
sourcing later in the chapter, Deutsche Bank wiU not outsource these two technologies
given that the firm concentrates on them as a means of creating value for customers.
while the activities that are part of the tasks firms complete when dealing with support
functions appear in Figure 3.5. AU items in both figures should be evaluated relative to
competitors’ capabilities and core competencies. To become a core competence and a
source of competitive advantage, a capability must allow the fum to either:
competitors, or
tunities to capture that value.
Value
Service
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.
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.
~.nltW~~-..,~~doo–MIItniOy.tr«tllw~’&’nll~~~~ft’Mnb*QIIil•,__-e…..,_..c-..•..,.’*”ll…….,._nJIIb~~iL
“”””-~-ond
~-“”‘·,.._….,for «he firm 10 recew
~ metMall and c:onv.rt them
ll’lltO M.i poducts.
product tO t~ custom.,. Efficiently
handling customers’ Ofdtf’l, choollllg
the optimal ~.wry channe-l, and
working wtth the Mance 1Uppon:
function to •rrtnge for cuscomert’
paymentS for cl41iivtf”td goodt are
exampaes of these KtMt'”
segmenting target wstomers on
the basis of their ~X~ique needs,
satisfy.-.g customers’ needs.
retaining customers, and locating
additional OJstomers.. Adven:ising
campaigns, developing and
managing product b
about “”‘””,_.. .. –. of!enng– •”-“”‘- .ond ,..,~
“””. pocixt’s ….._ …
examples cl1hew “”-
diAnge ,…v materiah into fil\lshed
producu.. Oewloping employees’
work sctl.clules. dettgning
product•on procMMI ~nd phy$ic.al
layout of the o,.rations’ facllrties,
detttmlnlng ptOduction e~pacity
nHds. and Mlect•ng 1nd
m1lnt~erung product.an equ•pment
are examples of aptcifc operations
ll(tMtt …
chain often requires building effective alliances with suppliers (and sometimes others
to which the firm outsources activities, as discussed in the next section) and devel-
oping strong positive relationships with customers. When firms have strong positive
relationships with suppliers and customers, they are said to have social capital.86 The
relationships themselves have value because they lead to transfers of knowledge as well
as to access to resources that a firm may not hold internally.” To build social capital
whereby resources such as knowledge are transferred across organizations requires
trust between partners. Indeed, partners must trust each other to allow their resources
to be used in such a way that both parties will benefit over time while neither party will
take advantage of the other.88
tions is challenging. Earlier in the chapter, we noted that id entifying and assessing the
value of a fum’s resources and capabilities requires judgment. Judgment is equally nec-
essary when using value chain analysis, because no obviously correct model or rule is
universally available to help in the process.
its resources and capabilities are not a source of core competence? Outsourcing is one
solution to consider.
F.dilorul'”wwloo~..,…,~~~-__.,afl«t*cOt’ftaii–.~CC!IIp!Clanaliamolll’n’ftdwna.ktD,_·C’~..,.._._,._.t….._~~…–..
the firm’s human capital. Selecting,
training, retaining, and compensating
human resources in ways that create
a capability and hopefufty a core
competence are specific examp~s
of these actMties..
Information Systems
information and knowtedge throughout
the firm. Identifying and utilizing
sophisticated technologies. determining
optimal ways to coUect and distribute
information and knowtedge to
organizational functions are activities
associated with this support function.
outsourcing is the purchase of a value-creating activity or a support function activity
from an external supplier. Not-for-profit agencies as well as for-profit organizations
actively engage in outsourcing.89 Firms engaging in effective outsourcing increase their
flexibility, mitigate risks, and reduce their capital investments.90 Moreover, in some
industries virtually all firms seek the value that can be captured through effective out-
sourcing. However, as is the case with other strategic management process decisions,
careful analysis is required before the firm decides to outsource.91 And if outsourcing
is to be used, firms must recognize that only activities where they cannot create value
or where they are at a substantial disadvantage compared to competitors should be
outsourced. 92 Experience suggests that virtually any activity associated with the value
chain functions or the support functions may fall into this category. We discuss differ-
ent activities that some firms outsource in the Strategic Focus. We also consider core
competencies that firms to whom others outsource activities may try to develop to
satisfy customers’ future outsourcing needs.
and capabilities required to achieve competitive superiority in each value chain activity
and support function. For example, research suggests that few companies can afford to
internally develop all the technologies that might lead to competitive advantage.93 By
of a value-creat ing activity or
a support function activity
from an external supplier.
Eddorial rt:’\·iew hai deemt’d lb:il :my SUppn’llie’d(.ilatelll does not m:dtriaiJy atfccl lbt o~~r.liJ leamina: upe:riern:e. Cmg:ij,’C’ U:.mina: reSt:r’\’tS lhe ri;hllo remo,,.-e addilion$1 (.ilatelll M Illy time ir s~ent ri£blll nostric.tioas require it.
core competencies and achieving a competitive advantage because it does not become
overextended. In addition, by outsourcing activities in which it lacks competence, the
firm can fully concentrate on those areas in which it has the potential to create value.
tial loss in a firm’s ability to innovate and the loss of jobs within the focal firm. When
evaluating the possibility of outsourcing, firms should anticipate 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 hand, firms are sometimes able to enhance 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.
and Strategic Decisions
as reflected by their resources, capabilities, and core competencies. If a ftrm 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.
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.
should understand that having a significant quantity of resources is not the same as hav-
ing the uright” resources. The uright” 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
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
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-level
strategy that it \vill use to compete against rivals. We describe different business-level
strategies in the next chapter.
Edilorul'”wwluo.,._.._…,…,…..~~- —,a««t:*cOftdll–.~ee..z. Lan.&mill’n’ftdwna.ktD,_·C’~..,.._._,._.t…._..,.._~…,_.._
As we discussed in the Opening Case, big pharma com-
Similar examples exist within firms competing in other indus-
The Ausrrolion, www..australian.com, March 22; K. Ferguson, 2018, \Nt’ry outsourcing
can leave a lasting mark on the US banking industry, Payments Journal, payments-
journal.com, March 23; A. Frazzeno. 20 18, Outsourcing in the new normal: Three
trends reshaping the global industry. FO/bes. www.forbe~com. March 21: K. de
Freytas-Tamura, 2018, U.K., land of’brexi(. quiettyoutsources some surgeries to
France, New Y01k Tunes, www.nytimes.com, March 17; A. Jain, 2018, This global fin-
tech enabler has a strategy to enter India’s crowded payment space, Entrepreneur.
www.entrepreneur.com, March 9; L Joyce. 201 a Six Strategic keys to becoming
a mobile-centric bank, The Financial Brand, thefinancialbrand.COil\ March 6; 201 5,
Deutsche Bank, H-P divide IT responsibility in cloud deal. Wall Street Journal Online,
www.wsj.com, February 25; D. A Thoppil, 201 S, Indian outsourcers struggle to
evotve as growth slows. Wall Street Journal Onlkle, www.wsj.com, February 22; S
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www.wsj.com, February 2: S. Mclain, 201 5, New outsourcing frontier in India:
&btorial rt:’\·iew has deemt’d tb&t &ny l~Uppn’tile’d tilaklll does oot materit!Uy atreet tbt’ o~~rliiJ Jeamins experiem>e. Cms;a!>~ Uamins R’krl’tS the ris;hlto remcn-e :additiontll tilaklll M any time it s:~ent risb~ nostrictioos: require it.
In the current competitive landscape, the most effective
above-average returns result only when core competencies
matched with opportumties (determ.ned by studying the firm’s
their own unique resources, capabilities, and core compe·
tencies to form different value-creating propositions that
Because competitive advantages are not permanently sustain·
taneously using their resources and capabilities to form new
ysis of the form’s resources (inputs to the production proce ss)
and capabilities (resources that have been p urposely inte·
the firm’s human capital possesses is among the most signifi·
the base for most competitive advantages. The firm m ust
their individual knowledge with that held by others so that,
organizational knowledge.
subsequently of compellt1ve advantages than are individual
costly-to-imitate capabilities 88
global mind-set 77
intangible resources 82
nonsubstitutable capabilities 89
outsourcing 93
rare capabilities 88
1. Why is it important for a firm to study and understand its inter·
How does it do so?
difficult.
petitive advantage. Over t1me, core competencies must be
supported, but they cannot be allowed to become core rigidi·
only when they allow the firm to create value by exploiting
ger possible, the company shifts its attention to forming other
itive advantage.
petitive pot ential of resources and capabilities. By studying
ities and su ppo rt functions, firms can understand their cost
ab le to create value.
commonly in the global economy, outsourcing is the p u rchase
should outsource only to companies possessing a competitive
advantage in terms ofthe particular value cha1n activity or
must continuously verify that it is not outsourCing activities
tangible resources 82
valuable capabilities 88
value 78
value chain activities 9 1
more valuable for creating capabilities than are intangible
bdllcnal”‘cwMt.._.. .. .., ~-.H~.sc-aot……wJ) .t!«tilhtO”\’nll~~ee.pp.~mcnn*nJIII•~’C….,_..~••) tJ..,II~nPb~ft’IIIIII”‘”L
successfully using thos tool?
firm’s strengths and weaknesses?
carefully banded product li nes, is taking actions to deal
with recent performance prob lems. These problems
manifested themselves in various ways, including the
need for the firm to issue three profit warnings in one
six-month period and a 34 percent decline in the price
of its stock in 2014 compared to 201
tinctive, branded fashion retailer selling quality cloth-
ing and accessories. In fact, the firm says that “the
Supcrdry brand is at the heart of the business.” The
brand is targeted to discerning customers who seek
to purchase “stylish clothing that is uniquely designed
and well made.” In this sense, the company believes
that its men’s and women’s products have “wide appeal,
capturing clements of ‘urban’ and ‘streetwear’ designs
with subtle combinations of vintage Americana,
Japanese imagery, and British tailoring, all with strong
attention to detail.” Thus, the firm’s brand is criti-
cal to the image it conveys with its historical target
customer-teens and those in their early twenties.
Those leading SuperGroup believe that customers love
the Superdry products as well as the “theatre and per-
sonality” of the stores in which they are sold. These
outcomes are important given the company’s in tention
of providing customers with “personalized shopping
experiences that enhance the brand rather than just
selling clothes.”
performance. What the firm wants to do, of course,
is correct the problems before the Superdry brand is
damaged. Management turmoil is one of the firm’s
problems. In January of 2015, the CEO abruptly left.
Almost simultaneously, the CFO was suspended for fil-
ing for personal bankruptcy. and the Chief Operating
believe that the firm’s growth had been ill -conceived,
signaling the possibility of ineffective strategic deci ·
sions on the part of the firm’s upper-level leaders. As
one analyst said: “The issue with SuperGroup is that
they’ve expanded too quickly, without the supporting
infrastructure.”
In particular, those now leading SuperGroup intend
to better control the firm as a means of protecting the
value of its brand. A new CEO has been appointed who
believes that “the business is very much more in control”
today than has been the case recently. A well-regarded
interim CFO has been appointed, and the ftrm’s board
has been strengthened by added experienced individu-
als. Commenting about these changes, an observer said
that SuperGroup has “moved from an owner-entrepre-
neurial style of management to a more professional and
experienced type of management. The key thing is, it is
much better now than it was.”
Superdry brand. The appointment of ldris Elba, actor
from The Wire, is seen as a major attempt to reig·
nite the brand’s image. In fact, SuperGroup says that
Elba epitomizes what the Superdry brand is- Brit ish,
grounded, and cool. The thinking here, too, is th at
Elba, who at the time of his selection was 42, would
appeal to the customer who was “growing up” with the
Superdry brand. For these customers, who are 25 and
older, SuperGroup is developing Superdry products
with less dramatic presentations of the brand’s well-
known large logos. Additional lines of clothing, for ski-
ing and rugby for example, are being developed for the
more mature Superdry customer. After correcting the
recently encountered problems. SuperGroup intends
every instance though, the firm will protect the brand
when entering new competitive arenas and will rely on
it as the foundation for intended success.
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