Hitt M.A., Ireland R.D., Hoskisson R.E. Strategic Management: Competitiveness and Globalization: Concepts
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Part 1: Strategic Management Inputs
Resources, Capabilities, and Core
Competencies
Resources, capabilities, and core competencies are the foundation of competitive advan-
tage. Resources are bundled to create organizational capabilities. In turn, capabilities are
the source of a firm’s core competencies, which are the basis of competitive advantages.
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Figure 3.1, on page 74, depicts these relationships. Here, we define and provide examples
of these building blocks of competitive advantage.
Resources
Broad in scope, resources cover a spectrum of individual, social, and organizational phe-
nomena.
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Typically, resources alone do not yield a competitive advantage.
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In fact, a
competitive advantage is generally based on the unique bundling of several resources.
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For example, Amazon.com combined service and distribution resources to develop its
competitive advantages. The firm started as an online bookseller, directly shipping orders
to customers. It quickly grew large and established a distribution network through which
it could ship “millions of different items to millions of different customers.” Lacking
Amazon’s combination of resources, traditional bricks-and-mortar companies, such as
Borders, found it difficult to establish an effective online presence. These difficulties
led some of them to develop partnerships with Amazon. Through these arrangements,
Amazon now handles the online presence and the shipping of goods for several firms,
including Borders—which now can focus on sales in its stores.
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These types of arrange-
ments are useful to the brick-and-mortar companies because they have little experience
in shipping large amounts of diverse merchandise directly to individuals.
Some of a firm’s resources (defined in Chapter 1 as inputs to the firm’s production
process) are tangible while others are intangible. Tangible resources are assets that can
be observed and quantified. Production equipment, manufacturing facilities, distribution
centers, and formal reporting structures are examples of tangible resources. Intangible
resources are assets that are rooted deeply in the firm’s history and have accumulated over
time. Because they are embedded in unique patterns of routines, intangible resources
are relatively difficult for competitors to analyze and imitate. Knowledge, trust between
managers and employees, managerial capabilities, organizational routines (the unique
ways people work together), scientific capabilities, the capacity for innovation, brand
name, and the firm’s reputation for its goods or services and how it interacts with people
(such as employees, customers, and suppliers) are intangible resources.
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The four types of tangible resources are financial, organizational, physical, and tech-
nological (see Table 3.1). The three types of intangible resources are human, innovation,
and reputational (see Table 3.2).
Financial Resources • The fi rm’s borrowing capacity
• The fi rm’s ability to generate internal funds
Organizational Resources • The fi rm’s formal reporting structure and its formal
planning, controlling, and coordinating systems
Physical Resources • Sophistication and location of a fi rm’s plant and
equipment
• Access to raw materials
Technological Resources • Stock of technology, such as patents, trademarks,
copyrights, and trade secrets
Table 3.1 Tangible Resources
Sources: Adapted from J. B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management,
17: 101; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 100–102.
Tangible resources are
assets that can be
observed and quantifi ed.
Intangible resources
include assets that are
rooted deeply in the fi rm’s
history, accumulate over
time, and are relatively
diffi cult for competitors to
analyze and imitate.
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Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
Tangible Resources
As tangible resources, a firm’s borrowing capacity and the status of its physical facilities
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 the firm’s assets,
because they disregard some intangible resources.
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The value of tangible resources is also
constrained because they are hard to leverage—it is difficult to derive additional busi-
ness 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.”
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Although production assets are tangible, many of the processes necessary to use these
assets are intangible. 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 tech-
nology that develop over time and create competitive advantage.
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Intangible Resources
Compared to tangible resources, intangible resources are a superior source of core
competencies.
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In fact, in the global economy, “the success of a corporation lies more in
its intellectual and systems capabilities than in its physical assets. [Moreover], the capac-
ity to manage human intellect—and to convert it into useful products and services—is
fast becoming the critical executive skill of the age.
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Because intangible resources are less visible and more difficult for competitors to
understand, purchase, imitate, or substitute for, firms prefer to rely on them rather
than on tangible resources as the foundation for their capabilities and core com-
petencies. In fact, the more unobservable (i.e., intangible) a resource is, the more
sustainable will be the competitive advantage that is based on it.
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Another benefit of
intangible resources is that, unlike 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 individualized knowledge
sets often can be leveraged to create additional knowledge that, although new to each
of them, contributes to performance improvements for the firm. This is especially
true when members of the top management team share knowledge with each other
to make more effective decisions. The new knowledge created is then often shared
Human Resources • Knowledge
• Trust
• Managerial capabilities
• Organizational routines
Innovation Resources • Ideas
• Scientifi c capabilities
• Capacity to innovate
Reputational Resources • Reputation with customers
• Brand name
• Perceptions of product quality, durability, and reliability
• Reputation with suppliers
• For effi cient, effective, supportive, and mutually benefi cial
interactions and relationships
Table 3.2 Intangible Resources
Sources: Adapted from R. Hall, 1992, The strategic analysis of intangible resources, Strategic Management Journal, 13:
136–139; R. M. Grant, 1991, Contemporary Strategy Analysis, Cambridge, U.K.: Blackwell Business, 101–104.
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Part 1: Strategic Management Inputs
with managers and employees in each of the units managed by executives in the top
management team.
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With intangible resources, the larger the network of users, the
greater the benefit to each party.
As shown in Table 3.2, the intangible resource of reputation is an important source of
competitive advantage. Indeed, some argue that “a firm’s reputation is widely considered
to be a valuable resource associated with sustained competitive advantage.”
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Earned
through the firm’s actions as well as its words, a value-creating reputation is a product of
years of superior marketplace competence as perceived by stakeholders.
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A reputation
indicates the level of awareness a firm has been able to develop among stakeholders and
the degree to which they hold the firm in high esteem.
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A well-known and highly valued brand name is an application of repu-
tation as a source of competitive advantage.
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A continuing commitment to
innovation and aggressive advertising facilitate firms’ efforts to take advantage
of the reputation associated with their brands.
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Because of the desirability of its
reputation, the Harley-Davidson brand name, for example, has such status that
it adorns a limited edition Barbie doll, a popular restaurant in New York City,
and a line of cologne. Additionally, the firm offers a broad range of clothing
items, from black leather jackets to fashions for tots through Harley-Davidson
MotorClothes.
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Even established firms need to build their reputations in new
markets that they enter. For example, Ford hired a well-respected Indian actor,
Sunil Shetty, to serve as the brand ambassador for the Ford Endeavor launch in
India. The Endeavor had the highest sales of SUVs in 2008.
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Capabilities
Capabilities exist when resources have been purposely integrated to achieve
a specific task or set of tasks. These tasks range from human resource selec-
tion to product marketing and research and development activities.
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Critical
to the building of competitive advantages, capabilities are often based on
developing, carrying, and exchanging information and knowledge through
the firm’s human capital.
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Client-specific capabilities often develop from repeated
interactions with clients and the learning about their needs that occurs. As a result,
capabilities often evolve and develop over time.
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The foundation of many capabilities
lies in the unique skills and knowledge of a firm’s employees and, often, their func-
tional expertise. Hence, the value of human capital in developing and using capabilities
and, ultimately, core competencies cannot be overstated.
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While global business leaders increasingly support the view that the knowledge possessed
by human capital is among the most significant of an organization’s capabilities and may
ultimately be at the root of all competitive advantages,
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firms must also be able to utilize
the knowledge they have and transfer it among their business units.
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Given this reality, the
firm’s challenge is to create an environment that allows people to integrate their individual
knowledge with that held by others in the firm so that, collectively, the firm has significant
organizational knowledge.
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As noted in the earlier Strategic Focus, GE has been effective in
developing its human capital and in promoting the transfer of their knowledge throughout the
company. Building important capabilities is critical to achieving high firm performance.
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As illustrated in Table 3.3, capabilities are often developed in specific functional areas
(such as manufacturing, R&D, and marketing) or in a part of a functional area (e.g.,
advertising). Table 3.3 shows a grouping of organizational functions and the capabilities
that some companies are thought to possess in terms of all or parts of those functions.
Core Competencies
Defined in Chapter 1, core competencies are capabilities that serve as a source of com-
petitive advantage for a firm over its rivals. Core competencies distinguish a company
competitively and reflect its personality. Core competencies emerge over time through an
Harley Davidson’s iconic
reputation transcends
motorcycles and for
some represents an
entire lifestyle.
Lon C. Diehl /PhotoEdit
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Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
organizational process of accumulating and learning how to deploy different resources
and capabilities.
84
As the capacity to take action, core competencies are “crown jewels of
a company,” the activities the company performs especially well compared with competi-
tors and through which the firm adds unique value to its goods or services over a long
period of time.
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Innovation is thought to be a core competence at Xerox today. It is not surpris-
ing because this firm was built on a world-changing innovation—xerography. And
even though Xerox was the first firm to integrate the mouse with the graphical user
interface of a PC, it was Apple Computer that initially recognized the value of this
innovation and derived value from it. In 2000, then-CEO Paul Allaire admitted that
Xerox’s business model no longer worked and that the firm had lost its innova-
tive ability. Some nine-plus years later, things have changed for the better at Xerox.
Using the capabilities of its scientists, engineers, and researchers, Xerox has recon-
stituted innovation as a core competence. For example, Xerox received more than
230 industry awards for the attributes of a range of products and services includ-
ing image quality, performance, and technical innovation. One example of a recent
focus of Xerox’s research is on identifying products and services that help customers
deal with the information explosion, according to Xerox’s Chief Technology Officer,
Sophie Vandebroek.
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How many core competencies are required for the firm to have a sustained compet-
itive advantage? Responses to this question vary. McKinsey & Co. recommends that its
clients identify no more than three or four competencies around which their strategic
actions can be framed. Supporting and nurturing more than four core competencies
may prevent a firm from developing the focus it needs to fully exploit its competencies
in the marketplace. At Xerox, services expertise, employee talent, and technological
skills are thought to be core competencies along with innovation.
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Functional Areas Capabilities Examples of Firms
Distribution Effective use of logistics management techniques Wal-Mart
Human Resources Motivating, empowering, and retaining employees Microsoft
Management Information
Systems
Effective and effi cient control of inventories through point-
of-purchase data collection methods
Wal-Mart
Marketing Effective promotion of brand-name products
Effective customer service
Innovative merchandising
Procter & Gamble
Polo Ralph Lauren Corp.
McKinsey & Co.
Nordstrom Inc.
Norrell Corporation
Crate & Barrel
Management Ability to envision the future of clothing
Effective organizational structure
Hugo Boss
PepsiCo
Manufacturing Design and production skills yielding reliable products
Product and design quality
Miniaturization of components and products
Komatsu
Witt Gas Technology
Sony
Research & Development Innovative technology
Development of sophisticated elevator control solutions
Rapid transformation of technology into new products and
processes
Digital technology
Caterpillar
Otis Elevator Co.
Chaparral Steel
Tho mson Consumer Electronics
Table 3.3 Examples of Firms’ Capabilities
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Part 1: Strategic Management Inputs
Building Core Competencies
Two tools help firms identify and build their core competencies. The first consists of
four specific criteria of sustainable competitive advantage that firms can use to determine
those capabilities that 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.
Four Criteria of Sustainable Competitive Advantage
As shown in Table 3.4, capabilities that are valuable, rare, costly to imitate, and nonsub-
stitutable are core competencies. In turn, core competencies are sources of competitive
advantage for the firm over its rivals. Capabilities failing to satisfy the four criteria of sus-
tainable competitive advantage are not core competencies, meaning that although every
core competence is a capability, not every capability is a core competence. In slightly
different words, for a capability to be a core competence, it must be valuable and unique
from a customer’s point of view. For a competitive advantage to be sustainable, the core
competence must be inimitable and nonsubstitutable by competitors.
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A sustained competitive advantage is achieved only when competitors cannot duplicate
the benefits of a firm’s strategy or when they lack the resources to attempt imitation. For
some period of time, the firm may earn a competitive advantage by using capabilities
that are, for example, valuable and rare, but imitable. For example, some firms are trying
to gain an advantage by out-greening their competitors. Wal-Mart initiated a major
sustainability program that helped to reduce the use of containers, saving approximately
1,000 barrels of oil and thousands of trees while simultaneously saving $2 million.
GE’s ecomanagement system, through which it has developed and introduced new,
“greener” products to meet growing demand, is another example.
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The length of
time a firm can expect to retain its competitive advantage is a function of how quickly
competitors can successfully imitate a good, service, or process. Sustainable competitive
advantage results only when all four criteria are satisfied.
Valuable
Valuable capabilities allow the firm to exploit opportunities or neutralize threats in its
external environment. By effectively using capabilities to exploit opportunities, a firm
creates value for customers. Under former CEO Jack Welch’s leadership, GE built a valu-
able competence in financial services. It built this powerful competence largely through
acquisitions and its core competence in integrating newly acquired businesses. In addi-
tion, making such competencies as financial services highly successful required plac-
ing the right people in the right jobs. As noted in the opening case, Welch emphasized
human capital because it is important in creating value for customers. That emphasis has
continued in the company after Welch retired.
Valuable Capabilities • Help a fi rm neutralize threats or exploit opportunities
Rare Capabilities • Are not possessed by many others
Costly-to-Imitate Capabilities • Historical: A unique and a valuable organizational culture
or 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
Nonsubstitutable Capabilities • No strategic equivalent
Table 3.4 The Four Criteria of Sustainable Competitive Advantage
Valuable capabilities
allow the fi rm to exploit
opportunities or neutral-
ize threats in its external
environment.
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Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
Rare
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 be sources of
competitive advantage for anyone of them. Instead, valuable but common (i.e., not rare)
resources and capabilities are sources of competitive parity.
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Competitive advantage
results only when firms develop and exploit valuable capabilities that differ from those
shared with competitors.
Costly to Imitate
Costly-to-imitate capabilities are capabilities that other firms cannot easily develop.
Capabilities that are costly to imitate are created because of one reason or a combination
of three reasons (see Table 3.4). First, a firm sometimes is able to develop capabilities
because of unique historical conditions. As firms evolve, they often acquire or develop
capabilities that are unique to them.
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A firm with a unique and valuable organizational culture that emerged in the early stages
of the company’s history “may have an imperfectly imitable advantage over firms founded
in another historical period;”
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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 1, organizational culture is a set of values that are shared by members in the organ-
ization. This will be explained in more detail in Chapter 12. An organizational culture is a
source of advantage when employees are held together tightly by their belief in it.
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For example, culture is a competitive advantage for Mustang Engineering (an engi-
neering and project management firm based in Houston, Texas). Established as a place
where people are expected to take care of people, Mustang offers “a company culture that
we believe is unique in the industry. Mustang is a work place with a family feel. A client
once described Mustang as a world-class company with a mom-and-pop culture.”
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A second condition of being costly to imitate occurs when the link between the firm’s
capabilities and its competitive advantage is causally ambiguous.
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In these instances,
competitors can’t clearly understand how a firm uses its capabilities as the foundation
for competitive advantage. As a result, firms are uncertain about the capabilities they
should develop to duplicate the benefits of a competitor’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 Southwest’s unique culture. Of all
Southwest imitators, Ryanair, an Irish airline headquartered in Dublin, is the most suc-
cessful. However, Ryanair is also a controversial company, praised by some, criticized by
others as described in the Strategic Focus. Ryanair’s core competence is its capability to
keep its costs excessively low and to generate alternative sources of revenue.
Social complexity is the third reason that capabilities can be costly to imitate. Social
complexity means that at least some, and frequently many, of the firm’s capabilities are
the product of complex social phenomena. Interpersonal relationships, trust, friendships
among managers and between managers and employees, and a firm’s reputation with
suppliers and customers are examples of socially complex capabilities. 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 personnel and pilots.
Nonsubstitutable
Nonsubstitutable capabilities are capabilities that do not have strategic equivalents.
This final criterion for a capability to be a source of competitive advantage “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 of firm resources) are strate-
gically equivalent when they each can be separately exploited to implement the same
strategies.”
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In general, the strategic value of capabilities increases as they become more
Rare capabilities are
capabilities that few,
if any, competitors
possess.
Costly-to-imitate
capabilities are
capabilities that other
fi rms cannot easily
develop.
Nonsubstitutable
capabilities are
capabilities that do
not have strategic
equivalents.
Ryanair is the leading low-cost airline in
Europe. It has achieved a high market share by
relentlessly holding down costs and thereby
offering the lowest prices on its routes. To
attract new customers, it once offered flights for one penny to selected destinations. It sold
almost 500,000 tickets with the promotion. While Michael O’Leary, Ryanair CEO, is known
to be cheap (he will not provide employees with pens; he recommends that they get them
from hotels where they stay overnight), the primary reason for Ryanair’s lowest cost status
is that it has the fastest turnarounds in the industry (their speed resembles that of an auto
racing pit crew). O’Leary is also constantly identifying new revenue streams such as charges
for use of airport check-in facilities, charging for each piece of luggage, offering rental cars
at the destination, charging to use the toilet on the plane, etc.
To obtain free publicity, O’Leary or other executives often make outrageous statements
and roundly criticize their competitors to get Ryanair’s name in the news. The firm uses
multiple marketing gimmicks such as advertising that directly criticizes competitors and
even some “off-color” advertising slogans. The firm’s core competence is the capability to
maintain the lowest costs in the industry and to generate alternative revenues. Because of its
very low fares, its passenger load grew at an annual rate of approximately 25 percent until
the economic crisis that began in 2008, but the company remained profitable in 2008.
Despite its success, Ryanair receives a significant amount of criticism. In 2006, for
example, it was voted as the least favorite airline (despite
its popularity evidenced in passenger numbers). Critics
have also accused Ryanair of poor customer service, an
unfriendly, uncaring staff, and hidden charges. Yet O’Leary
believes that Ryanair may be one of the few airlines in
Europe left standing after the latest severe economic
recession. He is planning growth (although the airline
announced some small reductions in service and staff in
2009) and is negotiating with Boeing and Airbus to buy as
many as 400 new aircraft. With its decided strengths and
acknowledged weaknesses, the future of Ryanair will be
interesting to witness.
Sources: 2005, Ryanair exercises options on five Boeing 737s, Wikinews,
http://en.wikinews.org, June 13; M. Scott, 2007, Ryanair flying high,
BusinessWeek, http://www.businessweek.com, July 31; A. Davidson, 2008,
Michael O’Leary: Ryanair’s rebel with a cause, The Sunday Times, http://
business.timesonline.co.uk, December 7; K. Done, 2009, Ryanair in talks to
buy 400 aircraft, Financial Times, http://www.ft.com, February 2; K. Done,
2009, Virgin and Ryanair to cut jobs, Financial Times, http://www.ft.com,
February 12; 2009, Ryanair Holdings PLC, http://www.answers.com, March 13;
2009, Ryanair, Wikipedia. http://www.wikipedia.org, March 13.
RYANAIR: THE PASSIONATE
COST CUTTER THAT IS
BOTH LOVED AND HATED
Michael O’Leary, CEO of low-
cost airline Ryanair, poses with
a model of an aircraft during a
press conference in Hamburg,
Germany. O’Leary’s intense
scrutiny of costs and monetizing
of services may contribute to
lower ticket prices but not
necessarily customer
satisfaction.
ULRICH PERREY/dpa /Landov
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Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
difficult to substitute. The more invisible capabilities are, the more difficult it is for firms
to find substitutes 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 existed for years at Southwest
Airlines, are examples of capabilities 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 as well and may stifle progress, because the firm may not know how to improve
processes that are not easily codified and thus are ambiguous.
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In summary, only using valuable, rare, costly-to-imitate, and nonsubstitutable capa-
bilities creates sustainable competitive advantage. Table 3.5 shows the competitive con-
sequences and performance implications resulting from combinations of the four criteria
of sustainability. The analysis suggested by the table helps managers determine the stra-
tegic 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 competi-
tive advantage, however, will be supported. Some competitors such as Coca-Cola and
PepsiCo 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.
Value Chain Analysis
Value chain analysis allows the firm to understand the parts of its operations that cre-
ate value and those that do not.
98
Understanding these issues is important because the
firm earns above-average returns only when the value it creates is greater than the costs
incurred to create that value.
99
The value chain is a template that firms use to analyze their cost position and to
identify the multiple means that can be used to facilitate implementation of a chosen
business-level strategy.
100
Today’s competitive landscape demands that firms examine
their value chains in a global rather than a domestic-only context.
101
In particular, activi-
ties associated with supply chains should be studied within a global context.
102
As shown in Figure 3.3, a firm’s value chain is segmented into primary and support
activities. Primary activities are involved with a product’s physical creation, its sale and
distribution to buyers, and its service after the sale. Support activities provide the assis-
tance necessary for the primary activities to take place.
The value chain shows how a product moves from the raw-material stage to the final
customer. For individual firms, the essential idea of the value chain is to create additional
value without incurring significant costs while doing so and to capture the value that has
Is the Resource
or Capability
Valuable?
Is the Resource
or Capability
Rare?
Is the Resource
or Capability
Costly to
Imitate?
Is the Resource
or Capability
Nonsubstitutable?
Competitive
Consequences
Performance
Implications
No No No No Competitive
disadvantage
Below-average
returns
Yes No No Yes/no Competitive parity Average returns
Yes Yes No Yes/no Temporary
competitive
advantage
Average returns
to above- average
returns
Yes Yes Yes Yes/no Sustainable
competitive
advantage
Above-average
returns
Table 3.5 Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage
Primary activities are
involved with a product’s
physical creation, its
sale and distribution to
buyers, and its service
after the sale.
Support activities
provide the assistance
necessary for the
primary activities to
take place.
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Part 1: Strategic Management Inputs
been created. In a globally competitive economy, the most valuable links on the chain
are people who have knowledge about customers. This locus of value-creating possibili-
ties applies just as strongly to retail and service firms as to manufacturers. Moreover, for
organizations in all sectors, the effects of e-commerce make it increasingly necessary for
companies to develop value-adding knowledge processes to compensate for the value
and margin that the Internet strips from physical processes.
103
Table 3.6 lists the items that can be evaluated to determine the value-creating poten-
tial of primary activities. In Table 3.7, the items for evaluating support activities are
shown. All items in both tables should be evaluated relative to competitors’ capabilities.
To be a source of competitive advantage, a resource or capability must allow the firm
(1) to perform an activity in a manner that provides value superior to that provided by
competitors, or (2) to perform a value-creating activity that competitors cannot perform.
Only under these conditions does a firm create value for customers and have opportuni-
ties to capture that value.
Creating value through value chain activities often requires building effective alli-
ances with suppliers (and sometimes others to which the firm outsources activities, as
discussed in the next section) and developing strong positive relationships with customers.
When firms have such strong positive relationships with suppliers and customers, they
are said to have “social capital.”
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The relationships themselves have value because they pro-
duce knowledge transfer and access to resources that a firm may not hold internally.
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To
build social capital whereby resources such as knowledge are transferred across organiza-
tions requires trust between the parties. The partners must trust each other in order to
allow their resources to be used in such a way that both parties will benefit over time and
neither party will take advantage of the other.
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Trust and social capital usually evolve
over time with repeated interactions but firms can also establish special means to jointly
Primary
Activities
Primary
Activities
Service
Marketing & Sales
Outbound Logistics
Operations
Inbound Logistics
Firm Infrastructure
Human Resource Management
Technological Development
Procurement
Support Activities
MARGIN
MARGIN
Figure 3.3 The Basic Value Chain
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Chapter 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
Inbound Logistics
Activities, such as materials handling, warehousing, and inventory control, used to receive,
store, and disseminate inputs to a product.
Operations
Activities necessary to convert the inputs provided by inbound logistics into fi nal product form.
Machining, packaging, assembly, and equipment maintenance are examples of operations
activities.
Outbound Logistics
Activities involved with collecting, storing, and physically distributing the fi nal product to
customers. Examples of these activities include fi nished-goods warehousing, materials
handling, and order processing.
Marketing and Sales
Activities completed to provide means through which customers can purchase products and to
induce them to do so. To effectively market and sell products, fi rms develop advertising and
promotional campaigns, select appropriate distribution channels, and select, develop, and
support their sales force.
Service
Activities designed to enhance or maintain a product’s value. Firms engage in a range of
service-related activities, including installation, repair, training, and adjustment.
Each activity should be examined relative to competitors’ abilities. Accordingly, fi rms rate each
activity as superior, equivalent, or inferior.
Table 3.6 Examining the Value-Creating Potential of Primary Activities
Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group,
from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, pp. 39–40,
Copyright © 1985, 1998 by Michael E. Porter.
Source: Adapted with the permission of The Free Press, an imprint of Simon & Schuster Adult Publishing Group,
from Competitive Advantage: Creating and Sustaining Superior Performance, by Michael E. Porter, pp. 40–43,
Copyright © 1985, 1998 by Michael E. Porter.
Procurement
Activities completed to purchase the inputs needed to produce a fi rm’s products. Purchased
inputs include items fully consumed during the manufacture of products (e.g., raw materials
and supplies, as well as fi xed assets—machinery, laboratory equipment, offi ce equipment,
and buildings).
Technological Development
Activities completed to improve a fi rm’s product and the processes used to manufacture it.
Technological development takes many forms, such as process equipment, basic research and
product design, and servicing procedures.
Human Resource Management
Activities involved with recruiting, hiring, training, developing, and compensating all
personnel.
Firm Infrastructure
Firm infrastructure includes activities such as general management, planning, fi nance,
accounting, legal support, and governmental relations that are required to support the work of
the entire value chain. Through its infrastructure, the fi rm strives to effectively and consistently
identify external opportunities and threats, identify resources and capabilities, and support
core competencies.
Each activity should be examined relative to competitors’ abilities. Accordingly, fi rms rate each
activity as superior, equivalent, or inferior.
Table 3.7 Examining the Value-Creating Potential of Support Activities