Chapter 3
The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages
1. Why is it important for a firm to study and understand its internal organization?
As they analyze their internal environment, a manager should think of the firm as a bundle of heterogeneous
resources and capabilities that can be used to create an exclusive market position. This means that firms should
no longer focus only on the traditional sources of competitive advantage (e.g., labor costs, access to capital, and
raw materials) as these advantages can be overcome through an international strategy and the relative free flow
of global resources. Instead, firms should seek out those resources and capabilities that other firms do not have,
at least not in the same combinations. A firm’s resources are the source of its capabilities, some of which can
lead to core competencies that enable a firm to perform value-creating activities better than its competitors or
that its competitors cannot duplicate.
2. What is value? Why is it critical for the firm to create value? How does it do so?
Value is represented by the bundle of performance characteristics and attributes that a firm provides to customers
in the form of goods or services for which customers are willing to pay. Broadly speaking, value can be provided
by a product’s/service’s low cost, highly differentiated features, or a combination of the two (when these
strategies are superior to those offered by competitors).
Ultimately, it is critical that a firm be able to create customer value because it is the source of a firm’s potential
to earn above-average returns. Therefore, in the rapidly changing environments of the twenty-first-century
competitive landscape, firms must evaluate continuously the degree to which their core competencies create
customer value. What the firm intends to do to create value affects its choice of business-level strategy and its
