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TABLE 3.4
The Four Criteria of Sustainable Strategic Capabilities
Before they can be sources of competitive advantage, capabilities must be:
• valuable
• rare
• costly-to-imitate
• nonsubstitutable
Valuable
Capabilities that are valuable help a firm exploit opportunities and/or neutralize threats in the
external environment. Valuable capabilities allow a firm to develop and implement strategies
that create customer value.
Rare
Costly to Imitate
Capabilities are costly to imitate when other firms are unable to develop them except at a cost
disadvantage relative to firms that already have them. This usually is a result of one or a
combination of three conditions:
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1. Unique historical conditions can make duplication of capabilities costly. For example,
Teaching Note
This may explain why such companies as IBM and General Motors, whose cultures
developed early in each company’s history – and during relatively calm or stable
environments – were able to rely on formal controls and multiple approvals of
strategies and be successful. However, their respective cultures, grounded in rigidity
and bureaucracy, may have prevented them from successfully adapting to rapid
environmental change in a fast-paced global environment.
2. Causal ambiguity also may prevent competitors from perfectly imitating a competency if
Nonsubstitutable
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Table Note
TABLE 3.5
Outcomes from Combinations of the Criteria for Sustainable Competitive Advantage
Highlights from Table 3.5 are:
• Resources and capabilities that are neither valuable, rare, costly to imitate, nor
nonsubstitutable mean that the firm will be at a competitive disadvantage and will earn
below-average returns.
Teaching Note
Given the criteria for the sustainability of a competitive advantage, ask students if
The Gap’s Old Navy concept (or another case with which they are likely to be
personally familiar) represents a source of competitive advantage that can be
sustained over time. One likely interpretation using the criteria set out in Table 3.5 is
6
Explain how value-chain analysis is used to identify and
evaluate resources and capabilities.
Value Chain Analysis
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A framework that firms can use to identify and evaluate the ways in which their resources
and capabilities can add value is value chain analysis. This framework is useful because it
enables firms to understand which parts of their operations or activities create value by
segmenting the value chain into primary and secondary activities as illustrated in Figure 3.3.
FIGURE 3.3
A Model of the Value Chain
Figure 3.3 illustrates how the value-creating activities performed by the firm can be
separated into value chain activities and support functions.
FIGURE 3.4
Creating Value Through Value Chain Activities
Figure 3.4 illustrates the link between the value chain activities and customer value. All areas
of the value chain can help firms deliver value to customers.
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Distribution consists of activities related to getting the final product to the customer.
Efficiently handling customers’ orders, choosing the optimal delivery channel, and
working with the finance support function to arrange for customers’ payments for
delivered goods are examples of these activities.
FIGURE 3.5
Creating Value Through Support Functions
Figure 3.5 illustrates the link between the support functions a company performs and
customer value. All support functions can help firms deliver value to customers.
Finance consists of activities associated with effectively acquiring and managing
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Using the value chain framework enables managers to study the firm’s resources and
capabilities in relationship to the primary and support activities performed to design,
manufacture, and distribute products, and to assess them relative to competitors’ capabilities.
For these activities to be sources of competitive advantage, a firm must be able to:
• Perform primary or support activities in a manner superior to the ways that competitors
perform them
The managerial challenge is that the value-creation process is difficult and there is no one
best way to assess a firm’s primary and support activities or to evaluate the value-creating
potential of those activities either within the firm or relative to competitors, because of
incomplete or ambiguous data.
By being objective, managers may be able to use the value chain framework to identify new,
unique ways to combine resources and capabilities to create value that are difficult for
7
OUTSOURCING
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• With limited resources and capabilities, firms can increase their ability to develop
resources and capabilities to form core competencies and achieve competitive advantage
by nurturing a few core competencies.
Firms engaging in outsourcing can increase their flexibility, mitigate risks, and reduce their
capital investment.
To ensure that the appropriate primary and support activities are outsourced, four skills are
essential for managers involved in outsourcing programs:
• Strategic thinking – understanding whether/how outsourcing creates competitive
advantage within the company
Teaching Note
Outsourcing can take several forms, depending on a firm’s strategic objectives.
Examples of outsourcing strategies that, while different, enable outsourcing firms to
achieve their strategic objectives while changing the face of college campuses
include:
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8, 9
Discuss the importance of identifying internal strengths and
weaknesses; Discuss the importance of avoiding core rigidities.
COMPETENCIES, STRENGTHS, WEAKNESSES, AND STRATEGIC DECISIONS
Tools such as outsourcing help the firm focus on its core competencies as the source of 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 competence
to be a permanent competitive advantage can’t be assumed.
In the final analysis, changes in the external environment do not cause core competencies to
become core rigidities; rather, strategic myopia and inflexibility on the part of managers are
the cause. Thus, nurturing existing competencies must be balanced by efforts to encourage
the development of new competencies.
1. Why is it important for a firm to study and understand its internal organization?
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2. What is value? Why is it critical for the firm to create value? How does it do so?
3. What are the differences between tangible and intangible resources? Why is it
important for decision makers to understand these differences? Are tangible
resources more valuable for creating capabilities than are intangible resources, or is
the reverse true? Why? (
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4. What are capabilities? How do firms create capabilities?
5. What four criteria must capabilities satisfy for them to become core competencies?
Why is it important for firms to use these criteria to evaluate their capabilities’ value–
creating potential?
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6. What is value chain analysis? What does the firm gain by successfully using this tool?
7. What is outsourcing? Why do firms outsource? Will outsourcing’s importance grow
in the future? If so, why?
Outsourcing is the purchase of a value-creating activity from an outside supplier that can
provide the greatest value. A firm is likely to engage in outsourcing when it identifies
primary and support activities in which its resources and capabilities are neither sources of
competence nor of sustainable competitive advantage. In such instances, firms should
consider purchasing these activities from firms that can add value to the activity (relative to
the firm’s competitors).
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8. How do firms identify internal strengths and weaknesses? Why is it vital that
managers have a clear understanding of their firm’s strengths and weaknesses?
By completing the internal analysis, firms can (must) identify their strengths and weaknesses
in resources, capabilities, and core competencies. For example, if they have weak capabilities
or do not have core competencies in areas required to achieve a competitive advantage, they
9. What are core rigidities? What does it mean to say that each core competence could
become a core rigidity?
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ADDITIONAL QUESTIONS AND EXERCISES
The following questions and exercises can be presented for in-class discussion or assigned as
homework.
Application Discussion Questions
1. Several companies use their brand as a competitive advantage. Ask the class, given their
knowledge about the global economy, which brands they believe have the strongest
likelihood of remaining a source of advantage in the twenty-first century? Why? What
effects do they believe the Internet’s capabilities will have on this brand, and what should
the owner of the brand do in light of them?
2. Students should visit the manager of a local store to obtain the following information.
Using the definition presented in the chapter, define value for the manager. Ask the
manager if the definition is consistent with how her or his firm thinks of value. If there is a
difference, ask the manager to assess why the difference exists.
3. Have students consider a group (e.g., a fraternity or sorority, Toastmaster’s, or a volunteer
organization) in which they hold membership. Using the categories shown in Tables 3.1
and 3.2, list what they perceive as the group’s tangible and intangible resources. Show the
list to another member of the group. Does that person agree with your assessment of the
group’s resources? If not, what might account for the differences? If differences do exist
between you and your colleague, what is the meaning of such differences in terms of
trying to form the group’s capabilities?
4. Refer to the third question. Ask students if it was easier to list the tangible or the
intangible resources? Why? How confident are they with their assessments?
5. What competitive advantage do individual students feel that the university or college
possesses? What evidence can they provide to support this opinion? Does the class as a
whole agree with the assessments? If not,why not?
6. Ask students what effects they believe the Internet will have on the university or college
within the next five years as it seeks to develop new competitive advantages. In their view,
do the strategic decision makers in your educational institution understand the Internet’s
capabilities? If not,why not?
7. Trust is identified in the chapter as a potential source of competitive advantage. Ask
students if they have ever been involved in a situation in which trust was instrumental in
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accomplishing an organization’s goals? If so, what outcomes were made possible because
of trust?
Ethics Questions
1. Can efforts to develop sustainable competitive advantages result in employees using
unethical practices? If so, what unethical practices might be used to compare a firm’s core
competencies with those held by rivals? How do the Internet’s capabilities affect actions
taken to form competitive advantages that will help the firm in its efforts to outperform its
rivals?
2. Do ethical practices affect a firm’s ability to develop brand as a source of competitive
advantage? If so, how does this happen? Can you think of brands that are a source of
competitive advantage at least in part because of the firm’s ethical practices?
3. What is the difference between exploiting a firm’s human capital and using that capital as
a source of competitive advantage? Are there situations in which the exploitation of
human capital can be a source of advantage? If so, can you name such a situation? If the
exploitation of human capital can be a source of competitive advantage, is this a
sustainable advantage? Why or why not?
4. Are there any ethical dilemmas associated with outsourcing? If so, what are they? How
would you deal with outsourcing ethical dilemmas you believe exist?
5. What ethical responsibilities do managers have if they determine that a set of employees
has skills that are valuable only to a core competence that is becoming a core rigidity?
6. Through the Internet, firms sometimes make a vast array of data, information, and
knowledge available to competitors as well as to customers and suppliers. What ethical
issues, if any, are involved when the firm finds competitively relevant information on a
competitor’s website?
7. Firms are aware that competitors read information that is posted on their websites. Given
this reality, is it ethical for a firm to include false information, for example, about its
sources of competitive advantage on its website in hopes that the information will
influence competitors to take certain actions as a result of viewing it?
INSTRUCTOR’S NOTES FOR MINDTAP
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INSTRUCTOR’S NOTES FOR DIRECTED CASE
Columbia Sportswear
Columbia Sportswear Company is a leader in the highly competitive active outdoor
sportswear apparel market. This case takes students through the company’s humble
beginnings as a hat distributor and how its decision to start manufacturing its owns
product line was a turning point for the company. Students will learn how Columbia’s
culture and business personality helped it grow into a sportswear apparel juggernaut as
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INSTRUCTOR’S NOTES FOR EXPERIENTIAL EXERCISES
Build a Better Mousetrap: Creating a Competitive Advantage
The focus of this chapter is on understanding how a firm’s resources and capabilities
serve as the cornerstone for competencies and, ultimately, are a source of competitive
advantage.
Why did you choose the firm you did?
What are its core competencies?
How has outsourcing helped achieve the company’s competitive advantage?
INSTRUCTOR’S NOTES FOR VIDEO EXERCISES
The media quiz offers additional opportunities for students to apply the concepts in the
chapter to a real-world scenario as it is described in news reports.
Title: Mars, Inc.: Increasing Capacity for Competitive Advantage
RT: 4:21
Topic Key: Value, Resources, Capabilities, Core Competencies, Sustainable
Competitive Advantage
Suggested Discussion Questions and Answers
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• What are some of Mars Inc.’s competitive advantages?
• What resources and resulting capabilities and core competencies do you see
within the Mars Inc. organization that gives it strategic competitiveness?
• What is an example of Mars Inc.’s quality control capabilities?