Exam 3: The Internal Organization: Resources, Capabilities, Core Competencies, and Competitive Advantages

A firm should outsource only activities where it cannot create value or where it is at a substantial disadvantage compared to competitors.

Compared to tangible resources, intangible resources are an inferior source of core competencies.

Core competencies are capabilities that serve as a source of competitive advantage for a firm over its rivals.

A veterinary practice has added a pet boarding and grooming facility. Most of the practice's competitors also provide these services. The veterinary practice is gaining competitive

Trademarks and copyrights are examples of a firm's tangible resources.

One criteria for a resource or capability to be a source of competitive advantage is that it allows the firm to perform a value-creating activity that competitors cannot perform.

According to the Chapter 3 Strategic Focus, while P&G has only a handful of capabilities, these capabilities result in well over a hundred core competencies that allow it to create unique value for customers.

The key to achieving competitiveness, earning above-average returns, and remaining ahead of competitors in the long run is to manage current core competencies

An investor is considering buying a restaurant that has been in operation for a number of years. The restaurant has a highly-reputed chef, and many long-term kitchen and wait staff who work together smoothly. It has a reputation for dishes of consistently high quality and an appealing dining atmosphere.

Describe the importance of internal analysis to the strategic success of the firm.

Firms should never outsource a primary activity because of the danger of the activity being imitated by rivals.

The value of tangible assets such as the firm's borrowing capacity and its physical plant are high because they can be easily leveraged to derive additional value.

According to the Chapter 3 Strategic Focus, P&G typically uses its capabilities and core competencies to grow through mergers, acquisitions, and cooperative relationships.

Creating customer value is the source of the firm's potential to earn above-average returns.

Case Scenario : ERP Inc. ERPI is a leading provider of enterprise integration software (EIS). EIS allows a firm to connect and integrate processes across all aspects of its business, regardless of where they are located around the world. ERPI is a product-focused company, whereas most competitors in its market space, like Oracle, operate as "solutions companies." Oracle and Microsoft have begun to devote considerable resources to the development of and acquisition of products to compete in the EIS space. Despite these recent threats, one benefit of its product-focused strategy is that ERPI's proprietary product is generally recognized as being 200% to 300% better than competitors' software. ERPI estimates it will take 2 to 3 years for competitors to develop the capabilities needed to bring a competing product to market. ERPI invests a considerable percentage of its profits in basic R&D to support its core products. As evidence of this, among its competitors the firm maintains the largest in-house programming staff dedicated solely to the development of advanced enterprise integration software. Installation and related consulting for EIS typically cost between $100 and $200 million, with the ERPI software component accounting for about 20% of the installed cost (the remaining 80% is spent on the actual installation, not counting the value of the customer's time). ERPI's target market consists of the world's largest manufacturing and industrial firms and it currently enjoys a 60 percent market share -(Refer to the above Case Scenario) If the time for the competitor to produce a product similar to ERPI's were 2-3 months instead of 2-3 years, which portion of your assessment of ERPI's capabilities would change?

When firms lay off employees they are

Case Scenario : Heartsong LLC. Heartsong LLC is a designer and manufacturer of replacement heart valves based in Peoria, Illinois. While a relatively small company in the medical devices field, it has established a worldwide reputation as the provider of choice high-quality, leading-edge artificial heart valves. Most of its products are sold to large regional hospital systems and research hospitals. Specialty heart centers are another emerging, but fast-growing, market for its valves. While Heartsong would like to grow quickly, its growth is constrained by the need to finance larger production runs and then carry this additional inventory. For products like those of Heartsong, vendors typically do not collect payment until the unit is actually used in surgery. Moreover, heart valves are usually required on short notice which means that they must be either onsite, or inventoried at a nearby location. If nearby, then transport of the unit to a hospital or heart center occurs within a matter of hours, and sometimes minutes. For this reason, accelerated growth would require Heartsong to both finance increased production of its heart valves, along with carrying increased levels of inventory that are in fact sitting on their customers' shelves. In fact, inventory-carrying cost is its single largest cost outside of research and development. While profitable growth is necessary if Heartsong is to continue extending its competitive advantage through increasingly greater investments in basic heart valve R&D, it is not clear that the company can internally support all these increased financial commitments (R&D, manufacturing, and inventory). Doc Watson, the CEO of Heartsong, is considering an outside contractor, EdFex, to handle the inventorying, warehousing, and delivery of its valves. EdFex has secure, high-tech warehouses in most major population centers around the country, and can ensure delivery of a product to these markets from its warehouses in less than one hour. -(Refer to the above Case Scenario) Heartsong should not outsource its inventorying, warehousing, and delivery of its valves to EdFex since EdFex poses a direct threat as a future competitor.

It is possible that Borders' core competencies of store locations and a desirable physical environment for customers became core rigidities eventually leading to the filing of bankruptcy as a result of

Value chain activities in the value chain create value, whereas support functions generate costs.

According to the Chapter 3 Opening Case, all of the following are core competencies of Subway EXCEPT