3-1. 3-2 assessing the internal environment of the firm mcgraw-hill/irwin strategic management, 3/e...

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Assessing the Internal Environment of the Firm

McGraw-Hill/IrwinStrategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Chapter three

Part 1: strategic analysis

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Learning Objectives

After reading this chapter, you should have a good understanding of:

The benefits and limitations of SWOT analysis in conducting an internal analysis of the firm.

The primary and support activities of a firm’s value chain.


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Learning Objectives After reading this chapter, you should

have a good understanding of: How value-chain analysis can help

managers create value by investigating relationships among activities within the firm and between the firm and its customers and suppliers.

The resource-based view of the firm and the different types of tangible and intangible resources, as well as organizational capabilities.


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Learning Objectives


The four criteria that a firm’s resources must possess to maintain a sustainable advantage and how value created can be appropriated by employees.

The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms.


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Learning Objectives



The value of recognizing how the interests of a variety of stakeholders can be interrelated.

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The Limitations of SWOT Analysis

Strengths may not lead to an advantage

SWOT’s focus on the external environment is too narrow

SWOT gives a one-shot view of a moving target

SWOT overemphasizes a single dimension of strategy


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Value-Chain Analysis Sequential process of value-

creating activities The amount that buyers are

willing to pay for what a firm provides them

Value is measured by total revenue

Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service


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The Value Chain


Adapted from Exhibit 3.1 The Value Chain: Primary and Support ActivitiesSource: Adapted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter.

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Primary Activities


Inbound Logistics

Associated with receiving, storing and distributing inputs to the product

Location of distribution facilitiesMaterial and inventory control systemsSystems to reduce time to send “returns” to suppliersWarehouse layout and designs

Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

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Primary Activities


Associated with transforming inputs into the final product form

Efficient plant operationsAppropriate level of automation in manufacturingQuality production control systemsEfficient plant layout and workflow design

Inbound Logistics

Operations


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Primary Activities


Associated with collecting, storing, and distributing the product or service to buyers

Effective shipping processesEfficient finished goods warehousing processesShipping of goods in large lot sizesQuality material handling equipment

Inbound Logistics

Operations

Outbound Logistics


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Primary Activities


Associated with purchases of products and services by end users and the inducements used to get them to make purchases

Highly motivated and competent sales forceInnovative approaches to promotion and advertisingSelection of most appropriate distribution channelsProper identification of customer segments and needsEffective pricing strategies

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales


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Associated with providing service to enhance or maintain the value of the product

Effective use of procedures to solicit customer feedback and to act on informationQuick response to customer needs and emergenciesAbility to furnish replacement partsEffective management of parts and equipment inventoryQuality of service personnel and ongoing trainingWarranty and guarantee policies

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service


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Support Activities


Typically supports the entire value chain and not individual activities

Effective planning systemsAbility of top management to anticipate and act on key environmental trends and eventsAbility to obtain low-cost funds for capital expenditures and working capitalExcellent relationships with diverse stakeholder groupsAbility to coordinate and integrate activities across the value chainHighly visible to inculcate organizational culture, reputation, and values

General Administration

Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities

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Support Activities


Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel

Effective recruiting, development, and retention mechanisms for employeesQuality relations with trade unionsQuality work environment to maximize overall employee performance and minimize absenteeismReward and incentive programs to motivate all employees



Human ResourceManagement

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Support Activities


Related to a wide range of activities and those embodied in processes and equipment and the product itself

Effective R&D activities for process and product initiativesPositive collaborative relationships between R&D and other departmentsState-of-the art facilities and equipmentCulture to enhance creativity and innovationExcellent professional qualifications of personnelAbility to meet critical deadlines



Technology Development


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Support Activities


Function of purchasing inputs used in the firm’s value chain

Procurement of raw material inputsDevelopment of collaborative “win-win” relationships with suppliersEffective procedures to purchase advertising and media servicesAnalysis and selection of alternate sources of inputs to minimize dependence on one supplierAbility to make proper lease versus buy decisions



Technology Development

Procurement


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Interrelationships among Value-Chain Activities within and across Organizations


Importance of relationships among value activities

Interrelationships among activities within the firmRelationships among activities within the firm and with other organization (e.g., customers and suppliers)

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Resource-Based View of the Firm


Two perspectivesThe internal analysis of phenomena within a companyAn external analysis of the industry and its competitive environment

Three key types of resourcesTangible resourcesIntangible resourcesOrganizational capabilities

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Types of Resources


Tangible Resources

Relatively easy to identify, and include physical and financial assets used to create value for customersFinancial resources

Firm’s cash accountsFirm’s capacity to raise equityFirm’s borrowing capacity

Physical resourcesModern plant and facilitiesFavorable manufacturing locationsState-of-the-art machinery and equipment

Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities

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Types of Resources


Relatively easy to identify, and include physical and financial assets used to create value for customersTechnological resources

Trade secretsInnovative production processesPatents, copyrights, trademarks

Organizational resourcesEffective strategic planning processesExcellent evaluation and control systems

Tangible Resources


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Types of Resources


Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

HumanExperience and capabilities of employeesTrustManagerial skillsFirm-specific practices and procedures


Tangible Resources

Intangible Resources

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Types of Resources


Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

Innovation and creativityTechnical and scientific skillsInnovation capacities

ReputationBrand nameReputation with customersReputation with suppliers


Tangible Resources


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Types of Resources


Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end

Outstanding customer serviceExcellent product development capabilitiesInnovativeness of products and servicesAbility to hire, motivate, and retain human capital

Tangible Resources


Organizational Capabilities


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Firm Resources and Sustainable Competitive Advantages


Is the resource or capability…ValuableRareDifficult to imitate

Difficult to substitute

Implications

Neutralize threats and exploit opportunities

Not many firms possess

Physically unique

Path dependency

Causal ambiguity

Social complexity No equivalent strategic

resources or capabilities

Adapted from Exhibit 3.7 Four Criteria for Assessing Sustainability of Resources and Capabilities

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Is the Resource Valuable?


Organizational resources can be a source of competitive advantage only when they are valuable

Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

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Is the Resource Rare?


Organizational resources also possessed by competitors are not sources of competitive advantage

Common strategies based on similar resources give no one firm an advantageCompetitive advantages are gained only from uncommon resources, resources that are rare to other competitors

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Can the Resource be Imitated Easily?


Difficulty in imitating resources is key to value creation because it constrains competition Profits generated from inimitable

resources are more likely to be sustainable

Physical uniquenessPath dependencyCausal ambiguitySocial complexity

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Are Substitutes Readily Available?


There must be no strategically equivalent valuable resources that are themselves not rare or inimitable

Substitutability may take at least two formsCompetitor may be able to substitute

a similar resource that enables it to develop and implement the same strategy

Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)

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Criteria for Sustainable Competitive Advantage and Strategic Implications


Exhibit 3.8 Criteria for Sustainable Competitive Advantage and Strategic ImplicationsSource; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp. 99-120.

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Evaluating Firm Performance


Two approaches for evaluating firm performance

Financial ratio analysisBalance sheetIncome statement

Balanced scorecard (stakeholder perspective)

EmployeesCustomersOwners

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Financial Ratio Analysis


Five types of financial ratiosShort-term solvency or liquidityLong-term solvency measuresAsset management (or turnover)ProfitabilityMarket value

Meaningful ratio analysis must includeAnalysis of how ratios change over timeHow ratios are interrelated

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Financial Ratio Analysis: Historical Comparisons


Exhibit 3.9 Historical Trends: Return on Sales (ROS) for a Hypothetical Company

Dess Exhibit 3.9.CLP

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Financial Ratio Analysis: Comparison with Industry Norms


Exhibit 3.10 How Financial Ratios Differ across IndustriesSource: Dun & Bradstreet, Industry Norms and Key Business Ratios, 2003-2004,

Desktop Edition,

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Financial Ratio Analysis: Comparison with Key Competitors


Exhibit 3.10 Comparison of Procter & Gamble’s and Key Competitors’ Drug Revenues and R&D ExpendituresSource: R. Berner, “Procter & Gamble: Just Say No to Drugs,” Business Week, October 9, 2000, p. 128; data courtesy of Lehman Brothers and Procter & Gamble.

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The Balanced Scorecard


Provides a meaningful integration of many issues that come into evaluating a firm’s performanceFour key perspectives

How do customers see us? (customer perspective)What must we excel at? (internal perspective)Can we continue to improve and create value? (innovation and learning perspective)How do we look to shareholders? (financial perspective)

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Customer Perspective

TimeQualityPerformance and serviceCost

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ProcessesCycle timeQualityEmployee SkillsProductivity

DecisionsActionsCoordinationResources and capabilities


Internal BusinessPerspective

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Introduction of new products and servicesGreater value for customersIncreased operating efficiencies



Innovation and Learning Perspective

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ProfitabilityGrowthShareholder valueIncreased market shareReduced operating expensesHigher asset turnover



Innovation and Learning Perspective

Financial Perspective

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