strategic management text & cases University of Bahrain College of Business Administration MGT 434 Strategic Management MGT434 1

chapter three Assessing the Internal Environment of the Firm Part 1: strategic analysis McGraw-Hill/Irwin Copyright © 2006 The McGraw-Hill Companies, Inc. All rights reserved. MGT434 2

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 MGT434 3

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 MGT434 4

The Value Chain Adapted from Exhibit 3.1 The Value Chain: Primary and Support Activities Source: 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. General administration Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service MGT434 5

Primary Activities Associated with receiving, storing and distributing inputs to the product – Location of distribution facilities – Material and inventory control systems – Systems to reduce time to send “returns” to suppliers – Warehouse layout and designs Inbound Logistics Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities MGT434 6

Primary Activities Associated with transforming inputs into the final product form – Efficient plant operations – Appropriate level of automation in manufacturing – Quality production control systems – Efficient plant layout and workflow design Inbound Logistics Operations Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities MGT434 7

Primary Activities Associated with collecting, storing, and distributing the product or service to buyers – Effective shipping processes – Efficient finished goods warehousing processes – Shipping of goods in large lot sizes – Quality material handling equipment (to increase order picking) Inbound Logistics Operations Outbound Logistics Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities MGT434 8

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 force – Innovative approaches to promotion and advertising – Selection of most appropriate distribution channels – Proper identification of customer segments and needs – Effective pricing strategies Inbound Logistics Operations Outbound Logistics Marketing and Sales Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities MGT434 9

Primary Activities 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 information – Quick response to customer needs and emergencies – Ability to furnish replacement parts – Effective management of parts and equipment inventory – Quality of service personnel and ongoing training – Warranty and guarantee policies Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities MGT434 10

Support Activities Typically supports the entire value chain and not individual activities – Effective planning systems – Ability of top management to anticipate and act on key environmental trends and events – Ability to obtain low-cost funds for capital expenditures and working capital – Excellent relationships with diverse stakeholder groups – Ability to coordinate and integrate activities across the value chain – Highly 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 MGT434 11

Support Activities Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel – Effective recruiting, development, and retention mechanisms for employees – Quality relations with trade unions – Quality work environment to maximize overall employee performance and minimize absenteeism – Reward and incentive programs to motivate all employees General Administration Human Resource Management Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities MGT434 12

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 initiatives – Positive collaborative relationships between R&D and other departments – State-of-the-art facilities and equipment – Culture to enhance creativity and innovation – Excellent professional qualifications of personnel – Ability to meet critical deadlines General Administration Human Resource Management Technology Development Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities MGT434 13

Support Activities Function of purchasing inputs used in the firm’s value chain – Procurement of raw material inputs – Development of collaborative “win-win” relationships with suppliers – Effective procedures to purchase advertising and media services – Analysis and selection of alternate sources of inputs to minimize dependence on one supplier – Ability to make proper lease versus buy decisions General Administration Human Resource Management Technology Development Procurement Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities MGT434 14

Interrelationships among Value-Chain Activities within and across Organizations Importance of relationships among value activities – Interrelationships among activities within the firm – Relationships among activities within the firm and with other organizations (e.g., customers and suppliers) MGT434 15

Resource-Based View of the Firm Two perspectives – The internal analysis of phenomena within a company – An external analysis of the industry and its competitive environment Three key types of resources – Tangible resources – Intangible resources – Organizational capabilities MGT434 16

Types of Resources Relatively easy to identify, and include physical and financial assets used to create value for customers – Financial resources Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity – Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment Tangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities MGT434 17

Types of Resources – Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks – Organizational resources Effective strategic planning processes Excellent evaluation and control systems Tangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities Relatively easy to identify, and include physical and financial assets used to create value for customers MGT434 18

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 – Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Tangible Resources Intangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities MGT434 19

Types of Resources – Innovation and creativity Technical and scientific skills Innovation capacities – Reputation Effective strategic planning processes Excellent evaluation and control systems Tangible Resources Intangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time MGT434 20

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 service – Excellent product development capabilities – Innovativeness of products and services – Ability to hire, motivate, and retain human capital Tangible Resources Intangible Resources Organizational Capabilities Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities MGT434 21

How Resources and Capabilities Lead to Advantages Adapted from Exhibit 3.5 Marks & Spencer: How Resources and Capabilities Lead to Advantages Source: Adapted with permission of Harvard Business Review: Exhibit from “Competing on Resources: Strategy in the 1990’s” by D. J. Collis and C. Montgomery, 73, no. 4 (1995). MGT434 22

Firm Resources and Sustainable Competitive Advantages Is the resource or capability… Valuable Rare Difficult to imitate Difficult to substitute Implications Adapted from Exhibit 3.6 Four Criteria for Assessing Sustainability of Resources and Capabilities Neutralize threats and exploit opportunities Not many firms possess Physically unique Path dependency Causal ambiguity Social complexity No equivalent strategic resources or capabilities MGT434 23

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 MGT434 24

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 advantage – Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors MGT434 25

Can the Resource be Imitated? 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 uniqueness Path dependency Causal ambiguity Social complexity MGT434 26

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 forms Competitor 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) MGT434 27

Criteria for Sustainable Competitive Advantage and Strategic Implications ValuableRareDifficult WithoutImplications to ImitateSubstancefor Competitiveness NoNoNoNoCompetitive disadvantage YesNoNoNoCompetitive parity YesYesNoNoTemporary competitive advantage YesYesYesYesSustainable competitive advantage Is a resource or capability… Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp MGT434 28

Evaluating Firm Performance Two approaches for evaluating firm performance – Financial ratio analysis Balance sheet Income statement – Balanced scorecard (stakeholder perspective) Employees Customers Owners MGT434 29

Financial Ratio Analysis Five types of financial ratios – Short-term solvency or liquidity – Long-term solvency measures – Asset management (or turnover) – Profitability – Market value Meaningful ratio analysis must include – Analysis of how ratios change over time – How ratios are interrelated MGT434 30

The Balanced Scorecard Time Quality Performance and service Cost Customer Perspective MGT434 31

The Balanced Scorecard Processes – Cycle time – Quality – Employee skills – productivity Decisions Actions Coordination Resources and capabilities Customer Perspective Internal Business Perspective MGT434 32

The Balanced Scorecard Introduction of new products and services Greater value for customers Increased operating efficiencies Customer Perspective Internal Business Perspective Innovation and Learning Perspective MGT434 33

The Balanced Scorecard Profitability Growth Shareholder value Increased market share Reduced operating expenses Higher asset turnover Customer Perspective Internal Business Perspective Innovation and Learning Perspective Financial Perspective MGT434 34