3-1 Assessing the Internal Environment of the Firm McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Chapter three Part 1: strategic analysis

3-2 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. McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

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

3-4 Learning Objectives  After reading this chapter, you should have a good understanding of:  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. McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3-5 Learning Objectives McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  After reading this chapter, you should have a good understanding of:  The value of recognizing how the interests of a variety of stakeholders can be interrelated.

3-6 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 McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3-7 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 McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3-8 The Value Chain McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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.

3-9 Primary Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Inbound Logistics 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 (e.g. Toyota Production System) Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-10 Primary Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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 (e.g. Toyota Production System) Inbound Logistics Operations Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-11 Primary Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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 Inbound Logistics Operations Outbound Logistics Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-12 Primary Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-13 Primary Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-14 Support Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-15 Support Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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 Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities General Administration Human Resource Management

3-16 Support Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-17 Support Activities McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-18 Interrelationships among Value- Chain Activities within and across Organizations McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  Importance of relationships among value activities  Interrelationships among activities within the firm  Relationships among activities within the firm and with other organization (e.g., customers and suppliers)

3-19 Applying the value chain to service organizations McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  Value-adding process may be configured differently depending on the type of business  The activities that may only provide support to one company may be critical to the primary value-adding activity of another firm.

3-20 McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3-21 Resource-Based View of the Firm McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  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

3-22 Types of Resources McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Tangible 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 Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities

3-23 Types of Resources McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Relatively easy to identify, and include physical and financial assets used to create value for customers  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

3-24 Types of Resources McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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 Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities Tangible Resources Intangible Resources

3-25 Types of Resources McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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 creativity  Technical and scientific skills  Innovation capacities  Reputation  Brand name  Reputation with customers  Reputation with suppliers Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities Tangible Resources Intangible Resources

3-26 Types of Resources McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-27 Firm Resources and Sustainable Competitive Advantages McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Is the resource or capability… Valuable Rare Difficult 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

3-28 Is the Resource Valuable? McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-29 Is the Resource Rare? McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-30 Can the Resource be Imitated Easily? McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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

3-31 Are Substitutes Readily Available? McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. 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)

3-32 Criteria for Sustainable Competitive Advantage and Strategic Implications McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Exhibit 3.8 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

3-33 Evaluating Firm Performance McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Two approaches for evaluating firm performance  Financial ratio analysis  Balance sheet  Income statement  Balanced scorecard (stakeholder perspective)  Employees  Customers  Owners

3-34 Financial Ratio Analysis McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  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

3-35 Financial Ratio Analysis: Historical Comparisons McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Exhibit 3.9 Historical Trends: Return on Sales (ROS) for a Hypothetical Company

3-36 Financial Ratio Analysis: Comparison with Industry Norms McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Exhibit 3.10 How Financial Ratios Differ across Industries Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, , Desktop Edition,

3-37 Financial Ratio Analysis: Comparison with Key Competitors McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Exhibit 3.10 Comparison of Procter & Gamble’s and Key Competitors’ Drug Revenues and R&D Expenditures Source: R. Berner, “Procter & Gamble: Just Say No to Drugs,” Business Week, October 9, 2000, p. 128; data courtesy of Lehman Brothers and Procter & Gamble.

3-38 The Balanced Scorecard McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  Provides a meaningful integration of many issues that come into evaluating a firm’s performance  Four 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)

3-39 The Balanced Scorecard McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.

3-40 The Balanced Scorecard McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Customer Perspective  Time  Quality  Performance and service  Cost

3-41 The Balanced Scorecard McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  Processes  Cycle time  Quality  Employee Skills  Productivity  Decisions  Actions  Coordination  Resources and capabilities Customer Perspective Internal Business Perspective

3-42 The Balanced Scorecard McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  Introduction of new products and services  Greater value for customers  Increased operating efficiencies Customer Perspective Internal Business Perspective Innovation and Learning Perspective

3-43 The Balanced Scorecard McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  Profitability  Growth  Shareholder value  Increased market share  Reduced operating expenses  Higher asset turnover Customer Perspective Internal Business Perspective Innovation and Learning Perspective Financial Perspective

3-44 Strategy Maps McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.  Building on the concepts that are foundation of the Balanced Scorecard  Strategy maps show the cause and effect links by which specific improvements in different areas lead to a desired outcome.  Also help employees see how their jobs are related to the overall objectives of the organization  Help us understand how an organization can convert its assets both tangible and intangible into tangible outcomes

3-45 Strategy Map template McGraw-Hill/Irwin Strategic Management, 3/e Copyright © 2007 The McGraw-Hill Companies, Inc. All rights reserved.