Firm Capabilities: Assessing Strengths ad Weaknesses Chapter 3 Firm Capabilities: Assessing Strengths ad Weaknesses by Robert Pitts & David Lei Slides prepared by John P. Orr Cameron University Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

What you will learn… Slide 1 of 2 The strategic management tool known as the value chain. The use of the value chain in evaluating an organization’s internal strengths and weaknesses. The difference between primary and support value-adding activities Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

What you will learn… The concept of competitive advantage Slide 2 of 2 The concept of competitive advantage The concept of distinctive competence Some important economic sources of competitive advantage Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

Firm Capabilities Pizza Hut Advantages General Motors Challenges Location Reputation Purchase discounts Interrelationships General Motors Challenges Design Process technology Workforce motivation Procurement costs Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

The Value Chain An analytical tool that describes all activities that make up the economic performance and capabilities of the firm. It is used to analyze and examine activities that create value for a given firm. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

Ex. 3-1. The Value Chain SUPPORT ACTIVITIES PRIMARY ACTIVITIES Infrastructure Human Resource Management SUPPORT ACTIVITIES Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 5

The Value Chain Primary Activities – Activities which relate directly to the actual creation, manufacture, distribution, and sale of a product or service to the firm’s customers. Secondary Activities – Economic activities which assist the firm’s primary activities. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

The Value Chain Upstream Activities – Economic activities that occur close to the firm’s suppliers but far away from the customers. Downstream Activities – Economic activities that occur close to the customer but far away from the firm’s suppliers. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

Support Activities Product Development – The conception, design, and commercialization of new products. Process Development – The design and use of new procedures, technologies, techniques, and other steps to improve the value-adding process. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

Ex. 3-2. Pizza Restaurant Industry Value Chain Obtain funds, carry out accounting and payroll functions, and perform other administrative tasks for each activity Infrastructure Human Resource Management Supervise truck drivers & warehouse personnel Supervise advertising personnel Supervise waiters Supervise kitchen personnel SUPPORT ACTIVITIES Improve truck routing & warehouse methods Develop new menu items, improve oven design Discover new promotional materials Improve restaurant lay-out Technology Development Buy trucks, lease warehouse space Buy dough, cheese, ovens, and supplies Buy tables, chairs, silver-ware to equip restaurant Procurement Buy TV time Haul dough, cheese, etc. to restaurants Develop advertising copy Serve food to restaurant customers PRIMARY ACTIVITIES Cook pizzas, make salads, etc. Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 5

Ex. 3-3. Automotive Industry Value Chain Infrastructure Obtain funds, carry out accounting and payroll functions, and perform other administrative tasks for each activity. Human Resource Management Supervise truck drivers, warehouse personnel Supervise assembly workers Supervise advertising & sales personnel Supervise maintenance personnel (Same as inbound logistics) SUPPORT ACTIVITIES Improve truck routing & warehouse methods Improve product design & assembly process Improve selling methods Improve maintenance procedures Technology Development (Same as inbound logistics) Buy trucks, lease warehouse space Buy components, assembly equipment Hire advertising agency, buy media time Buy tools for maintenance personnel Procurement (Same as inbound logistics) Transport components to assembly facility Assemble components into autos Advertise, promote, & sell autos Maintain, repair autos PRIMARY ACTIVITIES Transport autos to dealers Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 6

Ex. 3-4. Pizza Hut’s Business System Infrastructure Human Resource Management SUPPORT ACTIVITIES Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Key: = Extensive activity = Modest activity = No activity Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 7

Ex. 3-5: GM’s Business System Infrastructure Human Resource Management SUPPORT ACTIVITIES Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Key: = Extensive activity = Modest activity = No activity Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 8

Ex. 3-6. Common First-Mover Advantages Patents Channel Access License Supply Access Location Reputation Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 9

Ex. 3-7. Economies of Scale Cost per unit of output Scale of activity (plant size, sales volume, etc.) Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 10

Ex. 3-8. Major Contributors to Economies of Scale Specialization Purchase Discounts Fixed-Cost Spreading Vertical Integration Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 11

Ex. 3-9. Economies of Experience Cost per unit of output Cumulative volume * * Number of unit produced (or sold, serviced, developed, etc.) since commencing an activity. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 12

Ex. 3-10. Major Contributors to Experience Benefits Employee learning Product redesign Process improvement Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 13

Ex. 3-11. Activities Frequently Benefitting From First Mover Advantages Infrastructure Human Resource Management Reputation SUPPORT ACTIVITIES Patent protection; license Technology Development Supply access Procurement Patent protection License License Location, channel access, reputation Reputation; license PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 14

Ex. 3-12. Requirements for Achieving Scale and Experience Advantage • Centralization - Activity must be centralized • Susceptibility - Activity must be susceptible to to the processes which produce scale and experience benefits • Implementation - Activity must be properly implemented • Proprietary - Benefits of scale and experience must be proprietary Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 15

Ex. 3-13. Pizza Hut’s Sources of Competitive Advantage Infrastructure Human Resource Management SUPPORT ACTIVITIES Technology Development Procurement of food (S) Procurement of TV time (S, I) Procurement Reputation (FM): advertising (S,I) PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Key: FM = First Mover Advantages; S = Scale Advantage; I = Interrelationship Advantage Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. 16

Ex. 3-14. Comparative Financial Analysis: Key Ratios Type Examples Measures Indicators Productivity of firm’s value-adding activities Return on Equity (ROE) Profitability Profit after taxes Shareholder’s equity Current Assets Current Liabilities Measure of financial solvency Liquidity Current Ratio Asset use efficiency Turnaround of inventory Asset Turnover Inventory Turnover Sales_________ Total Assets Activity Sales_________ Inventory Corporate financing; financial risk; default risk Leverage Debt/Equity Ratio Liabilities______ Shareholders’ equity Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

Ethical Issues: Assessing Rivals Examining competitors’ products Questioning competitors’ employees Using consultants Engaging in industrial espionage ‘Raiding’ employees Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.