CHAPTER 5 Internal Analysis

Chapter Topics Resource-based View of the Firm SWOT Analysis Value Chain Analysis Internal Analysis: Making Meaningful Comparisons

Ingredients Critical to Successful Strategy Be consistent with conditions in the competitive environment Strategy must … Place realistic requirements on the firm’s resources Be carefully executed

What is the Resource-based View of the Firm? Firms differ in fundamental ways because each firm possesses a unique “bundle” of resources – tangible and intangible assets and organizational capabilities to make use of those assets

The Three Basic Resources Tangible assets Easiest to identify and often found on a firm’s balance sheet Include physical and financial assets Examples: production facilities, raw materials, financial resources Intangible assets Cannot be seen or touched Often very critical in creating competitive advantage Examples: brand names, company reputation, company morale Organizational capabilities Involve skills – ability to combine assets, people, and processes – used to transform inputs into outputs

Ex. 5-2: Examples of Different Resources (selected) Tangible Assets Intangible Assets Organizational Capabilities Hampton Inn’s reservation system Nike’s brand name Dell Computer’s customer service Ford Motor’s cash reserves Dell Computer’s reputation Wal-mart’s purchasing and inbound logistics 3M’s patents Wendy’s advertising with Dave Thomas Sony’s product development process Georgia Pacific’s land holdings Jack Welch as GE’s leader Coke’s global distribution coordination

Company Competencies vs. Core Competencies vs. Distinctive Competencies A company competence is the product of organizational learning and experience and represents “real proficiency in performing an internal activity” A core competence is a well-performed internal activity that is central (not peripheral or incidental) to a company’s competitiveness and profitability A distinctive competence is a competitively valuable activity that a company performs better than its rivals

What Makes a Resource Valuable? Competitive superiority: Does the resource help fulfill a customer’s need better than those of the firm’s competitors? Resource scarcity: Is the resource in short supply? Easily Imitated?: Is the resource easily copied or acquired? (**look to next 2 slides) Durability: How rapidly will the resource depreciate? Substitutability? Are other alternatives available?

Easily Imitated? Isolating Mechanisms Physically unique resources Resources virtually impossible to imitate E.g., one-of-a-kind real estate location, mineral rights, patents Path-dependent resources Resources that must be created over time in a manner that is often expensive and difficult to accelerate E.g., Dell Computer’s system of direct sales of customized PCs via the Internet, Coca-Cola’s brand name, Gerber Baby Food’s reputation for quality

Easily Imitated? Isolating Mechanisms Causal ambiguity Situations where it is difficult for competitors to understand how a firm has created its advantage E.g., Southwest Airlines’ approach Same plane, routes, gate procedures, number of attendants Culture of fun, family, and frugal yet focused service Economic deterrence Involves large capital investments in capacity to produce products or services in a given market that are scale sensitive

What Makes a Resource Valuable? Again… Competitive superiority: Does the resource help fulfill a customer’s need better than those of the firm’s competitors? Resource scarcity: Is the resource in short supply? Easily Imitated?: Is the resource easily copied or acquired? Durability: How rapidly will the resource depreciate? Substitutability? Are other alternatives available?

Guidelines: Using the Resource Based View in Internal Analysis Disaggregate resources – break them down into more specific competencies rather than use broad categories Utilize a functional perspective in disaggregating tangible and intangible assets and organizational capabilities Look at organizational processes and combinations of resources, not only at isolated assets or capabilities Use the value chain approach to uncover potentially valuable capabilities, activities, and processes

SWOT Analysis Strengths Weaknesses Opportunities Threats Based on assumption: an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation Strengths A resource advantage relative to competitors and the needs of markets firm serves . Weaknesses A limitation or deficiency in one or more resources or competencies relative to competitors. Opportunities A major favorable situation in a firm’s environment Threats A major unfavorable situation in a firm’s environment

SWOT Analysis - Some things to Look For … Potential Resource Strengths Potential Resource Weaknesses Potential Company Opportunities Potential External Threats Powerful strategy Strong financial condition Strong brand name image/reputation Widely recognized market leader Proprietary technology Cost advantages Strong advertising Product innovation skills Good customer service Better product quality Alliances or JVs No clear strategic direction Obsolete facilities Weak balance sheet; excess debt Higher overall costs than rivals Missing some key skills/competencies Subpar profits Internal operating problems . . . Falling behind in R&D Too narrow product line Weak marketing skills Serving additional customer groups Expanding to new geographic areas Expanding product line Transferring skills to new products Vertical integration Take market share from rivals Acquisition of rivals Alliances or JVs to expand coverage Openings to exploit new technologies Openings to extend brand name/image Entry of potent new competitors Loss of sales to substitutes Slowing market growth Adverse shifts in exchange rates & trade policies Costly new regulations Vulnerability to business cycle Growing leverage of customers or suppliers Reduced buyer needs for product Demographic changes

What is a Value Chain? The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value

What is Value Chain Analysis? Focuses on how a business creates customer value by examining contributions of different internal activities to that value Divides a business into a set of activities within the business Starts with inputs a firm receives Finishes with firm’s products or services and after-sales service to customers Allows for better identification of a firm’s strengths and weaknesses since the business is viewed as a process

Value Chain activities … (selected items) Human Resource Management General Administration Procurement Technology Development Inbound Logistics Operations Outbound Logistics Service Marketing and Sales

Internal Analysis: Making Meaningful Comparisons 1. Comparison with past performance 4. Comparison with success factors in industry 2. Stages of industry evolution Perspectives to use 3. Benchmarking – comparison with competitors