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Analyzing the Internal Environment of the Firm Chapter 3 Analyzing the Internal Environment of the Firm

Learning Objectives After reading this chapter, you should have a good understanding of: How an awareness of strategic goals can help an organization achieve coherence in its strategic direction. The primary and support activities of a firm’s value chain. 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 usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms. The value of recognizing how the interests of a variety of stakeholders can be interrelated. 3-3

Question Which of the following is not included in the hierarchy of goals of strategic direction? a) Mission Statement b) Company Vision c) SWOT analysis d) Strategic objectives Answer: c 3-4

Coherence in Strategic Direction Company vision Massively inspiring Overarching Long-term Driven by and evokes passion Fundamental statement of the organization’s Values Aspiration Goals Hierarchy of Goals Company vision 3-5

Coherence in Strategic Direction Mission statements Purpose of the company Basis of competition and competitive advantages More specific than vision Focused on the means by which the firm will compete Hierarchy of Goals Company vision Mission statements 3-6

Coherence in Strategic Direction 3-7

Coherence in Strategic Direction Strategic objectives Operationalize the mission statement Provide guidance on how the organization can fulfill or move toward the “higher goals” More specific Cover a more well-defined time frame Hierarchy of Goals Company vision Mission statements Strategic objectives 3-8

Coherence in Strategic Direction Strategic objectives Measurable Specific Appropriate Realistic Timely Challenging Resolve conflicts that arise Yardstick for rewards and incentives Hierarchy of Goals Company vision Mission statements Strategic objectives 3-9

Coherence in Strategic Direction 3-10

Question Value is measured by: a) supply of a firm’s product/service b) a firm’s net worth c) A firm’s customer base d) A firm’s total revenue Answer: d 3-11

Value-Chain Analysis Second key tool to understanding an organization’s internal environment 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 3-12

Value-Chain Analysis Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service Porter describes two different categories of activities: Primary – inbound logistics, operations, outbound logistics, marketing and sales, and service Support activities – procurement, technology development, human resource management, general management 3-13

Example - IBM Electronics Value Chain Management Helps companies save money The benefits of streamlining a business with value chain management include: Lower infrastructure costs associated with collaboration. Create commonality in parts and suppliers. Control inventory by getting the supply chain talking to the demand chain. Cut transaction costs by integrating with public and private exchanges. Deliver products to market faster while minimizing risk and capital investment. Example: Philips Consumer Electronics needed to quickly improve customer satisfaction and business profitability, therefore they engaged IBM to create a supply chain strategy focused on the future. IBM Electronics Value Chain Management helps companies save money by streamlining their value chain. The benefits of streamlining a business with value chain management include: Lower infrastructure costs associated with collaboration. Create commonality in parts and suppliers. Control inventory by getting the supply chain talking to the demand chain. Cut transaction costs by integrating with public and private exchanges. Deliver products to market faster while minimizing risk and capital investment. Source: www.ibm.com 3-14

The Value Chain 3-15

Primary Activity: 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 3-16

Primary Activity: Operations 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 3-17

Primary Activity: Outbound Logistics 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 3-18

Primary Activity: Marketing and Sales 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 3-19

Example: Pizza’s Global Footprint Domino Pizza store described as "more a logistics company than food service, since supply chain management is the factor that differentiates the winners from the losers" in this business Domino's Pizza has 8,000 stores in 54 countries and sales of $4.6 billion known for development of centralized ingredient logistics systems Outbound logistics make use of scooters, bikes, fleet-footed delivery boys and vans Pizzeria manager, Pavan Bhatia, describes Domino Pizza store as "more a logistics company than food service, since supply chain management is the factor that differentiates the winners from the losers" in this business Domino's Pizza has only 8,000 stores in 54 countries and sales of $4.6 billion It is known for its development of centralized ingredient logistics systems Outbound logistics from stores all over the world make use of scooters, bikes, fleet-footed delivery boys and vans www.forbes.com/logistics/2007/02/20/pizza-shipping-logistics-biz-logistics-cx_rm_0221pizza.html 3-20

Primary Activity: Service 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 3-21

Support Activity: Procurement 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 3-22

Question Which support activity is related to a wide range of activities and those embodied in processes and equipment and the product itself? a) Technology Development b) Human Resource Management c) General Management d) Procurement Answer: a 3-23

Support Activity: Technology Development 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 3-24

Support Activity: Human Resource Management 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 3-25

Support Activity: General Administration 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 3-26

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 organization (e.g., customers and suppliers) 3-27

Applying the Value Chain to Service Organizations What are the “operations” or transformation processes, of service organizations? In service, need to provide a customized solution rather than mass production Value chain to service industry suggests that the value-adding process may be different depending on type of business 3-28

Value Chain in Service Industry 3-29

Evaluating Firm Performance Two approaches for evaluating firm performance Financial ratio analysis Balance sheet Income statement Historical comparison Comparison with industry norms Comparison with key competitors Balanced scorecard (stakeholder perspective) Employees Customers Owners 3-30

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 3-31

Financial Ratio Analysis 3-32

Question What provides a meaningful integration of many issues that come into evaluating a firm’s performance? a) Balance Scorecard b) Customer Perspective c) Internal Business Perspective d) Innovation and Learning Prospective Answer: a 3-33

The Balance Scorecard Provides a meaningful integration of many issues that come into evaluating a firm’s performance Four key perspectives 3-34

The Balance Scorecard 3-35

Customer Perspective Time Quality Performance and service Cost 3-36

Internal Business Perspective Processes Cycle time Quality Employee Skills Productivity Decisions Actions Coordination Resources and capabilities 3-37

Innovation and Learning Perspective Introduction of new products and services Greater value for customers Increased operating efficiencies 3-38

Source: www.businessweek.com Example The world’s 10 most innovative companies, according to Business Week in 2007 are: Apple Google Toyota Motor General Electric Microsoft Proctor & Gamble 3M Walt Disney Co. IBM Sony Source: www.businessweek.com 3-39

Financial Perspective Profitability Growth Shareholder value Increased market share Reduced operating expenses Higher asset turnover 3-40

Potential Limitations of the Balanced Scorecard Lack of a clear strategy Limited or ineffective executive sponsorship Too much emphasis on financial measures rather than non-financial measures Poor data on actual performance Inappropriate links to scorecard measures to compensation Inconsistent or inappropriate Terminology 3-41