Chapter Three Assessing the Internal Environment of the Firm

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin After studying 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. How value-chain analysis can help managers create value by investigating relationships among activities within the firm and among the firm and its customers and suppliers. The different types of tangible and intangible resources, as well as organizational capabilities. The four criteria that a firm's resources must possess to maintain a sustainable advantage. The usefulness of financial ratio analysis as well as its inherent limitations. How to make meaningful comparisons of performance across firms. The value of recognizing how the interests of a variety of stakeholders can be interrelated. Learning Objectives TRANSPARENCY-20

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin The Value Chain: Primary and Support Activities The Value Chain General administration Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service Margin Support Activities Primary Activities Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1998 by Michael E. Porter. Exhibit 3.1 TRANSPARENCY-21

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities Source: Adapted with permission of The Free Press, a division of Simon & Schuster, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. Location of distribution facilities to minimize shipping times Excellent material and inventory control systems Systems to reduce time to send “returns” to suppliers Warehouse layout and designs to increase efficiency of operations for incoming materials Efficient plant operations to minimize costs Appropriate level of automation in manufacturing Quality production control systems to reduce costs and enhance quality Efficient plant layout and workflow design Effective shipping processes to provide quick delivery and minimize damages Efficient finished goods warehousing processes Shipping of goods in large lot sizes to minimize transportation costs Quality material handling equipment to increase order picking 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 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 as required Effective management of parts and equipment inventory Quality of service personnel and ongoing training Appropriate warranty and guarantee policies Inbound Logistics OperationsOutbound Logistics Marketing and Sales Service PROFIT MARGIN Exhibit 3.2 TRANSPARENCY-22

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin The Value Chain: Some Factors to Consider in Assessing Firm’s 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. Copyright © 1985, 1998 by Michael E. Porter. Exhibit 3.3 Effective planning systems to attain overall goals and objectives 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 system” Highly visible to inculcate organizational culture, reputation, and values 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 Effective research and development 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 Procurement of raw material inputs to optimize quality, speed and minimize the associated costs 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 PROFIT MARGIN General Administration Human Resource Management Technology Development Procurement TRANSPARENCY-23

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin The Resource Based View of the Firm: Resources and Capabilities FinancialFirm’s cash account and cash equivalents Firm’s capacity to raise equity Firm’s borrowing capacity PhysicalModern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment TechnologicalTrade secrets Innovative production processes Patents, copyrights, trademarks OrganizationalEffective strategic planning processes Excellent evaluation and control systems Tangible Resources Source: Adapted from J.B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R.M. Grant, 1991, Contemporary Strategy Analysis (Cambridge, U.K.: Blackwell Business), Hitt, M.A., Ireland, R.D. & Hoskisson, R.E Strategic Management: Competitivenesss and Globalization. Fourth Edition. South-Western College Publishing: Cincinnati, Ohio. Exhibit 3.4 HumanExperience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Innovation and creativity Technical and scientific skills Innovation capacities ReputationBrand name Reputation with customers for quality and reliability Reputation with suppliers for fairness, non-zero sum relationships Intangible Resources Organization Capabilities Firm competences or skills the firm employs to transfer inputs to outputs Capacity to combine tangible and intangible resources, using organizational processes to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital Examples: TRANSPARENCY-24

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Marks & Spencer: How Resources and Capabilities Lead to Advantages Lower costs and higher quality of goods sold Fewer layers of hierarchy Capabilities Customer recognition with minimal advertising No promotional sales Lower labor turnover 8.7% labor costs versus 10%-20% industry average Intangible 1% of revenues allocated to occupancy costs (versus 3% to 9% industry average) Tangible Competitive Advantages in Great Britain Resource Ownership (vs. leasing) of property Brand reputation Employee loyalty Supplier chain Managerial judgment Source: Adapted from Collins, D. & Montgomery, C Competing on resources: Strategy in the 1990s. Harvard Business Review, 73(4): 123. Exhibit 3.5 TRANSPARENCY-25

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Assessing Sustainability of Resources and Capabilities: Four Criteria No equivalent strategic resources or capabilities Difficult to substitute Physically unique Path dependency (how accumulated over time) Causal ambiguity (difficult to disentangle what it is or how it could be recreated) Social complexity (trust, interpersonal relationships, culture, reputation) Difficult to imitate Not many firms possessRare Neutralize threats and exploit opportunities Valuable ImplicationsIs the resource or capability... Exhibit 3.6 TRANSPARENCY-26

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Criteria for Sustainable Competitive Advantage and Strategic Implications Is a Resource… Source: Adapted from Barney Firm Resources a Sustained Competitive Advantage. Journal of Management, 17: ValuableRare Difficult to Imitate Without Substitutes Implications for Competitiveness No Competitive disadvantage YesNo Competitive parity Yes No Temporary competitive advantage Yes Sustainable competitive advantage Exhibit 3.7 TRANSPARENCY-27

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Historical Trends: ROS for a Hypothetical Company 20% 10% Return n Sales Years 1, 2, 3 Years 4, 5, 6 Years 6, 7, 8 Years 8, 9, 10 Years 6, 7, 8, 9, 10 Year Exhibit 3.8 TRANSPARENCY-28

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin How Financial Ratios Differ Across Industries Financial Ratio Semi- conductors Grocery Stores Skilled nursing facilities Quick ratio (times) Current ratio (times) Total liabilities to net worth (%) Collection period (days) Assets to sales (%) Return on sales (%) Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, Desktop Edition. SIC # Exhibit 3.9 TRANSPARENCY-29

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin Comparison of Procter & Gamble’s Drug Revenues and R&D Expenditures and Key Competitors COMPANY (OR DIVISION) SALES* (billions) R&D BUDGET (billions) P&G DRUG DIVISION $0.8 $0.38 BRISTOL-MYERS SQUIBB$20.2 $1.8 PFIZER$27.4 $4.0 MERCK$32.7 $2.1 * Most recently completed fiscal year. Data: Lehman Brother Procter & Gamble Co. Exhibit 3.10 Source: Berner, R Procter & Gamble: Just say no to drugs. Business Week: October 9:128. TRANSPARENCY-30

CHAPTER 3 McGraw-Hill/Irwin Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT  Gregory G. Dess and G. T. Lumpkin ECI’s Balanced Business Scorecard Exhibit 3.11 Financial Perspective GOALSMEASURES Survive Cash Flow Succeed Quarterly sales growth and operating income by division Prosper Increased market share and ROE Customer Perspective GOALSMEASURES New products Percent of sales from new products Responsive supply On-time delivery (defined by customer) Customer partnership Number of cooperative engineering efforts Source: Adapted from Kaplan, R.S. & Norton, D.P The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1): Internal Business Perspective GOALSMEASURES Manufacturing excellence Cycle time Unit cost Yield Design productivity Silicon efficiency Engineering efficiency New product introduction Actual introduction schedule versus plan Innovation and Learning Perspective GOALSMEASURES Technology leadership Time to develop next generation Manufacturing learning Process time to maturity Product focus Percent of products that equal 80% sales Time to market New product introduction versus competition TRANSPARENCY-31