1. McGraw-Hill/Irwin STRATEGIC MANAGEMENT Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor3 Assessing the Internal Environment of the Firm

2. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor 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 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. 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 as well as 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. Learning Objectives TRANSPARENCY-21 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor The Value Chain: Primary and Support 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-22

4. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities Exhibit 3.2 TRANSPARENCY-23

5. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor The Value Chain: Some Factors to Consider in Assessing Firm’s Support Activities Exhibit 3.3 TRANSPARENCY-24

6. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor 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), 100-102. Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2001. Strategic Management: Competitivenesss and Globalization. Fourth Edition. South-Western College Publishing: Cincinnati, Ohio. Exhibit 3.4 Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Innovation and creativity Technical and scientific skills Innovation capacities Reputation Brand 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-25

7. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor Marks & Spencer: How Resources and Capabilities Lead to Advantages Source: Adapted from Collins, D. & Montgomery, C. 1995. Competing on resources: Strategy in the 1990s. Harvard Business Review, 73(4): 123. Exhibit 3.5 TRANSPARENCY-26

8. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor 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-27 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

9. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor Criteria for Sustainable Competitive Advantage and Strategic Implications Is a Resource… Source: Adapted from Barney 1991. Firm Resources a Sustained Competitive Advantage. Journal of Management, 17:99-120. ValuableRare Difficult to Imitate Without Substitutes Implications or Competitiveness No Competitive disadvantage YesNo Competitive parity Yes No Temporary competitive advantage Yes Sustainable competitive advantage Exhibit 3.7 TRANSPARENCY-28

10. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor Historical Trends: ROS for a Hypothetical Company Exhibit 3.8 TRANSPARENCY-29 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

11. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor How Financial Ratios Differ Across Industries Financial Ratio Semi- conductors Grocery Stores Skilled nursing facilities Quick ratio (times) 1.5 0.5 1.1 Current ratio (times) 3.2 1.6 1.9 Total liabilities to net worth (%)34.8114.0 93.0 Collection period (days)54.8 2.9 40.2 Assets to sales (%)98.1 21.2108.7 Return on sales (%) 3.1 0.9 2.0 Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000. Desktop Edition. SIC # 0100-8999. Exhibit 3.9 TRANSPARENCY-30

12. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor 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. 2000. Procter & Gamble: Just say no to drugs. Business Week: October 9:128. TRANSPARENCY-31

13. Chapter 3 McGraw-Hill/Irwin STRATEGIC MANAGEMENT Gregory G. Dess, G. T. Lumpkin and Marilyn L. Taylor 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. 1992. The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1): 71-79. 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-32