1. 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.

2. 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.

3. 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.

4. 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.

5. 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.

6. 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

7. 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.

8. 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.

9. 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.

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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.

23. 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.