1. McGraw-Hill/Irwin Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. STRATEGIC MANAGEMENT Assessing the Internal Environment of the Firm Strategic Management (BA 491) Internal Analysis Internal Analysis

2. 2 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Hierarchy of Goals Review: Strategic Direction Company vision Massively inspiring Overarching Long-term Driven by and evokes passion Fundamental statement of the organization’s Values Aspiration Goals Company vision

3. 3 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Hierarchy of Goals Company vision Review: 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 Mission statements

4. 4 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Hierarchy of Goals Company vision Mission statements Review: Strategic Direction Strategic objectives Operationalize the mission statement Measurable, specific, appropriate, realistic, timely, challenging, resolve conflicts that arise, and yardstick for rewards and incentives Strategic objectives

5. 5 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Value-Chain Analysis 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 Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service

6. 6 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Value Chain Source: Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. General administration Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service

7. 7 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 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 organizations (e.g., customers and suppliers)

8. 8 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Resource-Based View of the Firm Two perspectives The internal analysis of phenomena within a company An external analysis of the industry and its competitive environment Three key types of resources Tangible resources Intangible resources Organizational capabilities

9. 9 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment Tangible Resources

10. 10 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks Organizational resources Effective strategic planning processes Excellent evaluation and control systems Types of Resources Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers

11. 11 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Tangible Resources Intangible Resources

12. 12 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Innovation and creativity Technical and scientific skills Innovation capacities Reputation Effective strategic planning processes Excellent evaluation and control systems Tangible Resources Intangible Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

13. 13 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital Tangible Resources Intangible Resources Organizational Capabilities

14. 14 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. How Resources and Capabilities Lead to Advantages Source: Adapted from “Competing on Resources: Strategy in the 1990’s” by D. J. Collis and C. Montgomery, Harvard Business Review, 73, no. 4 (1995).

15. 15 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Firm Resources and Sustainable Competitive Advantages Is the resource or capability… Valuable Rare Difficult to imitate Difficult to substitute Implications Neutralize threats and exploit opportunities Not many firms possess Physically unique Path dependency Causal ambiguity Social complexity No equivalent strategic resources or capabilities

16. 16 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Is the Resource Valuable? Organizational resources can be a source of competitive advantage only when they are valuable Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

17. 17 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Is the Resource Rare? Organizational resources also possessed by competitors are not sources of competitive advantage Common strategies based on similar resources give no one firm an advantage Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors

18. 18 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Can the Resource be Imitated? Difficulty in imitating resources is key to value creation because it constrains competition Profits generated from inimitable resources are more likely to be sustainable Physical uniqueness Path dependency Causal ambiguity Social complexity

19. 19 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Are Substitutes Readily Available? There must be no strategically equivalent valuable resources that are themselves not rare or inimitable Substitutability may take at least two forms Competitor may be able to substitute a similar resource that enables it to develop and implement the same strategy Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)

20. 20 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Criteria for Sustainable Competitive Advantage and Strategic Implications ValuableRareDifficult WithoutImplications to ImitateSubstitutesfor Competitiveness NoNoNoNoCompetitive disadvantage YesNoNoNoCompetitive parity YesYesNoNoTemporary competitive advantage YesYesYesYesSustainable competitive advantage Is a resource or capability… Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp. 99-120.

21. 21 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Provides a meaningful integration of many issues that come into evaluating a firm’s performance Four key perspectives How do customers see us? (customer perspective) What must we excel at? (internal perspective) Can we continue to improve and create value? (innovation and learning perspective) How do we look to shareholders? (financial perspective)

22. 22 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Time Quality Performance and service Cost Customer Perspective

23. 23 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Processes Cycle time Quality Employee skills productivity Decisions Actions Coordination Resources and capabilities Customer Perspective Internal Business Perspective

24. 24 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Introduction of new products and services Greater value for customers Increased operating efficiencies Leadership Customer Perspective Internal Business Perspective Innovation and Learning Perspective

25. 25 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Profitability Growth Shareholder value Increased market share Reduced operating expenses Higher asset turnover Customer Perspective Internal Business Perspective Innovation and Learning Perspective Financial Perspective

26. 26 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 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

27. 27 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Ratio Analysis: Historical Comparisons Exhibit 3.8 Historical Trends: Return on Sales (ROS) for a Hypothetical Company

28. 28 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Ratio Analysis: Comparison with Industry Norms Exhibit 3.9 How Financial Ratios Differ across Industries Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000, Desktop Edition, SIC #0100- 8999 GrocerySkilled-Nursing Financial RatioSemiconductorsStoreFacilities Quick Ratio (times)1.50.51.1 Current ratio (times)3.21.61.9 Total liabilities to net worth (%)34.8114.093.0 Collection period (days)54.82.940.2 Assets to sales (%)98.121.2108.7 Return on sales (%)3.10.92.0

29. 29 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Financial Ratio Analysis: Comparison with Key Competitors Source: R. Berner, “Procter & Gamble: Just Say No to Drugs,” Business Week, October 9, 2000, p. 128; data courtesy of Lehman Brothers and Procter & Gamble. Sales*R&D budget Company (or division($ billions)($ billions) P&G Drug Division$ 0.8$ 0.38 Bristol-Myers Squibb20.21.80 Pfizer27.44.00 Merck32.72.10 *Most recently completed fiscal year. Data: Lehman Brothers, Procter & Gamble Co.