1. Internal Environment Assessing the Internal Environment of the Firm C HAPTER 3

2. Where we are… Forecasts  Does our current strategy need to change? Analysis of External Environment  6 General Environment Segments  Porter’s-5-Forces Analysis of Internal Environment  1. Value-Chain analysis  2. Resource-based view of the firm  3. Firm Performance 3-2

3. The Limitations of SWOT Analysis Strengths may not lead to an advantage Focus on the external environment is too narrow Gives a one-shot view of a moving target (static) Overemphasizes a single dimension of strategy 3-3

4. VALUE-CHAIN ANALYSIS Section 1 4

5. Value-Chain Analysis Value-chain analysis  a strategic analysis of an organization that uses value creating activities. Value  is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue  Want it to be more than the cost of production. Creating value for buyers that exceeds the costs of production is a key concept used in analyzing a firm’s competitive position. 3-5

6. The Value Chain Exhibit 3.1 3-6

7. Value-Chain Analysis Primary activities  contribute to the physical creation of the product or service, its sale and transfer to the buyer, and its service after the sale. 3-7 inbound logistics, operations, outbound logistics, marketing and sales, marketing and sales, and service

8. Value-Chain Analysis Support activities  activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities 3-8 Procurement, Technology development, Human resource management, General administration

9. QUESTION In assessing its primary activities, an airline would examine: A. Employee training programs B. Baggage handling C. Criteria for lease versus purchase decisions D. The effectiveness of its lobbying activities 3-9

10. The Value Chain Exhibit 3.1 3-10

11. 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 3-11

12. Primary Activity: Operations Associated with transforming inputs into the final product form  Efficient plant operations  Incorporation of appropriate process technology  Quality production control systems  Efficient plant layout and workflow design 3-12

13. Primary Activity: Outbound Logistics Associated with collecting, storing, and distributing the product or service to buyers  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 3-13

14. 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 3-14

15. 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 3-15

16. 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 3-16

17. 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 3-17

18. Support Activity: Technology Development Related to a wide range of activities, including 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 3-18

19. 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 3-19

20. 3-20 Company XYZ

21. Interrelationships among Value-Chain Activities within and across Organizations Two levels Interrelationships among activities within the firm Relationships among activities within the firm and with other organization (e.g., customers and suppliers) 3-21

22. Value Chains in Service Industries 3-22

23. RESOURCE-BASED VIEW Section 2 23

24. Resource-Based View of the Firm Firm resources are all  Assests  Capabilities  Organizational processes  Information  Knowledge  Etc. that enable it to develop and implement value-creating strategies. 3-24

25. Resource-Based View of the Firm RBV: perspective that firms’ competitive advantages are due to their endowment of strategic resources that are: valuable, rare, costly to imitate, and costly to substitute 3-25 VRIN ValuableRareInimitableNonsubstitutable Organization Specific

26. Resources and *Sustainable Competitive Advantages First, the resource must be valuable in the sense that it exploits opportunities and/or neutralizes threats in the firm’s environment. Second, it must be rare among the firm’s current and potential competitors. 3-26

27. Firm Resources and Sustainable Competitive Advantages Third, the resource must be difficult for competitors to imitate.  Inimitable Fourth, the resource must have no strategically equivalent substitutes.  Nonsubstitutable 3-27

28. Sources of Inimitability Physical uniqueness Path dependency  (history) Causal ambiguity  (not clear what causes) Social complexity  (relationships among managers, org culture, org. reputation) 3-28 VRIO (Organization Specific)

29. Definitions path dependency: resources are unique and therefore scarce because of all that has happened along the path followed in their development and/or accumulation. causal ambiguity: means that would-be competitors may be thwarted because it is impossible to disentangle the causes (or possible explanations) of either what the valuable resource is or how it can be re-created. social complexity: a characteristic of a firm’s resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers. 3-29

30. Resource-Based View of the Firm Combines two perspectives  The internal analysis of phenomena within a company  An external analysis of the industry and its competitive environment Unique combinations  Resources are combined to create (sustainable) competitive advantage 3-30

31. 3-31 Types of Resources Tangible resources Intangible resources Dynamic capabilities

32. Types of Resources Tangible resources  organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources. 3-32

33. Tangible Resources: Examples Financial  cash account and cash equivalents  capacity to raise equity  borrowing capacity Physical  Modern plant, facilities  Favorable manufacturing locations  State-of-the-art machinery, equipment Technological  Trade secrets  Innovative production processes  Patents, copyrights, trademarks Organizational (intangible)  Effective strategic planning processes  Excellent evaluation and control systems 3-33

34. Types of Resources Intangible resources organizational  assets that are difficult to identify and account for and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources. 3-34

35. Intangible Resources: Examples 3-35 Human Resources Experience, capabilities of employees Trust Managerial skills Firm-specific practices and procedures Innovation and creativity Technical and scientific skills Innovation capacities Research & development Reputation Brand name Reputation with customers for quality and reliability Reputation with suppliers for fairness, non– zero-sum relationships

36. Types of Resources Organizational capabilities  The competencies and skills that a firm employs to transform inputs into outputs.  Capacity to combine tangible and intangible resources, using organizational processes to attain desired end. Examples:  Outstanding customer service.  Excellent product development capabilities.  Innovativeness of products and services.  Ability to hire, motivate, and retain human capital. 3-36

37. Tangible Financial Physical Technological Organizational Intangible Human Innovation Reputation Organizational Capabilities 3-37 Company XYZ VRINO? Valuable – Rare – Inimitable – Non-substitutable Organization Specific

38. The Generation & Distribution of a Firm’s Profits Extended RBV of firm Four factors help explain the extent to which employees and managers will be able to obtain a proportionately high level of the profits that they generate Employee bargaining power Employee replacement cost Employee exit costs Manager bargaining power 3-38

39. 3-39 If employees are vital to forming a firm’s unique capability, they will earn disproportionately high wages. Employee Bargaining Power If employees’ skills are idiosyncratic and rare (a source of resource-based advantages), they should have high bargaining power based on the high cost required by the firm to replace them. Employee Replacement Cost May reduce an employee’s bargaining power. An individual may face high personal costs when leaving the organization. Thus, that individual’s threat of leaving may not be credible. Employee Exit Costs Managers’ power is based on how well they create resource-based advantages. They are in a position to have a more thorough, integrated understanding of the total operation. Manager Bargaining Power

40. Apple Campbell Ford Johnson & Johnson Keurig Samsung Page 99: Exercise Value-Chain & VRIN 3-40

41. EVALUATING FIRM PERFORMANCE Section 3 41

42. Evaluating Firm Performance Financial ratio analysis  Balance sheet  Income statement  Historical comparison  Comparison with industry norms  Comparison with key competitors Stakeholder perspective  Employees  Customers  Owners 3-42

43. Financial Ratio Analysis Five types of financial ratios  Short-term solvency or liquidity  Long-term solvency measures  Asset management (or turnover)  Profitability  Market value 3-43

44. Five Types of Financial Ratios (p.105) 3-44

45. The Balance Scorecard Provides a meaningful integration of many issues that come into evaluating a firm’s performance Four key perspectives  How do customers see us?  What must we excel at?  Can we continue to improve and create value?  How do we look to shareholders? 3-45

46. Balanced Scorecard 3-46

47. Customer Perspective 3-47 TimeQuality Performance and service Cost

48. Internal Business Perspective 3-48 Processes  Cycle time, quality,  employee skills,  productivity Decisions Actions Coordination Resources and capabilities

49. Innovation and Learning Perspective 3-49 Introduction of new products and services Greater value for customers Increased operating efficiencies

50. Financial Perspective 3-50 ProfitabilityGrowth Shareholder value Increased market share Reduced operating expenses Higher asset turnover

51. 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 3-51

52. Balance and Fit Strengths & Opportunities Weaknesses & Threats 3-52 Resources and Capabilities Environment