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Assessing the InternalAssessing the InternalEnvironment of the FirmEnvironment of the Firm

Chapter Three

McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.


Learning ObjectivesLearning Objectives

After reading this chapter, you should have a good understanding of:

LO3.1 The benefits and limitations of SWOT analysis in conducting an internal analysis of the firm.

LO3.2 The primary and support activities of a firm’s value chain.

LO3.3 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.

LO3.4 The resource-based view of the firm and the different types of tangible and intangible resources, as well as organizational capabilities.

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Learning Objectives (cont.)Learning Objectives (cont.)

LO 3.5 The four criteria that a firm’s resources must possess to maintain a sustainable advantage and how value created can be appropriated by employees.

LO 3.6 The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms.

LO 3.7 The value of the “balanced scorecard” in recognizing how the interests of a variety of stakeholders can be interrelated.

LO 3.8 How firms are using Internet technologies to add value and achieve unique advantages. (Appendix)


The Limitations of SWOT AnalysisThe Limitations of SWOT Analysis

Strengths may not lead to an advantageSWOT’s focus on the external

environment is too narrowSWOT gives a one-shot view of a moving

targetSWOT overemphasizes a single dimension

of strategy


Value-Chain AnalysisValue-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



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.

◦inbound logistics, operations, outbound logistics, marketing and sales, and service


QUESTIONQUESTION

In assessing its primary activities, an airline would examine: A. Employee training programsB. Baggage handlingC. Criteria for lease versus purchase decisionsD. The effectiveness of its lobbying activities



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

◦procurement, technology development, human resource management, and general administration.


The Value ChainThe Value Chain3-10Exhibit 3.1admission.edhole.com

Primary Activity: Inbound Primary Activity: Inbound LogisticsLogistics

Associated with receiving, storing and distributing inputs to the product◦Location of distribution facilities◦Warehouse layout

and designs


Primary Activity: OperationsPrimary Activity: Operations

Associated with transforming inputs into the final product form◦Efficient plant operations◦Incorporation of appropriate process technology◦Efficient plant layout and workflow design


Primary Activity: Outbound Primary Activity: Outbound LogisticsLogistics

Associated with collecting, storing, and distributing the product or service to buyers◦Effective shipping processes to provide quick delivery

and minimize damages◦Shipping of goods in large lot sizes to minimize

transportation costs.


Primary Activity: Marketing Primary Activity: Marketing and Salesand Sales

Associated with purchases of products and services by end users and the inducements used to get them to make purchases◦Innovative approaches to promotion and advertising◦Proper identification of customer segments and needs


Primary Activity: ServicePrimary Activity: Service

Associated with providing service to enhance or maintain the value of the product◦Quick response to customer needs and emergencies◦Quality of service

personnel and ongoing training


Support Activity: ProcurementSupport 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◦Analysis and selection of alternate sources of inputs to

minimize dependence on one supplier


Support Activity: Support Activity: Human Resource ManagementHuman 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◦Reward and incentive programs to motivate all

employees


Support Activity: Support Activity: Technology DevelopmentTechnology Development

Related to a wide range of activities and 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◦Excellent professional qualifications of personnel


Support Activity: Support Activity: General AdministrationGeneral Administration

Typically supports the entire value chain and not individual activities◦Effective planning systems◦Excellent relationships with diverse stakeholder

groups◦Effective information technology to integrate value-

creating activities


Interrelationships among Value-Chain Interrelationships among Value-Chain Activities within and across Activities within and across OrganizationsOrganizations

Interrelationships among activities within the firm

Relationships among activities within the firm and with other organization (e.g., customers and suppliers)

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Two levels


Value Chains in Service IndustriesValue Chains in Service Industries3-21

Exhibit 3.4


Resource-Based View of the FirmResource-Based View of the Firm

Resource-based view of the firm◦perspective that firms’ competitive advantages are due

to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute.


Resource-Based View of the FirmResource-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


Types of ResourcesTypes of Resources

Tangible resources◦organizational assets that are relatively easy to

identify, including physical assets, financial resources, organizational resources, and technological 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.



Organizational capabilities ◦The competencies and

skills that a firm employs to transform inputs into outputs.


QUESTIONQUESTION

Gillette combines several technologies to attain unparalleled success in the wet shaving industry. This is an example of their A. Tangible resourcesB. Intangible resourcesC. Organizational capabilitiesD. Strong primary activities


Firm Resources and Sustainable Firm Resources and Sustainable Competitive AdvantagesCompetitive 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.


Firm Resources and Firm Resources and Sustainable Competitive Sustainable Competitive AdvantagesAdvantages

Third, the resource must be difficult for competitors to imitate.

Fourth, the resource must have no strategically equivalent substitutes.


Sources of InimitabilitySources of Inimitability

Physical uniquenessPath dependencyCausal ambiguitySocial complexity


The Generation and The Generation and Distribution of a Firm’s ProfitsDistribution of a Firm’s Profits

Employee bargaining powerEmployee replacement costEmployee exit costsManager bargaining power

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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


Evaluating Firm PerformanceEvaluating Firm Performance

Financial ratio analysis◦ Balance sheet◦ Income

statement◦ Historical

comparison◦ Comparison with

industry norms◦ Comparison with

key competitors

Stakeholder perspective◦ Employees◦ Customers◦ Owners


Financial Ratio AnalysisFinancial Ratio Analysis

Five types of financial ratios◦Short-term solvency or liquidity◦Long-term solvency measures◦Asset management (or turnover)◦Profitability◦Market value


Financial Ratio AnalysisFinancial Ratio Analysis

Historical comparisonsComparison with industry normsComparison with key competitors


Five Types of Financial RatiosFive Types of Financial Ratios3-35admission.edhole.com

The Balance ScorecardThe 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?


Customer PerspectiveCustomer Perspective

TimeQualityPerformance and serviceCost


Internal Business Perspective Internal Business Perspective

ProcessesDecisionsActionsCoordinationResources and

capabilities


Innovation and Learning Innovation and Learning PerspectivePerspective

Introduction of new products and servicesGreater value for customersIncreased operating efficiencies


Financial PerspectiveFinancial Perspective

ProfitabilityGrowthShareholder valueIncreased market shareReduced operating expensesHigher asset turnover


Potential Limitations of the Potential Limitations of the Balanced ScorecardBalanced Scorecard

Lack of a clear strategyLimited or ineffective executive sponsorshipToo much emphasis on financial measures

rather than non-financial measuresPoor data on actual performanceInappropriate links to scorecard measures to

compensationInconsistent or inappropriate terminology


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