INTERNAL ANALYSISMBA – August 23, 2009Professor William Wan

OBJECTIVESOBJECTIVES1. Introduce value chain and describe the

differences between primary and support activities.

2. Introduce resources and capabilities and the RBV four characteristics.

3. Combine the above two for conducting internal analysis.

Internal AnalysisInternal Analysis Internal analysis helps managers

understand what is strategically possible and choose the best strategy.

A firm cannot successfully implement any strategy without the appropriate set of resources and capabilities. Weaknesses—the firm’s resource and

capability deficiencies that make it difficult for the firm to complete important tasks

Strengths—resources and capabilities that allow the firm to complete important tasks.

Value ChainValue Chain

Consists of the structure of activities that firms use to implement their strategy.

Sequential process of value-creating activities

Firms analyze their value chain to understand how activities contribute to creating value for customers.

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

The Value ChainThe Value Chain

Industry Value Chain

FIRM INFRASTRUCTURE

HR MANAGEMENT

TECHNOLOGY DEVELOPMENTPROCUREMENT

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING& SALES

SERVICE

Supplier Value Chains

FirmValue Chain

BuyerValue Chains

Firm Value Chain

Support Activities

PrimaryActivities

Value-Chain AnalysisValue-Chain Analysis

Each stage of the value chain’s primary activities adds costs, but creates value as well.

Primary Activities: Activities that add value directly to the

production and selling of a product. Support Activities

Activities that provide support to the primary activities so that they can be completed effectively.

Add value indirectly

OUTSOURCINGOUTSOURCING

FIRM INFRASTRUCTURE

HR MANAGEMENT

TECHNOLOGY DEVELOPMENTPROCUREMENT

INBOUNDLOGISTICS

OPERATIONS OUTBOUNDLOGISTICS

MARKETING& SALES

SERVICE

Outsourcing Outsourcing PartnerPartner

Resource Based View Resource Based View (RBV)(RBV)

Draw a sharp distinction between a portfolio of businesses & a portfolio of resources.

Conventional conceptualization of a firm is defined by its business(es); but this recent line of thought proposes that a firm should be defined by what resources & capabilities it possess.

If just focusing on end products, miss the real strengths of a company

Core Competencies

Businesses

Products

Roots = Resources & Capabilities

““Tree” Tree” AnalogyAnalogy

The products we see made by a company is the outcomes of the “roots” of the company.

We don’t normally see the roots (resources & capabilities) of a company, but they are the most important. The roots grow the trunk of a tree.

By mostly taking care of the roots! (Trimming the leaves does not help a whole lot.)

HOW DOES A TREE GROW WITH A LARGE TRUNK, GREEN LEAVES, AND SWEET FRUITS, ETC. ?

Tangible ResourcesTangible Resources

Relatively easy to identify. Examples:

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

Intangible ResourcesIntangible 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.

Examples: Human capital

Experience and capabilities of employees Trust Firm-specific practices and procedures

Reputation Brand name Reputation with customers & suppliers

CapabilitiesCapabilities

Competencies or skills that a firm employs to combine tangible and/or intangible resources.

Examples: Outstanding customer service Excellent product development

capabilities Innovativeness of products and

services Ability to hire, motivate, and

retain human capital

RBV RBV 44 Criteria Criteria

Is the resource/capability…

Valuable?

Rare?

Inimitatable?

Nonsubstitutable?

What does it What does it mean?mean?

• Neutralize threats and exploit opportunities

• Not many firms possess

• Hard for competitors to imitate the resource/capability

• No equivalent strategic resources or capabilities

STRATEGIC IMPLICATIONSSTRATEGIC IMPLICATIONSValuable? Rare? Inimitable? Nonsubstitu-

table?Implications for Competitiveness

No No No No Competitive Disadvantage

Yes No No No Competitive Parity

Yes Yes No No Temporary Competitive Advantage

Yes Yes Yes Yes Sustainable Sustainable Competitive Competitive AdvantageAdvantage

Core CompetenceCore Competence

A resource/capability that (closely) meets all 4 RBV criteria; hence leading to sustainable competitive advantage.

SEARCHING FOR CORE SEARCHING FOR CORE COMPETENCECOMPETENCE

Step 1. Identify a company’s value-adding activities.

Step 2. Use a Value Chain to help understand where these value-adding activities reside in a company’s value chain.

*identify the resources/capabilities leading to those activities.

Step 3. Use the RBV 4 criteria to assess if the company has any broad core competence(s) by assessing each main value chain activities (e.g., marketing; human resources). *Pay attention if a value chain activity has a cluster of value-adding

activities. It may indicate the presence of broad core competence.

Step 4. If no broad core competence is present, continue to use the four criteria to assess if the company has any narrow core competence (e.g., advertising under marketing). Continue this process.

IN ESSENCE,IN ESSENCE, A firm’s internal environment (strengths and

weaknesses) informs us what opportunities it can capture and what threats it can deal with.

Similar to Five Forces for industry analysis, value chain analysis can assist us to conduct an internal analysis.

Can use the RBV 4 criteria to assess which activities (through a firm’s resources & capabilities) of the value chain are a firm’s core competence(s).