3

Assessing the Internal

Environment of the Firm
McGraw-Hill/Irwin
Strategic Management: Text and Cases, 4e Copyright 2008 The McGraw-Hill Companies, Inc. All rights reserved.
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Learning Objectives

After reading this chapter, you should have a good

understanding of:
- The benefits and limitations of SWOT analysis in conducting an internal
analysis of the firm.
- The primary and support activities of a firms value chain.
- 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.
- 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

After reading this chapter, you should have a good

understanding of:
- The four criteria that a firms resources must possess to maintain a
sustainable advantage and how value created can be appropriated by
employees.
- The usefulness of financial ratio analysis, its inherent limitations, and
how to make meaningful comparisons of performance across firms.
- The value of recognizing how the interests of a variety of stakeholders
can be interrelated.
- How firms are using Internet technologies to add value and achieve
unique advantages. (Appendix)
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The Limitations of SWOT Analysis

Strengths may not lead to an advantage

SWOTs focus on the external environment is too
narrow
SWOT gives a one-shot view of a moving target
SWOT overemphasizes a single dimension of strategy
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Question

Which of the following is true regarding the SWOT

analysis?
A) By itself, the SWOT analysis often helps a firm develop
competitive advantages that can be sustained over time.
B) The SWOT analysis's not the best starting point for creating
strategies.
C) The SWOT analysis simulates self-reflection and group
discussions on how to improve a firm and position it for
success.
D) The SWOT analysis is not a tried-and-true tool of strategic
analysis.
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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
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Example

IBM Electronics Value Chain Management helps companies

save money by streamlining their value chain.
The benefits of streamlining a business with value chain
management include:
- Lower infrastructure costs associated with collaboration.
- Create commonality in parts and suppliers.
- Control inventory by getting the supply chain talking to the
demand chain.
- Cut transaction costs by integrating with public and private
exchanges.
- Deliver products to market faster while minimizing risk and
capital investment.
Source: www.ibm.com
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The Value Chain

Adapted from Exhibit 3.1 The Value Chain: Primary and Support Activities
Source: Adapted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage:
Creating and Sustaining Superior Performance by Michael E. Porter.
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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
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Primary Activity: Operations

Associated with transforming inputs into the final

product form
- Efficient plant operations
- Appropriate level of automation in manufacturing
- Quality production control systems
- Efficient plant layout and workflow design
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Primary Activity: Outbound Logistics

Associated with collecting, storing, and distributing

the product or service to buyers
- Effective shipping processes
- Efficient finished goods warehousing processes
- Shipping of goods in large lot sizes
- Quality material handling equipment
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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
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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
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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
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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
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Support Activity:
Technology 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
- State-of-the art facilities and equipment
- Culture to enhance creativity and innovation
- Excellent professional qualifications of personnel
- Ability to meet critical deadlines
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Support Activity: Procurement

Function of purchasing inputs used in the firms 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
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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 organization (e.g., customers and suppliers)
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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
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Types of Resources:
Tangible Resources
Relatively easy to identify, and include physical and
financial assets used to create value for customers
Financial resources
- Firms cash accounts
- Firms capacity to raise equity
- Firms borrowing capacity
Physical resources
- Modern plant and facilities
- Favorable manufacturing locations
- State-of-the-art machinery and equipment
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Types of Resources:
Tangible Resources
Technological resources
- Trade secrets
- Innovative production processes
- Patents, copyrights, trademarks
Organizational resources
- Effective strategic planning processes
- Excellent evaluation and control systems
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Types of 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
- Human
Experience and capabilities of employees
Trust
Managerial skills
Firm-specific practices and procedures
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Types of Resources:
Intangible Resources

Innovation and creativity

- Technical and scientific skills
- Innovation capacities
Reputation
- Brand name
- Reputation with customers
- Reputation with suppliers
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Types of Resources:
Organizational Capabilities
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
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Firm Resources and

Sustainable Competitive Advantages
Is the resource or Implications
capability Neutralize threats and
exploit opportunities
Valuable Not many firms possess
Rare Physically unique
Difficult to imitate Path dependency
Causal ambiguity
Social complexity

Difficult to substitute No equivalent strategic

resources or capabilities

Adapted from Exhibit 3.7 Four Criteria for Assessing Sustainability of Resources and Capabilities
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Question

In the bookseller industry, can different firm resources

become strategic substitutes for Amazon.com?
Explain.
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Criteria for Sustainable Competitive

Advantage and Strategic Implications

Exhibit 3.8 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source; Adapted from J. Barney, Firm Resources a Sustained Competitive Advantage,
Journal of Management 17 (1991), pp. 99-120.
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Evaluating Firm Performance

Two approaches for evaluating firm performance

- Financial ratio analysis
Balance sheet
Income statement
Historical comparison
Comparison with industry norms
Comparison with key competitors
- Balanced scorecard (stakeholder perspective)
Employees
Customers
Owners
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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
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The Balance Scorecard

Provides a meaningful integration of many issues that

come into evaluating a firms 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)
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Customer Perspective

Time
Quality
Performance and service
Cost
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Internal Business Perspective

Processes
- Cycle time
- Quality
- Employee Skills
- Productivity
Decisions
Actions
Coordination
Resources and capabilities
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Innovation and Learning Perspective

Introduction of new products and services

Greater value for customers
Increased operating efficiencies
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Example

The worlds 10 most innovative companies, according to

Business Week in 2007 are:
1. Apple
2. Google
3. Toyota Motor
4. General Electric
5. Microsoft
6. Proctor & Gamble
7. 3M
8. Walt Disney Co.
9. IBM
10. Sony
Source: www.businessweek.com
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Financial Perspective

Profitability
Growth
Shareholder value
Increased market share
Reduced operating expenses
Higher asset turnover
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Potential Limitations of the

Balanced Scorecard

Lack of a clear strategy

Limited or ineffective executive sponsorship
Too much emphasis on financial measures rather than
nonfinancial measures
Poor data on actual performance
Inappropriate links to scorecard measures to
compensation
Inconsistent or inappropriate Terminology