Assessing the Internal Environment of the Firm Chapter Three Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin.

Assessing the InternalEnvironment of the Firm

Chapter Three

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Learning ObjectivesAfter reading this chapter, you should have a good

understanding of:LO1 The benefits and limitations of SWOT analysis in

conducting an internal analysis of the firm.LO2 The primary and support activities of a firm’s value

chain.LO3 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.

LO4 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.)LO 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 6 The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms.

LO 7 The value of the “balanced scorecard” in recognizing how the interests of a variety of stakeholders can be interrelated.

LO 8 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• SWOT’s 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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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

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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.

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

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QUESTION

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

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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

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

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The Value Chain

Exhibit 3.1

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Primary Activity: Inbound Logistics

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

and designs

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Primary 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

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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 Shipping of goods in large lot sizes to

minimize transportation costs.

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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 Innovative approaches to promotion and

advertising Proper identification of customer segments

and needs

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Primary 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

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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 Analysis and selection of alternate sources of

inputs to minimize dependence on one supplier

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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 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 Excellent professional qualifications of

personnel

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Support Activity: General 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

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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)

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Value Chains in Service Industries

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Resource-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.

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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

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Types of Resources

• Tangible resources organizational assets that are relatively easy

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

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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.

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Types of Resources

• Organizational capabilities The competencies

and skills that a firm employs to transform inputs into outputs.

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QUESTION

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

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Firm 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.

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Firm Resources and Sustainable Competitive Advantages

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

• Fourth, the resource must have no strategically equivalent substitutes.

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Sources of Inimitability

• Physical uniqueness

• Path dependency

• Causal ambiguity

• Social complexity

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The Generation and Distribution of a Firm’s Profits

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

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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

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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

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Financial Ratio Analysis

• Historical comparisons

• Comparison with industry norms

• Comparison with key competitors

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Five Types of Financial Ratios

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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?

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Customer Perspective

• Time

• Quality

• Performance and service

• Cost

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Internal Business Perspective

• Processes

• 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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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 non-financial measures• Poor data on actual performance• Inappropriate links to scorecard measures to

compensation• Inconsistent or inappropriate terminology

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