Chapter 3 Assessing the Internal Environment of the Firm.

Chapter 3Chapter 3

Assessing the Internal

Environment of the Firm

3-2

Agenda

• Process of internal analysis

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

• The resource-based view of the firm

• VRIS

• Financial ratio analysis

• Balanced Scorecard

3-3The Pathway to

The Foundation

of

The Source of The Source of

ResourcesResources** TangibleTangible

** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Sources of Competitive Advantage

Sources of Competitive Advantage

CoreCoreCompetenciesCompetencies

Gained through Core Competencies

Gained through Core Competencies

SustainedSustainedCompetitiveCompetitiveAdvantageAdvantage

Components of Internal AnalysisComponents of

Internal Analysis

Above-AverageReturns

Above-AverageReturns

StrategicStrategicCompetitivenessCompetitiveness

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** IntangibleIntangible Components of Internal AnalysisComponents of

Internal Analysis

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ResourcesResources

What a firm has to work with:

its assets, including its people and the value of its brand name

What a firm Has...

3-6

ResourcesResources

Resources represent inputs into a firm’s production process...

such as capital equipment, skills of employees, brand names, finances and talented managers

What a firm Has...



3-7

ResourcesResourcesWhat a firm has to work with:




“Some genius invented the Oreo. We’re just living off the inheritance.”“Some genius invented the Oreo. We’re just living off the inheritance.”

F. Ross Johnson,Former President & CEO,

RJR Nabisco

F. Ross Johnson,Former President & CEO,

RJR Nabisco

What a firm Has...

3-8

“Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson,

Former President & CEO, RJR Nabisco

Resources What a firm Has...





ResourcesResources

Tangible ResourcesTangible ResourcesFinancialFinancial**

PhysicalPhysical**

Human ResourcesHuman Resources**

OrganizationalOrganizational**

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Tangible ResourcesTangible ResourcesFinancialFinancial**

PhysicalPhysical**

Human ResourcesHuman Resources**

OrganizationalOrganizational**

ResourcesResources What a firm Has...





ResourcesResources

Intangible ResourcesIntangible ResourcesTechnologicalTechnological**

InnovationInnovation**

Brand NamesBrand Names**

Corporate CultureCorporate Culture**

“Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson,

Former President & CEO, RJR Nabisco

3-10


** IntangibleIntangible Components of Internal AnalysisComponents of

Internal Analysis

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The Source of


** IntangibleIntangible

CapabilitiesCapabilities

Teams of ResourcesTeams of Resources

Components of Internal AnalysisComponents of

Internal Analysis

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CapabilitiesCapabilities What a firm Does...

Capabilities represent:

the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.

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Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.


Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.

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Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.


Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.

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The Value Chain

General administration

Human resource management

Technology development

Procurement

Inbound logistics

OperationsOutbound logistics

Marketing and sales

Service

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Primary Activities

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

Inbound Logistics

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Primary Activities

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

Inbound Logistics

Operations

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Primary Activities

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

Inbound Logistics

Operations

Outbound Logistics

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Primary Activities

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

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

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Primary Activities

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

Inbound Logistics

Operations

Outbound Logistics

Marketing and Sales

Service

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Support Activities

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

General Administration

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Support Activities

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 absenteeisn

• Reward and incentive programs to motivate all employees


Human ResourceManagement

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Support Activities

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



Technology Development

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Support Activities

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



Technology Development

Procurement

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The Value Chain

General administration

Human resource management

Technology development

Procurement

Inbound logistics

OperationsOutbound logistics

Marketing and sales

Service

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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 organizations (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

Relatively easy to identify, and include physical and financial assets used to create value for customers

• 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

Tangible Resources

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• Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks

• Organizational resources Effective strategic planning

processes Excellent evaluation and control

systems

Types of Resources

Tangible Resources

Relatively easy to identify, and include physical and financial assets used to create value for customers

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Types of 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

Tangible Resources

Intangible Resources

Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities

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Types of Resources

• Innovation and creativity Technical and scientific skills Innovation capacities

• Reputation Effective strategic planning processes Excellent evaluation and control

systems

Tangible 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

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Types of Resources

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

Tangible Resources


Organizational Capabilities

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How Resources and Capabilities Lead to Advantages

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Firm Resources and Sustainable Competitive Advantages

Is the resource or capability…

Valuable

Rare

Difficult to imitate

Difficult to substitute

Implications

• Neutralize threats and exploit opportunities

• Not many firms possess

• Physically unique

• Path dependency

• Causal ambiguity

• Social complexity

• No equivalent strategic resources or capabilities

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Is the Resource Valuable?

Organizational resources can be a source of competitive advantage only when they are valuable

• Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

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Is the Resource Rare?

Organizational resources also possessed by competitors are not sources of competitive advantage

• Common strategies based on similar resources give no one firm an advantage

• Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors

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Can the Resource be Imitated?

Difficulty in imitating resources is key to value creation because it constrains competition

• Profits generated from inimitable resources are more likely to be sustainable

Physical uniqueness Path dependency Causal ambiguity Social complexity

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Are Substitutes Readily Available?

There must be no strategically equivalent valuable resources that are themselves not rare or inimitable

• Substitutability may take at least two forms Competitor may be able to substitute a similar

resource that enables it to develop and implement the same strategy

Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)

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Criteria for Sustainable Competitive Advantage and Strategic Implications

Valuable Rare Difficult Without Implications to Imitate Substitute 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 competitive advantage

Is a resource or capability…

Exhibit 3.7 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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Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders

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It should never be taken for granted that core competencies will continue to provide a source of competitive advantageIt should never be taken for granted that core competencies will continue to provide a source of competitive advantage

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All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

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All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment

3-44

Evaluating Firm Performance

Two approaches for evaluating firm performance

• Financial ratio analysis Balance sheet Income statement

• 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

3-46

Financial Ratio Analysis: Historical Comparisons

Exhibit 3.8 Historical Trends: Return on Sales (ROS) for a Hypothetical Company

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Financial Ratio Analysis: Comparison with Industry Norms

Grocery Skilled-NursingFinancial Ratio Semiconductors Store Facilities

Quick Ratio (times) 1.5 0.5 1.1

Current ratio (times) 3.2 1.6 1.9

Total liabilities to net worth (%)34.8 114.0 93.0

Collection period (days) 54.8 2.9 40.2

Assets to sales (%) 98.1 21.2 108.7

Return on sales (%) 3.1 0.9 2.0

3-48

Financial Ratio Analysis: Comparison with Key Competitors

Sales* R&D budgetCompany (or division ($ billions) ($ billions)

P&G Drug Division $ 0.8 $ 0.38

Bristol-Myers Squibb 20.2 1.80

Pfizer 27.4 4.00

Merck 32.7 2.10

*Most recently completed fiscal year. Data: Lehman Brothers, Procter & Gamble Co.

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The Balanced Scorecard

• Provides a meaningful integration of many issues that come into evaluating a firm’s 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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• Time

• Quality

• Performance and service

• Cost

Customer Perspective

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• Processes

• Cycle time

• Quality

• Employee skills

• productivity

• Decisions

• Actions

• Coordination

• Resources and capabilities


Internal BusinessPerspective

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• Introduction of new products and services

• Greater value for customers

• Increased operating efficiencies



Innovation and Learning Perspective

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• Profitability

• Growth

• Shareholder value

• Increased market share

• Reduced operating expenses

• Higher asset turnover



Innovation and Learning Perspective

Financial Perspective

Chapter 3 Assessing the Internal Environment of the Firm.

Documents

resources resources

human resources

source of resources

individual firm resources

rjr nabisco resources

brand names

rjr nabisco slide

firms production process