CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin 3-1.

CHAPTER 3STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin

3-1

McGraw-Hill/Irwin Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

Assessing the Internal

Environment of the Firm

Chapter 3


3-3 After studying this chapter, you should have a good understanding of:

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

• How value-chain analysis can help managers create value by investigating internal and external relationships among activities

• The different types of tangible and intangible resources, as well as organizational capabilities

• The four criteria that a firm's resources must possess to maintain a sustainable advantage

• How to make meaningful comparisons of performance across firms

• The value of recognizing how the interests of a variety of stakeholders can be interrelated

Learning Objectives


3-4Firms and Resources

• Why are some firms so successful, and other less so, within very similar environments?

• Why are firms so different from each other?


3-5 The Value Chain:Primary and Support Activities

The Value Chain

General administrationHuman resource management

Technology development

Procurement

Inboundlogistics

Operations Outboundlogistics

Marketing and sales

Service

Margin

Mar

gin

Su

pp

ort

Act

ivit

ies

Primary Activities

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1998 by Michael E. Porter.

Exhibit 3.1


3-6 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

Source: Adapted with permission of The Free Press, a division of Simon & Schuster, from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter.

• Location of distribution facilities to minimize shipping times

• Excellent material and inventory control systems

• Efficient plant operations

• Appropriate level of automation

• Quality production control systems to reduce costs and enhance quality

• Efficient plant layout and workflow design

• Effective shipping processes to provide quick delivery

• Efficient finished goods ware-housing processes

• Shipping of goods in large lot sizes to minimize transport-ation costs

• Highly motivated, competent sales force

• Innovative approaches to promotion and advertising

• Selection of appropriate distribution channels

• Customer segments and needs identified

• Effective pricing

•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 as required

Inbound Logistics

Operations Outbound Logistics

Marketing and Sales

Service

PR

OF

IT M

AR

GIN

Exhibit 3.2


3-7Value Chain: Support Activities (1)

• General Administration– Effective planning– Excellent relationships

with diverse stakeholders

– Ability to integrate and coordinate value chain activities

– Effective culture and reputation

• Human Resource Management– Effective recruiting,

training, and retention

– Union relationships

– Effective reward and incentive programs


3-8Value Chain: Support Activities (2)

• Technology Development– Effective R&D– Relationships between

R&D and other depts.– Creative and

innovation in culture– Personnel

qualifications

• Procurement

– Win-win relationships with suppliers

– Processes and procedures optimize quality, price, service, speed

– Proper lease versus buy decisions


3-9 The Sustainability of Resources and Capabilities: Four Criteria

• Physically unique

• Path dependency

• Causal ambiguity

• Social complexity`

• No equivalent strategic resources or capabilities

Difficult to imitate

Difficult to substitute

• Not many firms possessRare

• Neutralize threats and exploit opportunities

Valuable

ImplicationsIs the resource or capability

Exhibit 3.6


3-10 Criteria for Sustainable Competitive Advantage and Strategic Implications

Is a Resource…

Source: Adapted from Barney 1991. Firm Resources a Sustained Competitive Advantage. Journal of Management, 17:99-120.

Valuable RareDifficult to Imitate

Without Substitutes

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 competitive advantage

Exhibit 3.7


3-11 Tangible Resources

Financial • Firm’s cash account and cash equivalents• Firm’s capacity to raise equity• Firm’s borrowing capacity

Physical • Modern plant and facilities• Favorable manufacturing locations• State-of-the-art machinery and equipment

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

Organizational

• Effective strategic planning processes• Excellent evaluation and control systems

Source: Adapted from J.B. Barney, 1991, Firm resources and sustained competitive advantage, Journal of Management, 17: 101; R.M. Grant, 1991, Contemporary Strategy Analysis (Cambridge, U.K.: Blackwell Business), 100-102. Hitt, M.A., Ireland, R.D. & Hoskisson, R.E. 2001. Strategic Management: Competitivenesss and Globalization. Fourth Edition. South-Western College Publishing: Cincinnati, Ohio.

Exhibit 3.4(adapted)


3-12 Intangible Resources

Human • Experience and capabilities of employees• Trust• Managerial skills• Firm-specific practices and procedures

Innovation & creativity

• Technical and scientific skills• Innovation capacities

Reputation • Brand name• Reputation with customers for quality and

reliability• Reputation with suppliers for fairness

Exhibit 3.4(adapted)


3-13 Organizational Capabilities

• Competencies or skills employed to transfer inputs to outputs

• The capacity to combine tangible and intangible resources, using organizational processes to attain a desired end


3-14Examples of Organizational Capabilities

• Outstanding customer service

• Excellent product development capabilities

• Innovativeness of products and services

• The ability to hire, motivate, and retain human capital


3-15 Marks & Spencer: How Resources and Capabilities Lead to Advantages

•Lower costs and higher quality of goods sold

•Fewer layers of hierarchy

Capabilities

•Customer recognition with minimal advertising No promotional sales

•Lower labor turnover 8.7% labor costs versus 10%-20% industry average

Intangible

•1% of revenues allocated to occupancy costs (versus 3% to 9% industry average)

Tangible

Competitive Advantages in Great Britain

Resource

Ownership (vs. leasing) of property

Brand reputation

Employee loyalty

Supplier chain

Managerial judgment

Source: Adapted from Collins, D. & Montgomery, C. 1995. Competing on resources: Strategy in the 1990s. Harvard Business Review, 73(4): 123.

Exhibit 3.5


3-16 Firm Performance: Financial Ratios

LiquidityLiquidity

Long-term solvencyLong-term solvency

Asset managementAsset management

ProfitabilityProfitability

Market valueMarket value


3-17 Performance: Bases for Comparison

• Historical comparisonsHistorical comparisons

• Industry normsIndustry norms

• Key competitors or strategic groupKey competitors or strategic group


3-18 Historical Trends: ROS for a Hypothetical Company

20%

10%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Ret

urn

n S

ales

Years 1, 2, 3

Years 4, 5, 6

Years 6, 7, 8 Years 8, 9, 10

Years 6, 7, 8, 9, 10

Year

Exhibit 3.8


3-19 How Financial Ratios Differ Across Industries

Financial RatioSemi-

conductorsGrocery Stores

Skilled nursing 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

Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000. Desktop Edition. SIC # 0100-8999.

Exhibit 3.9


3-20 Comparison of Procter & Gamble’s Sales and R&D Budget to its Key Competitors

COMPANY (OR DIVISION)

SALES*

(billions)

R&D BUDGET

(billions)

P&G DRUG DIVISION $0.8 $0.38

BRISTOL-MYERS SQUIBB $20.2 $1.8

PFIZER $27.4 $4.0

MERCK $32.7 $2.1

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

Exhibit 3.10

Source: Berner, R. 2000. Procter & Gamble: Just say no to drugs. Business Week: October 9:128.


3-21 ECI’s Balanced Business ScorecardExhibit 3.11

Financial Perspective

GOALS MEASURES

• Survive • Cash Flow

• Succeed • Quarterly sales growth and

operating income by division

• Prosper • Increased market share and ROE

Customer Perspective

GOALS MEASURES

• New products • Percent of sales from new products

• Responsive supply • On-time delivery (defined by customer)

• Customer partnership

• Number of cooperative engineering efforts

Source: Adapted from Kaplan, R.S. & Norton, D.P. 1992. The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1): 71-79.

Internal Business Perspective

GOALS MEASURES

• Manufacturing excellence • Cycle time• Unit cost• Yield

• Design productivity • Silicon efficiency• Engineering efficiency

• New product introduction • Actual introduction schedule versus plan

Innovation and Learning Perspective

GOALS MEASURES

• Technology leadership • Time to develop next generation

• Manufacturing learning • Process time to maturity

• Product focus • Percent of products that equal 80% sales

• Time to market • New product introduction versus competition

CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin 3-1.

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