Assessing

the Internal
Environment
of the Firm

Module 3

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education .
 Learning Objectives
3-2

After reading this chapter, you should have a

good understanding of:
LO3.1 The benefits and limitations of SWOT analysis in
conducting an internal analysis of the firm.

LO3.2 The primary and support activities of a firm’s value

chain.
LO3.3 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.
 Learning Objectives
3-3

LO3.4 The resource-based view of the firm and the

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

LO3.5 The four criteria that a firm’s resources must

possess to maintain a sustainable advantage and how value
created can be appropriated by employees and managers.

LO3.6 The usefulness of financial ratio analysis, its

inherent limitations, and how to make meaningful
comparisons of performance across firms.

LO3.7 The value of the “balanced scorecard” in

recognizing how the interests of a variety of stakeholders
can be interrelated.
 The Importance of the Internal
3-4
Environment

Consider…
Which activities must a firm effectively
manage and integrate in order to
attain competitive advantages in the
marketplace?
Which resources and capabilities must
a firm create and nurture in order to
sustain a competitive advantage?
 The Limitations of SWOT
3-5
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
 Value-Chain Analysis
3-6

🞑 Value-chain analysis looks at the

sequential process of value-creating
activities
🞑 Value is the amount buyers are willing to pay
for what a firm provides
🞑 How is value created within the organization?
🞑 How is value created for other organizations
in the overall supply chain or distribution
channel?
🞑 The value received must exceed the costs of
production
 Example: Streamlining the Value Chain
3-7

🞑 IBM & SAP have teamed up to help firms

reduce value chain inefficiencies &
improve operational effectiveness
🞑 Benefits of value chain streamlining:
🞑 Commonality between parts & suppliers
🞑 Integration of sales forecasting & inventory
management
🞑 Lowered transaction, infrastructure &
operating costs
🞑 Deliver products to market faster
 Value-Chain Analysis
3-8

🞑 Primary activities contribute to the

physical creation of the product or service;
the sale & transfer to the buyer; and
service after the sale:
🞑 Inbound logistics
🞑 Operations
🞑 Outbound logistics
🞑 Marketing & sales
🞑 Service
 Question?
3-9

🞑 In assessing its primary activities, an

airline would examine:
A. Employee training programs
B. Baggage handling
C. Criteria for lease versus purchase decisions
D. The effectiveness of its lobbying activities
 Value-Chain Analysis
3-10

🞑 Support activities either add value by

themselves or add value through
important relationships with both primary
activities & other support activities:
🞑 Procurement
🞑 Technology development
🞑 Human resource management
🞑 General administration
 The Value Chain
3-11

Exhibit 3.1 The Value Chain: Primary and Support Activities

Source: Reprinted with permission of The Free Press, a division of Simon & Schuster Inc., from Competitive
Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The
Free Press. All rights reserved.
 Primary Activity: Inbound
Logistics
3-12

🞑 Inbound logistics is primarily associated

with receiving, storing & distributing
inputs to the product:
🞑 Material handling
🞑 Warehousing
🞑 Inventory control
🞑 Vehicle scheduling
🞑 Returns to suppliers
 Primary Activity: Operations
3-13

🞑 Operations include all activities

associated with transforming inputs in to
the final product form:
🞑 Machining
🞑 Packaging
🞑 Assembly
🞑 Testing or quality control
🞑 Printing
🞑 Facility operations
 Primary Activity: Outbound
Logistics
3-14

🞑 Outbound logistics includes collecting,

storing, & distributing the product or
service to buyers:
🞑 Finished goods
🞑 Warehousing
🞑 Material handling
🞑 Delivery vehicle operation
🞑 Order processing
🞑 Scheduling & distribution
 Primary Activity: Marketing &
Sales
3-15

🞑 Marketing & sales activities involve

purchases of products & services by end
users and includes how to induce buyers
to make those purchases:
🞑 Advertising
🞑 Promotion
🞑 Sales force management
🞑 Pricing & price quoting
🞑 Channel selection
🞑 Channel relations
 Primary Activity: Service
3-16

🞑 Service includes all actions associated

with providing service to enhance or
maintain the value of the product:
🞑 Installation
🞑 Repair
🞑 Training
🞑 Parts supply
🞑 Product adjustment
 Support Activity:
3-17
Procurement
🞑 Procurement involves how the firm
purchases inputs used in its value chain:
🞑 Procurement of raw material inputs
■ Optimizing quality & speed
■ Minimizing associated costs
🞑 Development of collaborative win-win
relationships with suppliers
🞑 Analysis & selection of alternative sources of
inputs to minimize dependence on one
supplier
 Support Activity: Technology
Development
3-18

🞑 Technology development is related to a

wide range of activities:
🞑 Effective R&D activities for process & product
initiatives
🞑 Collaborative relationships between R&D and
other departments
🞑 State-of-the-art facilities & equipment
🞑 Excellent professional qualifications of
personnel
🞑 Organizational culture to enhance creativity
& innovation
 Support Activity: Human Resource
Management
3-19

🞑 Human resource management consists

of activities involved in recruitment,
hiring, training & development, &
compensation of all types of personnel:
🞑 Effective employee retention mechanisms
🞑 Quality relations with trade unions
🞑 Reward & incentive programs to motivate all
employees
 Support Activity: General
3-20
Administration
🞑 General administration involves
🞑 Effective planning systems to attain overall
goals & objectives
🞑 Excellent relations with diverse stakeholder
groups
🞑 Effective information technology to
coordinate & integrate value-creating
activities across the value chain
🞑 Ability of top management to anticipate & act
on key environmental trends & events, create
strong values, culture & reputation
 Interrelationships Among Value-
3-21
Chain Activities
Managers must not ignore the importance of
interrelationships among value-chain activities

🞑 Interrelationships 🞑 Relationships
among activities among activities
within the firm within the firm and
with other
stakeholders such
as customers &
suppliers
 Example: The Value Chain in
3-22
Service Organizations

Exhibit 3.4 Some Examples of Value Chains in Service Industries

 Resource-Based View of the
3-23
Firm
🞑 The resource-based view of the firm (RBV)
🞑 Combines an internal analysis of phenomena
within a company
🞑 With an external analysis of the industry & its
competitive environment
🞑 Resources can lead to a competitive
advantage
🞑 If they are valuable, rare, hard to duplicate
🞑 When tangible resources, intangible resources,
& organizational capabilities are combined
 Types of Firm Resources
3-24

🞑 Tangible resources are assets that are

relatively easy to identify:
🞑 Physical assets: plant & facilities, location,
machinery & equipment
🞑 Financial assets: cash & cash equivalents,
borrowing capacity, capacity to raise equity
🞑 Technological resources: trade secrets,
patents, copyrights, trademarks, innovative
production processes
🞑 Organizational resources: effective
planning processes & control systems
 Types of Firm Resources
3-25

🞑 Intangible resources are difficult for

competitors to account for or imitate – are
embedded in unique routines & practices:
🞑 Human resources: trust, experience &
capabilities of employees; managerial skills &
effectiveness of work teams
🞑 Innovation resources: technical & scientific
expertise & ideas; innovation capabilities
🞑 Reputation resources: brand names,
reputation for fairness with suppliers;
reliability & product quality with customers
 Types of Firm Resources
3-26

🞑 Organizational capabilities are

competencies or skills that a firm employs
to transform inputs into outputs; the
capacity to combine tangible & intangible
resources to attain desired ends
🞑 Outstanding customer service
🞑 Excellent product development capabilities
🞑 Superb innovation processes & flexibility in
manufacturing processes
🞑 Ability to hire, motivate, & retain human capital
 Question?
3-27

🞑 Gillette combines several technologies to

attain unparalleled success in the wet
shaving industry. This is an example of
their
A. tangible resources.
B. intangible resources.
C. organizational capabilities.
D. strong primary activities.
 Firm Resources and Sustainable
Competitive Advantages
3-28

🞑 Strategic resources have four attributes:

🞑 Valuable in formulating & implementing
strategies to improve efficiency or
effectiveness
🞑 Rare or uncommon; difficult to exploit
🞑 Difficult to imitate or copy due to
physical uniqueness, path dependency,
causal ambiguity, or social complexity
🞑 Difficult to substitute with strategically
equivalent resources or capabilities
 Sources of Inimitability
3-29

🞑 Physical uniqueness: resources that are

physically unique
🞑 Path dependency: scarce because of all that
has happened along the path followed in a
resource’s development and/or
accumulation
🞑 Causal ambiguity: impossible to explain
what caused it to exist or how to re-create it
🞑 Social complexity: a result of social
engineering such as interpersonal relations
 Criteria for Sustainable
3-30
Competitive Advantage

Exhibit 3.7 Criteria for Sustainable Competitive Advantage and

Strategic Implications
Source: Adapted from Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of
Management, 17:99 – 120.
 The Generation and Distribution
3-31
of the 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
 Evaluating Firm Performance
3-32

Balanced Scorecard
Financial Ratio
Stakeholder
Analysis
Perspective

🞑 Balance sheet 🞑 Employees

🞑 Income statement 🞑 Owners
🞑 Market valuation 🞑 Customer satisfaction
🞑 Historical comparison 🞑 Internal processes
🞑 Comparison with 🞑 Innovation, learning &
industry norms improvement activities
🞑 Comparison with key 🞑 Financial perspectives
competitors
 Financial Ratio Analysis
3-33

🞑 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
 Five Types of Financial
3-34
Ratios

Exhibit 3.9
A Summary
of Five
Types of
Financial
Ratios
 The Balanced Scorecard
3-35

🞑 A meaningful integration of many issues

that come into evaluating 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 & learning perspective)
🞑 How do we look to shareholders? (financial
perspective)
 Customer Perspective
3-36

🞑 Managers must articulate goals for four

key categories of customer concerns:
🞑 Time
🞑 Quality
🞑 Performance and service
🞑 Cost
 Internal Business Perspective
3-37

🞑 Managers must focus on those critical

internal operations that enable them to
satisfy customer needs:
🞑 Business processes
■ Cycle time, quality, employee skills, productivity
🞑 Decisions
🞑 Coordinated actions
🞑 Key resources and capabilities
 Innovation and Learning
3-38
Perspective
🞑 Managers must make frequent changes to
existing products & services as well as
introduce entirely new products with
extended capabilities. This requires:
🞑 Human capital (skills, talent, knowledge)
🞑 Information capital (information systems,
networks)
🞑 Organization capital (culture, leadership)
 Financial Perspective
3-39

🞑 Managers must measure how the firm’s

strategy, implementation, and execution
are indeed contributing to bottom line
improvement. Financial goals include:
🞑 Profitability, growth, shareholder value
🞑 Improved sales
🞑 Increased market share
🞑 Reduced operating expenses
🞑 Higher asset turnover
 Limitations of the Balanced
3-40
Scorecard

🞑 Not a “quick fix” – needs proper execution

🞑 Needs a commitment to learning
🞑 Needs employee involvement in
continuous process improvement
🞑 Needs cultural change
🞑 Needs a focus on nonfinancial rather than
financial measures
🞑 Needs data on actual performance