Transcript Strategic Management: Text and Cases

Chapter 3
Assessing the
Internal
Environment of the
Firm
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
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Learning Objectives
• After reading this chapter, you should
have a good understanding of:
• The value of recognizing how the interests of
a variety of stakeholders can be interrelated.
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Capabilities
The Source of
The Source of
Teams of
Resources
Core
Competencies
Resources
* Tangible
* Intangible
Components of
Internal Analysis
Strategic
Competitiveness
Sources of
Competitive
Advantage
Sustained
Competitive
Advantage
Above-Average
Returns
Gained through
Core Competencies
The
Foundation
of
The Pathway to
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Resources
* Tangible
* Intangible
Components of
Internal Analysis
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Resources
What a firm Has...
What a firm has to work with:
its assets, including its people and
the value of its brand name
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Resources
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills of
employees, brand names, finances
and talented managers
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Resources
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers
“Some genius invented the Oreo. We’re just
living off the inheritance.”
F. Ross Johnson,
Former President & CEO,
RJR Nabisco
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Resources
Resources
Tangible Resources
*
*
*
*
Financial
Physical
Human Resources
Organizational
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers
“Some genius invented the Oreo.
We’re just living off the
inheritance.”
F. Ross Johnson,
Former President & CEO, RJR Nabisco
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Resources
Resources
Tangible Resources
*
*
*
*
Financial
Physical
Human Resources
Organizational
What a firm Has...
What a firm has to work with:
its assets, including its people
and the value of its brand name
Resources represent inputs into a
firm’s production process...
such as capital equipment, skills
of employees, brand names,
finances and talented managers
Intangible Resources
*
*
*
*
Technological
Innovation
Brand Names
Corporate Culture
“Some genius invented the Oreo.
We’re just living off the
inheritance.”
F. Ross Johnson,
Former President & CEO, RJR Nabisco
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Resources
* Tangible
* Intangible
Components of
Internal Analysis
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Capabilities
The Source of
Teams of
Resources
Resources
* Tangible
* Intangible
Components of
Internal Analysis
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Capabilities
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
What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
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.
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Capabilities
What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual
firm resources to achieve a desired objective.
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 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
Operations
Outbound
logistics
Marketing
and sales
Service
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 Activities
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
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
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Primary Activities
Inbound
Logistics
Associated with transforming inputs
into the final product form
• Efficient plant operations
Operations
• Appropriate level of automation in
manufacturing
• Quality production control systems
• Efficient plant layout and workflow
design
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
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Primary Activities
Inbound
Logistics
Operations
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
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
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Primary Activities
Inbound
Logistics
Associated with purchases of products
and services by end users and the
inducements used to get them to
make purchases
Operations
• Highly motivated and competent sales
force
Outbound
Logistics
• Innovative approaches to promotion and
advertising
Marketing and
Sales
• Selection of most appropriate distribution
channels
• Proper identification of customer segments
and needs
• Effective pricing strategies
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
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Primary Activities
Inbound
Logistics
Associated with providing service to
enhance or maintain the value of the
product
Operations
• Effective use of procedures to solicit
customer feedback and to act on information
Outbound
Logistics
Marketing and
Sales
Service
• 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
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
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Support Activities
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
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
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Support Activities
General
Administration
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 absenteeisn
• Reward and incentive programs to
motivate all employees
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
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Support Activities
General
Administration
Human Resource
Management
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
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
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Support Activities
General
Administration
Human Resource
Management
Function of purchasing inputs
used in the firm’s value chain
• Procurement of raw material inputs
• Development of collaborative “win-win”
relationships with suppliers
Technology
Development
• Effective procedures to purchase
advertising and media services
Procurement
• Analysis and selection of alternate
sources of inputs to minimize
dependence on one supplier
• Ability to make proper lease versus buy
decisions
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
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The Value Chain
General administration
Human resource management
Technology development
Procurement
Inbound
logistics
Operations
Outbound
logistics
Marketing
and sales
Service
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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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
Tangible
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
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and 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
• Technological resources



Trade secrets
Innovative production processes
Patents, copyrights, trademarks
• Organizational resources


Effective strategic planning
processes
Excellent evaluation and control
systems
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
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Types of Resources
Tangible
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
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
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Types of Resources
Tangible
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
• Innovation and creativity


Technical and scientific skills
Innovation capacities
• Reputation


Effective strategic planning processes
Excellent evaluation and control
systems
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
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Types of Resources
Tangible
Resources
Intangible
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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How Resources and Capabilities Lead to
Advantages
Adapted from Exhibit 3.5 Marks & Spencer: How Resources and Capabilities Lead to Advantages
Source: Adapted with permission of Harvard Business Review: Exhibit from “Competing on Resources: Strategy
in the 1990’s” by D. J. Collis and C. Montgomery, 73, no. 4 (1995).
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Firm Resources and Sustainable
Competitive Advantages
Is the resource or
capability…
Implications
Valuable
• Neutralize threats and exploit
opportunities
Rare
• Not many firms possess
Difficult to imitate
• Physically unique
• Path dependency
• Causal ambiguity
• Social complexity
Difficult to substitute
• 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
Is a resource or capability…
Valuable
Rare Difficult
Without
to Imitate Substance
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 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 Reminders
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Core Competencies--Cautions and Reminders
It should never be taken for granted that core competencies
will continue to provide a source of competitive advantage
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Core Competencies--Cautions and Reminders
It should never be taken for granted that core competencies
will continue to provide a source of competitive advantage
All core competencies have the potential to become
Core Rigidities
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Core Competencies--Cautions and Reminders
It should never be taken for granted that core competencies
will continue to provide a source of competitive advantage
All 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
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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
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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
Financial Ratio
Grocery
Semiconductors Store
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
Exhibit 3.9 How Financial Ratios Differ across Industries
Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000, Desktop Edition, SIC #01008999
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Financial Ratio Analysis: Comparison with
Key Competitors
Sales*
($ billions)
R&D budget
($ 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
Company (or division
*Most recently completed fiscal year. Data: Lehman Brothers, Procter
& Gamble Co.
Exhibit 3.10 Comparison of Procter & Gamble’s and Key Competitors’ Drug Revenues and R&D Expenditures
Source: R. Berner, “Procter & Gamble: Just Say No to Drugs,” Business Week, October 9, 2000, p. 128; data
courtesy of Lehman Brothers and Procter & Gamble.
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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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The Balanced Scorecard
Customer
Perspective
• Time
• Quality
• Performance and service
• Cost
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The Balanced Scorecard
Customer
Perspective
Internal Business
Perspective
• Processes
• Cycle time
• Quality
• Employee skills
• productivity
• Decisions
• Actions
• Coordination
• Resources and capabilities
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The Balanced Scorecard
Customer
Perspective
Internal Business
Perspective
Innovation and
Learning Perspective
• Introduction of new products
and services
• Greater value for customers
• Increased operating
efficiencies
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The Balanced Scorecard
Customer
Perspective
Internal Business
Perspective
• Profitability
• Growth
• Shareholder value
• Increased market share
Innovation and
Learning Perspective
Financial
Perspective
• Reduced operating expenses
• Higher asset turnover
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