Transcript Analyzing the Firm - Texas Tech University

INTERNAL ANALYSIS
MBA – August 23, 2009
Professor William Wan
OBJECTIVES
1.
Introduce value chain and describe the
differences between primary and support
activities.
2.
Introduce resources and capabilities and
the RBV four characteristics.
3.
Combine the above two for conducting
internal analysis.
Internal Analysis


Internal analysis helps managers understand
what is strategically possible and choose the
best strategy.
A firm cannot successfully implement any
strategy without the appropriate set of resources
and capabilities.
Weaknesses—the firm’s resource and capability
deficiencies that make it difficult for the firm to
complete important tasks
 Strengths—resources and capabilities that allow the
firm to complete important tasks.

Value Chain

Consists of the structure of activities that firms use to
implement their strategy.

Sequential process of value-creating activities

Firms analyze their value chain to understand how
activities contribute to creating value for customers.

The amount that buyers are willing to pay for what a
firm provides them

Value is measured by total revenue

Firm is profitable to the extent the value it receives
exceeds the total costs involved in creating its product
or service
Support
Activities
The
ValueChain
Chain
Firm Value
Primary
Activities
FIRM INFRASTRUCTURE
HR MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
Industry
Supplier
Value Chains
OUTBOUND
LOGISTICS
MARKETIN
G
& SALES
SERVICE
Value Chain
Firm
Value Chain
Buyer
Value Chains
Value-Chain Analysis

Each stage of the value chain’s primary activities
adds costs, but creates value as well.

Primary Activities:


Activities that add value directly to the production and selling
of a product.
Support Activities
Activities that provide support to the primary activities so that
they can be completed effectively.
 Add value indirectly

OUTSOURCING
FIRM INFRASTRUCTURE
HR MANAGEMENT
TECHNOLOGY DEVELOPMENT
PROCUREMENT
INBOUND
LOGISTICS
OPERATIONS
OUTBOUND
LOGISTICS
MARKETIN
G
& SALES
Outsourcing Partner
SERVICE
Resource Based View (RBV)

Draw a sharp distinction between a portfolio of
businesses & a portfolio of resources.


Conventional conceptualization of a firm is defined by its
business(es); but this recent line of thought proposes that
a firm should be defined by what resources & capabilities
it possess.
If just focusing on end products, miss the real strengths
of a company
Products
Core
Competencies
Roots
= Resources &
Capabilities
Businesses
“Tree” Analogy

The products we see made by a company is the
outcomes of the “roots” of the company.

We don’t normally see the roots (resources &
capabilities) of a company, but they are the most
important. The roots grow the trunk of a tree.
HOW DOES A TREE GROW WITH A LARGE TRUNK, GREEN
LEAVES, AND SWEET FRUITS, ETC. ?
By
mostly taking care of the
roots! (Trimming the leaves
does not help a whole lot.)
Tangible Resources


Relatively easy to identify.
Examples:
 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
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.
Examples:
 Human capital
 Experience and capabilities of employees
 Trust
 Firm-specific practices and procedures
 Reputation
 Brand name
 Reputation with customers & suppliers
Capabilities
Competencies or skills that a firm
employs to combine tangible and/or
intangible resources.
 Examples:

Outstanding customer service
 Excellent product development capabilities
 Innovativeness of products and services
 Ability to hire, motivate, and retain human
capital

RBV 4 Criteria
Is the
resource/capability…
What does it mean?
Valuable?
• Neutralize threats and
exploit opportunities
Rare?
• Not many firms possess
Inimitatable?
• Hard for competitors to
imitate the resource/capability
Nonsubstitutable?
• No equivalent strategic
resources or capabilities
STRATEGIC IMPLICATIONS
Valuable?
Rare?
Inimitable?
Nonsubstitutable?
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
Core Competence
A
resource/capability that
(closely) meets all 4 RBV
criteria; hence leading to
sustainable competitive
advantage.
SEARCHING FOR CORE COMPETENCE
Step 1. Identify a company’s value-adding activities.
Step 2. Use a Value Chain to help understand where
these value-adding activities reside in a company’s
value chain.
*identify the resources/capabilities leading to those activities.
Step 3. Use the RBV 4 criteria to assess if the company has
any broad core competence(s) by assessing each main
value chain activities (e.g., marketing; human
resources).
*Pay attention if a value chain activity has a cluster of value-adding
activities. It may indicate the presence of broad core
competence.
Step 4. If no broad core competence is present, continue
to use the four criteria to assess if the company has
any narrow core competence (e.g., advertising under
marketing). Continue this process.
IN ESSENCE,
A
firm’s internal environment (strengths and
weaknesses) informs us what opportunities it can
capture and what threats it can deal with.
 Similar
to Five Forces for industry analysis, value
chain analysis can assist us to conduct an internal
analysis.
 Can
use the RBV 4 criteria to assess which activities
(through a firm’s resources & capabilities) of the
value chain are a firm’s core competence(s).