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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The Source of Resources * Tangible * Intangible Capabilities Teams of Resources Components of Internal Analysis The Source of Core Competencies Sources of Competitive Advantage Strategic Competitiveness Above-Average Returns The Pathway to Sustained Competitive Advantage Gained through Core Competencies The Foundation of

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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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* * * * 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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* * * * Tangible Resources Financial Physical Human Resources Organizational * * * * Intangible Resources Technological Innovation Brand Names Corporate Culture

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 * Tangible * Intangible Components of Internal Analysis

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The Source of Capabilities 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

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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

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Primary Activities

Inbound Logistics Operations

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

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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

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Primary Activities

Inbound Logistics Operations Outbound Logistics Marketing and Sales

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

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Primary Activities

Inbound Logistics Operations Outbound Logistics Marketing and Sales Service

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

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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

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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

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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

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Support Activities

General Administration Human Resource Management Technology Development Procurement

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

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The Value Chain

General administration Human resource management Technology development Procurement Inbound logistics Operations Outbound 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

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

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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

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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

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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

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Firm Resources and Sustainable Competitive Advantages

Implications Is the resource or capability…

Valuable Rare Difficult to imitate Difficult to substitute • • • • • • • 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

No Yes Yes Yes

Rare Is a resource or capability… Difficult to Imitate Without Substitute Implications for Competitiveness

No No Yes Yes No No No Yes No No No Yes Competitive disadvantage Competitive parity Temporary competitive advantage 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

Quick Ratio (times) Current ratio (times) 1.5

3.2

Total liabilities to net worth (%) 34.8

Collection period (days) 54.8

Assets to sales (%) Return on sales (%) 98.1

3.1

0.5

1.6

114.0

2.9

21.2

0.9

Skilled-Nursing Facilities

1.1

1.9

93.0

40.2

108.7

2.0

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Financial Ratio Analysis: Comparison with Key Competitors

Company (or division Sales* ($ billions) R&D budget ($ billions)

P&G Drug Division Bristol-Myers Squibb Pfizer Merck $ 0.8

20.2

27.4

32.7

$ 0.38

1.80

4.00

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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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 Innovation and Learning Perspective

• Profitability • Growth • Shareholder value • Increased market share • Reduced operating expenses • Higher asset turnover

Financial Perspective

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