2. Assessing the Internal Environment of the Firm
Chapter 3
Assessing the Internal Environment of the Firm
McGraw-Hill/Irwin
Copyright © 2004 by The McGraw-Hill Companies, Inc. All rights reserved.

3. After studying this chapter, you should have a good understanding of:
Learning Objectives
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

4. Firms and Resources
Why are some firms so successful, and other less so, within very similar environments?
Why are firms so different from each other?

5. The Value Chain: Primary and Support Activities
Exhibit 3.1
The Value Chain
General administration
Human resource management
Technology development
Procurement
Inbound
logistics
Operations
Outbound
Marketing and sales
Service
Margin
Support Activities
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.

6. The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
Exhibit 3.2
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
PROFIT MARGIN
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.
Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
Service

7. Value 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

8. Value 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

9. The Sustainability of Resources and Capabilities: Four Criteria
Exhibit 3.6
Physically unique
Path dependency
Causal ambiguity
Social complexity`
No equivalent strategic resources or capabilities
Difficult to imitate
Difficult to substitute
Not many firms possess
Rare
Neutralize threats and exploit opportunities
Valuable
Implications
Is the resource or capability

10. Implications for Competitiveness
Criteria for Sustainable Competitive Advantage and Strategic Implications
Exhibit 3.7
Is a Resource…
Valuable
Rare
Difficult to Imitate
Without Substitutes
Implications for Competitiveness No
Competitive disadvantage
Yes
Competitive parity
Temporary competitive advantage
Sustainable competitive advantage
Source: Adapted from Barney Firm Resources a Sustained Competitive Advantage. Journal of Management, 17:

11. Tangible Resources Financial Physical Technological Organizational
Exhibit 3.4
(adapted)
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), Hitt, M.A., Ireland, R.D. & Hoskisson, R.E Strategic Management: Competitivenesss and Globalization. Fourth Edition. South-Western College Publishing: Cincinnati, Ohio.

12. Intangible Resources Human Innovation & creativity Reputation
Exhibit 3.4
(adapted)
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

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

14. Examples of Organizational Capabilities
Outstanding customer service
Excellent product development capabilities
Innovativeness of products and services
The ability to hire, motivate, and retain human capital

15. Marks & Spencer: How Resources and Capabilities Lead to Advantages
Exhibit 3.5
Resource
Competitive Advantages in Great Britain
Tangible
Ownership (vs. leasing) of property
1% of revenues allocated to occupancy costs (versus 3% to 9% industry average)
Customer recognition with minimal advertising No promotional sales
Lower labor turnover % labor costs versus %-20% industry average
Brand reputation
Intangible
Employee loyalty
Capabilities
Supplier chain
Lower costs and higher quality of goods sold
Fewer layers of hierarchy
Source: Adapted from Collins, D. & Montgomery, C Competing on resources: Strategy in the 1990s. Harvard Business Review, 73(4): 123.
Managerial judgment

16. Firm Performance: Financial Ratios
Liquidity
Long-term solvency
Asset management
Profitability
Market value

17. Performance: Bases for Comparison
Historical comparisons
Industry norms
Key competitors or strategic group

18. Historical Trends: ROS for a Hypothetical Company
Exhibit 3.8
Historical Trends: ROS for a Hypothetical Company
20%
10%
Return n Sales
Years 1, 2, 3
Years 4, 5, 6
Years 6, 7, 8
Years 8, 9, 10
Years 6, 7, 8, 9, 10
Year

19. How Financial Ratios Differ Across Industries
Exhibit 3.9
How Financial Ratios Differ Across Industries
Financial Ratio
Semi-
conductors
Grocery 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, Desktop Edition. SIC #

20. Exhibit 3.10
Comparison of Procter & Gamble’s Sales and R&D Budget to its Key Competitors
COMPANY (OR DIVISION)
SALES*
(billions)
R&D BUDGET
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.
Source: Berner, R Procter & Gamble: Just say no to drugs. Business Week: October 9:128.

21. ECI’s Balanced Business Scorecard
Exhibit 3.11
Financial Perspective
GOALS
MEASURES
Survive
Cash Flow
Succeed
Quarterly sales growth and
operating income by division
Prosper
Increased market share and ROE
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
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
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 % sales
Time to market
New product introduction versus competition
Source: Adapted from Kaplan, R.S. & Norton, D.P The balanced scorecard: Measures that drive performance. Harvard Business Review, 69(1):