1. McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Analyzing the Internal Environment of the Firm
Chapter 3
Analyzing the Internal Environment of the Firm

3. Learning Objectives
After reading this chapter, you should have a good understanding of:
How an awareness of strategic goals can help an organization achieve coherence in its strategic direction.
The primary and support activities of a firm’s value chain.
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.
The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms.
The value of recognizing how the interests of a variety of stakeholders can be interrelated.
3-3

4. Question
Which of the following is not included in the hierarchy of goals of strategic direction?
a) Mission Statement
b) Company Vision
c) SWOT analysis
d) Strategic objectives
Answer: c
3-4

5. Coherence in Strategic Direction
Company vision
Massively inspiring
Overarching
Long-term
Driven by and evokes passion
Fundamental statement of the organization’s
Values
Aspiration
Goals
Hierarchy of Goals
Company vision
3-5

6. Coherence in Strategic Direction
Mission statements
Purpose of the company
Basis of competition and competitive advantages
More specific than vision
Focused on the means by which the firm will compete
Hierarchy of Goals
Company vision
Mission statements
3-6

7. Coherence in Strategic Direction
3-7

8. Coherence in Strategic Direction
Strategic objectives
Operationalize the mission statement
Provide guidance on how the organization can fulfill or move toward the “higher goals”
More specific
Cover a more well-defined time frame
Hierarchy of Goals
Company vision
Mission statements
Strategic objectives
3-8

9. Coherence in Strategic Direction
Strategic objectives
Measurable
Specific
Appropriate
Realistic
Timely
Challenging
Resolve conflicts that arise
Yardstick for rewards and incentives
Hierarchy of Goals
Company vision
Mission statements
Strategic objectives
3-9

10. Coherence in Strategic Direction
3-10

11. Question Value is measured by: a) supply of a firm’s product/service
b) a firm’s net worth
c) A firm’s customer base
d) A firm’s total revenue
Answer: d
3-11

12. Value-Chain Analysis
Second key tool to understanding an organization’s internal environment
Sequential process of value-creating activities
The amount that buyers are willing to pay for what a firm provides them
Value is measured by total revenue
3-12

13. Value-Chain Analysis
Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service
Porter describes two different categories of activities:
Primary – inbound logistics, operations, outbound logistics, marketing and sales, and service
Support activities – procurement, technology development, human resource management, general management
3-13

14. Example - IBM Electronics Value Chain Management
Helps companies save money
The benefits of streamlining a business with value chain management include:
Lower infrastructure costs associated with collaboration.
Create commonality in parts and suppliers.
Control inventory by getting the supply chain talking to the demand chain.
Cut transaction costs by integrating with public and private exchanges.
Deliver products to market faster while minimizing risk and capital investment.
Example: Philips Consumer Electronics needed to quickly improve customer satisfaction and business profitability, therefore they engaged IBM to create a supply chain strategy focused on the future.
IBM Electronics Value Chain Management helps companies save money by streamlining their value chain.
The benefits of streamlining a business with value chain management include:
Lower infrastructure costs associated with collaboration.
Create commonality in parts and suppliers.
Control inventory by getting the supply chain talking to the demand chain.
Cut transaction costs by integrating with public and private exchanges.
Deliver products to market faster while minimizing risk and capital investment.
Source:
3-14

15. The Value Chain
3-15

16. Primary Activity: 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
3-16

17. Primary Activity: 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
3-17

18. Primary Activity: 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
3-18

19. Primary Activity: 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
3-19

20. Example: Pizza’s Global Footprint
Domino Pizza store described as "more a logistics company than food service, since supply chain management is the factor that differentiates the winners from the losers" in this business
Domino's Pizza has 8,000 stores in 54 countries and sales of $4.6 billion
known for development of centralized ingredient logistics systems
Outbound logistics make use of scooters, bikes, fleet-footed delivery boys and vans
Pizzeria manager, Pavan Bhatia, describes Domino Pizza store as "more a logistics company than food service, since supply chain management is the factor that differentiates the winners from the losers" in this business
Domino's Pizza has only 8,000 stores in 54 countries and sales of $4.6 billion
It is known for its development of centralized ingredient logistics systems
Outbound logistics from stores all over the world make use of scooters, bikes, fleet-footed delivery boys and vans
3-20

21. Primary Activity: 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
3-21

22. Support Activity: 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
3-22

23. Question
Which support activity is related to a wide range of activities and those embodied in processes and equipment and the product itself?
a) Technology Development
b) Human Resource Management
c) General Management
d) Procurement
Answer: a
3-23

24. Support Activity: 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
3-24

25. Support Activity: 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 absenteeism
Reward and incentive programs to motivate all employees
3-25

26. Support Activity: 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
3-26

27. 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 organization (e.g., customers and suppliers)
3-27

28. Applying the Value Chain to Service Organizations
What are the “operations” or transformation processes, of service organizations?
In service, need to provide a customized solution rather than mass production
Value chain to service industry suggests that the value-adding process may be different depending on type of business
3-28

29. Value Chain in Service Industry
3-29

30. Evaluating Firm Performance
Two approaches for evaluating firm performance
Financial ratio analysis
Balance sheet
Income statement
Historical comparison
Comparison with industry norms
Comparison with key competitors
Balanced scorecard (stakeholder perspective)
Employees
Customers
Owners
3-30

31. 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
3-31

32. Financial Ratio Analysis
3-32

33. Question
What provides a meaningful integration of many issues that come into evaluating a firm’s performance?
a) Balance Scorecard
b) Customer Perspective
c) Internal Business Perspective
d) Innovation and Learning Prospective
Answer: a
3-33

34. The Balance Scorecard
Provides a meaningful integration of many issues that come into evaluating a firm’s performance
Four key perspectives
3-34

35. The Balance Scorecard
3-35

36. Customer Perspective
Time
Quality
Performance and service
Cost
3-36

37. Internal Business Perspective
Processes
Cycle time
Quality
Employee Skills
Productivity
Decisions
Actions
Coordination
Resources and capabilities
3-37

38. Innovation and Learning Perspective
Introduction of new products and services
Greater value for customers
Increased operating efficiencies
3-38

39. Source: www.businessweek.com
Example
The world’s 10 most innovative companies, according to Business Week in 2007 are:
Apple
Google
Toyota Motor
General Electric
Microsoft
Proctor & Gamble 3M
Walt Disney Co.
IBM
Sony
Source:
3-39

40. Financial Perspective
Profitability
Growth
Shareholder value
Increased market share
Reduced operating expenses
Higher asset turnover
3-40

41. Potential Limitations of the Balanced Scorecard
Lack of a clear strategy
Limited or ineffective executive sponsorship
Too much emphasis on financial measures rather than non-financial measures
Poor data on actual performance
Inappropriate links to scorecard measures to compensation
Inconsistent or inappropriate Terminology
3-41