1. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-1 Firm Capabilities: Assessing Strengths ad Weaknesses by Robert Pitts & David Lei Slides prepared by John P. Orr Cameron University Chapter 3

2. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-2 What you will learn… The strategic management tool known as the value chain. The use of the value chain in evaluating an organization’s internal strengths and weaknesses. The difference between primary and support value-adding activities Slide 1 of 2

3. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-3 What you will learn… The concept of competitive advantage The concept of distinctive competence Some important economic sources of competitive advantage Slide 2 of 2

4. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-4 Firm Capabilities Pizza Hut Advantages Location Reputation Purchase discounts Interrelationships General Motors Challenges Design Process technology Workforce motivation Procurement costs

5. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-5 The Value Chain An analytical tool that describes all activities that make up the economic performance and capabilities of the firm. It is used to analyze and examine activities that create value for a given firm.

6. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-6 Ex. 3-1. The Value Chain Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service SUPPORT ACTIVITIES Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc., from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright ©1985 by Michael E. Porter.

7. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-7 The Value Chain Primary Activities – Activities which relate directly to the actual creation, manufacture, distribution, and sale of a product or service to the firm’s customers. Secondary Activities – Economic activities which assist the firm’s primary activities.

8. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-8 The Value Chain Upstream Activities – Economic activities that occur close to the firm’s suppliers but far away from the customers. Downstream Activities – Economic activities that occur close to the customer but far away from the firm’s suppliers.

9. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-9 Support Activities Product Development – The conception, design, and commercialization of new products. Process Development – The design and use of new procedures, technologies, techniques, and other steps to improve the value-adding process.

10. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-10 Ex. 3-2. Pizza Restaurant Industry Value Chain Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Obtain funds, carry out accounting and payroll functions, and perform other administrative tasks for each activity Supervise truck drivers & warehouse personnel Improve truck routing & warehouse methods Buy trucks, lease warehouse space Haul dough, cheese, etc. to restaurants Supervise kitchen personnel Develop new menu items, improve oven design Buy dough, cheese, ovens, and supplies Cook pizzas, make salads, etc. Supervise advertising personnel Discover new promotional materials Buy TV time Develop advertising copy Supervise waiters Improve restaurant lay- out Buy tables, chairs, silver- ware to equip restaurant Serve food to restaurant customers Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service SUPPORT ACTIVITIES Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

11. Slide 3-11 Ex. 3-3. Automotive Industry Value Chain Obtain funds, carry out accounting and payroll functions, and perform other administrative tasks for each activity. Supervise truck drivers, warehouse personnel Improve truck routing & warehouse methods Buy trucks, lease warehouse space Transport components to assembly facility Supervise assembly workers Improve product design & assembly process Buy components, assembly equipment Assemble components into autos Supervise advertising & sales personnel Improve selling methods Hire advertising agency, buy media time Advertise, promote, & sell autos Supervise maintenance personnel Improve maintenance procedures Buy tools for maintenance personnel Maintain, repair autos Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service (Same as inbound logistics) Transport autos to dealers (Same as inbound logistics) Infrastructure Human Resource Management Technology Development Procurement SUPPORT ACTIVITIES PRIMARY ACTIVITIES Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved.

12. Slide 3-12 Ex. 3-4. Pizza Hut’s Business System Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Key: = Extensive activity= Modest activity= No activity Infrastructure Human Resource Management Technology Development Procurement SUPPORT ACTIVITIES PRIMARY ACTIVITIES

13. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-13 Ex. 3-5: GM’s Business System SUPPORT ACTIVITIES Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Key: = Extensive activity= Modest activity= No activity Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES

14. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-14 Ex. 3-6. Common First-Mover Advantages Patents License Location Channel Access Supply Access Reputation

15. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-15 Ex. 3-7. Economies of Scale Scale of activity (plant size, sales volume, etc.) Cost per unit of output

16. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-16 Ex. 3-8. Major Contributors to Economies of Scale Specialization Fixed-Cost Spreading Fixed-Cost Spreading Purchase Discounts Purchase Discounts Vertical Integration Vertical Integration

17. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-17 Ex. 3-9. Economies of Experience Cumulative volume * * Number of unit produced (or sold, serviced, developed, etc.) since commencing an activity. Cost per unit of output

18. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-18 Ex. 3-10. Major Contributors to Experience Benefits Employee learning Employee learning Product redesign Product redesign Process improvement Process improvement

19. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-19 Ex. 3-11. Activities Frequently Benefitting From First Mover Advantages Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Supply access Patent protection License Reputation; license Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service License Patent protection; license Reputation SUPPORT ACTIVITIES Location, channel access, reputation

20. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-20 Ex. 3-12. Requirements for Achieving Scale and Experience Advantage Centralization Susceptibility Implementation Proprietary - Activity must be centralized - Activity must be susceptible to to the processes which produce scale and experience benefits - Activity must be properly implemented - Benefits of scale and experience must be proprietary

21. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-21 Ex. 3-13. Pizza Hut’s Sources of Competitive Advantage Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Procurement of food (S) Reputation (FM): advertising (S,I) Inbound Logistics OperationsOutbound Logistics Marketing / Sales Service Key: FM = First Mover Advantages; S = Scale Advantage; I = Interrelationship Advantage Procurement of TV time (S, I) SUPPORT ACTIVITIES

22. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-22 Ex. 3-14. Comparative Financial Analysis: Key Ratios Profitability Leverage Activity Liquidity Type Examples Measures Indicators Profit after taxes Shareholder’s equity Return on Equity (ROE) Current Ratio Asset Turnover Inventory Turnover Debt/Equity Ratio Current Assets Current Liabilities Liabilities______ Shareholders’ equity Sales_________ Total Assets Sales_________ Inventory Productivity of firm’s value-adding activities Measure of financial solvency Asset use efficiency Turnaround of inventory Corporate financing; financial risk; default risk

23. Copyright ©2003 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3-23 Ethical Issues: Assessing Rivals Examining competitors’ products Questioning competitors’ employees Using consultants Engaging in industrial espionage ‘Raiding’ employees