© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 1 Session 9 Internal Analysis

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 2 Session Topics Resource-Based View of the Firm Three Basic Resources What Makes a Resource Valuable? Using the Resource-Based View in Internal Analysis SWOT Analysis The Functional Approach Value Chain Analysis Internal Analysis: Making Meaningful Comparisons Comparison with Past Performance Stages of Industry Evolution Benchmarking Comparison with Success Factors in the Industry

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 3 Be consistent with conditions in the competitive environment Place realistic requirements on the firm’s resources Be carefully implemented/executed Strategy must... Ingredients Critical to a Successful Strategy

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 4 What is the Resource-Based View of the Firm? Firms differ in fundamental ways because each firm possesses a unique “bundle” of resources - tangible and intangible assets and organizational capabilities to make use of those assets.

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 5 The RBV of The Firm More internally oriented Key analytic tool is value chain analysis Resources are not mobile/transferable across company and industry boundaries Focuses on sharpening your skills at executing value chain activities that create superior efficiency, innovation, quality, and/or company responsiveness.

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 6 The Industrial/Organizational Economics Perspective More externally oriented Key Analytic tool is Porter’s Five Forces Model Assumes that resources are transferable/mobile across across company boundaries More of a free-agent mentality Choose your industry wisely and then set about to develop resource proficiency

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 7 The Three Basic Resources Tangible assets Easiest to identify and often found on a firm’s balance sheet Include physical and financial assets Examples: Production facilities, raw materials, financial resources, real estate, computers Intangible assets Cannot be seen or touched Often very critical in creating competitive advantage Examples: Brand names, company reputation, company morale, patents and trademarks, accumulated experience Organizational capabilities Involve skills - ability to combine assets, people, and processes - used to transform inputs into outputs

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 8 Examples of Different Resources Tangible Assets Hampton Inn’s reservation system McDonald’s locations Georgia Pacific’s land holdings Virgin Airlines’ plane fleet Coca-Cola’s Coke formula Intangible Assets Nike’s brand name Coke’s brand recognition Wendy’s advertising with Dave Thomas Disney’s image IBM’s management team Southwest Airlines culture Organizational Capabilities Southwest’s turnaround time Wal-Mart’s purchasing and inbound logistics Sony’s product- development processes Nordstrom’s customer service 3M’s innovation process

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 9 What Makes a Resource Valuable? 1. Competitive superiority: Does the resource help fulfill a customer’s need better than those of firm’s competitors? 2. Resource scarcity: Is the resource in short supply? 3. Inimitability: Is the resource easily copied or acquired? 4. Appropriability: Who actually gets the profit created by a resource? 5. Durability: How rapidly will the resource depreciate? 6. Substitutability: Are other alternatives available?

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 10 Characteristics Making Resources Difficult to Imitate Physically unique resources Resources virtually impossible to imitate Examples: One-of-a-kind real estate location, mineral rights, patents Path-dependent resources Resources that must be created over time in a manner that is often expensive and difficult to accelerate Examples: Dell Computer’s system of direct sales of customized PCs via the Internet, Coca-Cola’s brand name, Gerber Baby Food’s reputation for quality

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 11 Characteristics Making Resources Difficult to Imitate Causal ambiguity (How do they do that?) Situations where it is difficult for competitors to understand how a firm has created its advantage Example: Southwest Airlines’ approach Same plane, routes, gate procedures, number of attendants Culture of fun, family, and frugal yet focused services Economic deterrence Involves large capital investments in capacity to provide products or services in a given market that are scale sensitive

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 12 Resource Inimitability Easy to imitate Cash Commodities Can be imitated Capacity preemption Economies of scale Difficult to imitate Brand loyalty Employee satisfaction Reputation for fairness Cannot be imitated Patents Unique locations Unique assets

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 13 Guidelines: Using the RBV in Internal Analysis Disaggregate resources - break them into more specific competencies rather than use broad categories Use a functional perspective in disaggregating tangible and intangible assets and organizational capabilities Look at organizational processes and combinations of resources, not only at isolated assets or capabilities Use the value chain approach to uncover potentially valuable capabilities, activities, and processes

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 14 Marketing Firm’s products/services Concentration of sales in a few products or to a few customers Ability to gather needed information about markets Market share Product-service mix and expansion potential Channels of distribution Effective sales organization Product-service image, reputation, and quality’ Imaginativeness, efficiency, effectiveness of sales promotion Pricing strategy and flexibility After-sale service and follow-up Goodwill - brand loyalty Financial and Accounting Ability to raise short-term and long- term capital; debt-equity Corporate-level resources Cost of capital relative to competitors Tax considerations Relations with owners, investors, and stockholders Leverage position Cost of entry and barriers to entry Price-earnings ration Working capital Effective cost control Financial size Efficiency and effectiveness of accounting system Key Resources Across Functional Areas

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 15 Production, Operations, Technical Raw materials cost and availability, supplier relationships Inventory control systems Location, layout, and use of facilities Economies of scale Technical efficiency of facilities Effectiveness of subcontracting use Degree of vertical integration Efficiency and cost-benefit of equipment Effectiveness of operation control procedures Costs and technological competencies relative to competitors Research and development Patents and trademarks Human Resources Management personnel Employees’ skills and morale Labor relations costs compared to competitors Efficiency and effectiveness of personnel policies Effectiveness of incentives used to motivate performance Ability to level peaks and valleys of employment Employee turnover and absenteeism Specialized skills Experience Key Resources Across Functional Areas (continued)

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 16 Quality Management Relationship with suppliers, customers Internal practices to enhance quality of products and services Procedures for monitoring quality Information Systems Timeliness and accuracy of information about sales, operations, cash, and suppliers Relevance of information for tactical decisions Information to manage quality issues: customer service Ability of people to use information provided Key Resources Across Functional Areas (continued)

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 17 Organization and General Management Organizational structure Firm’s image and prestige Firm’s record in achieving objectives Organization of communication system Overall organizational control system Organizational climate and culture Use of systematic procedures in decision making Top-management skills, capabilities, and interest Strategic planning system Intra-organizational synergy Fig. 6-5: Key Resources Across Functional Areas (concluded)

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 18 SWOT Analysis Strengths A resource advantage relative to competitors and the needs of markets firm serves Weaknesses A limitation or deficiency in one or more resources or competencies relative to competitors Opportunities A major favorable situation in a firm’s environment Threats A major unfavorable situation in a firm’s environment Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 19 Numerous environmental opportunities Major environmental threats Substantial internal strengths Critical internal weaknesses Cell 3: Supports a turnaround- oriented strategy Cell 1: Supports an aggressive strategy Cell 4: Supports a defensive strategy Cell 2: Supports a diversification strategy SWOT Analysis Diagram

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 20 What is Value Chain Analysis? Focuses on how a business creates customer value by examining contributions of different internal activities to that value Divides a business into sets of activities within the business Starts with inputs a firm receives Finishes with firm’s products or services and after- sales service to customers Allows better identification of a firm’s strengths and weaknesses since the business is viewed as a process

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill 21 Primary Activities Support Activities Research, technology, and systems development Human resource management General administration Procurement Inbound Logistics Operations Outbound logistics Marketing and sales Service Margin The Value Chain

© 2000 The McGraw-Hill Companies, Inc. Irwin/McGraw-Hill Comparison with past performance 2. Stages of industry evolution 3. Benchmarking - Comparison with competitors 4. Comparison with success factors in the industry Perspectives to use in evaluating how a firm stacks up based on its internal capabilities Internal Analysis: Making Meaningful Comparisons