1 Part 2: Analyzing Environments Chapter 4: Analyzing the Firm

 Reading and studying this chapter should enable you to:  1. Explain how to identify the firm’s strengths and weaknesses by using an internal analysis.  2. Define resources, capabilities, and core competencies and explain their relationships.  3. Describe the four characteristics that core competencies must have to be competitive advantages. 3

 Reading and studying this chapter should enable you to:  4. Explain the value chain and describe the differences between primary and support activities.  5. Define outsourcing and describe its advantages and disadvantages. 4

 A firm cannot successfully implement any strategy without being able to use the appropriate set of resources, capabilities, and core competencies.  These must be identified and understood as a precursor to selecting a strategy:  Strengths  Weaknesses 5

 In general terms, strengths suggest possibilities while weaknesses suggest constraints.  Firms deal with two kinds of resources – tangible and intangible.  Tangible resources are valuable assets that can be seen or quantified, such as manufacturing equipment and financial capital.  Financial capital 6

 Intangible resources are assets that contribute to creating value for customers but are not physically identifiable.  Reputation  Brand know-how  Organizational culture The full set of resources a firm holds is called a resource portfolio. 7

Tangible resources may be bought and sold. Not hard to identify: human capital, money, physical assets. Not hard to evaluate through accounting systems and external auditors. Intangible resources must be constantly attended to. Harder to identify: organization culture, reputation, brand names. 8

9 Real options – Strategic flexibility for firms - Future oriented - Controlling uncertainty - Examples: Rolls Royce and Pharmaceutical Companies

 True value of resources emerges when converted to capabilities and eventually converted to core competencies.  Commonly, capabilities are part of organizational functions such as marketing, manufacturing, finance, and so forth.  Example: Apple’s new products 10

 Each of them is a product of deliberate attempts to integrate several resources with the purpose of completing one or more work tasks.  Capabilities result when employees think carefully about which combination of resources will allow the firm to create a capability with potential to become a core competence. 11

 When core competencies allow the firm to create value for customers by performing a key activity better than competitors, it has a competitive advantage.  Product innovation: LG Electronics, Apple, Honda  Product leadership  People leadership  Market leadership 12

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 Valuable  E.g. Apple’s iTunes  Rare  E. g. Coca-Cola and PepsiCo  Difficult to Imitate  E.g. Challenging Motorola, Nokia & Samsung  Nonsubstitutable  E.g. Lexus’ after-sales service 15

 Using resources, capabilities and core competencies in ways that create more value for customers compared to competitors’  Enable firms to capture larger shares of the market and increase their returns creating value for owners and other shareholders 16

 The value chain is the structure of activities the firm uses to implement its business level strategy.  The focus of value chain analysis is on primary and secondary activities. Primary activities include:  inbound logistics (such as sources of parts),  operations (such as manufacturing if dealing with a physical product),  sales and distribution of products, and after-sales service. 17

 Support activities provide support to the primary activities so that they can be completed effectively. Secondary activities include  Human resources  Information Technology Support  Purchasing  Accounting 18

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 Each stage of the value chain adds costs, but (hopefully) creates value.  Support activities create value for customers, but their effects are indirect.  Firms analyze their value chain continuously to find ways to operate more efficiently thereby creating more value for customers. 20

 Outsourcing involves acquiring a capability from an external supplier that contributes to the focal firm’s ability to create value for customers.  Firms seek one or more benefits when they decide to outsource the performance of an activity to an external supplier. 21

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 Benefits  Concentrating resources on primary activities  Reducing the risks assumed  Challenges  Cost cutting is not a long term fix  Often tactical in orientation rather than strategic 23

 A vision disconnected from the realities of internal capabilities is doomed to failure  A systematic assessment of how the company compares to the competition is important in strategy development 24

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