3-1 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. PEMBA Strategy Course – BUSI 7136 PEST & Internal Analysis for Strategy Formulation Dr. Garry Adams Management Professor Auburn University 1/8 & 1/9/2011

3-2 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. PEST Analysis, Internal Analysis & Strategy Formulation PEST Analysis ( Value Chain Analysis Resource-Based View of the Firm Knowledge-Based View/Organizational Learning TOWS Matrix/Strategy Formulation

3-3 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The General Environment Segments of the general environment include: Political/Legal Economic Sociocultural/Demographic Technological (Some include International) General Environment 4-3

3-4 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The General Environment General environmental trends and events: Little ability to predict them Even less ability to control them Can vary across industries & firms General Environment 4-4

3-5 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Political/Legal Segment Tort reform Americans with Disabilities Act (ADA) Health care legislation & reform Deregulation of utility and other industries Increases in minimum wages Taxation at local, state, federal levels Legislation on corporate governance reforms (Sarbanes-Oxley Act) 4-5

3-6 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Economic Segment Interest rates Unemployment Consumer Price index Trends in GDP Changes in stock market valuations 4-6

3-7 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Sociocultural/Demographic Segment More women in the workforce/More single-family homes/Postponement of family formation Greater concern for fitness & environment Greater disparities in income levels Increased aging population Greater ethnic diversity 4-7

3-8 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Demographic Segment Aging population Rising affluence Changes in ethnic composition Geographic distribution of population Greater disparities in income levels 4-8

3-9 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Technological Segment Genetic engineering Emergence of Internet technology Computer-aided design/computer-aided manufacturing systems (CAD/CAM) Research in synthetic and exotic materials Pollution/global warming Miniaturization of computing technologies Wireless communication Nanotechnology 4-9

3-10 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. PEST Analysis Goals Identify emerging trends across dimensions that are most likely to impact your industry Focus on trend: 1.Direction (positive or negative) 2.Magnitude (small or large effect) 3.Scope (segments, industry, across industries) 4.Timing (immediate impact, delayed impact)

3-11 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Value-Chain Analysis 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 Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service

3-12 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Value Chain Adapted from Exhibit 3.1 The Value Chain: Primary and Support Activities Source: Adapted with permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. General administration Human resource management Technology development Procurement Inbound logistics Operations Outbound logistics Marketing and sales Service

3-13 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Primary Activities 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 Inbound Logistics Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-14 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Primary Activities 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 Inbound Logistics Operations Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-15 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Primary Activities 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 Inbound Logistics Operations Outbound Logistics Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-16 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Primary Activities 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 Inbound Logistics Operations Outbound Logistics Marketing and Sales Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-17 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Primary Activities 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 Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities

3-18 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Support Activities 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 General Administration Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities

3-19 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Support Activities 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 absenteeisn Reward and incentive programs to motivate all employees General Administration Human Resource Management Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities

3-20 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Support Activities 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 General Administration Human Resource Management Technology Development Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities

3-21 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Support Activities 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 General Administration Human Resource Management Technology Development Procurement Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities

3-22 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 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 organizations (e.g., customers and suppliers) Restructuring of activities to gain advantages (Dell Computers)

3-23 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Disintermediation and Reintermediation

3-24 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Value Chain Analysis Questions for Discussion How does the Value Chain Primary Activity order and content differ for a medical service provider? What are the primary mechanisms for Value delivery in the Medical Services industry?

3-25 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Resource-Based View of the Firm Two perspectives The internal analysis of phenomena within a company An external analysis of the industry and its competitive environment Three key types of resources Tangible resources Intangible resources Organizational capabilities

3-26 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and equipment Tangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities

3-27 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks Organizational resources Effective strategic planning processes Excellent evaluation and control systems Types of Resources Tangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities Relatively easy to identify, and include physical and financial assets used to create value for customers

3-28 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time Human Experience and capabilities of employees Trust Managerial skills Firm-specific practices and procedures Tangible Resources Intangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities

3-29 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Innovation and creativity Technical and scientific skills Innovation capacities Reputation Effective strategic planning processes Excellent evaluation and control systems Tangible Resources Intangible Resources Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time

3-30 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Types of Resources Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine/bundle tangible & intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital Tangible Resources Intangible Resources Organizational Capabilities Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities

3-31 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Firm Resources and Sustainable Competitive Advantages Is the resource or capability… Valuable Rare Difficult to imitate Organizationally Activatable Implications Adapted from Exhibit 3.6 Four Criteria for Assessing Sustainability of Resources and Capabilities Neutralize threats and exploit opportunities Not many firms possess Physically unique Path dependency Causal ambiguity Social complexity Does the firm possess important supporting resources?

3-32 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Is the Resource Valuable? Organizational resources can be a source of competitive advantage only when they are valuable Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness

3-33 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Is the Resource Rare? Organizational resources also possessed by competitors are not sources of competitive advantage Common strategies based on similar resources give no one firm an advantage Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors

3-34 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Can the Resource be Imitated? Difficulty in imitating resources is key to value creation because it constrains competition Profits generated from inimitable resources are more likely to be sustainable Physical uniqueness Path dependency Causal ambiguity Social complexity

3-35 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Is the Resource Activatable? Does the firm possess complementary resources to maximize capability potential? Examples of Complementary Resources Include: Financial Capital Human Capital Plant & Equipment Developed Distribution Channels

3-36 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Criteria for Sustainable Competitive Advantage and Strategic Implications ValuableRareDifficult ActivatableImplications to Imitatefor Competitiveness YesNoNoNoCompetitive disadvantage YesNoNoYesCompetitive parity YesYesNoYesTemporary competitive advantage YesYesYesYesSustainable competitive advantage Is a resource or capability… Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp

3-37 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Questions for Discussion What are the primary tangible resources you possess in your practice? What are the important intangible resources to your practice? How are these tangible & intangible resources bundled into capabilities? What capabilities do competitors possess that you would like to build/acquire?

3-38 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Ratio of Market Value to Book Value for Selected Companies AnnualMarketBookRatio of Sales Value Value Market to Company($ billions) ($ billions) ($ billions) Book Value Exhibit 4.1 Ratio of Market Value to Book Value for Selected Companies eBay Microsoft Intel General Motors Corp Nucor (Steel) J. C. Penney Note: The data on market valuations are as of June 16, All other financial data is based on the most recently available balance sheets and income statements.

3-39 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Central Role of Knowledge in Today’s Economy Creation of wealth in a knowledge economy Effective management of knowledge workers Intellectual capital Assets such as Reputation & Brand Value Employee loyalty and commitment Customer relationships Company values Experience and skills of employees

3-40 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Central Role of Knowledge in Today’s Economy Intellectual capital = Market value of firm – Book value of firm How do companies create value in the knowledge- intensive economy? Human capital (individual capabilities, knowledge, skills, and experience of the company’s employees and managers) Social capital (the network of relationships that individuals have within & across organizations) Knowledge Explicit knowledge Tacit knowledge

3-41 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Learning Organizations A Learning Organization Is Defined as: An organization skilled at creating, acquiring, and transferring knowledge and at modifying its behavior to reflect new knowledge and insights.

3-42 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. 42 Balanced Scorecard Design

3-43 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Time Quality Performance & After Sales Service Relative Value Delivered Customer Perspective

3-44 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Processes Cycle time Quality Employee skills productivity Decisions Actions Coordination Resources and capabilities Customer Perspective Internal Business Perspective

3-45 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Introduction of new products and services Greater value for customers Increased operating efficiencies Customer Perspective Internal Business Perspective Innovation and Learning Perspective

3-46 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. The Balanced Scorecard Profitability Growth Shareholder value Increased market share Reduced operating expenses Higher asset turnover Customer Perspective Internal Business Perspective Innovation and Learning Perspective Financial Perspective

3-47 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. TOWS Matrix

3-48 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. TOWS Matrix SO Strategies Strategies that enable competitive advantage, external opportunities match well with internal strengths, allows for competitive advantage to be built and maintained.

3-49 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. TOWS Matrix ST Strategies Mitigation Strategies, firm possesses internal strengths that facilitates neutralization of external threats, may lead to temporary advantage if competitors are impacted by environmental threats.

3-50 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. TOWS Matrix WO Strategies Acquisition/Development Strategies, situation where strategies are formulated to acquire or develop new resources/capabilities to take advantage of external opportunities.

3-51 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. TOWS Matrix WT Strategies Consolidation/Exit Strategies, if firms can’t find ways to convert weaknesses to strengths via acquisition/development, exit from market is recommended.

3-52 Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved. Applying SWOT/TOWS Analysis 1. Review Case Material 2. Identify the Primary Problems/Issues 3. Analyze Internal/External Environments 4. Develop Strategic Alternatives 5. Make Strategy Formulation & Implementation Recommendations