M A R C U S

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved INTERNAL ANALYSIS

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3-3 Chapter Objectives  To review the basics of management theory.  To provide a number of approaches for analyzing a firm’s internal strengths and weaknesses including the value chain, the 7Ss, and the resource based view (RBV).  To distinguish between resources, capabilities, and competencies.  To explain how RBV may be used to achieve sustained competitive advantage (SCA).

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3-4 Internal Analysis Internal analysis is the process of examining an organization’s strengths and weaknesses. Its purpose is to understand the degree to which the organization can deal with the external opportunities and threats that it confronts. It focuses on two questions: What can an organization do to enhance its position? How can it put itself in a better position to compete against its foes?

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3-5 Ex. 3.1 Strategy Requires External Analysis and Internal Analysis Strategy Internal Analysis Management Principles Seven Ss Value Chain Resources, Capabilities, and Competencies External Analysis Five Forces Macroenvironment Stakeholders The Firm- Strategy Interface The Strategy- Environment Interface

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3-6 Attributes of Core Competencies  Provide access to new markets  Give customer benefits  Difficult for competitors to imitate

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3-7 Classic Approach to Management Theory  The organization must have:  A well defined hierarchy  A division of labor to allow high degrees of specialization  Specific assignments of authority and responsibility  Unity of command and direction and subordination of individual interest to the common good

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3-8 The Human Relations Approach to Management Theory  Informal coordination in groups should replace centralized controls  Communications between employees and managers should be two-way  Compensation should be based on performance, not on following orders  Management should foster an environment that is conducive to employees’ development and learning

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved. 3-9 Ex. 3.2 The 7S Framework

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 3.3 The Value Chain Administration Human Resource Management Technology Development Resource Procurement Inbound Logistics Operations Outbound Logistics Marketing and Sales Service Profit Primary Activities SupportSupport ActIvitiesActIvities

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 3.4 Value Chain Linkages Supplier Value Chain Supplier Value Chain Firm Value Chain Channel Value Chain Channel Value Chain Customer Value Chain

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 3.5 Basic Differences Between IO and RBV Industrial Organization Model (IO) Resource-Based Model View (RBV) Sustained advantage is determined by factors Outside firm Focus on Industry structure and attractiveness Inside Firm Identifying, developing, and obtaining these factors

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 3.6 Approaches to Achieving Superior Performance IO ModelResource-Based View Focus on … External Factors (Porter’s Five Forces) Internal factors (Resources, Capabilities, Competencies) Which affect… All firms in the industry equally; all have the same prospects Each firm in industry differently; each has different prospects Which explains why … All firms in the same industry perform roughly the same Some firms in the same industry perform at a higher level than others So select the … Right industry to achieve superior performance Right firm to achieve superior performance

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Resources and Capabilities  Resources are the organization’s basic financial, physical, and human capital  Capabilities allow the organization to exploit these resources

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Competencies  Competencies allow managers to link key resources and capabilities and to combine, transfer, and channel them to satisfy customer needs

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Types of Resources Resources Financial capital Money from: Entrepreneurs Equity holders Bonds Banks Retained earnings Physical capital Plant Equipment Land Natural resources Raw materials Manufacturing robots

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 3.7 Key Organizational Resources TangibleIntangible Financial and physical capital Land Buildings Plant Equipment Natural resources/raw materials Semifinished and unsold goods Brand names and trademarks Reputation Patents and licenses Technical or mkting. know-how Trade secrets/intellectual prop.

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 3.8 Key Organizational Capabilities Company SkillsRoutines Coordination and allocation of resources Putting resources to productive use Organization structure and control systems Cultural norms and values Technological skills Production knowledge Experience with government Customer loyalty Managerial talent How managers make decisions How internal processes are handled How employees interact and cooperate

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex. 3.9 Interaction of Resources and Capabilities Resources Relatively easy to imitate Buy on open market if tangible Develop if intangible Capabilities Hard to imitate Invisible to outsiders Deep in company Not dependent on individuals Team chemistry Competencies Rare: possessed by few, if any, of firm’s competitors Costly to imitate: other firms cannot obtain, or must obtain at much higher cost Valuable: allow firm to exploit opportunities or neutralize threats in environment Nonsubstitutable: nothing else provides same value +=

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex Creation of Distinctive Competencies Resources Capabilities Distinctive Competence Superior Efficiency Quality Innovation Customer Responsiveness Hardware Ingredients Paint, Easel Software Recipes Artistic Sense

McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved Ex From Capabilities to Competencies Efficient production Skilled people Low-cost supply Efficient delivery and ordering Product dev. Teams Timely customer info. Market research Sales force feedback Close supplier ties Und. What is happening in field Point-of-sale data from vendors Rapid inv. change Low-cost Products and Services Innovative Products and Services Quick Response and Flexibility Constituent Capabilities Distinctive Competencies Behind every distinctive competence there is blend of many capabilities