1. Chapter 5
Internal Analysis

2. Chapter Topics Resource-based View of the Firm Value Chain Analysis
SWOT Analysis
Internal Analysis: Making Meaningful Comparisons

3. Ingredients Critical to Successful Strategy
Be consistent with conditions in the competitive environment
Strategy must …
Place realistic requirements on the firm’s resources
Be carefully executed

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

5. 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
Intangible assets
Cannot be seen or touched
Often very critical in creating competitive advantage
Examples: brand names, company reputation, company morale
Organizational capabilities
Involve skills – ability to combine assets, people, and processes – used to transform inputs into outputs

6. Ex. 5-2: Examples of Different Resources (selected)
Tangible Assets
Intangible Assets
Organizational Capabilities
Hampton Inn’s reservation system
Budweiser’s brand name
Dell Computer’s customer service
Ford Motor’s cash reserves
Dell Computer’s reputation
Wal-mart’s purchasing and inbound logistics
3M’s patents
Nike’s advertising with LeBron James
Sony’s product development process
Georgia Pacific’s land holdings
Katie Couric as NBC’s “Today” host
Coke’s global distribution coordination

7. What Makes a Resource Valuable?
Competitive superiority: Does the resource help fulfill a customer’s need better than those of the firm’s competitors?
Resource scarcity: Is the resource in short supply?
Inimitability: Is the resource easily copied or acquired?
Appropriability: Who actually gets the profit created by a resource?
Durability: How rapidly will the resource depreciate?
Substitutability? Are other alternatives available?

8. Isolating Mechanisms Physically unique resources
Resources virtually impossible to imitate
E.g., 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
E.g., 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

9. Isolating Mechanisms Causal ambiguity Economic deterrence
Situations where it is difficult for competitors to understand how a firm has created its advantage
E.g., Southwest Airlines’ approach
Same plane, routes, gate procedures, number of attendants
Culture of fun, family, and frugal yet focused service
Economic deterrence
Involves large capital investments in capacity to produce products or services in a given market that are scale sensitive

10. Ex. 5-4: Resource Inimitability (Adapted)
Easy to imitate
Cash, commodities
Can be imitated (but may not be)
Capacity preemption, economies of scale
Difficult to imitate
Brand loyalty, employee satisfaction, reputation for fairness
Cannot be imitated
Patents, unique locations, unique assets

11. Guidelines: Using the RBV in Internal Analysis
Disaggregate resources – break them down into more specific competencies rather than use broad categories
Utilize 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

12. Ex. 5-6: Key Resources Across Functional Areas (Selected)
Marketing
Firm’s products/services
Concentration of sales in a few products or a few customers
Ability to gather needed information about markets
Market share
Product-service mix and expansion potential
Channels of distribution
Effective sales organization
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

13. Ex. 5-6 (contd.) 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
Personnel
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

14. Ex. 5-6 (contd.) Quality Management
Relationships 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

15. Ex. 5-6 (contd.) Organization and General Management
Organizational structure
Firm’s image and prestige
Firm’s record in achieving objectives
Organization of communication system
Organizational climate and culture
Use of systematic procedures in decision making
Top management skills, capabilities, and interest
Strategic planning system
Intra-organizational synergy

16. What is a Value Chain?
The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value

17. 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 a set 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 for better identification of a firm’s strengths and weaknesses since the business is viewed as a process

18. Ex. 5-7: The Value Chain General Administration
Human Resource Management
Margin
Support Activities
Research, Technology, and Systems Development
Procurement
Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
Service
Margin
Primary Activities

19. Conducting a Value Chain Analysis
Identify activities
Allocate costs
Recognize the difficulty in activity-based cost accounting
Identify the activities that differentiate the firm
Examine the value chain
Develop meaningful comparisons to use when evaluating value activities

20. Ex. 5-10: Possible Factors for Assessing Sources of Differentiation in Primary and Support Activities of the Value Chain (selected items)
General Administration
Capability to identify new product market opportunities and potential environmental threats
Quality of strategic planning system to achieve corporate objectives
Ability to obtain relatively low-cost funds for capital expenditures and working capital
Human Resource Management
Effectiveness of procedures for recruiting, training, and promoting all levels of employees
Appropriateness of reward system for motivating and challenging employees
A work environment minimizing absenteeism and keeping turnover low

21. Ex. 5-10 (contd.) Technology Development
Success of R&D activities in leading to product and process innovation
Quality of working relationships between R&D personnel and other departments
Timeliness of technology development activities in meeting critical deadlines
Procurement
Development of alternate sources for inputs to minimize dependence on a single supplier
Procurement of raw materials (1) on a timely basis, (2) at lowest possible cost, and (3) at acceptable levels of quality
Procedures for procurement of plant, machinery, and buildings

22. Ex. 5-10 (contd.) Inbound Logistics Operations Outbound Logistics
Soundness of material and inventory control systems
Productivity of equipment compared to key competitors
Timeliness and efficiency of delivery of finished goods and services
Efficiency of raw material warehousing activities
Appropriate automation of production processes
Efficiency of finished goods warehousing activities
Effectiveness of production control systems to improve quality and improve costs

23. Ex. 5-10 (contd.) Service Marketing and Sales
Means to solicit customer input for product improvements
Promptness of attention to customer complaints
Appropriateness of warranty and guarantee policies
Quality of customer education and training
Ability to provide replacement parts and repair services
Marketing and Sales
Effectiveness of research to identify customer segments and needs
Innovation in sales promotion and advertising
Evaluation of alternate distribution channels
Motivation and compensation of sales force
Development of quality image and favorable reputation

24. SWOT Analysis Opportunities Threats Strengths Weaknesses
Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation
Opportunities
A major favorable situation in a firm’s environment
Threats
A major unfavorable situation in a firm’s environment
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

25. Ex. 5-12: SWOT Analysis Diagram
Numerous environmental opportunities
Cell 3: Supports a turnaround-oriented strategy
Cell 1: Supports an aggressive strategy
Critical internal weaknesses
Substantial internal strengths
Cell 4: Supports a defensive strategy
Cell 2: Supports a diversification strategy
Major environmental threats

26. Internal Analysis: Making Meaningful Comparisons
1. Comparison with past performance
4. Comparison with success factors in industry
2. Stages of industry evolution
Perspectives to use
3. Benchmarking – comparison with competitors

27. Ex. 5-13: Sources of Distinctive Competence at Different Stages of Industry Evolution
Functional Area
Introduction
Growth
Maturity
Decline
Marketing
Resources/skills to create widespread awareness and find acceptance from customers ; advantageous access to distribution
Ability to establish brand recognition, find niche, reduce price, solidify strong distribution relations, and develop new channels
Skills in aggressively promoting products to new markets and holding existing markets; pricing flexibility; skills in differentiating products and holding customer loyalty
Cost effective means of efficient access to selected channels and markets; strong customer loyalty or dependence; strong company image

28. Ex. 5-13 (contd.) Functional Area Introduction Growth Maturity Decline
Production operations
Ability to expand capacity effectively, limit number of designs, develop standards
Ability to add product variants, centralize production, or otherwise lower costs; ability to improve product quality; seasonal subcontracting capacity
Ability to improve product and reduce costs; ability to share or reduce capacity; advantageous supplier relationships; subcontracting
Ability to prune product line; cost advantage in production, location or distribution; simplified inventory control; subcontracting or long production runs

29. Ex. 5-13 (contd.) Functional Area Introduction Growth Maturity Decline
Finance
Resources to support high net cash overflow and initial losses; ability to use leverage effectively
Ability to finance rapid expansion, to have net cash outflows but increasing profits; resources to support product improvements
Ability to generate and redistribute increasing net cash inflows; effective cost control systems
Ability to reuse or liquidate unneeded equipment; advantage in cost of facilities; control system accuracy; streamlined management control

30. Ex. 5-13 (contd.) Functional Area Introduction Growth Maturity Decline
Personnel
Flexibility in staffing and training new management; existence of employees with key skills in new products or markets
Existence of an ability to add skilled personnel; motivated and loyal workforce
Ability to cost effectively, reduce workforce, increase efficiency
Capacity to reduce and reallocate personnel

31. Ex. 5-13 (contd.) Functional Area Introduction Growth Maturity Decline
Engineering and R&D
Ability to make engineering changes, have technical bugs in product and process resolved
Skill in quality and new feature development; ability to start developing successor product
Ability to reduce costs, develop variants, differentiate products
Ability to support other grown areas or to apply product to unique customer needs
Key functional area and strategy focus
Engineering: market penetration
Sales: consumer loyalty; market share
Production efficiency: successor products
Finance: maximum investment recovery