2. Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin Strategic Management: Text and Cases, 4e 3 Assessing the Internal Environment of the Firm

3. 3 - 3 Learning Objectives After reading this chapter, you should have a good understanding of: -The benefits and limitations of SWOT analysis in conducting an internal analysis of the firm. -The primary and support activities of a firm’s value chain. -How value-chain analysis can help managers create value by investigating relationships among activities within the firm and between the firm and its customers and suppliers. -The resource-based view of the firm and the different types of tangible and intangible resources, as well as organizational capabilities.

4. 3 - 4 Learning Objectives After reading this chapter, you should have a good understanding of: -The four criteria that a firm’s resources must possess to maintain a sustainable advantage and how value created can be appropriated by employees. -The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms. -The value of recognizing how the interests of a variety of stakeholders can be interrelated. -How firms are using Internet technologies to add value and achieve unique advantages. (Appendix)

5. 3 - 5 The Limitations of SWOT Analysis Strengths may not lead to an advantage SWOT’s focus on the external environment is too narrow SWOT gives a one-shot view of a moving target SWOT overemphasizes a single dimension of strategy

6. 3 - 6 Question Which of the following is true regarding the SWOT analysis? A) By itself, the SWOT analysis often helps a firm develop competitive advantages that can be sustained over time. B) The SWOT analysis's not the best starting point for creating strategies. C) The SWOT analysis simulates self-reflection and group discussions on how to improve a firm and position it for success. D) The SWOT analysis is not a tried-and-true tool of strategic analysis.

7. 3 - 7 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

8. 3 - 8 Example IBM Electronics Value Chain Management helps companies save money by streamlining their value chain. The benefits of streamlining a business with value chain management include: -Lower infrastructure costs associated with collaboration. -Create commonality in parts and suppliers. -Control inventory by getting the supply chain talking to the demand chain. -Cut transaction costs by integrating with public and private exchanges. -Deliver products to market faster while minimizing risk and capital investment. Source: www.ibm.com

9. 3 - 9 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.

10. 3 - 10 Primary Activity: Inbound Logistics 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

11. 3 - 11 Primary Activity: Operations 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

12. 3 - 12 Primary Activity: Outbound Logistics 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

13. 3 - 13 Primary Activity: Marketing and Sales 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

14. 3 - 14 Primary Activity: Service 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

15. 3 - 15 Support Activity: General Administration 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

16. 3 - 16 Support Activity: Human Resource Management 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 absenteeism -Reward and incentive programs to motivate all employees

17. 3 - 17 Support Activity: Technology Development 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

18. 3 - 18 Support Activity: Procurement 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

19. 3 - 19 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 organization (e.g., customers and suppliers)

20. 3 - 20 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

21. 3 - 21 Types of Resources: Tangible 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

22. 3 - 22 Types of Resources: Tangible Resources Technological resources -Trade secrets -Innovative production processes -Patents, copyrights, trademarks Organizational resources -Effective strategic planning processes -Excellent evaluation and control systems

23. 3 - 23 Types of Resources: Intangible 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

24. 3 - 24 Types of Resources: Intangible Resources Innovation and creativity -Technical and scientific skills -Innovation capacities Reputation -Brand name -Reputation with customers -Reputation with suppliers

25. 3 - 25 Types of Resources: Organizational Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and 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

26. 3 - 26 Firm Resources and Sustainable Competitive Advantages Is the resource or capability… Valuable Rare Difficult to imitate Difficult to substitute Implications Neutralize threats and exploit opportunities Not many firms possess Physically unique Path dependency Causal ambiguity Social complexity No equivalent strategic resources or capabilities Adapted from Exhibit 3.7 Four Criteria for Assessing Sustainability of Resources and Capabilities

27. 3 - 27 Question In the bookseller industry, can different firm resources become strategic substitutes for Amazon.com? Explain.

28. 3 - 28 Criteria for Sustainable Competitive Advantage and Strategic Implications Exhibit 3.8 Criteria for Sustainable Competitive Advantage and Strategic Implications Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp. 99-120.

29. 3 - 29 Evaluating Firm Performance Two approaches for evaluating firm performance -Financial ratio analysis Balance sheet Income statement Historical comparison Comparison with industry norms Comparison with key competitors -Balanced scorecard (stakeholder perspective) Employees Customers Owners

30. 3 - 30 Financial Ratio Analysis Five types of financial ratios -Short-term solvency or liquidity -Long-term solvency measures -Asset management (or turnover) -Profitability -Market value Meaningful ratio analysis must include -Analysis of how ratios change over time -How ratios are interrelated

31. 3 - 31 The Balance Scorecard Provides a meaningful integration of many issues that come into evaluating a firm’s performance Four key perspectives -How do customers see us? (customer perspective) -What must we excel at? (internal perspective) -Can we continue to improve and create value? (innovation and learning perspective) -How do we look to shareholders? (financial perspective)

32. 3 - 32 Customer Perspective Time Quality Performance and service Cost

33. 3 - 33 Internal Business Perspective Processes -Cycle time -Quality -Employee Skills -Productivity Decisions Actions Coordination Resources and capabilities

34. 3 - 34 Innovation and Learning Perspective Introduction of new products and services Greater value for customers Increased operating efficiencies

35. 3 - 35 Example The world’s 10 most innovative companies, according to Business Week in 2007 are: 1.Apple 2.Google 3.Toyota Motor 4.General Electric 5.Microsoft 6.Proctor & Gamble 7.3M 8.Walt Disney Co. 9.IBM 10.Sony Source: www.businessweek.com

36. 3 - 36 Financial Perspective Profitability Growth Shareholder value Increased market share Reduced operating expenses Higher asset turnover

37. 3 - 37 Potential Limitations of the Balanced Scorecard Lack of a clear strategy Limited or ineffective executive sponsorship Too much emphasis on financial measures rather than nonfinancial measures Poor data on actual performance Inappropriate links to scorecard measures to compensation Inconsistent or inappropriate Terminology