Strategy
CHAPTER 3
Assessing the Internal Environment of the Firm
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Value-Chain Analysis
Value-chain analysis looks at the sequential process of value-creating activities.
Value is the amount buyers are willing to pay for what a firm provides.
How is value created within the organization?
How is value created for other organizations in the overall supply chain or distribution channel?
The value received must exceed the costs of production.
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SWOT is a good starting point, but it doesn’t give enough guidance regarding the specific action steps needed to enact strategic change. For instance, a firm may have a capability that is a strength, but that, by itself, cannot create or sustain competitive advantage. It’s too easy to become preoccupied with a single dimension or element of what is, essentially, a moving target…MORE analysis may be necessary, which is where the value chain comes in. Value-chain analysis = a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm’s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm’s competitive position.
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Value-Chain Analysis Primary Activities
Primary activities contribute to the physical creation of the product or service; the sale & transfer to the buyer; and service after the sale.
Inbound logistics
Operations
Outbound logistics
Marketing & sales
Service
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Primary activities = sequential activities of the value chain that refer to the physical creation of the product or service, its sale and transfer to the buyer, and its service after sale, including inbound logistics, operations, outbound logistics, marketing and sales, and service.
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Value-Chain Analysis Support Activities
Support activities either add value by themselves or add value through important relationships with both primary activities & other support activities.
Procurement
Technology development
Human resource management
General administration
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Support activities = activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities; including procurement, technology development, human resource management, and general administration.
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The Value Chain
Exhibit 3.1 The Value Chain: Primary and Support Activities
Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The Free Press.
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To get the most out of value-chain analysis, view the concept in its broadest context, without regard to the boundaries of your own organization – place your organization within a more encompassing value chain that includes your firm’s suppliers, customers, and alliance partners. This helps identify how value is created for other organizations in the overall supply chain or distribution channel. For an interesting example, look at Case General Motors. (Remember the strategic groups discussion from Chapter 2? What does GM have to do to compete with other groups in its industry? How important might the value chain be in this industry?)
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Primary Activity: Inbound Logistics
Inbound logistics are primarily associated with receiving, storing & distributing inputs to the product.
Material handling
Warehousing
Inventory control
Vehicle scheduling
Returns to suppliers
Factors to consider include:
Location of distribution facilities
Warehouse layout
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Inbound logistics = receiving, storing, and distributing inputs of a product. Example = Toyota’s just-in-time (JIT) inventory systems where parts deliveries arrive at the assembly plants only hours before they are needed. This allows Toyota to fill a buyer’s new car order in just 5 days. Inbound logistics includes location of distribution facilities, design of material and inventory control systems, warehouse layout and design, and efficient systems to return products to suppliers.
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Primary Activity: Operations
Operations include all activities associated with transforming inputs into the final product form.
Machining
Packaging & Assembly
Testing or quality control
Printing
Facility operations
Factors to consider include:
Efficient plant operations & layout
Incorporation of appropriate process technology
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Operations = all activities associated with transforming inputs into the final product form. Example = Shaw Industries’ ability to reduce expenses associated with the disposal of dangerous chemicals used in the manufacture of floor coverings. Operations includes assessment of efficiency of plant operations, incorporation of appropriate process technology, efficient plant layout and workflow design, degree of automation, extent of appropriate quality control systems.
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Primary Activity: Outbound Logistics
Outbound logistics includes collecting, storing, & distributing the product or service to buyers.
Finished goods & warehousing
Material handling
Delivery vehicle operation
Order processing, scheduling & distribution
Factors to consider include:
Effective shipping processes
Minimizing shipping costs by grouping goods into large lot sizes
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Outbound logistics = collecting, storing, and distributing the product or service to buyers. Example = Campbell Soup uses an electronic network so retailers can inform Campbell of product needs and inventory levels. This allows Campbell to forecast future demand and determine which products to replenish, delivering inventory the same day. The retailer gains efficiency, and therefore has an incentive to carry a broader line of Campbell products. Outbound logistics includes effective shipping processes to provide quick delivery and minimize damages, efficient finished goods warehousing processes, the ability to ship goods in large lot sizes to minimize transportation costs, and the use of quality material handling equipment. (See also Case Campbell Soup.)
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Primary Activity: Marketing & Sales
Marketing & sales activities involve purchases of products & services by end users and includes how to induce buyers to make those purchases.
Advertising & promotion
Sales force management
Pricing & price quoting
Channel selection & channel relations
Factors to consider include:
Innovative approaches to promotion & advertising
Proper identification of customer segments & needs
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Marketing and sales = activities associated with purchases of products and services by end users and the inducements used to get them to make purchases. Example = the Mercedes-Benz AMG got premiere “product placement” as a fleet of these showed up to pick up James Bond in the 2016 Spectre movie. Marketing and sales includes the development of a highly motivated and competent sales force, innovative approaches to promotion and advertising, selection of the most appropriate distribution channels, proper identification of customer segments and needs, and effective pricing strategies.
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Primary Activity: Service
Service includes all actions associated with providing service to enhance or maintain the value of the product.
Installation & repair
Training
Parts supply
Product adjustment
Factors to consider include:
Quick response to customer needs
Quality of service personnel, ongoing training
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Service = actions associated with providing service to enhance or maintain the value of the product. Example = Nordstrom service reps can take control of the customer’s web browser and lead her to the specific product she wants. Service includes 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, and warranty and guarantee policies.
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Support Activity: Procurement
Procurement involves how the firm purchases inputs used in its value chain.
Procurement of raw material inputs
Optimizing quality & speed
Minimizing associated costs
Development of collaborative win-win relationships with suppliers
Analysis & selection of alternative sources of inputs to minimize dependence on one supplier
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SUPPORT ACTIVITIES are those functions that support the value chain. Each industry might have distinct value activities that are unique to that industry, but here are some common ones. Procurement = the function of purchasing inputs used in the firm’s value chain, including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings. Example = Microsoft does formal reviews of its outside suppliers, including a feedback system that helps clarify expectations. In addition to the above activities, procurement includes effective procedures to purchase advertising and media services, and the ability to make proper lease versus buy decisions.
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Support Activity: Technology Development
Technology development is related to a wide range of activities.
Effective R&D activities for process & product initiatives
Collaborative relationships between R&D and other departments
State-of-the-art facilities & equipment
Excellent professional qualifications of personnel
Use of data analytics
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Technology development = activities associated with the development of new knowledge that is applied to the firm’s operations. The array of technologies employed in most firms is very broad, ranging from technologies used to prepare documents and transport goods, to those embodied in processes and equipment or the product itself. Technology development related to the product and its features supports the entire value chain, while other technology development is associated with particular primary or support activities. Example = the French firm Techniq is a global leader in the energy industry, focusing on pipelines. In collaboration with Schlumberger, Techniq has developed “intelligent” pipes that add significant value for customers, while increasing Techniq’s margins. Technology development includes activities related to the process as well as the product, such as enhancing the ability to meet critical deadlines. Strategy Spotlight 3.2 discusses how Coca-Cola has used data analytics to meet the taste demands of its global customers.
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Support Activity: Human Resource Management
Human resource management consists of activities involved in recruitment, hiring, training & development, & compensation of all types of personnel.
Effective employee recruiting, development, & retention mechanisms
Quality relations with trade unions
Reward & incentive programs to motivate all employees
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Human resource management = activities involved in the recruiting, hiring, training, development and compensation of all types of personnel. It supports both individual primary and support activities such as the hiring of engineers and scientists, as well as supporting the entire value chain through activities such as negotiations with labor unions. Example = JetBlue recruited flight attendants with a one-year contract so they could travel, meet lots of people, then decide what else they might like to do. Human resource management includes creating a quality work environment to maximize overall employee performance and minimize absenteeism.
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Support Activity: General Administration
General administration involves:
Effective planning systems to attain overall goals & objectives
Excellent relations with diverse stakeholder groups
Effective information technology to coordinate & integrate value-creating activities across the value chain
Ability of top management to anticipate & act on key environmental trends & events, create strong values, culture & reputation
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General administration = general management, planning, finance, accounting, legal and government affairs, quality management, and information systems; activities that support the entire value chain and not individual activities. These activities can be among the most important activities for competitive advantage. Example = how a telephone operating company effectively negotiates and maintains ongoing relations with regulatory bodies. General administration also includes, for instance, the ability to obtain low-cost funds for capital expenditures and working capital. Leadership plays a critical role here as well: Mark Zuckerberg and Jack Ma have been critical to the success of their respective companies, Facebook and Alibaba.
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Interrelationships Among Value-Chain Activities
Managers must not ignore the importance of relationships among value-chain activities.
What are the interrelationships among activities within the firm?
What are the relationships among activities within the firm and with other stakeholders such as customers & suppliers?
Consider integrating customers into the value chain.
Creating individualized products
Soliciting ideas for products & services
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Interrelationships = collaborative and strategic exchange relationships between value-chain activities either (a) within firms or (b) between firms. Strategic exchange relationships involve exchange of resources such as information, people, technology, or money that contribute to the success of the firm. Example = within the firm, how effective human resource practices can support the entire value chain. Example = between the firm and stakeholders, how teaming up with customers through a “prosumer” or crowdsourcing relationship can help the firm gain insight into customer needs and leverage the wisdom of the customer to create value for all. However, be careful, because customers can use this forum to criticize the company and its products. Research has shown that crowdsourcing can backfire half the time.
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Resource-Based View of the Firm
The resource-based view of the firm (RBV) integrates two activities.
An internal analysis of phenomena within a company
An external analysis of the industry & its competitive environment
Resources can lead to a competitive advantage.
If they are valuable, rare, hard to duplicate
If tangible resources, intangible resources, & organizational capabilities are combined
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A firm’s strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a competitive advantage. Resource-based view of the firm (RBV) = perspective that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities.
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Types of Tangible Firm Resources
Tangible resources are assets that are relatively easy to identify.
Physical assets: plant & facilities, location, machinery & equipment
Financial assets: cash & cash equivalents, borrowing capacity, capacity to raise equity
Technological resources: trade secrets, patents, copyrights, trademarks, innovative production processes
Organizational resources: effective planning processes, evaluation & control systems
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Firm resources are all assets, capabilities, organizational processes, information, knowledge, etc. controlled by a firm – resources that enable it to develop and implement value-creating strategies. Tangible resources = organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources. These include assets that the firm uses to create value for its customers: physical resources such as the plant’s proximity to customers and suppliers; financial resources such as accounts receivables; organizational resources such as employee development, evaluation and reward systems; technological resources such as trade secrets and patents.
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Types of Intangible Firm Resources
Intangible resources are difficult for competitors to account for or imitate. They are embedded in unique routines & practices.
Human resources: trust, experience & capabilities of employees; managerial skills & effectiveness of work teams, firm specific practices & procedures
Innovation resources: technical & scientific expertise & ideas; innovation capabilities
Reputation resources: brand names, reputation for fairness with suppliers, non-zero sum relationships; reputation for reliability & product quality with customers
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Intangible resources = organizational assets that are difficult to identify and account for, and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources. Example = Harley-Davidson’s strong brand image. A firm’s specific practices and procedures, and the firm’s culture, may also be resources that provide competitive advantage.
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Types of Firm Resources: Organizational Capabilities
Organizational capabilities are competencies or skills that a firm employs to transform inputs into outputs. It is the capacity to combine tangible & intangible resources to attain desired ends.
Outstanding customer service
Excellent product development capabilities
Superb innovation processes & flexibility in manufacturing processes
Ability to hire, motivate, & retain human capital
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Organizational capabilities = the competencies and skills that a firm employs to transform inputs into outputs. Capabilities involve an organization’s capacity to deploy tangible and intangible resources over time and generally in combination, and to leverage those capabilities to bring about a desired end. Example = Apple’s ability to combine and package technological components in new and innovative ways while also seeking to integrate the value chain. See Case Apple.
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Firm Resources and Sustainable Competitive Advantages
Strategic resources have four attributes.
Valuable in formulating & implementing strategies to improve efficiency or effectiveness
Rare or uncommon; difficult to exploit
Difficult to imitate or copy due to physical uniqueness, path dependency, causal ambiguity, or social complexity
Difficult to substitute with strategically equivalent resources or capabilities
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Strategic resources (also firm resources or organizational resources) = firms’ capabilities that are valuable, rare, costly to imitate, and costly to substitute. Firm attributes must be valuable in order to be considered resources and potential sources of competitive advantage. These valuable resources enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. If competitors or potential competitors also possessed the same valuable resource, it is not a source of competitive advantage unless it is uncommon or rare. Inimitability or being difficult to imitate is the key to value creation because it constrains competition. Having a resource that competitors can easily copy generates only temporary value. Non-substitutability means there is no strategically equivalent valuable resources that are themselves not rare or inimitable. However, even though a company cannot exactly imitate someone else’s resource, it may be able to develop an equivalent resource from another source, such as Amazon internet capabilities allows it to compete against prime brick-and-mortar Barnes & Noble locations.
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Sources of Inimitability
Physical uniqueness are resources that are physically unique, therefore impossible to duplicate.
Path dependency: hard to duplicate because of all that has happened along the path followed in the development and/or accumulation of resources.
Causal ambiguity: impossible to explain what caused a resource to exist or how to re-create it.
Social complexity: resources that result from social engineering such as interpersonal relations, culture.
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Physical uniqueness = a beautiful resort location, mineral rights, or patents. Path dependency = a characteristic of resources that is developed and or accumulated through a unique series of events. See Strategy Spotlight 3.4 for an example. Causal ambiguity = a characteristic of the firm’s resources that is costly to imitate because a competitor cannot determine what the resource is and/or how it can be re-created. Google is given as an example. Social complexity = a characteristic of a firm’s resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers.
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Criteria for Sustainable Competitive Advantage
Is a resource or capability . . .
| Valuable? | Rare? | Difficult to Imitate? | Without Substitutes? | Implications for Competitiveness? |
| No | No | No | No | Competitive disadvantage |
| Yes | No | No | No | Competitive parity |
| Yes | Yes | No | No | Temporary competitive advantage |
| Yes | Yes | Yes | Yes | Sustainable competitive advantage |
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source: Adapted from Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17:99 – 120.
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Resources and capabilities must be rare and valuable as well as difficult to imitate or substitute in order for a firm to attain competitive advantages that are sustainable over time. If resources and capabilities do not meet any of the four criteria it would be difficult to develop any type of competitive advantage in the short or long run. If resources and capabilities are not difficult for competitors to imitate or substitute firms could attain some level of competitive parity. Only when all four criteria are satisfied will competitive advantages be sustained over time.
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Evaluating Firm Performance
Balanced Scorecard Analysis
Employees
Owners
Customer satisfaction
Internal processes
Innovation, learning & improvement activities
Financial perspectives
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Financial ratio analysis = a technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation. When performing a financial ratio analysis, you must take into account the firm’s performance from a historical perspective (not just at one point in time) as well as how it compares with both industry norms and key competitors. Balanced scorecard = a method of evaluating a firm’s performance using performance measures from the customers’ perspectives, as well as internal, innovation and learning, and financial perspectives.
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The Balanced Scorecard
A meaningful integration of many issues that come into evaluating 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 & learning perspective)
How do we look to shareholders? (financial perspective)
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Balanced scorecard = a method of evaluating a firm’s performance using performance measures from the customers’ perspectives, as well as internal, innovation and learning, and financial perspectives. It includes financial measures that reflect the results of actions already taken, but it complements these indicators with measures of customer satisfaction, internal processes, and the organization’s innovation and improvement activities – operational measures that drive future financial performance. The balanced scorecard approach recognizes how the interests of a variety of stakeholders can be interrelated.
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Customer Perspective vs. Internal Business Perspective
Managers articulate goals for customer concerns.
Time versus Quality
Performance and service versus Cost
Then focus on those critical internal operations that enable them to satisfy customer needs.
Business processes
Cycle time, quality, employee skills, productivity
Decisions
Coordinated actions
Key resources and capabilities
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Customer perspective = measures of firm performance that indicate how well firms are satisfying customers’ expectations. Managers must translate their general mission statements on customer service into specific measures that reflect the factors that really matter to customers. Internal business perspective = measures of firm performance that indicate how well a firm’s internal processes, decisions, and actions are contributing to customer satisfaction. Customer-based measures are important, however they must be translated into indicators of what the firm must do internally to meet customer’s expectations. The internal measures should reflect business processes that have the greatest impact on customer satisfaction.
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Innovation and Learning Perspective
Managers must make frequent changes to existing products & services as well as introduce entirely new products with extended capabilities. This requires:
Human capital (skills, talent, knowledge)
Information capital (information systems, networks)
Organization capital (culture, leadership)
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Innovation and learning perspective = measures of firm performance that indicate how well firms are changing their product and service offerings to adapt to changes in the internal and external environments. A firm’s ability to improve, innovate, and learn is tied directly to its value. Simply put, only by developing new products and services, creating greater value for customers, and increasing operational efficiencies can a company penetrate new markets, increase revenues and margins, and enhance shareholder value. A firm’s ability to do well from an innovation and learning perspective is more dependent on its intangible than tangible assets.
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Financial Perspective
Managers must measure how the firm’s strategy, implementation, and execution are indeed contributing to bottom line improvement. Financial goals include:
Profitability, growth, shareholder value
This should lead to:
Improved sales
Increased market share
Reduced operating expenses
Higher asset turnover
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Financial perspective = measures of firms financial performance that indicate how well strategy, implementation and execution are contributing to bottom-line improvement. Periodic financial statements remind managers that improved quality, response time, productivity, and innovative products benefit the firm only when they result in improved sales, increased market share, reduced operating expenses, or higher asset turnover.
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Limitations of the Balanced Scorecard
Not a “quick fix” – needs proper execution
Needs a commitment to learning
Needs employee involvement in continuous process improvement
Needs cultural change
Needs a focus on nonfinancial rather than financial measures
Needs data on actual performance
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There is general agreement that there is nothing inherently wrong with the concept of the balanced scorecard. The key limitation is that some executives may view it as a “quick fix” that can be easily installed. Implementing a balanced metrics system is an evolutionary process. It is not a one-time task that can be quickly checked off as completed. If managers do not recognize this from the beginning and fail to commit to it long-term, the organization will be disappointed. Poor execution becomes the cause of such performance outcomes. And organizational scorecards must be aligned with individuals’ scorecards to turn the balanced scorecards into a powerful tool for sustained performance. (For a variation on the balanced scorecard concept, see the Malcolm Baldrige National Quality Award at https://www.nist.gov/baldrige/baldrige-criteria-commentary. This award encourages organizations to focus on critical aspects of managing and performing as an organization, using an integrated performance management framework that addresses innovation management, intelligent risk, and strategic priorities; social media; operational effectiveness; and work systems and core competencies. Through a self-study process, organizations can submit their findings for the award in business/non profit, education, and healthcare categories.)
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