Assessing Internal Environments

3

Assessing the Internal Environment of the Firm

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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.

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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)

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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

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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.

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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

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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

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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)

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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

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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

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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

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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

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Types of Resources:
Intangible Resources

• Innovation and creativity
• Technical and scientific skills
• Innovation capacities
• Reputation
• Brand name
• Reputation with customers
• Reputation with suppliers

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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

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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

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Question

In the bookseller industry, can different firm resources become strategic substitutes for Amazon.com?

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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.

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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

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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

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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)

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Customer Perspective

• Time
• Quality
• Performance and service
• Cost

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Internal Business Perspective

• Processes
• Cycle time
• Quality
• Employee Skills
• Productivity
• Decisions
• Actions
• Coordination
• Resources and capabilities

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Innovation and Learning Perspective

• Introduction of new products and services
• Greater value for customers
• Increased operating efficiencies

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Example

• The world’s 10 most innovative companies, according to Business Week in 2007 are:
• Apple
• Google
• Toyota Motor
• General Electric
• Microsoft
• Proctor & Gamble
• 3M
• Walt Disney Co.
• IBM
• Sony

Source: www.businessweek.com

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Financial Perspective

• Profitability
• Growth
• Shareholder value
• Increased market share
• Reduced operating expenses
• Higher asset turnover

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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

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Assessing the Internal Environment of the Firm