Discussion question of business strategy and policy based on the Wikipedia link that is been provided. Need answers by 10 am today

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Chapter 4

Internal Analysis: Resources, Capabilities, and Core Competencies

I. Chapter Introduction (NIB-p. 116)

A. Chapter 4 Learning Objectives (p. 116) 1. LO 4-1: Explain how shifting from an external to internal analysis of a firm can reveal

why and how internal firm differences are the root of competitive advantage.

2. LO 4-2: Differentiate among a firm’s core competencies, resources, capabilities, and activities.

3. LO 4-3: Compare and contrast tangible and intangible resources. 4. LO 4-4: Evaluate the two critical assumptions behind the resource-based view. 5. LO 4-5: Apply the VRIO framework to assess the competitive implications of a firm’s

resources.

6. LO 4-6: Evaluate different conditions that allow a firm to sustain a competitive advantage.

7. LO 4-7: Outline how dynamic capabilities can enable a firm to sustain a competitive advantage.

8. LO 4-8: Apply a value chain analysis to understand which of the firm’s activities in the process of transforming inputs into outputs generate differentiation and which drive

costs.

9. LO 4-9: Identify competitive advantage as residing in a network of distinct activities. 10. LO 4-10: Conduct a SWOT analysis to generate insights from external and internal

analysis and derive strategic implications.

B. Overview (NIB-p. 117) 1. Chapter Case 4 Five Guys’ Core Competency: “Make the Best Burger, Do Not Worry

about Cost”

2. One of the key messages of this chapter is that a firm’s ability to gain and sustain competitive advantage is partly driven by core competencies—unique strengths that

are embedded deep within a firm. (See more specific definition in Part II. B.)

a. Core competencies allow a firm to differentiate its products and services from those of its rivals, creating higher value for the customer OR offering products

and services of comparable value at lower cost.

3. In this chapter, we study analytical tools to explain why differences in firm performance exist even within the same industry.

a. When discussing industry, firm, and other effects in explaining superior performance, we noted that up to 55 percent of the overall performance

differences is explained by firm-specific effects (see Exhibit 1.1).

b. Looking inside the firm to analyze its resources, capabilities, and core competencies allows us to understand the firm’s strengths and weaknesses.

c. Linking these insights from a firm’s internal analysis to the ones derived in Chapter 3 on external analysis allows managers to determine their strategic

options.

d. Ideally, firms want to leverage their internal strengths to exploit external opportunities, and to mitigate internal weaknesses and external threats.

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4. 4.1 From External to Internal Analysis (p. 119) – Exhibit 4.1 depicts how and why we move from the firm’s external environment to its internal environment.

a. The firm’s response is dynamic. Rather than creating a onetime and thus a static fit, the firm’s internal strengths need to change with its external environment in a

dynamic fashion.

b. At each point the goal should be to develop resources, capabilities, and competencies that create a strategic fit with the firm’s environment.

II. 4.2 Core Competencies (p. 120) A. Introduction (NIB-p. 120)

1. To gain a better understanding of why and how firm differences explain competitive advantage, we begin this chapter by taking a closer look at core competencies.

a. The important point here is that competitive advantage can be driven by core competencies.

2. Although invisible by themselves, core competencies find their expression in superior products and services.

a. See your author’s discussion of the Five Guy’s featured in the Chapter Case. 3. Exhibit 4.3 identifies the core competencies of a number of companies, with

application examples.

4. See Strategy Highlight 4.1 Dr. Dre’s Core Competency: Coolness Factor that discusses the development, nurturing, honing, and leveraging of core competencies.

B. Competencies versus Core Competencies versus Distinctive Competencies (NIB) 1. A competence is an internal activity that a company performs better than other internal

activities.

a. Example 1: In all of the following examples assume that ABC Shoes and XYZ Shoes are the only leather shoe competitors in the mid-value market. If ABC

Shoes is able to provide a quality leather shoe at competitive prices within the

mid-value market, then this ability would be considered a competence. If XYZ

Shoes is able to provide a quality leather shoe at competitive prices within the

mid-value market, then this ability would be considered a competence.

2. A core competence is a well performed internal activity that is central, not peripheral, to a company’s strategy, competitiveness, and profitability. It is a unique strength

embedded deep within a firm.

a. Example 2: If we assume that ABC Shoes has a business strategy of providing quality leather shoes at a profitable, competitive price to the mid-value market,

then we can say that this is a core competence of ABC Shoes if it is able to

accomplish this strategy. In addition, if XYZ Shoes has a business strategy of

providing quality leather shoes at a profitable, competitive price to the mid-value

market, then we can say that this is a core competence of XYZ Shoes if it is able

to accomplish this strategy.

3. A distinctive competence is a competitively valuable activity that a company performs better than its rivals. It is a unique strength compared to a company’s competitors.

a. Example 3: In Example 2 above, if ABC Shoes is able to accomplish their strategy at a lower cost than XYZ Shoes, then this core competence becomes a

distinctive competence for ABC Shoes, but not for XYZ Shoes.

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C. Creating Core Competencies (NIB-p. 124) 1. Since core competencies are critical to gaining and sustaining competitive advantage, it

is important to understand how they are created.

2. Companies develop core competencies through the interplay of resources and capabilities.

a. Resources are any assets such as cash, buildings, machinery, or intellectual property that a firm can draw on when crafting and executing a strategy.

Resources can be either tangible or intangible.

b. Capabilities are the organizational and managerial skills necessary to orchestrate a diverse set of resources and to deploy them strategically. Capabilities are by

nature intangible. They find their expression in a company’s structure, routines,

and culture.

3. Exhibit 4.4 Linking Core Competencies, Resources, Capabilities, and Activities to Achieve Competitive Advantage and Superior Firm Performance shows this

relationship.

a. As shown in Exhibit 4.4, such competencies are demonstrated in the company’s activities, which can lead to competitive advantage, resulting in superior firm

performance.

(1) Activities are distinct and fine-ingrained business processes such as order taking, the physical delivery of products, or invoicing customers.

b. Each distinct activity enables firms to add incremental value by transforming inputs into goods and services (usually referred to as a company’s value chain).

c. In the interplay of resources and capabilities, resources reinforce core competencies, while capabilities allow managers to orchestrate their core

competencies. Explain

d. Strategic choices (e.g., business-level strategies and functional-level strategies/ tactics) find their expression in a set of specific firm activities, which leverage

core competencies for competitive advantage.

(1) Instructor’s Note: Achieving a competitive advantage does not necessarily mean that a core competency is a distinctive competency. In markets with

multiple competitors, Company A may have several core competencies each

of which are not performed better than a rival. However, the number of core

competencies that Company A possesses may be more than any individual

rival thereby giving it a competitive advantage and superior firm

performance.

(2) Example: Company A has developed five core competencies. Its closest rival, Company X, has developed only two core competencies. The fact that

Company A has more core competencies than its competitors gives it a

competitive advantage in the marketplace. However, when we compare

each of Company A’s five core competencies to its rivals, Company B

performs the first core competency better than Company A; Company C

performs the second core competency better than Company A; etc.

Therefore, Company A has no distinctive competencies.

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e. The arrows leading back from performance to resources and capabilities indicate that superior performance in the marketplace generates profits that can be

reinvested into the firm (retained earnings) to further hone and upgrade a firm’s

resources and capabilities in its pursuit of achieving and maintaining a strategic

fit within a dynamic environment.

4. Two other observations about Exhibit 4.4 a. First, core competencies that are not continuously nourished will eventually lose

their ability to yield a competitive advantage.

b. Second, in analyzing a company’s success in the market, it can be too easy to focus on the more visible elements or facets of core competencies such as

superior goods or services. While these are outward manifestations of core

competencies, what is even more important is to understand the invisible part of

core competencies.

(1) Later in this chapter we will look at tools to help bring more opaque aspects of a firm’s core competencies into the daylight to be seen with clarity.

III. 4.3 The Resource-Based View (p. 126) A. Introduction (NIB-p. 126)

1. Question: What are the company’s most important resources and capabilities, and will they give the company a lasting competitive advantage?

2. To gain a deeper understanding of how the interplay between resources and capabilities creates core competencies that drive firm activities leading to competitive advantage,

we turn to the resource-based view of the firm.

a. This model systematically aids in identifying core competencies. b. As the name suggests, this model sees resources as key to superior firm

performance.

3. Types of Company Resources (Instructor’s Note: Skip Exhibit 4.5) – Resources fall broadly into two categories: tangible and intangible.

a. Tangible resources have physical attributes and are visible (i.e., they can be touched or quantified). Following are the categories of tangible resources that we

will use in this class:

(1) Physical Resources: Land and real estate; manufacturing plants, equipment, and/or distribution facilities; the locations of stores, plants, or

distribution centers, including the overall pattern of their physical locations;

ownership of or access rights to natural resources (such as mineral

deposits).

(2) Financial Resources: Cash and cash equivalents; marketable securities; other financial assets such as a company’s credit rating and borrowing

capacity.

(3) Technological Assets: Patents, copyrights, production technology, innovation technologies, technological processes. (Note that technological

resources are included among tangible resources by convention, even

though some types such as copyrights and trade secrets are classified as

intangible resources by law.)

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(4) Organizational Resources: IT and communication systems (satellites, servers, workstations, etc.); other planning, coordination, and control

systems; the company’s organizational design and reporting structure.

b. Intangible resources have no physical attributes and thus are invisible (they are often embodied in something material). Following are the categories of intangible

resources that we will use in this class:

(1) Human Assets and Intellectual Capital: Education, experience, knowledge, and talent of the workforce, cumulative learning, and tacit

knowledge of employees; collective learning embedded in the organization,

the intellectual capital and know-how of specialized teams and workgroups;

the knowledge of key personnel concerning important business functions;

managerial talent and leadership skill; the creativity and innovativeness of

certain personnel.

(2) Brands, Company Image, and Reputational Assets: Brand names, trademarks, product or company image, buyer loyalty and goodwill;

company reputation for quality, service, and reliability; reputation with

suppliers and partners for fair dealing.

(3) Relationships: Alliances, joint ventures, or partnerships that provide access to technologies, specialized know-how, or geographic markets; networks of

dealers or distributors; the trust established with various partners.

(4) Company Culture and Incentive System: The norms of behavior, business principles, and ingrained beliefs within the company; the

attachment of personnel to the company’s ideals; the compensation system

and the motivation level of company personnel.

(5) Instructor’s Note: Do not use any of the intangible resource categories given in Exhibit 4.7 (p. 139).

4. Competitive advantage is more likely to spring from intangible rather than tangible resources.

a. Tangible assets, such as buildings or computer servers, can be bought on the open market by any comers who have the necessary cash.

b. However, a brand name must be built, often over long periods of time. 5. Note that the resource-based view of the firm uses the term resource much more

broadly than previously defined.

a. In the resource-based view of the firm, a resource includes any assets as well as any capabilities and competencies that a firm can draw upon when formulating

and implementing strategy.

B. Two Critical Assumptions (NIB-p. 127) 1. Two assumptions are critical in the resource-based model: (1) resource heterogeneity

and (2) resource immobility.

2. Resource Heterogeneity a. In the resource-based view, a firm is assumed to be a unique bundle of resources,

capabilities, and competencies.

b. The first critical assumption—resource heterogeneity—comes from the insight that bundles of resources, capabilities, and competencies differ across firms.

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c. This insight ensures that analysts look more critically at the resource bundles of firms competing in the same industry (or even the same strategic group), because

each bundle is unique to some extent.

3. Resource Immobility a. The second critical assumption—resource immobility—describes the insight

that resources tend to be “sticky” and do not move easily from firm to firm.

b. Because of that stickiness, the resource differences that exist between firms are difficult to replicate and, therefore, can last for a long time.

4. Combined, these insights tell us that resource bundles differ across firms, and such differences can persist for long periods.

5. Note that the critical assumptions of the resource-based model are fundamentally different from the way in which a firm is viewed in the perfectly competitive industry

structure introduced in Chapter 3.

a. In perfect competition, all firms have access to the same resources and capabilities, ensuring that any advantage that one firm has will be short-lived.

b. That is, when resources are freely available and mobile, competitors can move quickly to acquire resources that are utilized by the current market leader.

c. Although some commodity markets approach this situation, most other markets include firms whose resource endowments differ.

d. The resource-based view, therefore, delivers useful insights to managers about how to formulate a strategy that will enhance the chances of gaining a

competitive advantage.

C. The VRIO Framework (p. 128) 1. Our tool for evaluating a firm’s resource endowments is a framework that answers the

question of what resource attributes underpin competitive advantage.

a. This framework is implied in the resource-based model, identifying certain types of resources as key to superior firm performance.

b. For a resource to be the basis of a competitive advantage, it must be (1) Valuable (2) Rare (3) Costly to Imitate (4) Organized to Capture Value

c. Following the lead of Jay Barney, one of the pioneers of the resource-based view of the firm, we call this model the VRIO framework.

d. According to this model, a firm can gain and sustain a competitive advantage only when it has resources that satisfy all of the VRIO criteria.

e. Keep in mind that resources in the VRIO framework are broadly defined to include any assets as well as any capabilities and competencies that a firm can

draw upon when formulating and implementing strategy.

f. So to some degree, this presentation of the VRIO model summarizes all of our discussion in the chapter so far.

2. Exhibit 4.6 Applying the Resource-based View: A Decision Tree Revealing Competitive Implications

a. You can use this decision tree to decide if the resource, capability, or competency under consideration fulfills the VRIO requirements.

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b. As you study the following discussion of each of the VRIO attributes, you will see that the attributes accumulate.

c. Only if a firm’s managers are able to answer “yes” four times to the attributes listed in the decision tree is the resource in question a core competency that

underpins a firm’s sustainable competitive advantage.

3. Valuable – A valuable resource is one that enables the firm to exploit an external opportunity or offset an external threat. This has a positive effect on a firm’s

competitive advantage. In particular, a valuable resource enables a firm to increase its

economic value creation (V—C).

4. Rare – A resource is rare if only one or a few firms possess it. If the resource is common, it will result in perfect competition where no firm is able to maintain a

competitive advantage (see Chapter 3). A resource that is valuable but not rare can lead

to competitive parity at best. A firm is on the path to competitive advantage only if it

possesses a valuable resource that is also rare.

5. Costly to Imitate – A resource is costly to imitate if firms that do not possess the resource are unable to develop or buy the resource at a reasonable price.

a. If the resource in question is valuable, rare, and costly to imitate, then it is an internal strength and a core competency.

b. If the firm’s competitors fail to duplicate the strategy based on the valuable, rare, and costly-to-imitate resource, then the firm can achieve a temporary competitive

advantage.

c. A firm that enjoys a competitive advantage, however, attracts significant attention from its competitors. They will attempt to negate a firm’s resource advantage by

directly imitating the resource in question (direct imitation) or through working

around it to provide a comparable good or service (substitution).

(1) See your book discussion of each 6. Organized to Capture Value – The final criterion of whether a rare, valuable, and

costly-to-imitate resource can form the basis of a sustainable competitive advantage

depends on the firm’s internal structure.

a. To fully exploit the competitive potential of its resources, capabilities, and competencies, a firm must be organized to capture value—that is, it must have

in place an effective organizational structure and coordinating systems (see

Chapter 6).

b. If a firm is not effectively organized to exploit the competitive potential of a valuable, rare, and costly-to-imitate (VRI) resource, the best-case scenario is a

temporary competitive advantage (see Exhibit 4.6).

7. See Strategy Highlight 4.2 Applying VRIO: The Rise and Fall of Groupon 8. General Assumptions from Exhibit 4.6 (NIB)

a. Not Valuable: If a resource and/or capability is not valuable, it is a competitive disadvantage. The resource and/or capability may still be a competence if it is

performed better than other internal activities, but it cannot be a core competence

since it leads to a competitive disadvantage.

(1) Such a resource and/or capability would be considered a weakness.

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b. Valuable, Not Rare: If a resource and/or capability is valuable but not rare, it leads to competitive parity. The resource and/or capability probably will be both

a competence and a core competence if we assume it is central to the company’s

strategy since it leads to competitive parity.

c. Valuable + Rare, Not Costly to Imitate: If a resource and/or capability is valuable and rare, but not costly to imitate, it leads to a temporary competitive

advantage. The resource and/or capability will probably be both a competence

and core competence. Since rare means that one or a few firms possess this

resource and/or capability, it may be a distinctive competence if it allows the

company to perform better than its rivals.

d. Valuable + Rare + Costly to Imitate, Not Organized to Capture Value: If a resource and/or capability is valuable, rare, and costly to imitate, but not

organized to capture value, it leads to a temporary competitive advantage.

Since costly to imitate means that other firms to discuss this resource and/or

capability at least for the short term, then it is a distinctive competence.

e. Valuable + Rare + Costly to Imitate + Organized to Capture Value: If a resource and/or capability is valuable, rare, costly to imitate, and organized to capture

value, then it leads to a sustainable competitive advantage. By definition, such

resources and/or capabilities are distinctive competencies.

D. Isolating Mechanisms: How to Sustain a Competitive Advantage (p. 133) 1. Although VRIO resources can lay the foundation of a sustainable competitive

advantage, no competitive advantage can be sustained indefinitely.

a. Several conditions, however, can offer some protection to a successful firm by making it more difficult for competitors to imitate the resources, capabilities, or

competencies that underlie its competitive advantage:

(1) Better expectations of future resource value. (2) Path dependence. (3) Causal ambiguity. (4) Social complexity. (5) Intellectual property (IP) protection.

b. These barriers to imitation are important examples of isolating mechanisms because they prevent rivals from competing away the advantage a firm may

enjoy.

c. This link ties isolating mechanisms directly to one of the criteria in the resource- based view to assess the basis of competitive advantage: costly to imitate.

d. If one, or any combination, of these isolating mechanisms is present, a firm may strengthen its basis for competitive advantage, increasing its chance to be

sustainable over a longer period of time.

2. Better Expectations of Future Resource Value – Sometimes firms can acquire resources at a low cost, which lays the foundation for a competitive advantage later

when expectations about the future of the resource turn out to be more accurate.

3. Path Dependence – Path dependence describes a process in which the options one faces in a current situation are limited by decisions made in the past.

a. Often, early events—sometimes even random ones—have a significant effect on final outcomes.

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b. Path dependence also rests on the notion that time cannot be compressed at will. (1) While management can compress resources such as labor and R&D into a

shorter period, the push will not be as effective as when a firm spreads out

its effort and investments over a longer period.

(2) Trying to achieve the same outcome in less time, even with higher investments, tends to lead to inferior results, due to time compression

diseconomies.

c. Strategic decisions generate long-term consequences due to path dependence and time-compression diseconomies; they are not easily reversible. A competitor

cannot imitate or create core competencies quickly, nor can one buy a reputation

for quality or innovation on the open market.

4. Causal Ambiguity – Causal ambiguity describes a situation in which the cause and effect of a phenomenon are not readily apparent.

a. To formulate and implement a strategy that enhances a firm’s chances of gaining and sustaining a competitive advantage, managers need to have a hypothesis or

theory of how to compete.

b. This implies that managers need to have some kind of understanding about what causes superior or inferior performance.

c. Understanding the underlying reasons of observed phenomena is far from trivial, however.

5. Social Complexity – Social complexity describes situations in which different social and business systems interact.

a. There is frequently no causal ambiguity as to how the individual systems such as supply chain management or new product development work in isolation. They

are often managed through standardized business processes such as Six Sigma or

ISO 9000.

b. Social complexity, however, emerges when two or more such systems are combined. Copying the emerging complex social systems is difficult for

competitors because neither direct imitation nor substitution is a valid approach.

6. Intellectual Property Protection –Intellectual property (IP) protection is a critical intangible resource that can also help sustain a competitive advance.

a. Consider the five major forms of IP protection: patents, designs, copyrights, trademarks, and trade secrets.

b. The intent of IP protection is to prevent others from copying legally protected products or services.

c. In many knowledge-intensive industries that are characterized by high research and development (R&D) costs, IP protection provides not only an incentive to

make these risky and often large-scale investments in the first place, but also

affords a strong isolating mechanism that is critical to a firm’s ability to capture

the returns to investment.

d. IP protection can make direct imitation attempts difficult, if not outright illegal. e. IP protection does not last forever, however. Once the protection has expired the

invention can be used by others.

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IV. 4.4 The Dynamic Capabilities Perspective (p. 137) A. Introduction (NIB-p. 137)

1. A firm’s external environment is rarely stable (as discussed in Chapter 3). Rather, in many industries, change is fast and ferocious. Firms that fail to adapt their core

competencies to a changing external environment not only lose a competitive

advantage but also may go out of business.

2. A core competency can turn into a core rigidity if a firm relies too long on the competency without honing, refining, and upgrading as the environment changes.

a. Over time, the original core competency is no longer a good fit with the external environment, and it turns from an asset into a liability.

b. This is the reason reinvesting, honing, and upgrading resources and capabilities are so crucial to sustaining any competitive advantage (see Exhibit 4.3).

3. The dynamic capabilities perspective adds, as the name suggests, a dynamic or time element.

a. In particular, dynamic capabilities describe a firm’s ability to create, deploy, modify, reconfigure, upgrade, or leverage its resources over time in its quest for

competitive advantage.

b. Dynamic capabilities are essential to move beyond a short-lived advantage and create a sustained competitive advantage.

c. For a firm to sustain its advantage, any fit between its internal strengths and the external environment must be dynamic. That is, the firm must be able to change

its internal resource base as the external environment changes.

d. Not only do dynamic capabilities allow firms to adapt to changing market conditions, but they also enable firms to create market changes that can

strengthen their strategic position.

4. In the dynamic capabilities perspective, competitive advantage is the outflow of a firm’s capacity to modify and leverage its resource base in a way that enables it to gain

and sustain competitive advantage in a constantly changing environment.

a. Given the accelerated pace of technological change, in combination with deregulation, globalization, and demographic shifts, dynamic markets today are

the rule rather than the exception.

5. See Strategy Highlight 4.2: When Will P&G Play to Win Again? B. Exhibit 4.7: The Bathtub Metaphor (NIB-p. 139)

1. One way to think about developing dynamic capabilities and other intangible resources is to distinguish between resource stocks and resource flows.

a. In this perspective, resource stocks are the firm’s current level of intangible resources.

b. Resource flows are the firm’s level of investments to maintain or build a resource.

c. A helpful metaphor to explain the differences between resource stocks and resource flows is a bathtub that is being filled with water (see Exhibit 4.6).

(1) The amount of water in the bathtub indicates a company’s level of a specific intangible resource stock—such as its dynamic capabilities, new product

development, engineering expertise, innovation capability, reputation for

quality, and so on.

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(2) Intangible resource stocks are built through investments over time. These resource flows are represented in the drawing by the different faucets from

which water flows into the tub.

(3) How fast a firm is able to build an intangible resource—how fast the tub fills—depends on how much water comes out of the faucets and how long

the faucets are left open.

(4) In addition, how fast the bathtub fills depends on how much water leaks out of the tub. The most common way resource leakage occurs is through

employee turnover, especially if key employees leave.

d. According to the dynamic capabilities perspective, the managers’ task is to decide which investments to make over time in order to best position the firm for

competitive advantage in a changing environment.

(1) Moreover, managers also need to monitor the existing intangible resource stocks and their attrition rates.

V. 4.5 The Value Chain and Strategic Activity Systems (p. 140) A. Introduction (NIB-p. 140)

1. Question: How do value chain activities impact a company’s cost structure and customer value proposition?

2. The value chain describes the internal activities a firm engages in when transforming inputs into outputs.

a. Each activity the firm performs along the horizontal chain adds incremental value—raw materials and other inputs are transformed into components that are

assembled into finished products or services for the end consumer.

b. Each activity the firm performs along the value chain also adds incremental costs. c. A careful analysis of the value chain allows managers to obtain a more detailed

and fine-grained understanding of how the firm’s economic value creation (V –

C) breaks down into a distinct set of activities that help determine perceived value

(V) and the costs (C) to create it.

d. The value chain concept can be applied to basically any firm, from those in manufacturing industries to those in high-tech ones or service firms.

3. A firm’s core competencies are deployed through its activities (see Exhibit 4.4). a. A firm’s activities, therefore, are one of the key internal drivers of performance

differences across firms.

b. Activities are distinct actions that enable firms to add incremental value at each step by transforming inputs into goods and services.

(1) Managing a supply chain, running the company’s IT system and websites, and providing customer support are all examples of distinct activities.

(2) Activities are narrower than functional areas such as marketing, because each functional area is made up of a set of distinct activities.

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B. Michael Porter’s Generic Value Chain (NIB-p. 141) 1. As shown in the generic value chain in Appendix A, the transformation process from

inputs to outputs is composed of a set of distinct activities. (Instructor’s Note: We will

use the generic value chain in Appendix A instead of the one given to you by your

author in Exhibit 4.8.)

a. Every company’s business consists of a collection of activities undertaken in the course of producing, marketing, delivering, and supporting its product and/or

service.

(1) All the various activities that a company performs internally combined to form a value chain — so called because the underlying intent of a

company’s activities is ultimately to create value for buyers.

(2) When a firm’s distinct activities generate value greater than the costs to create them, the firm obtains a profit margin, assuming the market price the

firm is able to command exceeds the costs of value creation.

b. Each firm’s value chain needs to be modified to capture the specific activities of its business.

(1) Retail chain American Eagle Outfitters, for example, needs to identify suitable store locations, either build or rent stores, purchase goods and

supplies, manage distribution and store inventories, operate stores both in

the brick-and-mortar world and online, hire and motivate a sales force,

create payment and IT systems or partner with vendors, engage in

promotions, and ensure after-sales services including returns.

(2) A maker of semiconductor chips such as Intel, on the other hand, needs to engage in R&D, design and engineer semiconductor chips and their

production processes, purchase silicon and other ingredients, set up and

staff chip fabrication plants, control quality and throughput, engage in

marketing and sales, and provide after-sales customer support.

2. As shown in Appendix A, the value chain is divided into primary and support activities. a. The primary activities add value directly as the firm transforms inputs into

outputs.

b. The support activities add value indirectly to the transformation of inputs into outputs.

c. To help a firm achieve a competitive advantage, each distinct activity performed needs to either add incremental value to the product or service offering or lower

its relative cost.

C. Common Value Chain Activities Defined (NIB) 1. Inbound Logistics –Activities, costs, and assets associated with purchasing fuel,

energy, raw materials, parts and components, merchandise, and consumable items from

vendors; receiving, storing, and disseminating inputs from suppliers; inspection; and

inventory management.

2. Operations – Activities, costs, and assets associated with converting inputs into final products — goods and/or services (e.g., production, assembly, packaging, equipment

maintenance, facilities, operations, quality assurance, environmental protection).

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3. Distribution/Outbound Logistics – Activities, costs, and assets dealing with physically distributing the product to buyers (e.g., finished goods warehousing, order

processing, order picking and packing, shipping, delivery vehicle operations,

establishing and maintaining a network of dealers and distributors).

4. Sales and Marketing – Activities, costs, and assets related to sales force efforts, advertising and promotion, market research and planning, and dealer/distributor

support.

5. Service – Activities, costs, and assets associated with providing assistance to buyers, such as installation, spare parts delivery, maintenance and repair, technical assistance,

buyer inquiries, and complaints.

6. Procurement – Activities, costs, and assets associated with adding value to inbound logistics (e.g., purchase planning, determining standards of quality, identifying suitable

suppliers, negotiating prices, financing purchases).

a. Supply Chain Management – Supply chain management is the management of the flow of goods and services and includes all processes that transform raw

materials into final products. Thus, supply chain management encompasses both

inbound logistics and procurement.

7. Technology Development – Activities, costs, and assets associated with research and development (e.g., product R&D, process R&D, process design improvement) and

developing manufacturing techniques and automating processes (e.g., equipment

design, computer software development, telecommunications systems, computer-

assisted design and engineering, database capabilities, development of computerized

support systems).

8. Human Resource Management – Activities, costs, and assets associated with the recruitment, hiring, training, development, and compensation of all types of personnel;

labor relations activities; and development of knowledge-based skills and core

competencies.

9. Infrastructure – Activities, costs, and assets relating to general management, accounting and finance, legal and regulatory affairs, safety and security, management

information systems, forming strategic alliances and collaborating with strategic

partners, and other “overhead” functions.

D. Value Chain Analysis Example: Starbucks (NIB) 1. Inbound Logistics – The inbound logistics for Starbucks refer to company-appointed

coffee buyers selecting the finest quality coffee beans from producers in Latin

America, Africa, and Asia.

a. In the case of Starbucks, the green or unroasted beans are procured directly from the farms by the Starbucks buyers. These are transported to storage sites, after

which the beans are roasted and packaged.

b. Value is added to the beans through Starbucks’ proprietary roasting and packaging, which helps to increase their selling value. The beans are then sent to

distribution centers, a few of which are company-owned and some of which are

operated by other logistic companies.

c. The company does not outsource its procurement, ensuring high-quality standards right from the point of selection of coffee beans.

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2. Operations – Starbucks operates in more than 80 markets, either in the form of direct company-owned stores or licensed stores. (Starbucks does not follow the traditional

franchising terms.) The company has more than 32,000 stores globally. It is also the

owner of several brands, including Teavana, Seattle’s Best Coffee, and Evolution

Fresh.

a. According to its financial reports, the company generated 81% of its total net revenue during the first half of its 2020 fiscal year from its company-operated

stores while the licensed stores accounted for 11%.

3. Outbound Logistics – There is very little or no presence of intermediaries in product selling for Starbucks. The majority of the products are sold in stores. However, storage

and distribution to retail locations are important.

4. Marketing and Sales – Starbucks invests more in superior quality products and a high level of customer service than in aggressive marketing. However, need-based

marketing activities are carried out by the company during new product launches in the

form of sampling in areas around the stores.

5. Service – Starbucks aims at building customer loyalty through its in-store customer service. A signature retail objective of Starbucks has always been to provide customers

with a unique Starbucks Experience.

a. Service training is a key component of the value chain that helps to make its offerings unique. A substantial amount of value is created when baristas make

drinks for customers.

6. Procurement – Procurement is integrated across various aspects of the supply chain. Porter discusses procurement as a support activity. Many companies will establish

broad terms, requirements, and standards for all of their procurement dealings.

However, procurement relationships typically vary widely. Starbucks handles all of the

procurement for its own coffee beans, which it sees as one of its competitive

advantages.

7. Technology Development – Starbucks is very well-known for the use of technology, not only for coffee-related processes (to ensure consistency in taste and quality along

with cost savings) but to connect to its customers. Many customers use Starbucks stores

as a makeshift office or meeting place because of free and unlimited Wi-Fi.

a. Starbucks has launched several platforms where customers can ask questions, give suggestions, openly express opinions, and share experiences. Technology

helps to implement this feedback, especially in the area of its rewards program.

b. Starbucks also uses Apple’s iBeacon system, wherein customers can order a drink through the Starbucks phone app and get a notification of its readiness when they

walk in the store.

8. Human Resource Management – The committed workforce is considered a key attribute in the company’s success and growth over the years. Starbucks employees are

motivated through generous benefits and incentives. The company is known for taking

care of its workforce, a key reason for a low turnover of employees, which indicates

great human resource management. There are many training programs conducted for

employees in a setting of a work culture, which keeps its staff motivated and efficient.

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9. Infrastructure – This includes departments like management, finance, legal, etc., which are required to keep the company’s stores operational. Starbucks employs business

managers in its corporate offices. It also has store managers on-site that help to oversee

well-designed and pleasing stores complemented with good customer service provided

by the dedicated team of employees in green aprons.

E. Strategic Activity Systems (p. 143) 1. A strategic activity system conceives of a firm as a network of interconnected

activities.

2. Strategic activity systems are socially complex and causally ambiguous, thus enhancing the possibility that a competitive advantage can be sustained over time.

a. While one can easily observe several elements of a strategic activity system, the capabilities necessary to orchestrate and manage the network of distinct activities

cannot be so easily observed and therefore are difficult to imitate.

b. See the Firm A – Firm B hypothetical in your book. 3. Strategic activity systems need to evolve over time if a firm is to sustain a competitive

advantage.

4. See The Vanguard Group example in your book.

VI. 4.6 Implications for Strategic Leaders (p. 146) A. Introduction (NIB-p. 146)

1. We can combine external analysis from Chapter 3 with the internal analysis just introduced. Together the two allow you to begin formulating a strategy that matches

your firm’s internal resources and capabilities to the demands of the external industry

environment.

a. Ideally, managers want to leverage their firm’s internal strengths to exploit external opportunities, while mitigating internal weaknesses and external threats.

b. Both types of analysis in tandem allow managers to formulate a strategy that is tailored to their company, creating a unique fit between the company’s internal

resources and the external environment.

c. A strategic fit increases the likelihood that a firm is able to gain a competitive advantage. If a firm achieves a dynamic strategic fit, it is likely to be able to

sustain its advantage over time.

B. Using SWOT Analysis to Generate Insights from External and Internal Analysis (p. 146) 1. We synthesize insights from an internal analysis of the company’s strengths and

weaknesses with those from an analysis of external opportunities and threats using the

SWOT analysis.

2. A SWOT analysis allows the strategist to evaluate a firm’s current situation and future prospects by simultaneously considering internal and external factors.

a. The SWOT analysis encourages managers to scan the internal and external environments, looking for any relevant factors that might affect the firm’s current

or future competitive advantage.

b. The focus is on internal and external factors that can affect—in a positive or negative way—the firm’s ability to gain and sustain a competitive advantage.

c. To facilitate a SWOT analysis, managers use a set of strategic questions that link the firm’s internal environment to its external environment, as shown in Exhibit

4.11, to derive strategic implications.

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d. In this SWOT matrix, the horizontal axis is divided into factors that are external to the firm (the focus of Chapter 3) and the vertical axis into factors that are

internal to the firm (the focus of this chapter).

3. Steps in using the SWOT Analysis a. Step 1: Managers gather information for a SWOT analysis in order to link

internal factors (Strengths and Weaknesses) to external factors (Opportunities and

Threats).

b. Step 2: Managers use the SWOT matrix shown in Exhibit 4.9 to develop strategic alternatives for the firm using a four-step process:

(1) Focus on the Strengths/Opportunities quadrant (top left) to derive “offensive” alternatives by using an internal strength in order to exploit an

external opportunity.

(2) Focus on the Weaknesses/Threats quadrant (bottom right) to derive “defensive” alternatives by eliminating or minimizing an internal weakness

in order to mitigate an external threat.

(3) Focus on the Strengths/Threats quadrant (top right) to use an internal strength to minimize the effect of an external threat.

(4) Focus on the Weaknesses/Opportunities quadrant (bottom left) to shore up an internal weakness to improve its ability to take advantage of an external

opportunity.

c. Step 3: The strategist needs to carefully evaluate the pros and cons of each strategic alternative to select one or more alternatives to implement. Managers

need to carefully explain their decision rationale, including why other strategic

alternatives were rejected.

4. Limitation: A problem with this framework is that a strength can also be a weakness and an opportunity can also simultaneously be a threat.

a. Strategists may need to perform multiple analyses to compensate for this weakness.

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Appendix A

Michael Porter’s Generic Value Chain