Assessing the
Internal
Environment
of the Firm
chapter 3
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education .
Learning Objectives
3-2
After reading this chapter, you should have a
good understanding of:
LO3.1 The benefits and limitations of SWOT analysis in
conducting an internal analysis of the firm.
LO3.2 The primary and support activities of a firm’s value
chain.
LO3.3 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.
Learning Objectives
3-3
LO3.4 The resource-based view of the firm and the
different types of tangible and intangible resources, as
well as organizational capabilities.
LO3.5 The four criteria that a firm’s resources must
possess to maintain a sustainable advantage and how
value created can be appropriated by employees and
managers.
LO3.6The value of the “balanced scorecard” in recognizing
how the interests of a variety of stakeholders can be
interrelated.
The Importance of the Internal
3-4
Environment
Consider…
Which activities must a firm effectively
manage and integrate in order to
attain competitive advantages in the
marketplace?
Which resources and capabilities must
a firm create and nurture in order to
sustain a competitive advantage?
The Limitations of SWOT Analysis
3-5
The Limitations of SWOT Analysis
3-6
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
Value-Chain Analysis
3-7
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
Example: Streamlining the Value Chain
3-8
Example: Streamlining the Value Chain
3-9
IBM & SAP have teamed up to help firms
reduce value chain inefficiencies &
improve operational effectiveness
Benefits of value chain streamlining:
Commonality between parts & suppliers
Integration of sales forecasting & inventory
management
Lowered transaction, infrastructure &
operating costs
Deliver products to market faster
Value-Chain Analysis
3-10
Primary activities contribute to the
physical creation of the product or
service; the sale & transfer to the buyer;
and service after the sale:
Value-Chain Analysis
3-11
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
Question?
3-12
In assessing its primary activities, an
airline would examine:
A. Employee training programs
B. Baggage handling
C. Criteria for lease versus purchase decisions
D. The effectiveness of its lobbying activities
Value-Chain Analysis
3-13
Support activities either add value by
themselves or add value through
important relationships with both primary
activities & other support activities:
Value-Chain Analysis
3-14
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
The Value Chain
3-15
Exhibit 3.1 The Value Chain: Primary and Support Activities
Source: Reprinted with permission of The Free Press, a division of Simon & Schuster Inc., from Competitive
Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The
Free Press. All rights reserved.
Firm
infrastructure
NFL recruits top talent after generating hype
Human resource
management Vivid uses exclusivity contract to secure “beautiful star”
SAS low turnover rate through great benefits
UPS using technology for cost-cutting efficiency/ Dyson’s cyclone,
Technology
development
digital motor, and ball pivot/Nationwide GPS imaging for disaster
claims
Starbucks acquiring inputs from ethical sources
Procurement
Costco ‘s dual C.F. Martin IKEA’s flat HiltonToHome.co “Ace, the helpful
inventory leverages pack m increases brand place”
warehouse/retail flexible furniture aweareness Delta Airlines
store construction allows MyMacys additional tier on
methods customers to program helps loyalty program
Toyota transport in stores adapt to eBay’s innovations
Production car local tastes on the website for
System Ozarka water De Beers trying to search and
Limmer home drive demand evaluation of sellers
handcrafted delivery
boots Encore Wire
central
warehouse
Inbound logistics Operations Outbound Marketing and Service
logistics sales
16
Primary Activity: Inbound Logistics
3-17
Inbound logistics is primarily associated
with receiving, storing & distributing
inputs to the product:
Material handling
Warehousing
Inventory control
Vehicle scheduling
Returns to suppliers
Primary Activity: Operations
3-18
Operations include all activities associated
with transforming inputs in to the final
product form:
Machining
Packaging
Assembly
Testing or quality control
Printing
Facility operations
Primary Activity: Outbound Logistics
3-19
Outbound logistics includes collecting,
storing, & distributing the product or
service to buyers:
Finished goods
Warehousing
Material handling
Delivery vehicle operation
Order processing
Scheduling & distribution
Primary Activity: Marketing & Sales
3-20
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
Primary Activity: Service
3-21
Service includes all actions associated
with providing service to enhance or
maintain the value of the product:
Installation
Repair
Training
Parts supply
Product adjustment
Support Activity: Procurement
3-22
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
Support Activity: Technology
3-23
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
Organizational culture to enhance creativity
& innovation
Support Activity: Human Resource
3-24
Management
Human resource management consists of
activities involved in recruitment, hiring,
training & development, & compensation
of all types of personnel:
Effective employee retention mechanisms
Quality relations with trade unions
Reward & incentive programs to motivate all
employees
Support Activity: General
3-25
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
Interrelationships Among Value-
3-26
Chain Activities
Managers must not ignore the importance of
interrelationships among value-chain activities
Interrelationships Relationships
among activities among activities
within the firm within the firm and
the with other
n d by
p a in stakeholders such
Ex cha ing as customers &
ue ang es
l
v exch ourc
a suppliers
res
Value Chain
Uses
27
Value Chain
Uses
Internal Analysis
Define New Business
Competitor Analysis
Margin Analysis
Other Examples Example2
Coach
Caterpillar
Southwest versus Wal Mart
28
Example: The Value Chain in Service
3-29
Organizations
Exhibit 3.4 Some Examples of Value Chains in Service Industries
Resource-Based View of the Firm
3-30
The resource-based view of the firm (RBV)
Combines an internal analysis of phenomena
within a company
With an external analysis of the industry & its
competitive environment
Resources can lead to a competitive
advantage
If they are valuable, rare, hard to duplicate
When tangible resources, intangible resources,
& organizational capabilities are combined
Types of Firm Resources
3-31
Tangible resources are assets that are
relatively easy to identify:
Types of Firm Resources
3-32
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 & control systems
Types of Firm Resources
3-33
Intangible resources are difficult for
competitors to account for or imitate – are
embedded in unique routines & practices:
Types of Firm Resources
3-34
Intangible resources are difficult for
competitors to account for or imitate – are
embedded in unique routines & practices:
Human resources: trust, experience &
capabilities of employees; managerial skills &
effectiveness of work teams
Innovation resources: technical & scientific
expertise & ideas; innovation capabilities
Reputation resources: brand names,
reputation for fairness with suppliers;
reliability & product quality with customers
Types of Firm Resources
3-35
Organizational capabilities are competencies
or skills that a firm employs to transform
inputs into outputs; 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
Question?
3-36
Gillette combines several technologies to
attain unparalleled success in the wet
shaving industry. This is an example of
their
A. tangible resources.
B. intangible resources.
C. organizational capabilities.
D. strong primary activities.
Firm Resources and Sustainable
Competitive Advantages
3-37
Firm Resources and Sustainable
Competitive Advantages
3-38
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
Sources of Inimitability
3-39
Sources of Inimitability
3-40
Physical uniqueness: resources that are
physically unique
Path dependency: scarce because of all that
has happened along the path followed in a
resource’s development and/or
accumulation
Causal ambiguity: impossible to explain
what caused it to exist or how to re-create it
Social complexity: a result of social
engineering such as interpersonal relations
Criteria for Sustainable
3-41
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.
Evaluating Firm Performance
3-42
Balanced Scorecard
Financial Ratio Analysis
Stakeholder Perspective
Balance sheet Employees
Income statement Owners
Market valuation Customer satisfaction
Historical comparison Internal processes
Comparison with Innovation, learning &
industry norms improvement activities
Comparison with key Financial perspectives
competitors
Financial Ratio Analysis
3-43
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
Five Types of Financial Ratios
3-44
Exhibit 3.9
A Summary
of Five Types
of Financial
Ratios
The Balanced Scorecard
3-45
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)
Customer Perspective
3-46
Managers must articulate goals for four
key categories of customer concerns:
Time
Quality
Performance and service
Cost
Internal Business Perspective
3-47
Managers must 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
Innovation and Learning
3-48
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)
Financial Perspective
3-49
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
Improved sales
Increased market share
Reduced operating expenses
Higher asset turnover
Limitations of the Balanced
3-50
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
