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Strategic ManagementPEARCE & ROBINSON
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter 5
Internal Analysis
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Chapter Topics
• Resource-based View of the Firm• Value Chain Analysis• SWOT Analysis• Internal Analysis: Making Meaningful
Comparisons
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ingredients Critical to Successful Strategy
Strategy must …
Be consistent with conditions in the
competitive environment
Place realistic requirements on
the firm’s resources
Place realistic requirements on
the firm’s resources
Be carefully executed
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What is the Resource-based View of the Firm?
Firms differ in fundamental ways because each firm possesses a unique “bundle” of resources –
tangible and intangible assets and organizational capabilities to make
use of those assets
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
The Three Basic Resources• Tangible assets
• Easiest to identify and often found on a firm’s balance sheet
• Include physical and financial assets• Examples: production facilities, raw materials, financial
resources
• Intangible assets• Cannot be seen or touched• Often very critical in creating competitive advantage• Examples: brand names, company reputation, company
morale
• Organizational capabilities• Involve skills – ability to combine assets, people, and
processes – used to transform inputs into outputs
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-2: Examples of Different Resources (selected)
Tangible Assets Intangible Assets Organizational Capabilities
Hampton Inn’s reservation system
Budweiser’s brand name
Dell Computer’s customer service
Ford Motor’s cash reserves
Dell Computer’s reputation
Wal-mart’s purchasing and inbound logistics
3M’s patents Nike’s advertising with LeBron James
Sony’s product development process
Georgia Pacific’s land holdings
Katie Couric as NBC’s “Today” host
Coke’s global distribution coordination
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What Makes a Resource Valuable?
• Competitive superiority: Does the resource help fulfill a customer’s need better than those of the firm’s competitors?
• Resource scarcity: Is the resource in short supply?
• Inimitability: Is the resource easily copied or acquired?
• Appropriability: Who actually gets the profit created by a resource?
• Durability: How rapidly will the resource depreciate?
• Substitutability? Are other alternatives available?
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Isolating Mechanisms
• Physically unique resources• Resources virtually impossible to imitate
• E.g., one-of-a-kind real estate location, mineral rights, patents
• Path-dependent resources– Resources that must be created over time in a
manner that is often expensive and difficult to accelerate
– E.g., Dell Computer’s system of direct sales of customized PCs via the Internet, Coca-Cola’s brand name, Gerber Baby Food’s reputation for quality
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Isolating Mechanisms
• Causal ambiguity• Situations where it is difficult for competitors to
understand how a firm has created its advantage
• E.g., Southwest Airlines’ approach• Same plane, routes, gate procedures, number of
attendants
• Culture of fun, family, and frugal yet focused service
• Economic deterrence• Involves large capital investments in capacity to
produce products or services in a given market that are scale sensitive
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-4: Resource Inimitability(Adapted)
• Easy to imitate• Cash, commodities
• Can be imitated (but may not be)• Capacity preemption, economies of scale
• Difficult to imitate• Brand loyalty, employee satisfaction,
reputation for fairness
• Cannot be imitated• Patents, unique locations, unique assets
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Guidelines: Using the RBV in Internal Analysis
• Disaggregate resources – break them down into more specific competencies rather than use broad categories
• Utilize a functional perspective in disaggregating tangible and intangible assets and organizational capabilities
• Look at organizational processes and combinations of resources, not only at isolated assets or capabilities
• Use the value chain approach to uncover potentially valuable capabilities, activities, and processes
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-6: Key Resources Across Functional Areas (Selected)
Marketing
• Firm’s products/services
• Concentration of sales in a few products or a few customers
• Ability to gather needed information about markets
• Market share
• Product-service mix and expansion potential
• Channels of distribution
• Effective sales organization
Financial and Accounting
• Ability to raise short-term and long-term capital; debt-equity
• Corporate-level resources
• Cost of capital relative to competitors
• Tax considerations
• Relations with owners, investors, and stockholders
• Leverage position
• Cost of entry and barriers to entry
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-6 (contd.)
Production, Operations, Technical
• Raw materials cost and availability, supplier relationships
• Inventory control systems
• Location, layout, and use of facilities
• Economies of scale
• Technical efficiency of facilities
• Effectiveness of subcontracting use
• Degree of vertical integration
Personnel
• Management personnel
• Employees’ skills and morale
• Labor relations costs compared to competitors
• Efficiency and effectiveness of personnel policies
• Effectiveness of incentives used to motivate performance
• Ability to level peaks and valleys of employment
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-6 (contd.)
Quality Management
• Relationships with suppliers, customers
• Internal practices to enhance quality of products and services
• Procedures for monitoring quality
Information Systems
• Timeliness and accuracy of information about sales, operations, cash, and suppliers
• Relevance of information for tactical decisions
• Information to manage quality issues, customer service
• Ability of people to use information provided
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-6 (contd.)
Organization and General Management• Organizational structure• Firm’s image and prestige• Firm’s record in achieving objectives• Organization of communication system• Organizational climate and culture• Use of systematic procedures in decision
making• Top management skills, capabilities, and
interest• Strategic planning system• Intra-organizational synergy
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What is a Value Chain?
The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
What is Value Chain Analysis?
• Focuses on how a business creates customer value by examining contributions of different internal activities to that value
• Divides a business into a set of activities within the business– Starts with inputs a firm receives
– Finishes with firm’s products or services and after-sales service to customers
• Allows for better identification of a firm’s strengths and weaknesses since the business is viewed as a process
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-7: The Value Chain
General Administration
Human Resource ManagementResearch, Technology, and Systems Development
Procurement
Inbound Logistics
Operations Outbound Logistics
Marketing and Sales
Service
Mar
gin
Margin
Primary Activities
Sup
port
Ac t
ivit
ies
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Conducting a Value Chain Analysis
• Identify activities
• Allocate costs
• Recognize the difficulty in activity-based cost accounting
• Identify the activities that differentiate the firm
• Examine the value chain
• Develop meaningful comparisons to use when evaluating value activities
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-10: Possible Factors for Assessing Sources of Differentiation in Primary and Support Activities of the Value
Chain (selected items)
General Administration• Capability to identify new
product market opportunities and potential environmental threats
• Quality of strategic planning system to achieve corporate objectives
• Ability to obtain relatively low-cost funds for capital expenditures and working capital
Human Resource Management
• Effectiveness of procedures for recruiting, training, and promoting all levels of employees
• Appropriateness of reward system for motivating and challenging employees
• A work environment minimizing absenteeism and keeping turnover low
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-10 (contd.)
Technology Development
• Success of R&D activities in leading to product and process innovation
• Quality of working relationships between R&D personnel and other departments
• Timeliness of technology development activities in meeting critical deadlines
Procurement
• Development of alternate sources for inputs to minimize dependence on a single supplier
• Procurement of raw materials (1) on a timely basis, (2) at lowest possible cost, and (3) at acceptable levels of quality
• Procedures for procurement of plant, machinery, and buildings
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-10 (contd.)
Inbound Logistics Operations Outbound Logistics
Soundness of material and inventory control systems
Productivity of equipment compared to key competitors
Timeliness and efficiency of delivery of finished goods and services
Efficiency of raw material warehousing activities
Appropriate automation of production processes
Efficiency of finished goods warehousing activities
Effectiveness of production control systems to improve quality and improve costs
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-10 (contd.)
Marketing and Sales• Effectiveness of research to
identify customer segments and needs
• Innovation in sales promotion and advertising
• Evaluation of alternate distribution channels
• Motivation and compensation of sales force
• Development of quality image and favorable reputation
Service
• Means to solicit customer input for product improvements
• Promptness of attention to customer complaints
• Appropriateness of warranty and guarantee policies
• Quality of customer education and training
• Ability to provide replacement parts and repair services
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
SWOT Analysis
Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation
OpportunitiesA major favorable situation in a firm’s environment
ThreatsA major unfavorable situation in a firm’s environment
StrengthsA resource advantage relative to competitors and the needs of markets firm serves
WeaknessesA limitation or deficiency in one or more resources or competencies relative to competitors
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-12: SWOT Analysis Diagram
Numerous environmental opportunities
Major environmental threats
Critical internal weaknesses
Substantial internal
strengths
Cell 3: Supports a turnaround-oriented
strategy
Cell 4: Supports a defensive strategy
Cell 1: Supports an aggressive
strategy
Cell 2: Supports a diversification
strategy
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Internal Analysis: Making Meaningful Comparisons
Perspectives to use
1. Comparison with past performance
2. Stages of industry evolution
3. Benchmarking – comparison with competitors
4. Comparison with success factors in
industry
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-13: Sources of Distinctive Competence at Different Stages of Industry Evolution
Functional Area
Introduction Growth Maturity Decline
Marketing Resources/skills to create widespread awareness and find acceptance from customers ; advantageous access to distribution
Ability to establish brand recognition, find niche, reduce price, solidify strong distribution relations, and develop new channels
Skills in aggressively promoting products to new markets and holding existing markets; pricing flexibility; skills in differentiating products and holding customer loyalty
Cost effective means of efficient access to selected channels and markets; strong customer loyalty or dependence; strong company image
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-13 (contd.)
Functional Area
Introduction Growth Maturity Decline
Production operations
Ability to expand capacity effectively, limit number of designs, develop standards
Ability to add product variants, centralize production, or otherwise lower costs; ability to improve product quality; seasonal subcontracting capacity
Ability to improve product and reduce costs; ability to share or reduce capacity; advantageous supplier relationships; subcontracting
Ability to prune product line; cost advantage in production, location or distribution; simplified inventory control; subcontracting or long production runs
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-13 (contd.)
Functional Area
Introduction Growth Maturity Decline
Finance Resources to support high net cash overflow and initial losses; ability to use leverage effectively
Ability to finance rapid expansion, to have net cash outflows but increasing profits; resources to support product improvements
Ability to generate and redistribute increasing net cash inflows; effective cost control systems
Ability to reuse or liquidate unneeded equipment; advantage in cost of facilities; control system accuracy; streamlined management control
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-13 (contd.)
Functional Area
Introduction Growth Maturity Decline
Personnel Flexibility in staffing and training new management; existence of employees with key skills in new products or markets
Existence of an ability to add skilled personnel; motivated and loyal workforce
Ability to cost effectively, reduce workforce, increase efficiency
Capacity to reduce and reallocate personnel
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McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc., All Rights Reserved.
Ex. 5-13 (contd.)
Functional Area
Introduction Growth Maturity Decline
Engineering and R&D
Ability to make engineering changes, have technical bugs in product and process resolved
Skill in quality and new feature development; ability to start developing successor product
Ability to reduce costs, develop variants, differentiate products
Ability to support other grown areas or to apply product to unique customer needs
Key functional area and strategy focus
Engineering: market penetration
Sales: consumer loyalty; market share
Production efficiency: successor products
Finance: maximum investment recovery