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CHAPTER 5

Internal Analysis

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Chapter Topics

• Resource-based View of the Firm• SWOT Analysis• Value Chain Analysis• Internal Analysis: Making Meaningful

Comparisons

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Ingredients Critical to Successful Strategy

Be consistent with conditions in the

competitive environment

Strategy must …

Place realistic requirements on

the firm’s resources

Place realistic requirements on

the firm’s resources

Be carefully executed

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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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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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Ex. 5-2: Examples of Different Resources

(selected)

Tangible Assets Intangible Assets Organizational Capabilities

Hampton Inn’s reservation system

Nike’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 Wendy’s advertising with Dave Thomas

Sony’s product development process

Georgia Pacific’s land holdings

Jack Welch as GE’s leader

Coke’s global distribution coordination

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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?

• Imitatability: 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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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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Ex. 5-4: Resource Imitatability(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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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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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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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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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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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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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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Ex. 5-7: SWOT Analysis Diagram

Numerous environmental opportunities

Major environmental threats

Critical internal weaknesses

Substantial internal

strengthsCell 2: Supports a diversification

strategy

Cell 1: Supports an aggressive

strategy

Cell 3: Supports a turnaround-oriented

strategy

Cell 4: Supports a defensive strategy

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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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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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Ex. 5-8: The Value Chain

General AdministrationHuman Resource Management

Research, Technology, and Systems DevelopmentProcurement

Inbound Logistics

Operations Outbound Logistics

Marketing and Sales

Service

Marg

in

Margin

Supp

ort A

ctiv

ities

Primary Activities

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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• Compare to competitors

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Ex. 5-11: 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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Ex. 5-11 (contd.)

ProcurementTechnology 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

• 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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Ex. 5-11 (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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Ex. 5-11 (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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Internal Analysis: Making Meaningful Comparisons

1. Comparison with past performance

4. Comparison with success factors in

industry

2. Stages of industry evolution

Perspectives to use

3. Benchmarking –comparison with competitors

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Ex. 5-13: Sources of Distinctive Competence at Different Stages of

Industry Evolution

Introduction Growth MaturityFunctional Area

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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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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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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Ex. 5-13 (contd.)

Functional Area

Introduction Growth Maturity Decline

Personnel Ability to cost effectively, reduce workforce, increase efficiency

Capacity to reduce and reallocate 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

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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