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Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
Assessing the Internal Environment of the Firm
chapter 3
Learning Objectives
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.
3-2
Learning Objectives
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.
LO3.6 The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms.
LO3.7 The value of the “balanced scorecard” in recognizing how the interests of a variety of stakeholders can be interrelated.
3-3
The Importance of the Internal 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?
3-4
The Limitations of SWOT Analysis
Strengths may not lead to an advantage SWOT’s focus on the external
environment is too narrow SWOT gives a one-shot view of a moving
target SWOT overemphasizes a single
dimension of strategy
3-5
Value-Chain Analysis
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
3-6
Example: Streamlining the Value Chain
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
3-7
Value-Chain Analysis
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
3-8
Question?
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
3-9
Value-Chain Analysis
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
3-10
The Value Chain
Exhibit 3.1 The Value Chain: Primary and Support ActivitiesSource: 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.
3-11
Primary Activity: Inbound Logistics
Inbound logistics is primarily associated with receiving, storing & distributing inputs to the product: Material handling Warehousing Inventory control Vehicle scheduling Returns to suppliers
3-12
Primary Activity: Operations
Operations include all activities associated with transforming inputs in to the final product form: Machining Packaging Assembly Testing or quality control Printing Facility operations
3-13
Primary Activity: Outbound Logistics
Outbound logistics includes collecting, storing, & distributing the product or service to buyers: Finished goods Warehousing Material handling Delivery vehicle operation Order processing Scheduling & distribution
3-14
Primary Activity: Marketing & Sales
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
3-15
Primary Activity: Service
Service includes all actions associated with providing service to enhance or maintain the value of the product: Installation Repair Training Parts supply Product adjustment
3-16
Support Activity: Procurement
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
3-17
Support Activity: Technology 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
3-18
Support Activity: Human Resource 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
3-19
Support Activity: General 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
3-20
Interrelationships Among Value-Chain Activities
Interrelationships among activities within the firm
Relationships among activities within the firm and with other stakeholders such as customers & suppliers
Managers must not ignore the importance of interrelationships among value-chain activities
Expand the
value chain
by
exchanging
resources
3-21
Example: The Value Chain in Service Organizations
Exhibit 3.4 Some Examples of Value Chains in Service Industries
3-22
Resource-Based View of the Firm
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
3-23
Types of Firm Resources
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
3-24
Types of Firm Resources
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
3-25
Types of Firm Resources
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
3-26
Question?
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.
3-27
Firm Resources and Sustainable Competitive Advantages
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
3-28
Sources of Inimitability
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
3-29
Criteria for Sustainable Competitive Advantage
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic ImplicationsSource: Adapted from Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17:99 – 120.
3-30
The Generation and Distribution of the Firm’s
Profits Four factors help explain the extent to
which employees and managers will be able to obtain a proportionately high level of the profits that they generate: Employee bargaining power Employee replacement cost Employee exit costs Manager bargaining power
3-31
Evaluating Firm Performance
Balance sheet Income statement Market valuation Historical comparison Comparison with
industry norms Comparison with key
competitors
Employees Owners Customer satisfaction Internal processes Innovation, learning &
improvement activities Financial perspectives
Financial Ratio Analysis
Balanced Scorecard Stakeholder Perspective
3-32
Financial Ratio Analysis
Five types of financial ratios Short-term solvency or liquidity Long-term solvency measures Asset management or turnover Profitability Market value
Meaningful ratio analysis must include: Analysis of how ratios change over time How ratios are interrelated
3-33
Five Types of Financial Ratios
Exhibit 3.9 A Summary of Five Types of Financial Ratios
3-34
The Balanced Scorecard
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)
3-35
Customer Perspective
Managers must articulate goals for four key categories of customer concerns: Time Quality Performance and service Cost
3-36
Internal Business Perspective
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
3-37
Innovation and Learning 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)
3-38
Financial Perspective
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
3-39
Limitations of the Balanced 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
3-40