Chapter 3Chapter 3
Assessing the Internal
Environment of the Firm
3-2
Agenda
• Process of internal analysis
• The primary and support activities of a firm’s value chain.
• The resource-based view of the firm
• VRIS
• Financial ratio analysis
• Balanced Scorecard
3-3The Pathway to
The Foundation
of
The Source of The Source of
ResourcesResources** TangibleTangible
** IntangibleIntangible
CapabilitiesCapabilities
Teams of ResourcesTeams of Resources
Sources of Competitive Advantage
Sources of Competitive Advantage
CoreCoreCompetenciesCompetencies
Gained through Core Competencies
Gained through Core Competencies
SustainedSustainedCompetitiveCompetitiveAdvantageAdvantage
Components of Internal AnalysisComponents of
Internal Analysis
Above-AverageReturns
Above-AverageReturns
StrategicStrategicCompetitivenessCompetitiveness
3-4
ResourcesResources** TangibleTangible
** IntangibleIntangible Components of Internal AnalysisComponents of
Internal Analysis
3-5
ResourcesResources
What a firm has to work with:
its assets, including its people and the value of its brand name
What a firm Has...
3-6
ResourcesResources
Resources represent inputs into a firm’s production process...
such as capital equipment, skills of employees, brand names, finances and talented managers
What a firm Has...
What a firm has to work with:
its assets, including its people and the value of its brand name
3-7
ResourcesResourcesWhat a firm has to work with:
its assets, including its people and the value of its brand name
Resources represent inputs into a firm’s production process...
such as capital equipment, skills of employees, brand names, finances and talented managers
“Some genius invented the Oreo. We’re just living off the inheritance.”“Some genius invented the Oreo. We’re just living off the inheritance.”
F. Ross Johnson,Former President & CEO,
RJR Nabisco
F. Ross Johnson,Former President & CEO,
RJR Nabisco
What a firm Has...
3-8
“Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson,
Former President & CEO, RJR Nabisco
Resources What a firm Has...
What a firm has to work with:
its assets, including its people and the value of its brand name
Resources represent inputs into a firm’s production process...
such as capital equipment, skills of employees, brand names, finances and talented managers
ResourcesResources
Tangible ResourcesTangible ResourcesFinancialFinancial**
PhysicalPhysical**
Human ResourcesHuman Resources**
OrganizationalOrganizational**
3-9
Tangible ResourcesTangible ResourcesFinancialFinancial**
PhysicalPhysical**
Human ResourcesHuman Resources**
OrganizationalOrganizational**
ResourcesResources What a firm Has...
What a firm has to work with:
its assets, including its people and the value of its brand name
Resources represent inputs into a firm’s production process...
such as capital equipment, skills of employees, brand names, finances and talented managers
ResourcesResources
Intangible ResourcesIntangible ResourcesTechnologicalTechnological**
InnovationInnovation**
Brand NamesBrand Names**
Corporate CultureCorporate Culture**
“Some genius invented the Oreo. We’re just living off the inheritance.” F. Ross Johnson,
Former President & CEO, RJR Nabisco
3-10
ResourcesResources** TangibleTangible
** IntangibleIntangible Components of Internal AnalysisComponents of
Internal Analysis
3-11
The Source of
ResourcesResources** TangibleTangible
** IntangibleIntangible
CapabilitiesCapabilities
Teams of ResourcesTeams of Resources
Components of Internal AnalysisComponents of
Internal Analysis
3-12
CapabilitiesCapabilities What a firm Does...
Capabilities represent:
the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.
3-13
CapabilitiesCapabilities What a firm Does...
Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.
Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.
Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.
3-14
CapabilitiesCapabilities What a firm Does...
Capabilities represent:the firm’s capacity or ability to integrate individual firm resources to achieve a desired objective.
Capabilities develop over time as a result of complex interactions that take advantage of the interrelationships between a firm’s tangible and intangible resources that are based on the development, transmission and exchange or sharing of information and knowledge as carried out by the firm's employees.
Capabilities become important when they are combined in unique combinations which create core competencies which have strategic value and can lead to competitive advantage.
3-15
The Value Chain
General administration
Human resource management
Technology development
Procurement
Inbound logistics
OperationsOutbound logistics
Marketing and sales
Service
3-16
Primary Activities
Associated with receiving, storing and distributing inputs to the product
• Location of distribution facilities
• Material and inventory control systems
• Systems to reduce time to send “returns” to suppliers
• Warehouse layout and designs
Inbound Logistics
3-17
Primary Activities
Associated with transforming inputs into the final product form
• Efficient plant operations
• Appropriate level of automation in manufacturing
• Quality production control systems
• Efficient plant layout and workflow design
Inbound Logistics
Operations
3-18
Primary Activities
Associated with collecting, storing, and distributing the product or service to buyers
• Effective shipping processes
• Efficient finished goods warehousing processes
• Shipping of goods in large lot sizes
• Quality material handling equipment
Inbound Logistics
Operations
Outbound Logistics
3-19
Primary Activities
Associated with purchases of products and services by end users and the inducements used to get them to make purchases• Highly motivated and competent sales
force
• Innovative approaches to promotion and advertising
• Selection of most appropriate distribution channels
• Proper identification of customer segments and needs
• Effective pricing strategies
Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
3-20
Primary Activities
Associated with providing service to enhance or maintain the value of the product• Effective use of procedures to solicit
customer feedback and to act on information
• Quick response to customer needs and emergencies
• Ability to furnish replacement parts
• Effective management of parts and equipment inventory
• Quality of service personnel and ongoing training
• Warranty and guarantee policies
Inbound Logistics
Operations
Outbound Logistics
Marketing and Sales
Service
3-21
Support Activities
Typically supports the entire value chain and not individual activities• Effective planning systems
• Ability of top management to anticipate and act on key environmental trends and events
• Ability to obtain low-cost funds for capital expenditures and working capital
• Excellent relationships with diverse stakeholder groups
• Ability to coordinate and integrate activities across the value chain
• Highly visible to inculcate organizational culture, reputation, and values
General Administration
3-22
Support Activities
Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel• Effective recruiting, development, and
retention mechanisms for employees
• Quality relations with trade unions
• Quality work environment to maximize overall employee performance and minimize absenteeisn
• Reward and incentive programs to motivate all employees
General Administration
Human ResourceManagement
3-23
Support Activities
Related to a wide range of activities and those embodied in processes and equipment and the product itself • Effective R&D activities for process and
product initiatives
• Positive collaborative relationships between R&D and other departments
• State-of-the art facilities and equipment
• Culture to enhance creativity and innovation
• Excellent professional qualifications of personnel
• Ability to meet critical deadlines
General Administration
Human ResourceManagement
Technology Development
3-24
Support Activities
Function of purchasing inputs used in the firm’s value chain• Procurement of raw material inputs
• Development of collaborative “win-win” relationships with suppliers
• Effective procedures to purchase advertising and media services
• Analysis and selection of alternate sources of inputs to minimize dependence on one supplier
• Ability to make proper lease versus buy decisions
General Administration
Human ResourceManagement
Technology Development
Procurement
3-25
The Value Chain
General administration
Human resource management
Technology development
Procurement
Inbound logistics
OperationsOutbound logistics
Marketing and sales
Service
3-26
Interrelationships among Value-Chain Activities within and across Organizations
• Importance of relationships among value activities
• Interrelationships among activities within the firm
• Relationships among activities within the firm and with other organizations (e.g., customers and suppliers)
3-27
Resource-Based View of the Firm
• Two perspectives
• The internal analysis of phenomena within a company
• An external analysis of the industry and its competitive environment
• Three key types of resources
• Tangible resources
• Intangible resources
• Organizational capabilities
3-28
Types of Resources
Relatively easy to identify, and include physical and financial assets used to create value for customers
• Financial resources Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity
• Physical resources Modern plant and facilities Favorable manufacturing locations State-of-the-art machinery and
equipment
Tangible Resources
3-29
• Technological resources Trade secrets Innovative production processes Patents, copyrights, trademarks
• Organizational resources Effective strategic planning
processes Excellent evaluation and control
systems
Types of Resources
Tangible Resources
Relatively easy to identify, and include physical and financial assets used to create value for customers
3-30
Types of Resources
Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time
• Human Experience and capabilities of
employees Trust Managerial skills Firm-specific practices and
procedures
Tangible Resources
Intangible Resources
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
3-31
Types of Resources
• Innovation and creativity Technical and scientific skills Innovation capacities
• Reputation Effective strategic planning processes Excellent evaluation and control
systems
Tangible Resources
Intangible Resources
Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time
3-32
Types of Resources
Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end
• Outstanding customer service
• Excellent product development capabilities
• Innovativeness of products and services
• Ability to hire, motivate, and retain human capital
Tangible Resources
Intangible Resources
Organizational Capabilities
3-33
How Resources and Capabilities Lead to Advantages
3-34
Firm Resources and Sustainable Competitive Advantages
Is the resource or capability…
Valuable
Rare
Difficult to imitate
Difficult to substitute
Implications
• Neutralize threats and exploit opportunities
• Not many firms possess
• Physically unique
• Path dependency
• Causal ambiguity
• Social complexity
• No equivalent strategic resources or capabilities
3-35
Is the Resource Valuable?
Organizational resources can be a source of competitive advantage only when they are valuable
• Enable a firm to formulate and implement strategies that improve its efficiency or effectiveness
3-36
Is the Resource Rare?
Organizational resources also possessed by competitors are not sources of competitive advantage
• Common strategies based on similar resources give no one firm an advantage
• Competitive advantages are gained only from uncommon resources, resources that are rare to other competitors
3-37
Can the Resource be Imitated?
Difficulty in imitating resources is key to value creation because it constrains competition
• Profits generated from inimitable resources are more likely to be sustainable
Physical uniqueness Path dependency Causal ambiguity Social complexity
3-38
Are Substitutes Readily Available?
There must be no strategically equivalent valuable resources that are themselves not rare or inimitable
• Substitutability may take at least two forms Competitor may be able to substitute a similar
resource that enables it to develop and implement the same strategy
Very different firm resources can become strategic substitutes (such as e-business as a substitute for physical retail facility)
3-39
Criteria for Sustainable Competitive Advantage and Strategic Implications
Valuable Rare Difficult Without Implications to Imitate Substitute for Competitiveness
No No No No Competitive disadvantage
Yes No No No Competitive parity
Yes Yes No No Temporary competitive advantage
Yes Yes Yes Yes Sustainable competitive advantage
Is a resource or capability…
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp. 99-120.
3-40
Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders
3-41
Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders
It should never be taken for granted that core competencies will continue to provide a source of competitive advantageIt should never be taken for granted that core competencies will continue to provide a source of competitive advantage
3-42
Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders
It should never be taken for granted that core competencies will continue to provide a source of competitive advantageIt should never be taken for granted that core competencies will continue to provide a source of competitive advantage
All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities
3-43
Core Competencies--Cautions and RemindersCore Competencies--Cautions and Reminders
It should never be taken for granted that core competencies will continue to provide a source of competitive advantageIt should never be taken for granted that core competencies will continue to provide a source of competitive advantage
All core competencies have the potential to become Core RigiditiesAll core competencies have the potential to become Core Rigidities
Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment
Core Rigidities are former core competencies that sow the seeds of organizational inertia and prevent the firm from responding appropriately to changes in the external environment
3-44
Evaluating Firm Performance
Two approaches for evaluating firm performance
• Financial ratio analysis Balance sheet Income statement
• Balanced scorecard (stakeholder perspective) Employees Customers Owners
3-45
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
3-46
Financial Ratio Analysis: Historical Comparisons
Exhibit 3.8 Historical Trends: Return on Sales (ROS) for a Hypothetical Company
3-47
Financial Ratio Analysis: Comparison with Industry Norms
Grocery Skilled-NursingFinancial Ratio Semiconductors Store Facilities
Quick Ratio (times) 1.5 0.5 1.1
Current ratio (times) 3.2 1.6 1.9
Total liabilities to net worth (%)34.8 114.0 93.0
Collection period (days) 54.8 2.9 40.2
Assets to sales (%) 98.1 21.2 108.7
Return on sales (%) 3.1 0.9 2.0
3-48
Financial Ratio Analysis: Comparison with Key Competitors
Sales* R&D budgetCompany (or division ($ billions) ($ billions)
P&G Drug Division $ 0.8 $ 0.38
Bristol-Myers Squibb 20.2 1.80
Pfizer 27.4 4.00
Merck 32.7 2.10
*Most recently completed fiscal year. Data: Lehman Brothers, Procter & Gamble Co.
3-49
The Balanced Scorecard
• Provides a meaningful integration of many issues that come into evaluating a firm’s 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 and learning perspective)
• How do we look to shareholders? (financial perspective)
3-50
The Balanced Scorecard
• Time
• Quality
• Performance and service
• Cost
Customer Perspective
3-51
The Balanced Scorecard
• Processes
• Cycle time
• Quality
• Employee skills
• productivity
• Decisions
• Actions
• Coordination
• Resources and capabilities
Customer Perspective
Internal BusinessPerspective
3-52
The Balanced Scorecard
• Introduction of new products and services
• Greater value for customers
• Increased operating efficiencies
Customer Perspective
Internal BusinessPerspective
Innovation and Learning Perspective
3-53
The Balanced Scorecard
• Profitability
• Growth
• Shareholder value
• Increased market share
• Reduced operating expenses
• Higher asset turnover
Customer Perspective
Internal BusinessPerspective
Innovation and Learning Perspective
Financial Perspective