Chapter 5

1. Chapter 5 Internal Analysis

2. Chapter Topics • Resource-based View of the Firm • Value Chain Analysis • SWOT Analysis • Internal Analysis: Making Meaningful Comparisons

3. Ingredients Critical to Successful Strategy Be consistent with conditions in the competitive environment Strategy must … Place realistic requirements on the firm’s resources Be carefully executed

4. 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

5. 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

6. Ex. 5-2: Examples of Different Resources (selected)

7. 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? What Makes a Resource Valuable?

8. 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

9. 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

10. 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

11. 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

12. 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 Ex. 5-6: Key Resources Across Functional Areas (Selected)

13. 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 Ex. 5-6 (contd.)

14. 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 Ex. 5-6 (contd.)

15. 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

16. 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

17. 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

18. Ex. 5-7: The Value Chain General Administration Human Resource Management Margin Support Activities Research, Technology, and Systems Development Procurement Inbound Logistics Outbound Logistics Operations Marketing and Sales Service Margin Primary Activities

19. 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

20. 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 Ex. 5-10: Possible Factors for Assessing Sources of Differentiation in Primary and Support Activities of the Value Chain(selected items)

21. 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 Ex. 5-10 (contd.)

22. Ex. 5-10 (contd.)

23. 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 Ex. 5-10 (contd.)

24. SWOT Analysis Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation Opportunities A major favorable situation in a firm’s environment Threats A major unfavorable situation in a firm’s environment Weaknesses A limitation or deficiency in one or more resources or competencies relative to competitors Strengths A resource advantage relative to competitors and the needs of markets firm serves

25. Ex. 5-12: SWOT Analysis Diagram Numerous environmental opportunities Cell 3: Supports a turnaround-oriented strategy Cell 1: Supports an aggressive strategy Critical internal weaknesses Substantial internal strengths Cell 4: Supports a defensive strategy Cell 2: Supports a diversification strategy Major environmental threats

26. 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

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

28. Ex. 5-13 (contd.)

29. Ex. 5-13 (contd.)

30. Ex. 5-13 (contd.)

31. Ex. 5-13 (contd.)