The Internal Environment

1. The Internal Environment The Strengths and Weakness of the Firm • A Firm’s Tangible & IntangibleResources combine with Firm’s Capabilities to create Distinctive Competencies • Distinctive Competencies – those activities that a firm performs better than any competing firm

2. The Internal Environment The Strengths and Weakness of the Firm • Sustained Competitive Advantage – firms that possess and exploit costly to imitate, rare, and valuable resources & capabilities in choosing and implementing their strategies may enjoy a period of sustained competitive advantage and above normal economic profit.

3. The Internal Environment The Strengths and Weakness of the Firm Tangible Resources: • Dow Chemical’s research laboratory and facilities • Intel’s semiconductor fabrication facilities • AT&T’s network of wire, cable, and satellites…

4. The Internal Environment The Strengths and Weakness of the Firm Intangible Resources: • Toyota’s well-known and trusted brand names, • New Season’s good reputation, • Intel’s knowledgeable and creative workforce, • Sun Microsystems’ unifying corporate culture, • Subway’s international experience with different country’s regulations on franchising, • Norm Thompson Outfitters’ visionary leader with strong motivation and communications skills,…

5. The Internal Environment The Strengths and Weakness of the Firm Capabilities • Emerge over time through complex interaction between and among tangible and intangible resources. • Become stronger and more valuable strategically through repetition and practice. • Skills and knowledge of firm’s employees, including functional expertise (human capital)

6. The Internal Environment The Strengths and Weakness of the Firm Capabilities Examples: • Toyota’s efficient distribution systems - Just-in-time (JIT) delivery, strong supplier relationships, and well-trained inventory specialists. • L.L. Bean’s customer segmentation procedures and systems - database management systems, effective market research efforts and strong supplier relationships. • Nike’s new product development procedures – creative workforce and innovation-driven culture, strong leadership, and effective market research.

7. The Internal Environment The Strengths and Weakness of the Firm Distinctive Competencies: The VRIO Framework • Question of Value: Do a firm’s resources and capabilities enable the firm to respond to neutralize external threats and/or capitalize on external opportunities? • Example: Are InFocus’ engineers and marketing staff able to develop and sell home-based projector systems before its competitors?

8. The Internal Environment The Strengths and Weakness of the Firm Distinctive Competencies: The VRIO Framework • Question of Rarity: Is a resource or capability currently controlled by only a small number of competing firms? • Example: Does InFocus have the technical expertise and market access that other firms do not have to innovate and sell home-based projector systems?

9. The Internal Environment The Strengths and Weakness of the Firm Distinctive Competencies: The VRIO Framework • Question of Inimitability: Do firms without the resource or capability face a cost disadvantage in obtaining or developing it? • Example: Is it quite expensive for Toshiba to internally develop the expertise to manufacture home-based projector systems?

10. The Internal Environment The Strengths and Weakness of the Firm Distinctive Competencies: The VRIO Framework • Question of Organization: Are a firm’s other policies and procedures organized to support the use of its valuable, rare, and costly to imitate resources and/or capabilities? • Example: Are InFocus’ organizational structure and compensation policies appropriate to support its efforts to develop, manufacture and distribute home-based projector systems?

11. The Internal Environment The Strengths and Weakness of the Firm Value Chain Analysis • Examines contributions of individual activities to overall level of customer value and ultimately financial performance. • Customer value: product differentiation, low cost, and/or responsiveness

12. The Internal Environment The Strengths and Weakness of the Firm Value Chain Analysis • Primary Activities • Inbound Logistics • Operations • Outbound Logistics • Marketing and Sales • Customer Service • Secondary Activities • Firm Infrastructure • Human Resource Management • Technology Development • Procurement

15. The Internal Environment • So strengths and weaknesses are based on how well value chain activities are performed • Resources and capabilities determine the performance of value chain activities. Look at… • Corporate culture and Leadership • Marketing management issues • Financial management issues • R&D management issues • HR management issues • Operations management issues • Information systems management issues • Stakeholder management issues

16. The Internal Environment The Strengths and Weakness of the Firm Is a resource or capability… Costly to Exploited Competitive Valuable? Rare? Imitate? By Firm? Implications No -- -- No Comp. Disadv. Yes No -- Comp. Parity Yes Yes No Temp Comp. Adv. Yes Yes Yes Yes Sustained Comp. Adv.

17. The Internal Environment Life Expectancy of SustainedCompetitive Advantage Length of Innovation Cycle the faster the cycle, the easier it is to take away competitive advantage Example: New generation of cameras born about every 10 months Number of Dimensions of Customer Value the more dimensions, the easier it is for competitors to find ways of eroding competitive advantage Example: An I-beam is an I-beam, but an automobile comes in many shapes, sizes, etc.

18. The Internal Environment Life Expectancy of Sustained Competitive Advantage Switching Costs Between Rivals: the easier it is to switch, the easier it is to take away competitive advantage Example: Difficulty in switching between office systems management service providers versus ease of switching between office supplies provider.

19. Internal Factor Analysis Summary

20. Internal Factor Analysis Summary • Same basic procedure as the External Factor Analysis Summary. • See page 101 and 102 of the text for more discussion of the IFAS.

21. Internal Scanning Example: Proctor & Gamble (circa 1992) Resources Research and Development P&G invests 4% of worldwide sales in research and development ahead of most of its global competitors. In 1997-98 this amounted to $1.5 billion. P&G has a world class, global research and development organization, with over 7,500 scientists working in 22 research centers in 12 countries around the world. Innovative Workforce P&G holds more than 24,000 active patents worldwide, and on average, receives about 3,800 more patents per year. This makes P&G among the world's largest holders of U.S. and global patents, putting it on a par with Intel, Lucent and Microsoft.

22. Proctor & Gamble Capability Directed growth and maximized chances of success by leveraging considerable technical competencies across product categories and national boundaries. Competencies A deep understanding of consumers, their habits and product needs. The ability to acquire, develop and apply technology across P&G's broad array of product categories. The ability to make "connections" between consumers' wants and what technology can deliver Strategic Issue Market research revealed brand loyal consumers were paying $725/year more than families buying private-label or store brands. Need new strategy to reduce costs and better meet consumer demand

23. Factors for Assessment: • Technology Development (R&D): was the initiator of product development, produced technologically superior productS • Firm Infrastructure: Relationship between R&D and Marketing & Sales -- Marketing released new products under new brand names • Marketing & Sales: complex with 17 pricing brackets for 34 product categories • Manufacturing: Capacity utilization averaged about 55%, with excess needed to handle bubble demand brought on by occasional price wars • Outbound Logistics: heavily paper-laden Methods for Assessment: Organizational Perspective: • Superior products no longer matched needs of marketplace, particularly in • developing markets. • Devolve products – less technology, lower price. • Put marketing research in charge of setting initial new product development • guidelines. • Improve internal processes for product development.

24. Methods for Assessment: Customer value: • Brand equity for existing brands is high (e.g. Ivory). Release new developments under existing brand names rather than creating new ones. Improve customer value by strengthening brand relationship to new products. Financial Perspective: • Outbound logistics unnecessarily expensive. Work with industry stakeholders, including competitors, to simplify delivery system through standardization and computerization. Improves industry’s profitability. • Reduce number of brands and product lines. Simplifies manufacturing process and eliminate slack in capacity utilization. Better ROA, and hopefully better P/E ratio.