Assessing the Internal Environment of the Firm

1. Chapter 3 Assessing the Internal Environment of the Firm

2. Learning Objectives 1. Be aware of the limitations of SWOT analysis 2. Understand value chain analysis and its benefits 3. Understand the resource based view of the firm and how a resource can lead to a competitive advantage. 4. Be aware of the usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms. 5. The value of recognizing how the interests of a variety of stakeholders can be interrelated.

3. 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

4. Value Chain Analysis Sequential process of value-creating activities Value - The amount that buyers are willing to pay for what a firm provides them Value is measured by total revenue Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service

5. The Value Chain

6. Inbound Logistics 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

7. Operations 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

8. Outbound Logistics 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

9. Marketing and Sales 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

10. Services 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

11. Procurement 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

12. Technology Development Related to a wide range of activities 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

13. Human Resource Management 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 absenteeism Reward and incentive programs to motivate all employees

14. General Administration 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

15. Relationship Between Activities Interrelationships among activities within the firm Relationships among activities within the firm and with other organizations (e.g., customers and suppliers) that are part of the firm�s expanded value chain.

16. Discussion Topic #1 How does the value chain analysis apply to service firms? What are the inbound logistics, operations, and outbound logistics for Orbitz.com? What about Idaho State University? What value chain activities create the most revenue for Orbitz? ISU?

17. Resource Based View 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

18. Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers Financial resources Physical resources Organizational Resources Technological Resources

19. 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 Human Innovation Reputation Culture

20. Organizational Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired ends Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital

21. Valuable & Rare 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 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

22. Inimitable 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

23. Substitutability 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)

24. Implications of the RBV

25. Discussion Topic #2 Identify a firm which currently has a competitive advantage according to the resource based view of the firm? Identify two examples of where large firms spent millions of dollars promoting or marketing something that did not or will not lead to a competitive advantage.

26. Division of Profits The percent of profits that employees will retain depends on several factors Employee bargaining power Employee replacement cost Employee switching costs Management bargaining power If employees are getting a higher percent of profits than they deserve, other factors such as poor governance may be to blame.

27. Evaluating Firm Performance Two approaches for evaluating firm performance Financial ratio analysis Stakeholder perspective Balanced Scorecard � balancing stakeholder concerns should not be a zero sum game.

28. 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

29. Historical Comparisons

30. Compare with Industry Norms

31. Compare with Key Competitors

32. 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)

33. Balanced Scorecard Cont. Customer perspective - Timeliness Quality Performance and service Cost Internal Perspective Cycle time, Quality Employee Skills Productivity Resources and capabilities

34. Balanced Scorecard Cont. Innovation & Learning Introduction of new products and services Greater value for customers Increased operating efficiencies Financial Control Profitability & Growth Shareholder value Increased market share Reduced operating expenses Higher asset turnover

35. Limitations of the Balanced SC Lack of a clear strategy Limited or ineffective executive sponsorship Too much emphasis on financial measures rather than nonfinancial measures Poor data on actual performance Inappropriate links to scorecard measures to compensation Inconsistent or inappropriate Terminology

36. Objectives 1. Be aware of the limitations of SWOT analysis 2. Understand value chain analysis and its benefits 3. Understand the resource based view of the firm and how a resource can lead to a competitive advantage. 4. Be aware of the usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms. 5. The value of recognizing how the interests of a variety of stakeholders can be interrelated.