Strategic Management-Chapter 03

Assessing the
Internal
Environment of
the Firm
chapter 3
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Learning Objectives
3-2
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.
Learning Objectives
3-3
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.
The Importance of the Internal
Environment
3-4
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?
The Limitations of SWOT Analysis
3-5
▪ 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
Value-Chain Analysis
3-6
▪ 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
Example:
Streamlining the Value Chain
3-7
▪ 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
3-8
▪ 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
Question?
3-9
▪ 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
3-10
▪ 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
The Value Chain
3-11
Exhibit 3.1 The Value Chain: Primary and Support Activities

Source: 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.
Primary Activity:
Inbound Logistics
3-12
▪ Inbound logistics is primarily associated with

receiving, storing & distributing inputs to the
product:
▪ Material handling
▪ Warehousing
▪ Inventory control
▪ Vehicle scheduling
▪ Returns to suppliers
Primary Activity: Operations
3-13
▪ Operations include all activities associated with

transforming inputs in to the final product form:
▪ Machining
▪ Packaging
▪ Assembly
▪ Testing or quality control
▪ Printing
▪ Facility operations
Primary Activity:
Outbound Logistics
3-14
▪ Outbound logistics includes collecting, storing,

& distributing the product or service to buyers:
▪ Finished goods
▪ Warehousing
▪ Material handling
▪ Delivery vehicle operation
▪ Order processing
▪ Scheduling & distribution
Primary Activity:
Marketing & Sales
3-15
▪ 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
Primary Activity: Service
3-16
▪ Service includes all actions associated with

providing service to enhance or maintain the
value of the product:
▪ Installation
▪ Repair
▪ Training
▪ Parts supply
▪ Product adjustment
Support Activity: Procurement
3-17
▪ 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
Support Activity: Technology
Development
3-18
▪ 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
Support Activity: Human Resource
Management
3-19
▪ Human resource management consists of

activities involved in recruitment, hiring, training
& development, & compensation of all types of
personnel:
▪ Effective employee recruiting, development, &
retention mechanisms
▪ Quality relations with trade unions
▪ Reward & incentive programs to motivate all
employees
Insights from Executives:
Human Resource Management
3-20
▪ In order to add value through Human Resource

Management, HRM initiatives must be
integrated with other value-creating activities.
HR must:
▪ Understand business realities
▪ Ensure HR practices support company goals
▪ Be willing to speak up when a proposed strategy
may create issues for the people side of the
business
▪ HR initiatives should be well designed &
rigorously tested before implementation
▪ High-level endorsement will increase acceptance
Insights from Executives:
Human Resource Management
3-21
▪ Research in HRM is always necessary in order to

figure out what makes people satisfied in their
work, motivates them to perform, and makes
them stay or leave an organization.
▪ What do YOU think are the most important
employee & workplace topics that contribute to
organizational performance?
▪ How many of you think PAY is the most important?
Support Activity:
General Administration
3-22
▪ 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
Interrelationships Among
Value-Chain Activities
3-23
Managers must not ignore the importance of

interrelationships
Managers must not ignore the importance of among value-chain activities
interrelationships among value-chain activities
▪ Interrelationships ▪ Relationships among

among activities activities within the
within the firm firm and with other
Expand the value stakeholders such as
chain by exchanging customers & suppliers
resources
Example: The Value Chain in
3-24
Service Organizations
Exhibit 3.4 Some Examples of Value Chains in Service Industries

Resource-Based View of the Firm
3-25
▪ The resource-based view of the firm (RBV)

integrates two activities:
▪ An internal analysis of phenomena within a company
▪ An external analysis of the industry & its competitive
environment
▪ Resources can lead to a competitive advantage
▪ If they are valuable, rare, hard to duplicate
▪ If tangible resources, intangible resources, &
organizational capabilities are combined
Types of Firm Resources
3-26
▪ 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
3-27
▪ 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;
reputation for reliability & product quality with
customers
3-28
▪ 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
Question?
3-29
▪ 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.
Firm Resources and Sustainable
Competitive Advantages
3-30
▪ 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
Sources of Inimitability
3-31
▪ Physical uniqueness: resources that are

physically unique, therefore impossible to duplicate
▪ Path dependency: hard to duplicate because of
all that has happened along the path followed in
the development and/or accumulation of resources
▪ Causal ambiguity: impossible to explain what
caused a resource to exist or how to re-create it
▪ Social complexity: resources that result from
social engineering such as interpersonal relations,
culture
Criteria for Sustainable
3-32
Competitive Advantage
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source: Adapted from Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17:99 – 120.
The Generation and Distribution of
3-33
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
Evaluating Firm Performance
3-34
Balanced Scorecard
Financial Ratio Analysis
Stakeholder Perspective
Balanced Scorecard Stakeholder
▪ Balance sheet ▪ Employees

▪ Income statement ▪ Owners
▪ Market valuation ▪ Customer satisfaction
▪ Historical comparison ▪ Internal processes
▪ Comparison with ▪ Innovation, learning
industry norms & improvement
▪ Comparison with key activities
competitors ▪ Financial
perspectives
3-35
▪ 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
Five Types of Financial Ratios
3-36
Exhibit 3.8 A
Summary of
Five Types of
Financial
Ratios
The Balanced Scorecard
3-37
▪ 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)
Customer Perspective
3-38
▪ Managers must articulate goals for four key

categories of customer concerns:
▪ Time
▪ Quality
▪ Performance and service
▪ Cost
Internal Business Perspective
3-39
▪ 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
Innovation and Learning
3-40
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)
Financial Perspective
3-41
▪ 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
Limitations of the Balanced
3-42
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

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Strategic Management-Chapter 03

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Assessing the

After reading this chapter, you should have a good

LO3.4 The resource-based view of the firm and the

Which activities must a firm effectively manage

Which resources and capabilities must a firm create

▪ Strengths may not lead to an advantage

▪ Value-chain analysis looks at the sequential

▪ IBM & SAP have teamed up to help firms reduce

▪ Primary activities contribute to the physical

▪ In assessing its primary activities, an airline

▪ Support activities either add value by

Exhibit 3.1 The Value Chain: Primary and Support Activities

▪ Inbound logistics is primarily associated with

▪ Operations include all activities associated with

▪ Outbound logistics includes collecting, storing,

▪ Marketing & sales activities involve purchases

▪ Service includes all actions associated with

▪ Procurement involves how the firm purchases

▪ Technology development is related to a wide

▪ Human resource management consists of

▪ In order to add value through Human Resource

▪ Research in HRM is always necessary in order to

▪ General administration involves:

Managers must not ignore the importance of

▪ Interrelationships ▪ Relationships among

Exhibit 3.4 Some Examples of Value Chains in Service Industries

▪ The resource-based view of the firm (RBV)

▪ Tangible resources are assets that are

▪ Intangible resources are difficult for

▪ Organizational capabilities are competencies

▪ Gillette combines several technologies to attain

▪ Firm Resources and Sustainable Competitive

▪ Physical uniqueness: resources that are

▪ Four factors help explain the extent to which

▪ Balance sheet ▪ Employees

▪ Five types of financial ratios:

▪ A meaningful integration of many issues that

▪ Managers must articulate goals for four key

▪ Managers must focus on those critical internal

▪ Managers must make frequent changes to

▪ Managers must measure how the firm’s strategy,

▪ Not a “quick fix” – needs proper execution

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