CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T.

Lumpkin
3-1
McGraw-Hill/Irwin Copyright 2004 by The McGraw-Hill Companies, Inc. All rights reserved.
Assessing the
Internal
Environment
of the Firm
Chapter 3
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-3
After studying this chapter, you should have
a good understanding of:
The primary and support activities of a firm's value
chain.
How value-chain analysis can help managers create
value by investigating internal and external
relationships among activities
The different types of tangible and intangible
resources, as well as organizational capabilities
The four criteria that a firm's resources must possess
to maintain a sustainable advantage
How to make meaningful comparisons of
performance across firms
The value of recognizing how the interests of a
variety of stakeholders can be interrelated
Learning
Objectives
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-4
Firms and Resources
Why are some firms so successful, and
other less so, within very similar
environments?

Why are firms so different from each
other?

CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-5
The Value Chain:
Primary and Support Activities
The Value Chain
General administration
Human resource management
Technology development
Procurement
Inbound
logistics
Operations
Outbound
logistics
Marketing
and sales
Service
Primary Activities
Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining
Superior Performance by Michael E. Porter. Copyright 1998 by Michael E. Porter.
Exhibit 3.1
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-6
The Value Chain: Some Factors to Consider
in Assessing a Firms Primary Activities
Source:
Adapted with
permission of
The Free Press,
a division of
Simon &
Schuster, from
Competitive
Advantage:
Creating and
Sustaining
Superior
Performance
by Michael E.
Porter.
Copyright
1985, 1998 by
Michael E.
Porter.
Location of
distribution
facilities to
minimize
shipping
times
Excellent
material and
inventory
control
systems
Efficient
plant
operations
Appropriate
level of
automation
Quality
production
control
systems to
reduce costs
and enhance
quality
Efficient
plant layout
and workflow
design
Effective
shipping
processes to
provide
quick
delivery
Efficient
finished
goods
ware-
housing
processes
Shipping of
goods in
large lot
sizes to
minimize
transport-
ation costs
Highly
motivated,
competent
sales force
Innovative
approaches
to promotion
and
advertising
Selection of
appropriate
distribution
channels
Customer
segments
and needs
identified
Effective
pricing
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 as
required
I nbound
Logistics
Operations Outbound
Logistics
Marketing
and Sales
Service
Exhibit 3.2
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-7
Value Chain: Support Activities (1)
General
Administration
Effective planning
Excellent relationships
with diverse
stakeholders
Ability to integrate
and coordinate value
chain activities
Effective culture and
reputation

Human Resource
Management
Effective recruiting,
training, and retention

Union relationships

Effective reward and
incentive programs
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-8
Value Chain: Support Activities (2)
Technology
Development
Effective R&D
Relationships between
R&D and other depts.
Creative and
innovation in culture
Personnel
qualifications
Procurement

Win-win relationships
with suppliers
Processes and
procedures optimize
quality, price, service,
speed
Proper lease versus
buy decisions
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-9
The Sustainability of Resources and
Capabilities: Four Criteria

Physically unique

Path dependency

Causal ambiguity

Social complexity`

No equivalent strategic resources
or capabilities


Difficult to imitate







Difficult to substitute

Not many firms possess Rare

Neutralize threats and exploit
opportunities


Valuable
Implications Is the resource or capability
Exhibit 3.6
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-10
Criteria for Sustainable Competitive
Advantage and Strategic Implications
Is a Resource
Source: Adapted from Barney 1991. Firm Resources a Sustained Competitive Advantage. Journal of Management, 17:99-120.

Valuable

Rare
Difficult
to Imitate
Without
Substitutes
Implications
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
Exhibit 3.7
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-11
Tangible Resources
Financial
Firms cash account and cash equivalents
Firms capacity to raise equity
Firms borrowing capacity

Physical
Modern plant and facilities
Favorable manufacturing locations
State-of-the-art machinery and equipment

Technological
Trade secrets
Innovative production processes
Patents, copyrights, trademarks

Organizational
Effective strategic planning processes
Excellent evaluation and control systems
Source: Adapted
from J.B. Barney,
1991, Firm
resources and
sustained
competitive
advantage, Journal
of Management,
17: 101; R.M.
Grant, 1991,
Contemporary
Strategy Analysis
(Cambridge, U.K.:
Blackwell
Business), 100-
102. Hitt, M.A.,
Ireland, R.D. &
Hoskisson, R.E.
2001. Strategic
Management:
Competitivenesss
and Globalization.
Fourth Edition.
South-Western
College Publishing:
Cincinnati, Ohio.
Exhibit 3.4
(adapted)
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-12
Intangible Resources
Human
Experience and capabilities of employees
Trust
Managerial skills
Firm-specific practices and procedures

Innovation
& creativity

Technical and scientific skills
Innovation capacities

Reputation
Brand name
Reputation with customers for quality and
reliability
Reputation with suppliers for fairness
Exhibit 3.4
(adapted)
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-13
Organizational Capabilities

Competencies or skills employed to
transfer inputs to outputs
The capacity to combine tangible and
intangible resources, using organizational
processes to attain a desired end

CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
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Examples of Organizational Capabilities

Outstanding customer service

Excellent product development capabilities

Innovativeness of products and services

The ability to hire, motivate, and retain
human capital

CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
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Marks & Spencer: How Resources and
Capabilities Lead to Advantages
Lower costs and higher
quality of goods sold



Fewer layers of
hierarchy




Capabilities

Customer recognition with
minimal advertising
No promotional sales


Lower labor turnover
8.7% labor costs versus
10%-20% industry
average

Intangible
1% of revenues allocated
to occupancy costs
(versus 3% to 9%
industry average)

Tangible
Competitive Advantages in
Great Britain
Resource
Ownership (vs. leasing)
of property
Brand reputation
Employee loyalty
Supplier chain
Managerial judgment
Source: Adapted
from Collins, D. &
Montgomery, C.
1995. Competing
on resources:
Strategy in the
1990s. Harvard
Business Review,
73(4): 123.
Exhibit 3.5
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-16
Firm Performance: Financial Ratios
Liquidity

Long-term solvency

Asset management

Profitability
Market value

CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-17
Performance: Bases for Comparison

Historical comparisons

Industry norms

Key competitors or strategic group

CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
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Historical Trends: ROS for a
Hypothetical Company
20%
10%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Year
Exhibit 3.8
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-19
How Financial Ratios Differ
Across Industries


Financial Ratio

Semi-
conductors


Grocery
Stores

Skilled
nursing
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
Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000. Desktop Edition. SIC # 0100-8999.
Exhibit 3.9
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-20
Comparison of Procter & Gambles Sales
and R&D Budget to its Key Competitors

COMPANY (OR DIVISION)
SALES*
(billions)
R&D BUDGET
(billions)
P&G DRUG DIVISION $0.8 $0.38
BRISTOL-MYERS SQUIBB $20.2 $1.8
PFIZER $27.4 $4.0
MERCK

$32.7 $2.1
* Most recently completed fiscal year. Data: Lehman Brother Procter & Gamble Co.
Exhibit 3.10
Source: Berner, R. 2000. Procter & Gamble: Just say no to drugs. Business Week: October 9:128.
CHAPTER 3 STRATEGIC MANAGEMENT Gregory G. Dess and G. T. Lumpkin
3-21
ECIs Balanced Business Scorecard
Exhibit 3.11
Financial Perspective
GOALS MEASURES
Survive Cash Flow
Succeed Quarterly sales growth and
operating income by division
Prosper Increased market share and ROE
Customer Perspective
GOALS MEASURES
New products Percent of sales from new
products
Responsive supply On-time delivery (defined by
customer)
Customer
partnership
Number of cooperative
engineering efforts
Source:
Adapted from
Kaplan, R.S.
& Norton,
D.P. 1992.
The balanced
scorecard:
Measures that
drive
performance.
Harvard
Business
Review,
69(1): 71-79.
Internal Business Perspective
GOALS MEASURES
Manufacturing excellence Cycle time
Unit cost
Yield
Design productivity Silicon efficiency
Engineering efficiency
New product introduction Actual introduction schedule
versus plan
Innovation and Learning Perspective
GOALS MEASURES
Technology leadership Time to develop next
generation
Manufacturing learning Process time to maturity
Product focus Percent of products that equal
80% sales
Time to market New product introduction
versus competition