Assessing the Internal

Environment of the Firm

Chapter Three

McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
 Value-Chain Analysis
• Value-chain analysis
 a strategic analysis of an organization that
uses value creating activities.
• Value is the amount that buyers are willing
to pay for what a firm provides them and is
measured by total revenue

3-2
 The Value Chain

Exhibit 3.1
3-3
 Value-Chain Analysis
• Primary activities
 contribute to the physical creation of the
product or service, its sale and transfer to the
buyer, and its service after the sale.
 inbound logistics, operations, outbound
logistics, marketing and sales, and service

3-4
 Value-Chain Analysis
• Support activities
 activities of the value chain that either add
value by themselves or add value through
important relationships with both primary
activities and other support activities
 procurement, technology development,
human resource management, and general
administration.

3-5
Primary Activity: Inbound Logistics
• Associated with receiving, storing and
distributing inputs to the product
 Location of distribution facilities
 Warehouse layout
and designs

3-6
 Primary Activity: Operations
• Associated with transforming inputs into
the final product form
 Efficient plant operations
 Incorporation of appropriate process
technology
 Efficient plant layout and workflow design

3-7
 Primary Activity: Outbound Logistics

• Associated with collecting, storing, and

distributing the product or service to
buyers
 Effective shipping processes to provide quick
delivery and minimize damages
 Shipping of goods in large lot sizes to
minimize transportation costs.

3-8
Primary Activity: Marketing and Sales

• Associated with purchases of products

and services by end users and the
inducements used to get them to make
purchases
 Innovative approaches to promotion and
advertising
 Proper identification of customer segments
and needs

3-9
 Primary Activity: Service
• Associated with providing service to
enhance or maintain the value of the
product
 Quick response to customer needs and
emergencies
 Quality of service
personnel and
ongoing training

3-10
 Support Activity: 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
 Analysis and selection of alternate sources of
inputs to minimize dependence on one
supplier

3-11
 Support Activity:
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
 Reward and incentive programs to motivate
all employees

3-12
 Support Activity:
Technology Development
• Related to a wide range of activities and
those 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
 Excellent professional qualifications of
personnel

3-13
 Support Activity:
General Administration
• Typically supports the entire value chain
and not individual activities
 Effective planning systems
 Excellent relationships with diverse
stakeholder groups
 Effective information technology to integrate
value-creating activities

3-14
Interrelationships among Value-Chain Activities
within and across Organizations

Two levels

• Interrelationships • Relationships
among activities among activities
within the firm within the firm and
with other
organization (e.g.,
customers and
suppliers)

3-15
Value Chains in Service Industries

3-16
 Resource-Based View of the Firm
• Resource-based view of the firm
 perspective that firms’ competitive
advantages are due to their endowment of
strategic resources that are valuable, rare,
costly to imitate, and costly to substitute.

3-17
 Resource-Based View of the Firm
• Two perspectives
 The internal analysis of phenomena within a
company
 An external analysis of the industry and its
competitive environment

3-18
 Types of Resources
• Tangible resources
 organizational assets that are relatively easy
to identify, including physical assets, financial
resources, organizational resources, and
technological resources.

3-19
 Types of Resources
• Intangible resources organizational
 assets that are difficult to identify and
account for and are typically embedded in
unique routines and practices, including
human resources, innovation resources, and
reputation resources.

3-20
 Types of Resources
• Organizational
capabilities
 The competencies
and skills that a
firm employs to
transform inputs
into outputs.

3-21
 Firm Resources and Sustainable
Competitive Advantages
• First, the resource must be valuable in the
sense that it exploits opportunities and/or
neutralizes threats in the firm’s
environment.
• Second, it must be rare among the firm’s
current and potential competitors.

3-22
 Firm Resources and Sustainable
Competitive Advantages
• Third, the resource must be difficult for
competitors to imitate.
• Fourth, the resource must have no
strategically equivalent substitutes.

3-23
Sources of Inimitability
• Physical
uniqueness
• Path dependency
• Causal ambiguity
• Social complexity

3-24
The Generation and Distribution of a 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

3-25
 Evaluating Firm Performance
• Financial ratio • Stakeholder
analysis perspective
 Balance sheet  Employees
 Income statement  Customers
 Historical  Owners
comparison
 Comparison with
industry norms
 Comparison with
key competitors

3-26
 Financial Ratio Analysis
• Five types of financial ratios
 Short-term solvency or liquidity
 Long-term solvency measures
 Asset management (or turnover)
 Profitability
 Market value

3-27
 Financial Ratio Analysis
• Historical comparisons
• Comparison with industry norms
• Comparison with key competitors

3-28
Five Types of Financial Ratios

3-29
 The Balance Scorecard
• Provides a meaningful integration of many
issues that come into evaluating a firm’s
performance
• Four key perspectives
 How do customers see us?
 What must we excel at?
 Can we continue to improve and create
value?
 How do we look to shareholders?
3-30
 Customer Perspective
• Time
• Quality
• Performance and service
• Cost

3-31
 Internal Business Perspective
• Processes
• Decisions
• Actions
• Coordination
• Resources and
capabilities

3-32
 Innovation and Learning Perspective

• Introduction of new products and services

• Greater value for customers
• Increased operating efficiencies

3-33
 Financial Perspective
• Profitability
• Growth
• Shareholder value
• Increased market share
• Reduced operating expenses
• Higher asset turnover

3-34
 Potential Limitations of the
Balanced Scorecard
• Lack of a clear strategy
• Limited or ineffective executive sponsorship
• Too much emphasis on financial measures
rather than non-financial measures
• Poor data on actual performance
• Inappropriate links to scorecard measures to
compensation
• Inconsistent or inappropriate terminology

3-35