Assessing the Internal
Environment of the Firm
The 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
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
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
QUESTION
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
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.
The Value Chain
Primary Activity: Inbound Logistics
► Associated with receiving, storing and distributing inputs to the product
► Location of distribution facilities
► Warehouse layout and designs
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
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.
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
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
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
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
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
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
Interrelationships among Value-Chain Activities within
and across Organizations
Two levels
► Interrelationships among activities ► Relationships among activities
within the firm within the firm and with other
organization (e.g., customers and
suppliers)
Value Chains in Service Industries
Exhibit 3.4
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.
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
Types of Resources
► Tangible resources
► organizational assets that are relatively easy to identify, including physical
assets, financial resources, organizational resources, and technological
resources.
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.
Types of Resources
► Organizational capabilities
► The competencies and skills that a
firm employs to transform inputs into
outputs.
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.
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.
Sources of Exclusivity
► Physical uniqueness – Location, Patents
► Path dependency – Current alternatives are limited by
past decisions
► Causal ambiguity – Cause of success or failure are not
apparent
► Social complexity – Two or more systems interact
creating many possibilities
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
Evaluating Firm Performance
► Financial ratio ► Stakeholder
analysis perspective
► Balance sheet ► Employees
► Income statement ► Customers
► Historical comparison ► Owners
► Comparison with
industry norms
► Comparison with key
competitors
Financial Ratio Analysis
► Five types of financial ratios
► Short-term solvency or liquidity
► Long-term solvency measures
► Asset management (or turnover)
► Profitability
► Market value
Financial Ratio Analysis
► Historical comparisons
► Comparison with industry norms
► Comparison with key competitors
Five Types of Financial Ratios
The Balanced Scorecard
► RS Kaplan and DP Norton came out with this popular approach in early 90s
► Here corporate goals are linked with strategic actions undertaken at the business
unit, departmental and individual level
► The score card allows managers to evaluate a firm from different complementary
perspectives
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?
Customer Perspective
► Time
► Quality
► Performance and service
► Cost
Internal Business Perspective
► Processes
► Decisions
► Actions
► Coordination
► Resources and capabilities
Innovation and Learning Perspective
► Introduction of new products and services
► Greater value for customers
► Increased operating efficiencies
Financial Perspective
► Profitability
► Growth
► Shareholder value
► Increased market share
► Reduced operating expenses
► Higher asset turnover
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