Assessing the Internal
Environment of the Firm
Chapter Three
McGraw-Hill/Irwin Copyright © by The McGraw-Hill Companies, Inc. All rights
Learning Objectives
LO1 The primary and support activities of a firm’s
value chain.
LO2 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.
LO3 The resource-based view of the firm and the
different types of tangible and intangible
resources, as well as organizational capabilities.
LO4 The four criteria that a firm’s resources must
possess to maintain a sustainable advantage.
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
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.
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
The Value Chain
Exhibit 3.1
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.
Types of Resources
Tangible resources
organizational assets that are relatively
easy to identify, including physical
assets, financial resources,
organizational resources, and
technological resources.
Tangible resources
Financial
Firm’s cash account and cash equivalents
Firm’s capacity to raise equity
Firm’s borrowing capacity
Physical
Modern plant and facilities
Favorable manufacturing locations
Sate-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
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.
Intangible resources
Human
Experience and capabilities of employees
Trust
Managerial skills
Firm-specific practices and procedures
Innovation and creativity
Technical and scientific skills
Innovation capacities
Reputation
Brand name
Reputation with customers for quality and
reliability
Reputation with suppliers for fairness, non-zero-
sum relationships
Types of Resources
Organizational
capabilities
Organizational capabilities
Firm competencies or skills the firm
employs to transfer inputs to outputs
Capacity to combine tangible and
intangible resources, using organizational
processes to attain desired end. E.g.
Outstanding customer service
Excellent product development capabilities
Innovativeness of products and services
Ability to hire, motivate, and retain human
capital
Identifying Organizational Capabilities:
A Functional Classification
QUESTION
Gillette combines several
technologies to attain unparalleled
success in the wet shaving industry.
This is an example of their
A. Tangible resourcesB. Intangible
resourcesC. Organizational
capabilitiesD. Strong primary
activities
Firm Resources and Sustainable
Competitive Advantages
1. the resource must be valuable in the
sense that it exploits opportunities and/or
neutralizes threats in the firm’s
environment.
2. it must be rare among the firm’s current
and potential competitors.
3. the resource must be difficult for
competitors to imitate.
4. the resource must have no strategically
equivalent substitutes.
VRIN
Valuable
Neutralize threats and exploit opportunities
Rare
Not many firms possess
Inimitable
Physically unique
Path dependency (accumulated over time)
Causal ambiguity (difficult to disentangle what it is or
how it could be re-created)
Social complexity (trust, interpersonal relationships,
culture, reputation)
No substitute
No equivalent strategic resources or capabilities
Criteria for sustainable competitive
advantage
Is a resource or capability…
Value-chain analysis (1)
Value-chain analysis (2)
Data summary
* About 2.1 million vehicles are covered in both floor mat and pedal recalls. Total vehicles
approx: 8.54m
Walmart
OREO