Assessing

the Internal
Environment
of the Firm
chapter 3
Copyright 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education

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 firms

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 firms 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.

3-4

The Importance of the

Internal Environment
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

SWOTs 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

Value-Chain Analysis
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:

Employee training programs

B. Baggage handling
C. Criteria for lease versus purchase decisions
D. The effectiveness of its lobbying activities
A.

Value-Chain Analysis
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
Organizational culture to enhance creativity
& innovation

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 retention mechanisms

Quality relations with trade unions
Reward & incentive programs to motivate
all employees

Support Activity: General

Administration

3-20

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

3-21

Interrelationships Among
Value-Chain Activities
Managers must not ignore the importance of
interrelationships among value-chain
activities
Interrelationships
Relationships
among activities
among activities
within the firm
within the firm and
he
with other
t
d in
n
a
a
stakeholders such
h
p
c
x
y
E ue
b
as customers &
val
g
in
g
suppliers
s
n
a rce
h
c ou
x
e es
r

Example: The Value Chain in

3-22

Service Organizations

Exhibit 3.4 Some Examples of Value Chains in Service

Industries

Resource-Based View of the

Firm

3-23

The resource-based view of the firm

(RBV)

Combines an internal analysis of phenomena

within a company
With an external analysis of the industry & its
competitive environment

Resources can lead to a competitive

advantage

If they are valuable, rare, hard to duplicate

When tangible resources, intangible resources, &
organizational capabilities are combined

Types of Firm Resources

3-24

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

Types of Firm Resources

3-25

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;
reliability & product quality with customers

Types of Firm Resources

3-26

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?
3-27

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
3-28

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
3-29

Physical uniqueness: resources that are

physically unique
Path dependency: scarce because of all
that has happened along the path followed
in a resources development and/or
accumulation
Causal ambiguity: impossible to explain
what caused it to exist or how to re-create it
Social complexity: a result of social
engineering such as interpersonal relations

3-30

Criteria for Sustainable

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 the Firms
Profits

3-31

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

3-32

Financial Ratio
Analysis

Balance sheet
Income statement
Market valuation
Historical comparison
Comparison with
industry norms
Comparison with key
competitors

Balanced Scorecard
Stakeholder Perspective

Employees
Owners
Customer satisfaction
Internal processes
Innovation, learning &
improvement activities
Financial perspectives

Financial Ratio Analysis

3-33

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

3-34

Five Types of Financial

Ratios

Exhibit 3.9
A Summary
of Five
Types of
Financial
Ratios

The Balanced Scorecard

3-35

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
3-36

Managers must articulate goals for four

key categories of customer concerns:

Time
Quality
Performance and service
Cost

Internal Business
Perspective

3-37

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

Perspective

3-38

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
3-39

Managers must measure how the firms

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

3-40

Limitations of the Balanced

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