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 firm’s 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 firm’s 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.
The Importance of the Internal
Environment
3-4
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
 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
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

A.
B.
C.
D.
In assessing its primary activities, an
airline would examine:
Employee training programs
Baggage handling
Criteria for lease versus purchase decisions
The effectiveness of its lobbying activities
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
Interrelationships Among ValueChain Activities
3-21
Managers must not ignore the importance of
interrelationships among value-chain activities

Interrelationships
among activities
within the firm

Relationships
among activities
within the firm and
with other
stakeholders such
as customers &
suppliers
Example: The Value Chain in Service
Organizations
3-22
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
resource’s 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

Criteria for Sustainable
Competitive Advantage
3-30
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 Firm’s 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
Five Types of Financial Ratios
3-34
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
 Cost
and service
Internal Business Perspective
3-37

Managers must focus on those critical
internal operations that enable them to
satisfy customer needs:
 Business
 Cycle
processes
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 firm’s
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
Limitations of the Balanced
Scorecard
3-40
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
