STRATEGIC MANAGEMENT
CONCEPTUAL FRAMEWORK: INTERNAL
OPERATING ENVIRONMENT
Professor Stefan Markowski
WYŻSZA SZKOŁA
INFORMATYKI I ZARZĄDZANIA
z siedzibą w Rzeszowie
Conceptual Framework: Internal
Operating Environment
• Business Enterprise, Resources, Structures and
Capabilities
• SWOT analysis: Strengths and Weaknesses
Key questions:
• Why does this organisation exist?
• What does it aim to achieve?
• What business is it in?
• What customers does it serve?
• Who does it works with? Competes against? Partners
with?
Conceptual Framework: internal
Operating Environment
Content:
• Fundamentals: Ownership, Control and Business
Objectives
• Fundamentals: Value Chain and Functional Structure
• Fundamentals: Profits and Shareholder Value
• Resource-based Perspective
• Resource and Capability Audit
• Strategic Resource and Capacity Evaluation
Fundamentals: Ownership, Control
and Business Objectives
Commercial Enterprise
transforms inputs into outputs
 is a coalition of factor owners/stakeholders
 must produce satisfactory rate of return on
inputs provided by each factor owner who is free
to enter and exit
 is a contractual hub for bi- and multi-lateral
contracts of engagement with factor owners
 operates under uncertainty whereby its (sales)
revenue may differ from its costs with the
residual being a profit or a loss

Fundamentals: Ownership, Control and
Business Objectives
Ownership
the firm is ‘owned’ by its equity holders (owners
of the equity capital), who provide a form of
internal insurance for other factor owners in and
are remunerated through profit sharing
 it deals with ‘moral hazards’ of factor employment
by vesting ownership power in the equity holders
(shareholders)
 revenue appropriation takes the form of a
‘pecking order’ of factor (owner) claims on the
firms’ income

Fundamentals: Ownership, Control and
Business Objectives
Stakeholders
/bargaining power)
(to each according to its market
shareholders
 managers
 employees
 creditors
 customers
 suppliers
 government
 unions and professional bodies
 communities

Fundamentals: Ownership, Control and
Business Objectives
Control
is normally vested in management (board of
directors), which may be divorced from
ownership
 agency problems (principals and agents), ie, the
management and non-equity stakeholders pursue
their own, often conflicting interests
 moral hazards of factor employment (shirking)
and adverse selection of management (the
quality of executives unknown at the time of
their hiring)

Fundamentals: Ownership, Control and
Business Objectives
Control

agency problems
 management pursues growth rather than
shareholder value
 management is risk averse and tries to
diversify corporate risk (shareholders may run
their own portfolios of different shares)
 herd instinct and mediocrity rewarded
 management maximises personal payoffs
 management seeks and protects status (eg,
through empire building)
Fundamentals: Ownership, Control and
Business Objectives
Control
solutions to agency problems included incentive
contracting (eg, stock options, profits sharing,
bonuses)
 stock (equity) markets help to resolve some
agency problems (threats of takeovers)
 conflicting business objectives - what matters
for shareholders? Other factor owners?
Customers? Suppliers?

Fundamentals: Ownership, Control and
Business Objectives
Business Objectives
(not mutually exclusive)
profit maximisation (see below)
 meeting market expectations, eg, satisfactory
shareholder value (see below)
 sales/revenue growth
 empire building (eg, employment, subsidiaries,
retail outlets)
 market penetration/share
 survival
 balancing key stakeholder interests
 product/process champion
 market leadership/dominance

Fundamentals: Ownership, Control and
Business Objectives
Mission Statement Cookbook
(describe the firm’s)
objectives
 business philosophy (creed) and values
 self-concept
 principal outputs
 core technologies
 key customer groups and markets
 corporate social responsibility (CSR)

(add)

gloss, warmth and fuzziness

the desirable public image
(mix vigorously into)
(as required)
Fundamentals: Value Chain and
Functional Structure
Business Value Adding Chain
Primary Activities
Inbound and Outbound Logistics
Input
Markets
Inputs
Procurement
Support Activities: HRM, IT,
Technology,Administration,
Design,
Operations
Outputs
Marketing & Sales
Distribution and
After-sale Support
Output
Markets
Fundamentals: Value Chain and
Functional Structure
Functional Structure

Corporate/ Head Office
HRM
Administration and IT Support Systems
R&D
Design
Operations
Logistics
Procurement
Marketing

Distributions/After-sale support








Fundamentals: Profits and Shareholder
Value
Profits
Profit = surplus of revenue over cost available for
distribution to profit takers (principally
shareholders)
 Profit maximisation - ex ante vs. ex post
 Economic profit = revenue less all explicit and
implicit costs (eg, cost of equity capital)
 Accounting profits = revenue less explicit costs

Sales Revenue - Explicit Costs = Operating Profit
Operating Profit - Tax - Cost of Equity (Dividend) =
Economic Value Added (EVA)
Fundamentals: Profits and Shareholder
Value
Shareholder Value

Value of equity = the discounted (capitalised)
stream of after-tax returns to equity holders
EQ =

t= n
Dividendt + EVAt
t= 0
-----------------------------(1 + r)t
S
EQ = Shareholder Value
where
t = time horizon, and
r is the discount rate
Fundamentals: Profits and Shareholder
Value
Shareholder Value

Shareholder Value (accounting perspective)
t= n
EQ =
S
t= 0
where
Ct
-----------------------------(1 + re)t
t = time horizon, and
re = company’s cost of equity capital
Ct = net cash flow = (net income + depreciation +
other non-cash expenses) - (capital expenditure +
increase in working capital)
Fundamentals: Profits and
Shareholder Value
Shareholder Value
Shareholder Value is often used as the key
performance/success indicator
 As shown above, it may differ from the firm’s stock
market valuation
 Discounting puts a premium a near future and
penalises events remote in time

Shareholders compare company performance in terms
of shareholder value and vote with their feet
Market Power and Business Resources


Superior market power produces monopoly rents
Superior resources produce Ricardian rents
Resource-based Perspective
• Since the early 1980s, Resource-based Perspective
(RBP) has emerged as arguably the dominant
contemporary approach to business strategy (see John
Kay, 1993, The Foundations of Corporate Success,
Oxford University Press) and a “breakthrough in
academic as well as practical strategy thinking” (Foss,
N.J., ed. 1997, Resources, Forms and Strategies,
Oxford University Press)
• The essence of the RBP is to explain the creation,
sustainment and renewal of competitive advantage of
firms in terms of their access to and control over
economic resources
Resource-based Perspective
Resources defined as tangible and intangible
productive assets owned by the firm
RBP is based on the following generalisations:
 there are systematic and relatively stable
differences across firms in the extent to which
they control resources that are necessary for
engaging in economic activities;
 these differences in firms’ resource endowments
cause differences in economic performance with
sustainable competitive advantage (as
demonstrated by the stream of economic rents)
resulting from the possession of resources which
are scarce (unique) and hard to imitate or
substitute;
Resource-based Perspective
 firms seek to achieve sustainable competitive
advantage to produce superior (or at least
satisfactory) economic performance, which, in
turn, generates superior returns (economic
rents) for resource owners;
 intangible resources, which are often hard to
understand and imitate, such as skills, tacit
knowledge, managerial competences and
business reputation are more likely to produce
sustainable competitive advantages than
tangible physical resource; and
Resource-based Perspective
 for economic rents to be appropriated by the
firm, resources must be acquired at prices below
their discounted net present values (otherwise
rents are fully captured by those supplying the
resources to the firm).
 there may also be limitations on resource
mobility between firms to prevent hold-up
problems where some or all of the rent may be
appropriated by those resource owners who are
potentially footloose and who may threaten to
take their unique resources with them if they
leave the firm
Resource-based Perspective
• RBP focuses on core competencies and competence
building processes (Prahalad, C.K. & Hamel, G. 1990,
The Core Competence of the Corporation, Harvard
Business Review, 66, May-June) and, more generally,
the formation and management of knowledge as the
basis of (dynamic) business capability (knowledgebased competitive advantage) (Teece et al, 1997,
Dynamic Capabilities and Strategic Management,
Strategic Management Journal, 18:7)
• But RBP has also been criticised for the circularity of
its arguments, ie, firms are successful because they
possess unique resources but the uniqueness of these
resources is defined in terms of success attributed to
them
Resource and Capability Audit
Resource audit
takes resource-based view of the firm
 to identify:
 the inventory of resources and capabilities
 capacities to produce specific outputs
 the extent of capacity utilisation
 resource accumulation (stocks)
 new capability/capacity formation (new
additions/investment)

“Each firm is a unique collection of highly
differentiated resources and capabilities” (Grant)
Resource and Capability Audit
Resource audit to



enumerate tangible resources and
assess/evaluate the intangibles (eg, goodwill,
intellectual property, staff loyalties,
organisational ethos)
benchmark and compare with other firms/activities
Organisational capabilities refer to the firm’s
potential (ability) to best use its resources
 Distinctive competencies: What organization does particularly well relative to
the competitors
 Core competencies: Capabilities fundamental to firm’s strategy and
performance
Resource and Capability Audit
Resource Classification and Metrics
Tangible Resources
Examples of Metrics
Financial
Debt/Equity ratio
Credit rating
Physical
Scale of plants
Age of equipment
Intangible Resources
Technology
Number of patents, R&D staff
Human
Qualifications, Labour disputes
Goodwill/reputation
Customer brand recognition
Supplier discounts
Resource and Capability Audit
Capability Audit to



identify core (distinctive, critical) and non-core
capabilities, and the firm’s position in the value adding
web (a network of value chains)
discover new product, process and organisational
capabilities
leverage resources to increase productivity through
resource concentration, and/or conservation, and/or
accumulation, and/or synergy, and/or replication of
successful deployments
Resource and capability audits help to determine internal
Strengths and Weaknesses
Strategic Resource and Capability
Evaluation
 Classification of capabilities
Cross- functional capabilities
Broad functional capabilities
Activity based capabilities
Specialized capabilities
Single task capabilities
 Routinization is essential to translate operating
practices into capabilities
 Learning by doing creates difficult to copy
capabilities
 Trade-off between efficiency and flexibility in
capability formation
Strategic Resource and Capability
Evaluation
 Ways of leveraging resources
 Converging resources to a few, clearly defined goals:
Focus and target
 Accumulating resources through mining experience or
borrowing from other firms
 Complementing resources through blending and
balancing
 Conserving resources through recycling and co-opting
 Functional analysis
 Value chain analysis (Value Chain: Primary and
support activities)
Strategic Resource and Capability
Evaluation
 Replicating capabilities
 Replicating them internally
 Systematization of knowledge that underlies capabilities
 Creating Standard Operating Procedures (SOPs)
 Developing new capabilities
 Capabilities as a result of early experiences - Path
dependence, routines
 Organizational capabilities: Rigid or Dynamic?
 Core capabilities become core rigidities with changing
environment
 Dynamic capabilities: Firm’s ability to integrate, build, and
reconfigure internal and external competencies to address
rapidly changing environments
Strategic Resource and Capability
Evaluation
Capability development
 Acquiring capabilities through mergers & acquisitions
 Integrating issues
 Cultural and personality clashes
 Accessing capabilities through strategic alliances
 Sharing of resources in pursuit of common goals
 Creating new capabilities
 Acquiring necessary resources
 Integrating these resources
 Housed within dedicated organizational units
 Search, experimentation and problem solving
 Creation of organizational routines
 Management of motivation and incentives
 Role of ‘Knowledge Management’
 Incubating capabilities into separate organizational unit
Strategic Resource and Capability
Evaluation
Framework for analyzing resources and capabilities
 Identify the team’s resources and capabilities
 Explore the linkages between resources and capabilities
 Appraise the firm’s resources and capabilities on
 Strategic importance
 Relative strength
 Develop strategic implications
 In relations to strengths
 How can these be exploited more effectively and fully
 In relation to weaknesses
 Identify opportunities to outsource activates that can be better performed by
other organizations
 How can weakness be corrected through acquiring and developing resources and
capabilities
Strategic Resource and Capability
Evaluation
Strategic Evaluation Process
Goals and Values
Resource/Capability Evaluation
Existing
Capabilities
Opportunities & Threats
Competitive Advantage
Vision, Mission, Strategy
External
Environment
Strategy Implementation
Strategic Resource and Capability
Evaluation
Weighted Score Card
Resources
Weight/
Importance
Strength/Weakness
Score Description
Finance
HRM
0.1
0.2
8
3
Location
…...
Capabilities
0.2
9
easily available
disputes,
poor skills
most favourable
0.1
0.2
3
7
needs urgent att.
strong brand name
0.1
2
capricious
Product
innovation
Marketing
After-sale
support
…..
Conceptual Framework: internal
Operating Environment
Readings
Grant, chs. 5-6 and 17
Pearce& Robinson, chs. 2 and 6
Questions for Discussion
• What do you understand by the key success
factors?
• What is the strategic balance method and how
is it applied?
• What is the ‘resource-based’ view of the firm?
Give examples.
Ever wonder how some people could do more than100%? Ever
wonder about those people who say they are giving more than
100%? Have you been to those meetings where someone wants you
to achieve over 100%? How about achieving 103%?
Here's a little scorecard math that might prove helpful. What makes
life 100%?
If, A B C D E F G H I J K L M N O P Q R S T U V W X Y Z is
represented as: 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
22 23 24 25 26.
Then,
H A R D W O R K = 8 1 18 4 23 15 18 11 = 98%
K N O W L E D G E = 11 14 15 23 12 5 4 7 5 = 96%
But, A T T I T U D E = 1 20 20 9 20 21 4 5 = 100%
and B U L L ... T = 2 21 12 12 19 8 9 20 = 103%
So, it stands to reason that hardwork and knowledge will get you
close, attitude will get you there, but bull..t will put you over the top
(Anonymous)