Assessing

the Internal
Environme
nt of the
Firm
chapter 3

Learning Objectives
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.

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Learning Objectives
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.

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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?
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The Limitations of SWOT Analysis

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

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Value-Chain Analysis
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

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Example: Streamlining the Value

Chain

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

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Value-Chain Analysis
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

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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

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Value-Chain Analysis
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

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The Value Chain

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
3-11
Free Press. All rights reserved.

Primary Activity: Inbound Logistics

Inbound logistics is primarily associated with receiving,
storing & distributing inputs to the product:

Material handling
Warehousing
Inventory control
Vehicle scheduling
Returns to suppliers

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Primary Activity: Operations

Operations include all activities associated with
transforming inputs in to the final product form:

Machining
Packaging
Assembly
Testing or quality control
Printing
Facility operations

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Primary Activity: Outbound

Logistics
Outbound logistics includes collecting, storing, &
distributing the product or service to buyers:

Finished goods
Warehousing
Material handling
Delivery vehicle operation
Order processing
Scheduling & distribution

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Primary Activity: Marketing &

Sales
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

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Primary Activity: Service

Service includes all actions associated with providing
service to enhance or maintain the value of the
product:

Installation
Repair
Training
Parts supply
Product adjustment

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Support Activity: Procurement

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

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Support Activity: Technology

Development
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

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Support Activity: Human

Resource Management
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

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Support Activity: General

Administration
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

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Interrelationships Among ValueChain 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
with other
he
t
d in
stakeholders such
n
a
a
h y
p
c
x
as customers &
E ue
b
val
g suppliers
n
i
g s
n
a rce
h
c ou
x
e es
r
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Example: The Value Chain in

Service Organizations

Exhibit 3.4 Some Examples of Value Chains in Service

Industries

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Resource-Based View of the Firm

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

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Types of Firm Resources

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

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Types of Firm Resources

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

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Types of Firm Resources

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

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Question?
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.

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Firm Resources and Sustainable

Competitive Advantages
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

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Sources of Inimitability
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

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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
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Management, 17:99 120.

The Generation and Distribution of the

Firms 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

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Evaluating Firm Performance

Financial Ratio
Analysis

Balanced Scorecard
Stakeholder Perspective

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

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

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

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Five Types of Financial Ratios

Exhibit 3.9
A Summary
of Five
Types of
Financial
Ratios

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The Balanced Scorecard

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)

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Customer Perspective
Managers must articulate goals for four key categories of
customer concerns:

Time
Quality
Performance and service
Cost

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Internal Business Perspective

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

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Innovation and Learning Perspective

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)

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Financial Perspective
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

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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

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