1 Session 9 Internal Analysis IrwinMc GrawHill 2000

1 Session 9 Internal Analysis Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

2 Session Topics Resource-Based View of the Firm l SWOT Analysis l The Functional Approach l Value Chain Analysis l Internal Analysis: Making Meaningful Comparisons l Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

3 Ingredients Critical to a Successful Strategy Be consistent with conditions in the competitive environment Strategy must. . . Place realistic requirements on the firm’s resources Be carefully implemented/executed Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

4 What is the Resource-Based View of the Firm? Firms differ in fundamental ways because each firm possesses a unique “bundle” of resources tangible and intangible assets and organizational capabilities - to make use of those assets. Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

5 The RBV of The Firm More internally oriented l Key analytic tool is value chain analysis l Resources are not mobile/transferable across company and industry boundaries l Focuses on sharpening your skills at executing value chain activities that create superior efficiency, innovation, quality, and/or company responsiveness. l Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

The Industrial/Organizational Economics Perspective 6 More externally oriented l Key Analytic tool is Porter’s Five Forces Model l Assumes that resources are transferable/mobile across company boundaries l More of a free-agent mentality l Choose your industry wisely and then set about to develop resource proficiency l Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

7 The Three Basic Resource Types l Tangible assets l l Intangible assets l l Easiest to identify and often found on a firm’s balance sheet Include physical and financial assets Examples: Production facilities, raw materials, financial resources, real estate, computers Cannot be seen or touched Often very critical in creating competitive advantage Examples: Brand names, company reputation, company morale, patents and trademarks, accumulated experience Organizational capabilities l Involve skills - ability to combine assets, people, and processes - used to transform inputs into outputs Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

8 Examples of Different Resources Tangible Assets Intangible Assets • Amazon’s Web • Nike’s brand name Presence • Mc. Donald’s locations • Georgia Pacific’s land holdings • Virgin Airlines’ plane fleet • Coca-Cola’s Coke formula • Coke’s brand recognition • KFC – Colonel Sanders • Disney’s “magical” image • IBM’s management team • Southwest Airlines culture Irwin/Mc. Graw-Hill Organizational Capabilities • Southwest’s turnaround time • Wal-Mart’s purchasing and inbound logistics • Apple’s productdevelopment processes • Nordstrom’s customer service • 3 M’s innovation process © 2000 The Mc. Graw-Hill Companies, Inc.

9 What Makes a Resource Valuable? 1. Competitive superiority: Does the resource help fulfill a customer’s need better than those of firm’s competitors? 2. Resource scarcity: Is the resource in short supply? 3. Inimitability: Is the resource easily copied or acquired? 4. Appropriability: Who actually gets the profit created by a resource? 5. Durability: How rapidly will the resource depreciate? 6. Substitutability: Are other alternatives available? Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

10 Characteristics Making Resources Difficult to Imitate l l Physically unique resources l Resources virtually impossible to imitate l Examples: One-of-a-kind real estate location, mineral rights, patents Path-dependent resources l Resources that must be created over time in a manner that is often expensive and difficult to accelerate l Examples: Dell Computer’s system of direct sales of customized PCs via the Internet, Coca-Cola’s brand name, Gerber Baby Food’s reputation for quality Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

11 Characteristics Making Resources Difficult to Imitate l l Causal ambiguity (How do they do that? ) l Situations where it is difficult for competitors to understand how a firm has created its advantage l Example: Southwest Airlines’ approach l Same plane, routes, gate procedures, number of attendants l Culture of fun, family, and frugal yet focused services Economic deterrence l Involves large capital investments in capacity to provide products or services in a given market that are scale sensitive Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

12 Resource Inimitability Cannot be imitated • Patents • Unique locations • Unique assets Difficult to imitate • Brand loyalty • Employee satisfaction • Reputation for fairness Can be imitated • Capacity preemption • Economies of scale Easy to imitate • Cash • Commodities Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

13 Guidelines: Using the RBV in Internal Analysis l Disaggregate resources - break them into more specific competencies rather than use broad categories l Use a functional perspective in disaggregating tangible and intangible assets and organizational capabilities l Look at organizational processes and combinations of resources, not only at isolated assets or capabilities l Use the value chain approach to uncover potentially valuable capabilities, activities, and processes Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

14 Key Resources Across Functional Areas Marketing Financial and Accounting • Firm’s products/services • Concentration of sales in a few products or to a few customers • Ability to gather needed information about markets • Market share • Product-service mix and expansion potential • Channels of distribution • Effective sales organization • Product-service image, reputation, and quality’ • Imaginativeness, efficiency, effectiveness of sales promotion • Pricing strategy and flexibility • After-sale service and follow-up • Goodwill - brand loyalty • Ability to raise short-term and longterm capital; debt-equity • Corporate-level resources • Cost of capital relative to competitors • Tax considerations • Relations with owners, investors, and stockholders • Leverage position • Cost of entry and barriers to entry • Price-earnings ration • Working capital • Effective cost control • Financial size • Efficiency and effectiveness of accounting system Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

15 Key Resources Across Functional Areas (continued) Production, Operations, Technical • Raw materials cost and availability, supplier relationships • Inventory control systems • Location, layout, and use of facilities • Economies of scale • Technical efficiency of facilities • Effectiveness of subcontracting use • Degree of vertical integration • Efficiency and cost-benefit of equipment • Effectiveness of operation control procedures • Costs and technological competencies relative to competitors • Research and development • Patents and trademarks Irwin/Mc. Graw-Hill Human Resources • Management personnel • Employees’ skills and morale • Labor relations costs compared to competitors • Efficiency and effectiveness of personnel policies • Effectiveness of incentives used to motivate performance • Ability to level peaks and valleys of employment • Employee turnover and absenteeism • Specialized skills • Experience © 2000 The Mc. Graw-Hill Companies, Inc.

16 Key Resources Across Functional Areas (continued) Quality Management Information Systems • Relationship with suppliers, customers • Timeliness and accuracy of information about sales, operations, cash, and suppliers • Internal practices to enhance quality of products and services • Relevance of information for tactical decisions • Procedures for monitoring quality • Information to manage quality issues: customer service • Ability of people to use information provided Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

17 Fig. 6 -5: Key Resources Across Functional Areas (concluded) Organization and General Management • Organizational structure • Firm’s image and prestige • Firm’s record in achieving objectives • Organization of communication system • Overall organizational control system • Organizational climate and culture • Use of systematic procedures in decision making • Top-management skills, capabilities, and interest • Strategic planning system • Intra-organizational synergy Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

18 SWOT Analysis Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation Opportunities A major favorable situation in a firm’s environment Threats A major unfavorable situation in a firm’s environment Strengths A resource advantage relative to competitors and the needs of markets firm serves Weaknesses A limitation or deficiency in one or more resources or competencies relative to competitors Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

19 SWOT Analysis Diagram Numerous environmental opportunities Critical internal weaknesses Cell 3: Supports a turnaroundoriented strategy Cell 1: Supports an aggressive strategy Cell 4: Supports a defensive strategy Cell 2: Supports a diversification strategy Substantial internal strengths Major environmental threats Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

20 What is Value Chain Analysis? Focuses on how a business creates customer value by examining contributions of different internal activities to that value l Divides a business into sets of activities within the business l l Starts with inputs a firm receives Finishes with firm’s products or services and aftersales service to customers Allows better identification of a firm’s strengths and weaknesses since the business is viewed as a process Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.

21 The Value Chain Irwin/Mc. Graw-Hill Primary Activities Marketing and sales Outbound logistics Operations Research, technology, and systems development Procurement M ar gi n Service M ar gi n Human resource management Inbound Logistics Support Activities General administration © 2000 The Mc. Graw-Hill Companies, Inc.

22 Internal Analysis: Making Meaningful Comparisons 1. Comparison with past performance Perspectives to use in evaluating how a firm stacks up based on its internal capabilities 2. Stages of industry evolution 3. Benchmarking - Comparison with competitors 4. Comparison with success factors in the industry Irwin/Mc. Graw-Hill © 2000 The Mc. Graw-Hill Companies, Inc.