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Chapter 5
Internal Analysis

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Chapter Topics
Resource-based View of the Firm Value Chain Analysis SWOT Analysis Internal Analysis: Making Meaningful Comparisons

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Ingredients Critical to Successful Strategy

Be consistent with conditions in the competitive environment Place realistic requirements on the firms resources Be carefully executed

Strategy must

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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

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The Three Basic Resources

Tangible assets
Easiest to identify and often found on a firms balance sheet Include physical and financial assets Examples: production facilities, raw materials, financial resources

Intangible assets
Cannot be seen or touched Often very critical in creating competitive advantage Examples: brand names, company reputation, company morale

Organizational capabilities
Involve skills ability to combine assets, people, and processes used to transform inputs into outputs

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Ex. 5-2: Examples of Different Resources (selected)

Tangible Assets
Hampton Inns reservation system
Ford Motors cash reserves 3Ms patents

Intangible Assets
Budweisers brand name
Dell Computers reputation

Organizational Capabilities
Dell Computers customer service
Wal-marts purchasing and inbound logistics

Nikes advertising with Sonys product LeBron James development process

Georgia Pacifics land holdings

Katie Couric as NBCs Today host

Cokes global distribution coordination

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What Makes a Resource Valuable?

Competitive superiority: Does the resource help fulfill a customers need better than those of the firms competitors? Resource scarcity: Is the resource in short supply? Inimitability: Is the resource easily copied or acquired? Appropriability: Who actually gets the profit created by a resource? Durability: How rapidly will the resource depreciate? Substitutability? Are other alternatives available?

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Isolating Mechanisms
Physically unique resources
Resources virtually impossible to imitate E.g., one-of-a-kind real estate location, mineral rights, patents

Path-dependent resources
Resources that must be created over time in a manner that is often expensive and difficult to accelerate E.g., Dell Computers system of direct sales of customized PCs via the Internet, Coca-Colas brand name, Gerber Baby Foods reputation for quality
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Isolating Mechanisms
Causal ambiguity
Situations where it is difficult for competitors to understand how a firm has created its advantage E.g., Southwest Airlines approach
Same plane, routes, gate procedures, number of attendants Culture of fun, family, and frugal yet focused service

Economic deterrence
Involves large capital investments in capacity to produce products or services in a given market that are scale sensitive
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Ex. 5-4: Resource Inimitability

(Adapted)

Easy to imitate
Cash, commodities

Can be imitated (but may not be)

Capacity preemption, economies of scale

Difficult to imitate
Brand loyalty, employee satisfaction, reputation for fairness

Cannot be imitated
Patents, unique locations, unique assets
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Guidelines: Using the RBV in Internal Analysis

Disaggregate resources break them down into more specific competencies rather than use broad categories Utilize a functional perspective in disaggregating tangible and intangible assets and organizational capabilities Look at organizational processes and combinations of resources, not only at isolated assets or capabilities Use the value chain approach to uncover potentially valuable capabilities, activities, and processes
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Ex. 5-6: Key Resources Across Functional Areas (Selected)

Marketing Firms products/services Concentration of sales in a few products or a few customers Ability to gather needed information about markets Market share Product-service mix and expansion potential Channels of distribution Effective sales organization Financial and Accounting Ability to raise short-term and long-term 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

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Ex. 5-6 (contd.)

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 Personnel 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

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Ex. 5-6 (contd.)

Quality Management Relationships with suppliers, customers Internal practices to enhance quality of products and services Procedures for monitoring quality Information Systems Timeliness and accuracy of information about sales, operations, cash, and suppliers Relevance of information for tactical decisions Information to manage quality issues, customer service Ability of people to use information provided

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Ex. 5-6 (contd.)

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Organization and General Management Organizational structure Firms image and prestige Firms record in achieving objectives Organization of communication system Organizational climate and culture Use of systematic procedures in decision making Top management skills, capabilities, and interest Strategic planning system Intra-organizational synergy
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What is a Value Chain?

The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value

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What is Value Chain Analysis?

Focuses on how a business creates customer value by examining contributions of different internal activities to that value Divides a business into a set of activities within the business
Starts with inputs a firm receives Finishes with firms products or services and after-sales service to customers

Allows for better identification of a firms strengths and weaknesses since the business is viewed as a process
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Ex. 5-7: The Value Chain

General Administration Human Resource Management
Research, Technology, and Systems Development

Procurement
Inbound Operations Outbound Marketing Logistics Logistics and Sales Service

Primary Activities
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Conducting a Value Chain Analysis

Identify activities Allocate costs Recognize the difficulty in activity-based cost accounting Identify the activities that differentiate the firm Examine the value chain Develop meaningful comparisons to use when evaluating value activities

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Ex. 5-10: Possible Factors for Assessing Sources of Differentiation in Primary and Support Activities of the Value Chain (selected items)

General Administration Capability to identify new product market opportunities and potential environmental threats Quality of strategic planning system to achieve corporate objectives Ability to obtain relatively lowcost funds for capital expenditures and working capital

Human Resource Management Effectiveness of procedures for recruiting, training, and promoting all levels of employees Appropriateness of reward system for motivating and challenging employees A work environment minimizing absenteeism and keeping turnover low

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Ex. 5-10 (contd.)

Technology Development Success of R&D activities in leading to product and process innovation Quality of working relationships between R&D personnel and other departments Timeliness of technology development activities in meeting critical deadlines Procurement Development of alternate sources for inputs to minimize dependence on a single supplier Procurement of raw materials (1) on a timely basis, (2) at lowest possible cost, and (3) at acceptable levels of quality Procedures for procurement of plant, machinery, and buildings

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Ex. 5-10 (contd.)

Inbound Logistics Soundness of material and inventory control systems Efficiency of raw material warehousing activities Operations Outbound Logistics

Productivity of equipment Timeliness and efficiency compared to key of delivery of finished competitors goods and services Appropriate automation of production processes Effectiveness of production control systems to improve quality and improve costs Efficiency of finished goods warehousing activities

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Ex. 5-10 (contd.)

Marketing and Sales Effectiveness of research to identify customer segments and needs Innovation in sales promotion and advertising Evaluation of alternate distribution channels Motivation and compensation of sales force Development of quality image and favorable reputation Service Means to solicit customer input for product improvements Promptness of attention to customer complaints Appropriateness of warranty and guarantee policies Quality of customer education and training Ability to provide replacement parts and repair services

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SWOT Analysis
Based on assumption an effective strategy derives from a sound fit between a firms internal resources and its external situation

Opportunities
A major favorable situation in a firms environment

Threats
A major unfavorable situation in a firms environment

Strengths

Weaknesses

A limitation or deficiency in one or A resource advantage relative to competitors and the needs of more resources or competencies relative to competitors markets firm serves
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Apple Computer
Strengths
Sizable miniature storage expertise User-friendly engineering skill Reputation and image with youthful consumers Brand name Web-savvy organization and people Jobs Pixar experience

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Weaknesses
Economies of scale vs. computer skills Maturing computer markets Limited financial resources Limited music industry expertise

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Apple Computer
Opportunities
Confused online music situation Emerging file-sharing restrictions Few core computerrelated opportunities
Threats
Growing global computer companies Major computer competitors

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Ex. 5-12: SWOT Analysis Diagram

Numerous environmental opportunities

Cell 3: Supports a turnaround-oriented strategy

Cell 1: Supports an aggressive strategy

Critical internal weaknesses

Cell 4: Supports a defensive strategy Cell 2: Supports a diversification strategy

Substantial internal strengths

Major environmental threats

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Limitations of SWOT Analysis

Can overemphasize internal strengths and downplay external threats Can be static and can risk ignoring changing circumstances Can overemphasize a single strength or element of strategy A strength is not necessarily a source of competitive advantages

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Internal Analysis: Making Meaningful Comparisons

1. Comparison with past performance

2. Stages of industry evolution

Perspectives to use

4. Comparison with success factors in industry

3. Benchmarking comparison with competitors

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Ex. 5-13: Sources of Distinctive Competence at Different Stages of Industry Evolution

Functional Area
Marketing

Introduction Growth
Resources/skills to create widespread awareness and find acceptance from customers ; advantageous access to distribution Ability to establish brand recognition, find niche, reduce price, solidify strong distribution relations, and develop new channels

Maturity
Skills in aggressively promoting products to new markets and holding existing markets; pricing flexibility; skills in differentiating products and holding customer loyalty

Decline
Cost effective means of efficient access to selected channels and markets; strong customer loyalty or dependence; strong company image

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Ex. 5-13 (contd.)

Functional Area
Production operations

Introduction
Ability to expand capacity effectively, limit number of designs, develop standards

Growth
Ability to add product variants, centralize production, or otherwise lower costs; ability to improve product quality; seasonal subcontracting capacity

Maturity
Ability to improve product and reduce costs; ability to share or reduce capacity; advantageous supplier relationships; subcontracting

Decline
Ability to prune product line; cost advantage in production, location or distribution; simplified inventory control; subcontracting or long production runs

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Ex. 5-13 (contd.)

Functional Area
Finance

Introduction
Resources to support high net cash overflow and initial losses; ability to use leverage effectively

Growth
Ability to finance rapid expansion, to have net cash outflows but increasing profits; resources to support product improvements

Maturity
Ability to generate and redistribute increasing net cash inflows; effective cost control systems

Decline
Ability to reuse or liquidate unneeded equipment; advantage in cost of facilities; control system accuracy; streamlined management control

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Ex. 5-13 (contd.)

Functional Area
Personnel

Introduction
Flexibility in staffing and training new management; existence of employees with key skills in new products or markets

Growth
Existence of an ability to add skilled personnel; motivated and loyal workforce

Maturity
Ability to cost effectively, reduce workforce, increase efficiency

Decline
Capacity to reduce and reallocate personnel

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Ex. 5-13 (contd.)

Functional Area
Engineering and R&D

Introduction
Ability to make engineering changes, have technical bugs in product and process resolved Engineering: market penetration

Growth
Skill in quality and new feature development; ability to start developing successor product Sales: consumer loyalty; market share

Maturity
Ability to reduce costs, develop variants, differentiate products Production efficiency: successor products

Decline
Ability to support other grown areas or to apply product to unique customer needs Finance: maximum investment recovery

Key functional area and strategy focus

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