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.
LO3.6The value of the “balanced scorecard” in recognizing
how the interests of a variety of stakeholders can be
interrelated.
 The Importance of the Internal
3-4
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?
 The Limitations of SWOT Analysis
3-5
 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
 Value-Chain Analysis
3-7

 Primary activities contribute to the

physical creation of the product or
service; the sale & transfer to the buyer;
and service after the sale:
 Value-Chain Analysis
3-8

 Support activities either add value by

themselves or add value through
important relationships with both primary
activities & other support activities:
 Interrelationships Among Value-
3-9
Chain 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
the with other
n d by
p a in stakeholders such
Ex cha ing as customers &
 ue ang es
l
v exch ourc
a suppliers
res
 Example: The Value Chain in Service
3-10
Organizations

Exhibit 3.4 Some Examples of Value Chains in Service Industries

 Resource-Based View of the Firm
3-11

 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
3-12

 Tangible resources are assets that are

relatively easy to identify:
 Types of Firm Resources
3-13

 Intangible resources are difficult for

competitors to account for or imitate – are
embedded in unique routines & practices:
 Types of Firm Resources
3-14

 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
 Firm Resources and Sustainable
Competitive Advantages
3-15
 Sources of Inimitability
3-16
 Criteria for Sustainable
3-17
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
Management, 17:99 – 120.
 Evaluating Firm Performance
3-18
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
 The Balanced Scorecard
3-19

 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
3-20

 Managers must articulate goals for four

key categories of customer concerns:
 Time
 Quality
 Performance and service
 Cost
 Internal Business Perspective
3-21

 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
 Innovation and Learning
3-22
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)
 Financial Perspective
3-23

 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
3-24
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