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 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.
LO3.4 The resource-based view of the firm and the
different types of tangible and intangible resources, as
well as organizational capabilities.
3-3 admission.edhole.com
4. Learning Objectives (cont.)
LO 3.5 The four criteria that a firm’s resources must
possess to maintain a sustainable advantage and
how value created can be appropriated by
employees.
LO 3.6 The usefulness of financial ratio analysis, its
inherent limitations, and how to make meaningful
comparisons of performance across firms.
LO 3.7 The value of the “balanced scorecard” in
recognizing how the interests of a variety of
stakeholders can be interrelated.
LO 3.8 How firms are using Internet technologies to add
value and achieve unique advantages. (Appendix)
3-4 admission.edhole.com
5. The Limitations of SWOT Analysis
Strengths may not lead to an advantage
SWOT’s 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
3-5 admission.edhole.com
6. Value-Chain Analysis
Value-chain analysis
a strategic analysis of an organization that
uses value creating activities.
Value is the amount that buyers are
willing to pay for what a firm provides
them and is measured by total revenue
3-6 admission.edhole.com
7. Value-Chain Analysis
Primary activities
contribute to the physical creation of the
product or service, its sale and transfer to the
buyer, and its service after the sale.
inbound logistics, operations, outbound
logistics, marketing and sales, and service
3-7 admission.edhole.com
8. 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
3-8 admission.edhole.com
9. Value-Chain Analysis
Support activities
activities of the value chain that either add
value by themselves or add value through
important relationships with both primary
activities and other support activities
procurement, technology development,
human resource management, and general
administration.
3-9 admission.edhole.com
11. Primary Activity: Inbound Logistics
Associated with receiving, storing and
distributing inputs to the product
Location of distribution facilities
Warehouse layout
and designs
3-11 admission.edhole.com
12. Primary Activity: Operations
Associated with transforming inputs into
the final product form
Efficient plant operations
Incorporation of appropriate process
technology
Efficient plant layout and workflow design
3-12 admission.edhole.com
13. Primary Activity: Outbound Logistics
Associated with collecting, storing, and
distributing the product or service to
buyers
Effective shipping processes to provide quick
delivery and minimize damages
Shipping of goods in large lot sizes to
minimize transportation costs.
3-13 admission.edhole.com
14. Primary Activity: Marketing and Sales
Associated with purchases of products
and services by end users and the
inducements used to get them to make
purchases
Innovative approaches to promotion and
advertising
Proper identification of customer segments
and needs
3-14 admission.edhole.com
15. Primary Activity: Service
Associated with providing service to
enhance or maintain the value of the
product
Quick response to customer needs and
emergencies
Quality of service
personnel and
ongoing training
3-15 admission.edhole.com
16. Support Activity: Procurement
Function of purchasing inputs used in the
firm’s value chain
Procurement of raw material inputs
Development of collaborative “win-win”
relationships with suppliers
Analysis and selection of alternate sources
of inputs to minimize dependence on one
supplier
3-16 admission.edhole.com
17. Support Activity:
Human Resource Management
Activities involved in the recruiting, hiring,
training, development, and compensation
of all types of personnel
Effective recruiting, development, and
retention mechanisms for employees
Quality relations with trade unions
Reward and incentive programs to motivate
all employees
3-17 admission.edhole.com
18. Support Activity:
Technology Development
Related to a wide range of activities and
those embodied in processes and
equipment and the product itself
Effective R&D activities for process and
product initiatives
Positive collaborative relationships between
R&D and other departments
Excellent professional qualifications of
personnel
3-18 admission.edhole.com
19. Support Activity:
General Administration
Typically supports the entire value chain
and not individual activities
Effective planning systems
Excellent relationships with diverse
stakeholder groups
Effective information technology to integrate
value-creating activities
3-19 admission.edhole.com
20. Interrelationships among Value-Chain Activities
within and across Organizations
Interrelationships
among activities
within the firm
Relationships
among activities
within the firm and
with other
organization (e.g.,
customers and
suppliers)
3-20
Two levels
admission.edhole.com
21. Value Chains in Service Industries
3-21
admission.edhole.com
Exhibit 3.4
22. Resource-Based View of the Firm
Resource-based view of the firm
perspective that firms’ competitive
advantages are due to their endowment of
strategic resources that are valuable, rare,
costly to imitate, and costly to substitute.
3-22 admission.edhole.com
23. Resource-Based View of the Firm
Two perspectives
The internal analysis of phenomena within a
company
An external analysis of the industry and its
competitive environment
3-23 admission.edhole.com
24. Types of Resources
Tangible resources
organizational assets that are relatively easy
to identify, including physical assets, financial
resources, organizational resources, and
technological resources.
3-24 admission.edhole.com
25. Types of Resources
Intangible resources organizational
assets that are difficult to identify and
account for and are typically embedded in
unique routines and practices, including
human resources, innovation resources, and
reputation resources.
3-25 admission.edhole.com
26. Types of Resources
Organizational
capabilities
The competencies
and skills that a firm
employs to
transform inputs into
outputs.
3-26 admission.edhole.com
27. 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
3-27 admission.edhole.com
28. Firm Resources and Sustainable
Competitive Advantages
First, the resource must be valuable in the
sense that it exploits opportunities and/or
neutralizes threats in the firm’s environment.
Second, it must be rare among the firm’s
current and potential competitors.
3-28 admission.edhole.com
29. Firm Resources and Sustainable
Competitive Advantages
Third, the resource must be difficult for
competitors to imitate.
Fourth, the resource must have no
strategically equivalent substitutes.
3-29 admission.edhole.com
31. The Generation and Distribution of a
Firm’s 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
3-31
admission.edhole.com
32. Evaluating Firm Performance
Financial ratio
analysis
Balance sheet
Income statement
Historical
comparison
Comparison with
industry norms
Comparison with
key competitors
Stakeholder
perspective
Employees
Customers
Owners
3-32 admission.edhole.com
33. Financial Ratio Analysis
Five types of financial ratios
Short-term solvency or liquidity
Long-term solvency measures
Asset management (or turnover)
Profitability
Market value
3-33 admission.edhole.com
34. Financial Ratio Analysis
Historical comparisons
Comparison with industry norms
Comparison with key competitors
3-34 admission.edhole.com
35. Five Types of Financial Ratios
3-35 admission.edhole.com
36. The Balance Scorecard
Provides a meaningful integration of
many issues that come into evaluating a
firm’s performance
Four key perspectives
How do customers see us?
What must we excel at?
Can we continue to improve and create
value?
How do we look to shareholders?
3-36 admission.edhole.com
38. Internal Business Perspective
Processes
Decisions
Actions
Coordination
Resources and
capabilities
3-38 admission.edhole.com
39. Innovation and Learning Perspective
Introduction of new products and services
Greater value for customers
Increased operating efficiencies
3-39 admission.edhole.com
41. Potential Limitations of the
Balanced Scorecard
Lack of a clear strategy
Limited or ineffective executive sponsorship
Too much emphasis on financial measures
rather than non-financial measures
Poor data on actual performance
Inappropriate links to scorecard measures to
compensation
Inconsistent or inappropriate terminology
3-41 admission.edhole.com
Editor's Notes
Creating value for buyers that exceeds the costs of production is a key concept used in analyzing a firm’s competitive position.
B – baggage handling
Associated with receiving, storing and distributing inputs to the product
Location of distribution facilities
Material and inventory control systems
Systems to reduce time to send “returns” to suppliers
Warehouse layout and designs
Associated with transforming inputs into the final product form
Efficient plant operations
Incorporation of appropriate process technology
Quality production control systems
Efficient plant layout and workflow design
Associated with collecting, storing, and distributing the product or service to buyers
Effective shipping processes to provide quick delivery and minimize damages
Efficient finished goods warehousing processes
Shipping of goods in large lot sizes to minimize transportation costs.
Quality material handling equipment
Associated with purchases of products and services by end users and the inducements used to get them to make purchases
Highly motivated and competent sales force
Innovative approaches to promotion and advertising
Selection of most appropriate distribution channels
Proper identification of customer segments and needs
Effective pricing strategies
Associated with providing service to enhance or maintain the value of the product
Effective use of procedures to solicit customer feedback and to act on information
Quick response to customer needs and emergencies
Ability to furnish replacement parts
Effective management of parts and equipment inventory
Quality of service personnel and ongoing training
Warranty and guarantee policies
Function of purchasing inputs used in the firm’s value chain
Procurement of raw material inputs
Development of collaborative “win-win” relationships with suppliers
Effective procedures to purchase advertising and media services
Analysis and selection of alternate sources of inputs to minimize dependence on one supplier
Ability to make proper lease versus buy decisions
Activities involved in the recruiting, hiring, training, development, and compensation of all types of personnel
Effective recruiting, development, and retention mechanisms for employees
Quality relations with trade unions
Quality work environment to maximize overall employee performance and minimize absenteeism
Reward and incentive programs to motivate all employees
Related to a wide range of activities and those embodied in processes and equipment and the product itself
Effective R&D activities for process and product initiatives
Positive collaborative relationships between R&D and other departments
State-of-the art facilities and equipment
Culture to enhance creativity and innovation
Excellent professional qualifications of personnel
Ability to meet critical deadlines
Typically supports the entire value chain and not individual activities
Effective planning systems
Ability of top management to anticipate and act on key environmental trends and events
Ability to obtain low-cost funds for capital expenditures and working capital
Excellent relationships with diverse stakeholder groups
Ability to coordinate and integrate activities across the value chain
Highly visible to inculcate organizational culture, reputation, and values
Tangible Resources
Financial
• Firm’s cash account and cash equivalents.
• Firm’s capacity to raise equity.
• Firm’s borrowing capacity.
Physical
• Modern plant and facilities.
• Favorable manufacturing locations.
• State-of-the-art machinery and equipment.
Technological
• Trade secrets.
• Innovative production processes.
• Patents, copyrights, trademarks.
Organizational
• Effective strategic planning processes.
• Excellent evaluation and control systems.
Intangible Resources
Human
• Experience and capabilities of employees.
• Trust.
• Managerial skills.
• Firm-specific practices and procedures.
Innovation and creativity
• Technical and scientific skills.
• Innovation capacities.
Reputation
• Brand name.
• Reputation with customers for quality and reliability.
• Reputation with suppliers for fairness, non–zero-sum
relationships.
Organizational Capabilities
• Firm competencies or skills the firm employs to transfer inputs to outputs.
• Capacity to combine tangible and intangible resources, using organizational
processes to attain desired end.
EXAMPLES:
• Outstanding customer service.
• Excellent product development capabilities.
• Innovativeness of products and services.
• Ability to hire, motivate, and retain human capital.
C – organizational capabilities
path dependency. This simply means that resources are unique and
therefore scarce because of all that has happened along the path followed in their development
and/or accumulation.
causal ambiguity. This
means that would-be competitors may be thwarted because it is impossible to disentangle
the causes (or possible explanations) of either what the valuable resource is or how it can
be re-created.
social complexity
a characteristic of a
firm’s resources that
is costly to imitate
because the social
engineering required
is beyond the capability
of competitors,
including interpersonal
relations
among managers,
organizational culture,
and reputation
with suppliers and
customers.
• Employee Bargaining Power. If employees are vital to forming a firm’s unique
capability, they will earn disproportionately high wages. For example, marketing
professionals may have access to valuable information that helps them to understand
the intricacies of customer demands and expectations, or engineers may understand
unique technical aspects of the products or services. Additionally, in some industries
such as consulting, advertising, and tax preparation, clients tend to be very loyal
to individual professionals employed by the firm, instead of to the firm itself. This
enables them to “take the clients with them” if they leave. This enhances their bargaining
power.
• Employee Replacement Cost. If employees’ skills are idiosyncratic and rare (a source
of resource-based advantages), they should have high bargaining power based on the
high cost required by the firm to replace them. For example, Raymond Ozzie, the
software designer who was critical in the development of Lotus Notes, was able to
dictate the terms under which IBM acquired Lotus.
• Employee Exit Costs. This factor may tend to reduce an employee’s bargaining
power. An individual may face high personal costs when leaving the organization.
Thus, that individual’s threat of leaving may not be credible. In addition, an
employee’s expertise may be firm-specific and of limited value to other firms. Causal
ambiguity may make it difficult for the employee to explain his or her specific contribution
to a given project. Thus, a rival firm might be less likely to pay a high wage
premium since it would be unsure of the employee’s unique contribution.
• Manager Bargaining Power. Managers’ power is based on how well they create
resource-based advantages. They are generally charged with creating value through
the process of organizing, coordinating, and leveraging employees as well as other
forms of capital such as plant, equipment, and financial capital (addressed further in
Chapter 4). Such activities provide managers with sources of information that may
not be readily available to others. Thus, although managers may not know as much
about the specific nature of customers and technologies, they are in a position to have
a more thorough, integrated understanding of the total operation.
Processes
Cycle time
Quality
Employee Skills
Productivity