Value Chain in Strategic Management

1. Assessing the
Internal
Environment of
the Firm
Chapter
Three
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 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.
3-2

3. 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)
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4. 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
3-4

5. 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
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6. 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
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7. 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
3-7

8. 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.
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9. The Value Chain
3-9
Exhibit 3.1

10. Primary Activity: Inbound Logistics
Associated with receiving, storing and
distributing inputs to the product
 Location of distribution facilities
 Warehouse layout
and designs
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11. 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
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12. 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.
3-12

13. 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
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14. 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
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15. 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
3-15

16. 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
3-16

17. 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
3-17

18. 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
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19. 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)
3-19
Two levels

20. Value Chains in Service Industries
3-20
Exhibit 3.4

21. 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.
3-21

22. 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
3-22

23. Types of Resources
Tangible resources
 organizational assets that are relatively easy
to identify, including physical assets, financial
resources, organizational resources, and
technological resources.
3-23

24. 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.
3-24

25. Types of Resources
Organizational
capabilities
 The competencies
and skills that a firm
employs to
transform inputs into
outputs.
3-25

26. 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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27. 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.
3-27

28. 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.
3-28

29. Sources of Inimitability
Physical
uniqueness
Path dependency
Causal ambiguity
Social complexity
3-29

30. The Generation and Distribution of a Firm’s
Profits
Employee bargaining power
Employee replacement cost
Employee exit costs
Manager bargaining power
3-30
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

31. 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
3-31

32. Financial Ratio Analysis
Five types of financial ratios
 Short-term solvency or liquidity
 Long-term solvency measures
 Asset management (or turnover)
 Profitability
 Market value
3-32

33. Financial Ratio Analysis
Historical comparisons
Comparison with industry norms
Comparison with key competitors
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34. Five Types of Financial Ratios
3-34

35. 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?
3-35

36. Customer Perspective
Time
Quality
Performance and service
Cost
3-36

37. Internal Business Perspective
Processes
Decisions
Actions
Coordination
Resources and
capabilities
3-37

38. Innovation and Learning Perspective
Introduction of new products and services
Greater value for customers
Increased operating efficiencies
3-38

39. Financial Perspective
Profitability
Growth
Shareholder value
Increased market share
Reduced operating expenses
Higher asset turnover
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40. 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
3-40