Class 3 Internal Conditions

Assessing the
Internal
Environment of
the Firm
chapter 3
Copyright 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale
or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website,
in whole or part.
Value-Chain Analysis
3-2
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
Copyright 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
3-3
Primary activities
Inbound logistics
Operations
Outbound logistics
Marketing & sales
Service
3-4
Support activities
Procurement
Technology development
Human resource management
General administration
The Value Chain

3-5
Exhibit 3.1 The Value Chain: Primary and Support Activities

Source: Reprinted with permission of The Free Press, a division of Simon & Schuster Inc., from Competitive
Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright 1985, 1998 by The
Free Press. All rights reserved.
Primary Activity:
Inbound Logistics
3-6
Inbound logistics is primarily associated with

receiving, storing & distributing inputs to the
product:
Material handling
Warehousing
Inventory control
Vehicle scheduling
Returns to suppliers
Primary Activity: Operations

3-7
Operations include all activities associated with

transforming inputs in to the final product form:
Machining
Packaging
Assembly
Testing or quality control
Printing
Facility operations
Primary Activity:
Outbound Logistics
3-8
Outbound logistics includes collecting, storing,

& distributing the product or service to buyers:
Finished goods
Warehousing
Material handling
Delivery vehicle operation
Order processing
Scheduling & distribution
Primary Activity:
Marketing & Sales
3-9
Marketing & sales activities involve purchases

of products & services by end users and includes
how to induce buyers to make those purchases:
Advertising
Promotion
Sales force management
Pricing & price quoting
Channel selection
Channel relations
Primary Activity: Service

3-10
Service includes all actions associated with

providing service to enhance or maintain the
value of the product:
Installation
Repair
Training
Parts supply
Product adjustment
Support Activity: Procurement

3-11
Procurement involves how the firm purchases

inputs used in its value chain:
Procurement of raw material inputs
Optimizing quality & speed
Minimizing associated costs
Development of collaborative win-win relationships

with suppliers
Analysis & selection of alternative sources of inputs
to minimize dependence on one supplier
Support Activity: Technology

Development
3-12
Technology development is related to a wide

range of activities:
Effective R&D activities for process & product
initiatives
Collaborative relationships between R&D and other
departments
State-of-the-art facilities & equipment
Excellent professional qualifications of personnel
Support Activity: Human Resource

Management
3-13
Human resource management consists of

activities involved in recruitment, hiring, training
& development, & compensation of all types of
personnel:
Effective employee recruiting, development, &
retention mechanisms
Quality relations with trade unions
Reward & incentive programs to motivate all
employees
Support Activity:
General Administration
3-14
General administration involves:

Effective planning systems to attain overall goals &
objectives
Excellent relations with diverse stakeholder groups
Effective information technology to coordinate &
integrate value-creating activities across the value
chain
Ability of top management to anticipate & act on
key environmental trends & events, create strong
values, culture & reputation
Types of Firm Resources

3-15
Tangible resources are assets that are

relatively easy to identify:
Physical assets: plant & facilities, location,
machinery & equipment
Financial assets: cash & cash equivalents,
borrowing capacity, capacity to raise equity
Technological resources: trade secrets, patents,
copyrights, trademarks, innovative production
processes
Organizational resources: effective planning
processes & control systems

3-16
Intangible resources are difficult for competitors

to account for or imitate are embedded in
unique routines & practices:
Human resources: trust, experience &
capabilities of employees; managerial skills &
effectiveness of work teams
Innovation resources: technical & scientific
expertise & ideas; innovation capabilities
Reputation resources: brand names,
reputation for fairness with suppliers;
reputation for reliability & product quality with
customers

3-17
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
Example: The Value Chain in

Service Organizations
3-18
Exhibit 3.4 Some Examples of Value Chains in Service

Industries
Firm Resources and Sustainable

Competitive Advantages
3-19
Strategic resources have four attributes:

Valuable in formulating & implementing
strategies to improve efficiency or effectiveness
Rare or uncommon; difficult to exploit
Difficult to imitate or copy due to physical
uniqueness, path dependency, causal
ambiguity, or social complexity
Difficult to substitute with strategically
equivalent resources or capabilities
Criteria for Sustainable

Competitive Advantage
3-20
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

3-21
Financial Ratio Analysis
Balanced Scorecard
Stakeholder Perspective
Five Types of Financial Ratios

3-22
The Balanced Scorecard

3-23
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
3-24
Managers must articulate goals for four key

categories of customer concerns:
Time
Quality
Performance and service
Cost
Internal Business Perspective

3-25
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

Perspective
3-26
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
3-27
Managers must measure how the firms 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

Class 3 Internal Conditions

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Class 3 Internal Conditions

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Assessing the

Value-chain analysis looks at the sequential

The Value Chain

Exhibit 3.1 The Value Chain: Primary and Support Activities

Inbound logistics is primarily associated with

Primary Activity: Operations

Operations include all activities associated with

Outbound logistics includes collecting, storing,

Marketing & sales activities involve purchases

Primary Activity: Service

Service includes all actions associated with

Support Activity: Procurement

Procurement involves how the firm purchases

Development of collaborative win-win relationships

Support Activity: Technology

Technology development is related to a wide

Support Activity: Human Resource

Human resource management consists of

General administration involves:

Types of Firm Resources

Tangible resources are assets that are

Types of Firm Resources

Intangible resources are difficult for competitors

Types of Firm Resources

Organizational capabilities are competencies

Example: The Value Chain in

Exhibit 3.4 Some Examples of Value Chains in Service

Firm Resources and Sustainable

Strategic resources have four attributes:

Criteria for Sustainable

Exhibit 3.7 Criteria for Sustainable Competitive Advantage and

Evaluating Firm Performance

Financial Ratio Analysis

Five Types of Financial Ratios

The Balanced Scorecard

A meaningful integration of many issues that

Managers must articulate goals for four key

Internal Business Perspective

Managers must focus on those critical internal

Innovation and Learning

Managers must make frequent changes to

Managers must measure how the firms strategy,

Profitability, growth, shareholder value

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