Internal Analysis

1. Internal Analysis MBA – August 23, 2009 Professor William Wan

2. Objectives • Introduce value chain and describe the differences between primary and support activities. • Introduce resources and capabilities and the RBV four characteristics. • Combine the above two for conducting internal analysis.

3. Internal Analysis • Internal analysis helps managers understand what is strategically possibleand choose the best strategy. • A firm cannot successfully implement any strategy without the appropriate set of resources and capabilities. • Weaknesses—the firm’s resource and capability deficiencies that make it difficult for the firm to complete important tasks • Strengths—resources and capabilities that allow the firm to complete important tasks.

4. Value Chain • Consists of the structure of activities that firms use to implement their strategy. • Sequential process of value-creating activities • Firms analyze their value chain to understand how activities contribute to creating value for customers.

5. The amount that buyers are willing to pay for what a firm provides them • Value is measured by total revenue • Firm is profitable to the extent the value it receives exceeds the total costs involved in creating its product or service

6. The Value Chain Firm Value Chain Primary Activities Support Activities FIRM INFRASTRUCTURE HR MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT MARKETING & SALES SERVICE INBOUND LOGISTICS OUTBOUND LOGISTICS OPERATIONS Industry Value Chain Supplier Value Chains Firm Value Chain Buyer Value Chains

7. Value-Chain Analysis • Each stage of the value chain’s primary activities adds costs, but creates value as well. • Primary Activities: • Activities that add value directly to the production and selling of a product. • Support Activities • Activities that provide support to the primary activities so that they can be completed effectively. • Add value indirectly

8. Outsourcing FIRM INFRASTRUCTURE HR MANAGEMENT TECHNOLOGY DEVELOPMENT PROCUREMENT MARKETING & SALES SERVICE INBOUND LOGISTICS OUTBOUND LOGISTICS OPERATIONS Outsourcing Partner

9. Resource Based View (RBV) • Draw a sharp distinction between a portfolio of businesses & a portfolio of resources. • Conventional conceptualization of a firm is defined by its business(es); but this recent line of thought proposes that a firm should be defined by what resources & capabilities it possess. • If just focusing on end products, miss the real strengths of a company

10. Products Businesses Core Competencies Roots = Resources & Capabilities

11. “Tree” Analogy • The products we see made by a company is the outcomes of the “roots” of the company. • We don’t normally see the roots (resources & capabilities) of a company, but they are the most important. The roots grow the trunk of a tree.

12. How does a tree grow with a large trunk, green leaves, and sweet fruits, etc. ? • By mostly taking care of the roots! (Trimming the leaves does not help a whole lot.)

13. Tangible Resources • Relatively easy to identify. • Examples: • Financial resources • Firm’s cash accounts • Firm’s capacity to raise equity • Firm’s borrowing capacity • Physical resources • Modern plant and facilities • Favorable manufacturing locations • State-of-the-art machinery and equipment

14. Intangible Resources • Difficult for competitors (and the firm itself) to account for or imitate, typically embedded in unique routines and practices that have evolved over time. • Examples: • Human capital • Experience and capabilities of employees • Trust • Firm-specific practices and procedures • Reputation • Brand name • Reputation with customers & suppliers

15. Capabilities • Competencies or skills that a firm employs to combine tangible and/or intangible resources. • Examples: • Outstanding customer service • Excellent product development capabilities • Innovativeness of products and services • Ability to hire, motivate, and retain human capital

16. RBV 4 Criteria Is the resource/capability… Valuable? Rare? Inimitatable? Nonsubstitutable? What does it mean? • Neutralize threats and exploit opportunities • Not many firms possess • Hard for competitors to imitate the resource/capability • No equivalent strategic resources or capabilities

17. Strategic Implications

18. Core Competence • A resource/capability that (closely) meets all 4 RBV criteria; hence leading to sustainable competitive advantage.

19. Searching for Core Competence • Step 1. Identify a company’s value-adding activities. • Step 2. Use a Value Chain to help understand where these value-adding activities reside in a company’s value chain. • *identify the resources/capabilities leading to those activities.

20. Step 3. Use the RBV 4 criteria to assess if the company has any broad core competence(s) by assessing each main value chain activities (e.g., marketing; human resources). *Pay attention if a value chain activity has a cluster of value-adding activities. It may indicate the presence of broad core competence. Step 4. If no broad core competence is present, continue to use the four criteria to assess if the company has any narrow core competence (e.g., advertising under marketing). Continue this process.

21. In essence, • A firm’s internal environment (strengths and weaknesses) informs us what opportunities it can capture and what threats it can deal with. • Similar to Five Forces for industry analysis, value chain analysis can assist us to conduct an internal analysis. • Can use the RBV 4 criteria to assess which activities (through a firm’s resources & capabilities) of the value chain are a firm’s core competence(s).