Session 8

1. Session 8 Internal Analysis

2. Session Topics • Resource-Based View of the Firm • Three Basic Resources • What Makes a Resource Valuable? • Using the Resource-Based View in Internal Analysis • SWOT Analysis • The Functional Approach • Value Chain Analysis • Internal Analysis: Making Meaningful Comparisons • Comparison with Past Performance • Stages of Industry Evolution • Benchmarking • Comparison with Success Factors in the Industry

3. Strategy must . . . Ingredients Critical to a Successful Strategy Be consistent with conditions in the competitive environment Place realistic requirements on the firm’s resources Becarefully implemented/executed

4. What is the Resource-Based View of the Firm? Firms differ in fundamental ways because each firm possesses a unique “bundle” of resources - tangible and intangible assets and organizational capabilities to make use of those assets.

5. The RBV of The Firm • More internally oriented • Key analytic tool is value chain analysis • Resources are not mobile/transferable across company and industry boundaries • Focuses on sharpening your skills at executing value chain activities that create superior efficiency, innovation, quality, and/or company responsiveness.

6. The Industrial/Organizational Economics Perspective • More externally oriented • Key Analytic tool is Porter’s Five Forces Model • Assumes that resources are transferable/mobile across across company boundaries • More of a free-agent mentality • Choose your industry wisely and then set about to develop resource proficiency

7. The Three Basic Resources • Tangible assets • Easiest to identify and often found on a firm’s balance sheet • Include physical and financial assets • Examples: Production facilities, raw materials, financial resources, real estate, computers • Intangible assets • Cannot be seen or touched • Often very critical in creating competitive advantage • Examples: Brand names, company reputation, company morale, patents and trademarks, accumulated experience • Organizational capabilities • Involve skills - ability to combine assets, people, and processes - used to transform inputs into outputs

8. Tangible Assets Intangible Assets Organizational Capabilities • Hampton Inn’s reservation system • McDonald’s locations • Georgia Pacific’s land holdings • Virgin Airlines’ plane fleet • Coca-Cola’s Coke formula • Nike’s brand name • Coke’s brand recognition • Wendy’s advertising with Dave Thomas • Disney’s image • IBM’s management team • Southwest Airlines culture • Southwest’s turnaround time • Wal-Mart’s purchasing and inbound logistics • Sony’s product-development processes • Nordstrom’s customer service • 3M’s innovation process Examples of Different Resources

9. What Makes a Resource Valuable? 1. Competitive superiority:Does the resource help fulfill a customer’s need better than those of firm’s competitors? 2. Resource scarcity:Is the resource in short supply? 3. Inimitability:Is the resource easily copied or acquired? 4. Appropriability:Who actually gets the profit created by a resource? 5. Durability:How rapidly will the resource depreciate? 6. Substitutability:Are other alternatives available?

10. Characteristics Making Resources Difficult to Imitate • Physically unique resources • Resources virtually impossible to imitate • Examples: One-of-a-kind real estate location, mineral rights, patents • Path-dependent resources • Resources that must be created over time in a manner that is often expensive and difficult to accelerate • Examples: Dell Computer’s system of direct sales of customized PCs via the Internet, Coca-Cola’s brand name, Gerber Baby Food’s reputation for quality

11. Characteristics Making Resources Difficult to Imitate • Causal ambiguity (How do they do that?) • Situations where it is difficult for competitors to understand how a firm has created its advantage • Example: Southwest Airlines’ approach • Same plane, routes, gate procedures, number of attendants • Culture of fun, family, and frugal yet focused services • Economic deterrence • Involves large capital investments in capacity to provide products or services in a given market that are scale sensitive

12. Resource Inimitability • Cannot be imitated • Patents • Unique locations • Unique assets • Difficult to imitate • Brand loyalty • Employee satisfaction • Reputation for fairness • Can be imitated • Capacity preemption • Economies of scale • Easy to imitate • Cash • Commodities

13. Guidelines: Using the RBV in Internal Analysis • Disaggregate resources - break them into more specific competencies rather than use broad categories • Use a functional perspective in disaggregating tangible and intangible assets and organizational capabilities • Look at organizational processes and combinations of resources, not only at isolated assets or capabilities • Use the value chain approach to uncover potentially valuable capabilities, activities, and processes

14. Key Resources Across Functional Areas • Marketing • Firm’s products/services • Concentration of sales in a few products or to a few customers • Ability to gather needed information about markets • Market share • Product-service mix and expansion potential • Channels of distribution • Effective sales organization • Product-service image, reputation, and quality’ • Imaginativeness, efficiency, effectiveness of sales promotion • Pricing strategy and flexibility • After-sale service and follow-up • Goodwill - brand loyalty • Financial and Accounting • Ability to raise short-term and long-term capital; debt-equity • Corporate-level resources • Cost of capital relative to competitors • Tax considerations • Relations with owners, investors, and stockholders • Leverage position • Cost of entry and barriers to entry • Price-earnings ration • Working capital • Effective cost control • Financial size • Efficiency and effectiveness of accounting system

15. Key Resources Across Functional Areas (continued) • Production, Operations, Technical • Raw materials cost and availability, supplier relationships • Inventory control systems • Location, layout, and use of facilities • Economies of scale • Technical efficiency of facilities • Effectiveness of subcontracting use • Degree of vertical integration • Efficiency and cost-benefit of equipment • Effectiveness of operation control procedures • Costs and technological competencies relative to competitors • Research and development • Patents and trademarks • Personnel • Management personnel • Employees’ skills and morale • Labor relations costs compared to competitors • Efficiency and effectiveness of personnel policies • Effectiveness of incentives used to motivate performance • Ability to level peaks and valleys of employment • Employee turnover and absenteeism • Specialized skills • Experience

16. Key Resources Across Functional Areas (continued) • Quality Management • Relationship with suppliers, customers • Internal practices to enhance quality of products and services • Procedures for monitoring quality • Information Systems • Timeliness and accuracy of information about sales, operations, cash, and suppliers • Relevance of information for tactical decisions • Information to manage quality issues: customer service • Ability of people to use information provided

17. Fig. 6-5: Key Resources Across Functional Areas (concluded) • Organization and General Management • Organizational structure • Firm’s image and prestige • Firm’s record in achieving objectives • Organization of communication system • Overall organizational control system • Organizational climate and culture • Use of systematic procedures in decision making • Top-management skills, capabilities, and interest • Strategic planning system • Intra-organizational synergy

18. SWOT Analysis Based on assumption an effective strategy derives from a sound “fit” between a firm’s internal resources and its external situation Opportunities A major favorable situation in a firm’s environment Threats A major unfavorable situation in a firm’s environment Strengths A resource advantage relative to competitors and the needs of markets firm serves Weaknesses A limitation or deficiency in one or more resources or competencies relative to competitors

19. Numerous environmental opportunities Cell 3: Supports a turnaround-oriented strategy Cell 1: Supports an aggressive strategy Critical internal weaknesses Substantial internal strengths Cell 4: Supports a defensive strategy Cell 2: Supports a diversification strategy Major environmental threats SWOT Analysis Diagram

20. What is Value Chain Analysis? • Focuses on how a business creates customer value by examining contributions of different internal activities to that value • Divides a business into sets of activities within the business • Starts with inputs a firm receives • Finishes with firm’s products or services and after-sales service to customers • Allows better identification of a firm’s strengths and weaknesses since the business is viewed as a process

21. General administration Human resource management Support Activities Margin Research, technology, and systems development Procurement Service Marketing and sales Inbound Logistics Outbound logistics Margin Operations Primary Activities The Value Chain

22. Perspectives to use in evaluating how a firm stacks up based on its internal capabilities Internal Analysis: Making Meaningful Comparisons 1. Comparison with past performance 2. Stages of industry evolution 3. Benchmarking - Comparison with competitors 4. Comparison with success factors in the industry