Value-Chain Analysis

A value chain is a linked set of value-creating activities that begin with basic raw materials coming from
suppliers, moving on to a series of value-added activities involved in producing and marketing a product or service,
and ending with distributors getting the final goods into the hands of the ultimate consumer.

CORPORATE VALUE-CHAIN ANALYSIS

Each corporation has its own internal value chain of activities. Porter proposes that a manufacturing firm’s
primary activities usually begin with inbound logistics (raw materials handling and warehousing), go through an
operations process in which a product is manufactured, and continue on to outbound logistics (warehousing and
distribution), to marketing and sales, and finally to service (installation, repair, and sale of parts). Several support
activities, such as procurement (purchasing), technology development (R&D), human resource management, and firm
infrastructure (accounting, finance, strategic planning), ensure that the primary value chain activities operate effectively
and efficiently.

BASIC ORGANIZATIONAL STRUCTURES

Simple structure has no functional or product categories and is appropriate for a small, entrepreneur-dominated
company with one or two product lines that operates in a reasonably small, easily identifiable market niche. Employees
tend to be generalists and jacks of- all-trades. In terms of stages of development (to be discussed in Chapter 9), this
is a Stage I company.
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Functional structure is appropriate for a medium-sized firm with several product lines in one industry. Employees
tend to be specialists in the business functions that are important to that industry, such as manufacturing, marketing,
finance, and human resources. In terms of stages of development (discussed in Chapter 9), this is a Stage II company.

Divisional structure is appropriate for a large corporation with many product lines in several related industries.
Employees tend to be functional specialists organized according to product/market distinctions. General Motors, for
example, groups its various auto lines into the separate divisions of Saturn, Chevrolet, Pontiac, Buick, and Cadillac.
Management.

Strategic business units (SBUs) are a modification of the divisional structure. Strategic business units are divisions
or groups of divisions composed of independent product market segments that are given primary responsibility and
authority for the management of their own functional areas.

Conglomerate structure is appropriate for a large corporation with many product lines in several unrelated industries.
A variant of the divisional structure, the conglomerate structure (sometimes called a holding company) is typically an
assemblage of legally independent firms (subsidiaries) operating under one corporate umbrella but controlled through
the subsidiaries’ boards of directors.

CORPORATE CULTURE

Corporate culture is the collection of beliefs, expectations, and values learned and shared by a corporation’s
members and transmitted from one generation of employees to another. The corporate culture generally reflects the
values of the founder(s) and the mission of the firm. It gives a company a sense of identity.

Cultural intensity is the degree to which members of a unit accept the norms, values, or other culture content
associated with the unit. This shows the culture’s depth. Organizations with strong norms promoting a particular value,
such as quality at BMW, have intensive cultures, whereas new firms (or those in transition) have weaker, less intensive
cultures. Employees in an intensive culture tend to exhibit consistent behavior, that is, they tend to act similarly over
time.

Cultural integration is the extent to which units throughout an organization share a common culture. This is the
culture’s breadth. Organizations with a pervasive dominant culture may be hierarchically controlled and power-
oriented, such as a military unit, and have highly integrated cultures. All employees tend to hold the same cultural
values and norms. In contrast, a company that is structured into diverse units by functions or divisions usually exhibits
some strong subcultures (for example, R&D versus manufacturing) and a less integrated corporate culture.
STRATEGIC MARKETING ISSUES
Market Position and Segmentation
Market position deals with the question, “Who are our customers?” It refers to the selection of specific areas
for marketing concentration and can be expressed in terms of market, product, and geographic locations. Through
market research, corporations are able to practice market segmentation with various products or services so that
managers can discover what niches to seek, which new types of products to develop, and how to ensure that a
company’s many products do not directly compete with one another.

Marketing Mix
Marketing mix refers to the particular combination of key variables under a corporation’s control that can be
used to affect demand and to gain competitive advantage. These variables are product, place, promotion, and price.
Within each of these four variables are several sub variables, listed in Table 5–1, that should be analyzed in terms of
their effects on divisional and corporate performance.

Product Life Cycle

One of the most useful concepts in marketing, insofar as strategic management is concerned, is the product
life cycle. As depicted in Figure 5–5, the product life cycle is a graph showing time plotted against the monetary sales
of a product as it moves from introduction through growth and maturity to decline. This concept enables a marketing
manager to examine the marketing mix of a particular product or group of products in terms of its position in its life
cycle.

Brand and Corporate Reputation

A brand is a name given to a company’s product which identifies that item in the mind of the consumer. Over
time and with proper advertising, a brand connotes various characteristics in the consumers’ minds. For example,
Disney stands for family entertainment. Ivory suggests “pure” soap. BMW means high-performance autos. A brand
can thus be an important corporate resource. If done well, a brand name is connected to the product to such an extent
that a brand may stand for an entire product category, such as Kleenex for facial tissue. The objective is for the
customer to ask for the brand name (Coke or Pepsi) instead of the product category (cola). The world’s 10 most
valuable brands in 2007 were Coca-Cola, Microsoft, IBM, GE, Nokia, Toyota, Intel, McDonald’s, Disney, and
Mercedes-Benz, in that order. According to Business Week, the value of the Coca-Cola brand is worth $65.3 billion.
A corporate brand is a type of brand in which the company’s name serves as the brand. Of the world’s top 10
world brands listed previously, all are company names. The value of a corporate brand is that it typically stands for
consumers’ impressions of a company and can thus be extended onto products not currently offered—regardless of
the company’s actual expertise. For example, Caterpillar, a manufacturer of heavy earth-moving equipment, used
consumer associations with the Caterpillar brand (rugged, masculine, construction-related) to market work boots.
Thus, consumer impressions of a brand can suggest new product categories to enter even though a company may
have no competencies in making or marketing that type of product or service.37
A corporate reputation is a widely held perception of a company by the general public. It consists of two
attributes: (1) stakeholders’ perceptions of a corporation’s ability to produce quality goods and (2) a corporation’s
prominence in the minds of stakeholders.38 A good corporate reputation can be a strategic resource. It can serve in
marketing as both a signal and an entry barrier. It contributes to its goods having a price premium.39 Reputation is
especially important when the quality of a company’s product or service is not directly observable and can be learned
only through experience. For example, retail stores are willing to stock a new product from P&G or Anheuser-Busch
because they know that both companies market only good-quality products that are highly advertised. Like tacit
knowledge, reputation tends to be long-lasting and hard for others to duplicate—thus providing sustainable competitive
advantage.40 It can have a significant impact on a firm’s stock price.41 Research reveals a positive relationship between
corporate reputation and financial performance.

STRATEGIC FINANCIAL ISSUES

Financial Leverage
The mix of externally generated short-term and long-term funds in relation to the amount and timing of
internally generated funds should be appropriate to the corporate objectives, strategies, and policies. The concept of
financial leverage (the ratio of total debt to total assets) is helpful in describing how debt is used to increase the
earnings available to common shareholders. When the company finances its activities by sales of bonds or notes
instead of through stock, the earnings per share are boosted: the interest paid on the debt reduces taxable income,
but fewer shareholders share the profits than if the company had sold more stock to finance its activities. The debt,
however, does raise the firm’s break-even point above what it would have been if the firm had financed from internally
generated funds only. High leverage may therefore be perceived as a corporate strength in times of prosperity and
ever-increasing sales, or as a weakness in times of a recession and falling sales. This is because leverage acts to
magnify the effect on earnings per share of an increase or decrease in dollar sales. Research indicates that greater
leverage has a positive impact on performance for firms in stable environments, but a negative impact for firms in
dynamic environments.
Capital Budgeting
Capital budgeting is the analyzing and ranking of possible investments in fixed assets such as land, buildings,
and equipment in terms of the additional outlays and additional receipts that will result from each investment. A good
finance department will be able to prepare such capital budgets and to rank them on the basis of some accepted
criteria or hurdle rate (for example, years to pay back investment, rate of return, or time to break-even point) for the
purpose of strategic decision making. Most firms have more than one hurdle rate and vary it as a function of the type
of project being considered. Projects with high strategic significance, such as entering new markets or defending
market share, will often have low hurdle rates.

R&D Intensity, Technological Competence, and Technology Transfer

The company must make available the resources necessary for effective research and development. A
company’s R&D intensity (its spending on R&D as a percentage of sales revenue) is a principal means of gaining
market share in global competition. The amount spent on R&D often varies by industry. For example, the U.S.
computer software industry traditionally spends 13.5% of its sales dollar for R&D, whereas the paper and forest
products industry spends only 1.0%.46 A good rule of thumb for R&D spending is that a corporation should spend at a
“normal” rate for that particular industry unless its strategic plan calls for unusual expenditures.
Simply spending money on R&D or new projects does not mean, however, that the money will produce useful
results. For example, Pharmacia Upjohn spent more of its revenues on research than any other company in any
industry (18%), but it was ranked low in innovation. A company’s R&D unit should be evaluated for technological
competence in both the development and the use of innovative technology. Not only should the corporation make a
consistent research effort (as measured by reasonably constant corporate expenditures that result in usable
innovations), it should also be proficient in managing research personnel and integrating their innovations into its day-
to-day operations. A company should also be proficient in technology transfer, the process of taking a new
technology from the laboratory to the marketplace. Aerospace parts maker Rockwell Collins, for example, is a master
of developing new technology, such as the “heads-up display” (transparent screens in an airplane cockpit that tell
pilots speed, altitude, and direction), for the military and then using it in products built for the civilian market.

Synthesis of Internal Factors

After strategists have scanned the internal organizational environment and identified factors for their particular
corporation, they may want to summarize their analysis of these factors using a form such as that given in Table 5–2.
This IFAS (Internal Factor Analysis Summary) Table is one way to organize the internal factors into the generally
accepted categories of strengths and weaknesses as well as to analyze how well a particular company’s management
is responding to these specific factors in light of the perceived importance of these factors to the company. Use the
VRIO framework (Value, Rareness, Imitability, & Organization) to assess the importance of each of the factors that
might be considered strengths. Except for its internal orientation, this IFAS Table is built the same way as the EFAS
Table described in Chapter 4 (in Table 4–5). To use the IFAS Table, complete the following steps:
1. In Column 1 (Internal Factors), list the eight to ten most important strengths and weaknesses facing the
company.
2. In Column 2 (Weight), assign a weight to each factor from 1.0 (Most Important) to 0.0 (Not Important)
based on that factor’s probable impact on a particular company’s current strategic position. The higher
the weight, the more important is this factor to the current and future success of the company. All weights
must sum to 1.0 regardless of the number of factors.
3. In Column 3 (Rating), assign a rating to each factor from 5.0 (Outstanding) to 1.0 (Poor) based on
management’s specific response to that particular factor. Each rating is a judgment regarding how well
the company’s management is currently dealing with each specific internal factor.
4. In Column 4 (Weighted Score), multiply the weight in Column 2 for each factor times its rating in Column
3 to obtain that factor’s weighted score.
5. In Column 5 (Comments), note why a particular factor was selected and/or how its weight and rating
were estimated.
6. Finally, add the weighted scores for all the internal factors in Column 4 to determine the total weighted
score for that particular company. The total weighted score indicates how well a particular company is
responding to current and expected factors in its internal environment. The score can be used to compare
that firm to other firms in its industry. Check to ensure that the total weighted score truly reflects the
company’s current performance in terms of profitability and market share. The total weighted score for
an average firm in an industry is always 3.0.