STRATEGIC MANAGEMENT

3rd WEEK

TAU - BUSINESS ADMINISTRATION

 Chapter
Three

Assessing the Internal

Environment of the Firm
 The Value Chain: Primary and Support
Activities

The Value Chain

Support Activities

General administration
Human resource management

M
ar
Technology development

gi
n
Procurement

Inbound Outbound Marketing Service

gi n
Operations
logistics logistics and sales

ar
M
Primary Activities
Value-chain analysis: a strategic analysis of an organization that
uses value-creating activities.
Primary activities: sequential activities of the value chain that
refer to the physical creation of the product or service, its sale and
transfer to the buyer, and its service after sale, including inbound
logistics, operations, outbound logistics, marketing and sales, and
service.

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; including procurement, technology development,
human resource management, and general administration.
The Value Chain: Some Factors to Consider
in Assessing a Firm’s Primary Activities
 Location of  Efficient plant  Effective  Highly motivated Effective use of
distribution operations to shipping and competent procedures to
facilities to minimize costs processes to sales force solicit customer
minimize  Appropriate level provide quick  Innovative feedback and to act
shipping times of automation in delivery and approaches to on information
 Excellent manufacturing minimize promotion and Quick response to
material and  Quality damages advertising customer needs and
inventory control production  Efficient finished  Selection of most emergencies
systems control systems goods appropriate Ability to furnish
 Systems to to reduce costs warehousing distribution replacement parts
reduce time to and enhance processes channels as required

GIN
send “returns” to quality  Shipping of  Proper Effective
suppliers  Efficient plant goods in large lot identification of management of

AR
 Warehouse layout and sizes to minimize customer parts and
layout and workflow design transportation segments and equipment

PROFIT M
designs to costs needs inventory
increase  Quality material  Effective pricing Quality of service
efficiency of handling strategies personnel and
operations for equipment to ongoing training
incoming increase order Appropriate
materials picking warranty and
guarantee
policies

Inbound Operations Outbound Marketing Service

Logistics Logistics and Sales
operations outbound logistics
all activities associated collecting, storing, and
with transforming inputs distributing the product or
into the final product form. service to buyers.

procurement
the function of purchasing
inputs used in the firm’s
value chain, including raw
materials, supplies, and
other consumable items
as well as assets such
as machinery, laboratory
equipment, office
equipment, and buildings.

service marketing and sales

actions associated with activities associated with
providing service to purchases of products
enhance or maintain the and services by end users
value of the product. and the inducements
used to get them to make
purchases.
The Value Chain: Some Factors to Consider
in Assessing Firm’s Support Activities
 Effective planning systems to attain overall goals and objectives
 Ability of top management to anticipate and act on key environmental trends and events
 Ability to obtain low cost funds for capital expenditures and working capital
 Excellent relationships with diverse stakeholder groups
 Ability to coordinate and integrate activities across the “value system”
 Highly visible to inculcate organizational culture, reputation, and values

General Administration

PROFIT MAR
 Effective recruiting, development, and retention mechanisms for employees
 Quality relations with trade unions
 Quality work environment to maximize overall employee performance and minimize absenteeism
 Reward and incentive programs to motivate all employees
Human Resource Management

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 Effective research and development activities for process and product initiatives
 Positive collaborative relationships between R&D and other departments
 State-of-the art facilities and equipment
 Culture to enhance creativity and innovation
 Excellent professional qualifications of personnel
 Ability to meet critical deadlines Technology Development

 Procurement of raw material inputs to optimize quality, speed and minimize the associated costs
 Development of collaborative “win-win” relationships with suppliers
 Effective procedures to purchase advertising and media services
 Analysis and selection of alternate sources of inputs to minimize dependence on one supplier
 Ability to make proper lease versus buy decisions Procurement
human resource
management
activities involved in
the recruiting, hiring,
training, development and
compensation of all types
of personnel.
general
administration
general management,
planning, finance,
accounting, legal and
government affairs,
quality management,
and information systems;
activities that support the
entire value chain and not
individual activities
technology
development
activities associated with
the development of new
knowledge that is
applied
to the firm’s operations.
interrelationships
collaborative and
strategic
exchange relationships
between value-chain
activities either (a) within
firms or (b) between
firms. Strategic exchange
relationships involve
exchange of resources
such as information,
people, technology, or
money that contribute to
the success of the firm.
 THE LIMITATIONS OF SWOT ANALYSIS

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

Strengths May Not Lead to an Advantage
The Resource Based View of the Firm:
Resources and Capabilities
Tangible Resources Organization Capabilities
Financial  Firm’s cash account and cash equivalents  Firm competences or skills the firm
 Firm’s capacity to raise equity employs to transfer inputs to outputs
 Firm’s borrowing capacity
 Capacity to combine tangible and
intangible resources, using organizational
Physical  Modern plant and facilities processes to attain desired end
 Favorable manufacturing locations
 State-of-the-art machinery and equipment
Examples:
Technological  Trade secrets  Outstanding customer service
 Innovative production processes  Excellent product development
 Patents, copyrights, trademarks capabilities
 Innovativeness of products and services
Organizational  Effective strategic planning processes
 Excellent evaluation and control systems  Ability to hire, motivate, and retain
Intangible Resources human capital
Human  Experience and capabilities of employees
 Trust
 Managerial skills
 Firm-specific practices and procedures

Innovation  Technical and scientific skills

and creativity  Innovation capacities

Reputation  Brand name

 Reputation with customers for quality and reliability
 Reputation with suppliers for fairness, non-zero sum relationships
tangible resources
organizational assets
that are relatively easy to
identify, including physical
assets, financial resources,
organizational resources,
and technological
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. organizational
capabilities
the competencies and
skills that a firm employs
to transform inputs into
outputs.
Marks & Spencer: How Resources and
Capabilities Lead to Advantages
Resource Competitive Advantages in
Great Britain

Ownership (vs. leasing) 1% of revenues allocated

Tangible of property
to occupancy costs
(versus 3% to 9%
industry average)

Brand reputation
Customer recognition with
minimal advertising
Intangible No promotional sales

Employee loyalty
Lower labor turnover
8.7% labor costs versus
10%-20% industry
average
Supplier chain Lower costs and higher
quality of goods sold

Capabilities Managerial judgment Fewer layers of

hierarchy
Assessing Sustainability of Resources and Capabilities: Four Criteria

Is the resource or capability . . . Implications

Valuable  Neutralize threats and exploit

opportunities

Rare  Not many firms possess

Difficult to imitate  Physically unique

 Path dependency (how
accumulated over time)
 Causal ambiguity (difficult to
disentangle what it is or how it
could be recreated)
 Social complexity (trust,
interpersonal relationships,
culture, reputation)

Difficult to substitute  No equivalent strategic resources

or capabilities
Criteria for Sustainable Competitive Advantage and Strategic
Implications

Is a Resource…

Difficult Without Implications

Valuable Rare to Imitate Substitutes for Competitiveness
No No No No Competitive disadvantage
Yes No No No Competitive parity
Yes Yes No No Temporary competitive advantage
Yes Yes Yes Yes Sustainable competitive advantage
 Financial Ratio Analysis
Financial ratio analysis a technique for measuring the performance of a firm according
to its balance sheet, income statement, and market valuation.
 Historical Trends: ROS for a Hypothetical Company

20% Ye
a rs Ye
Return n Sales

1, 6
2, , 5, 8 a rs
3 ar s4 6 ,7
Ye , 8 , 9, 10
Years
Yea
r
10% 10 s 6 , 7 , 8
, 9,

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Year
 How Financial Ratios Differ Across Industries

Semi- Skilled
Financial Ratio conductors Grocery nursing
Stores facilities

Quick ratio (times) 1.5 0.5 1.1

Current ratio (times) 3.2 1.6 1.9
Total liabilities to net worth (%) 34.8 114.0 93.0
Collection period (days) 54.8 2.9 40.2
Assets to sales (%) 98.1 21.2 108.7
Return on sales (%) 3.1 0.9 2.0
Comparison of Procter & Gamble’s Drug Revenues and R&D Expenditures
and Key Competitors

SALES* R&D BUDGET

COMPANY (OR DIVISION) (billions) (billions)

P&G DRUG DIVISION $0.8 $0.38

BRISTOL-MYERS SQUIBB $20.2 $1.8

PFIZER $27.4 $4.0

MERCK $32.7 $2.1

* Most recently completed fiscal year. Data: Lehman Brother Procter & Gamble Co.
ECI’s Balanced Business Scorecard
Financial Perspective Internal Business Perspective
GOALS MEASURES GOALS MEASURES
 Survive  Cash Flow  Manufacturing  Cycle time
excellence  Unit cost
 Succeed  Quarterly sales growth and  Yield
operating income by division
 Design productivity  Silicon efficiency
 Prosper  Increased market share and ROE  Engineering efficiency

 New product  Actual introduction schedule

introduction versus plan

Customer Perspective Innovation and Learning Perspective

GOALS MEASURES GOALS MEASURES
 Technology leadership  Time to develop next
 New products  Percent of sales from new generation
products
 Manufacturing learning  Process time to maturity

 Product focus  Percent of products that equal

 Responsive  On-time delivery (defined by 80% sales
supply customer)
 Time to market  New product introduction
versus competition
 Customer  Number of cooperative
partnership engineering efforts
“WASSALAM”