Strategic Management

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Session 10
Internal Analysis
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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

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Ingredients Critical to a Successful Strategy
Be consistent with conditions in the
competitive environment
Place realistic requirements on the
firms resources
Be carefully implemented/executed
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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.
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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.

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The Industrial/Organizational Economics
Perspective

• More externally oriented
• Key Analytic tool is Porters 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

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The Three Basic Resources

• Tangible assets
• Easiest to identify and often found on a firms
  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

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Examples of Different Resources
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What Makes a Resource Valuable?
1. Competitive superiority Does the resource
help fulfill a customers need better than those
of firms 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?
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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 Computers system of direct sales
  of customized PCs via the Internet, Coca-Colas
  brand name, Gerber Baby Foods reputation for
  quality

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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

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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

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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

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Key Resources Across Functional Areas

• Marketing
• Firms 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

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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

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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

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Fig. 6-5 Key Resources Across Functional Areas
(concluded)

• Organization and General Management
• Organizational structure
• Firms image and prestige
• Firms 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

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SWOT Analysis
Based on assumption an effective strategy derives
from a sound fit between a firms internal
resources and its external situation
Opportunities A major favorable situation in a
firms environment
Threats A major unfavorable situation in a firms
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
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SWOT Analysis Diagram
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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 firms products or services and
  after-sales service to customers
• Allows better identification of a firms
  strengths and weaknesses since the business is
  viewed as a process

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The Value Chain
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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