Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding in each assigned textbook chapter. Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion. Also, provide a graduate-level response to each of the following questions:
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Assessing the Internal Environment of the Firm
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After reading this chapter, you should have a good understanding of:
3-1 The primary and support activities of a firm’s value chain.
3-2 How value-chain analysis can help managers create value by investigating relationships among activities within the firm and between the firm and its customers and suppliers.
3-3 The resource-based view of the firm and the different types of tangible and intangible resources, as well as organizational capabilities.
3-4 The four criteria that a firm’s resources must possess to maintain a sustainable advantage and how value created can be appropriated by employees and managers.
3-5 The usefulness of financial ratio analysis, its inherent limitations, and how to make meaningful comparisons of performance across firms.
3-6 The value of the “balanced scorecard” in recognizing how the interests of a variety of stakeholders can be interrelated.
The Importance of the Internal Environment
Consider. . . Which activities must a firm effectively manage and integrate in order to attain competitive advantages in the marketplace? Which resources and capabilities must a firm create and nurture in order to sustain a competitive advantage?
What if two firms compete in the same industry and both have many strengths in a variety of functional areas: marketing, operations, logistics, etc.? However, one of these firms outperforms the other by a wide margin over a long period of time. How can this be? The value-creating activities that the firm manages well, and the bundles of resources and capabilities that the firm has created and nurtured over time are crucial to answering these questions.
Value-chain analysis looks at the sequential process of value-creating activities.
Value is the amount buyers are willing to pay for what a firm provides.
How is value created within the organization?
How is value created for other organizations in the overall supply chain or distribution channel?
The value received must exceed the costs of production.
SWOT is a good starting point, but it doesn’t give enough guidance regarding the specific action steps needed to enact strategic change. For instance, a firm may have a capability that is a strength, but that, by itself, cannot create or sustain competitive advantage. It’s too easy to become preoccupied with a single dimension or element of what is, essentially, a moving target…MORE analysis may be necessary, which is where the value chain comes in. Value-chain analysis = a strategic analysis of an organization that uses value-creating activities. Value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm’s product commands, and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service. Creating value for buyers that exceeds the costs of production (i.e. margin) is a key concept used in analyzing a firm’s competitive position.
Value-Chain Analysis Primary Activities
Primary activities contribute to the physical creation of the product or service; the sale & transfer to the buyer; and service after the sale.
Marketing & sales
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.
Question (1 of 2)
In assessing its primary activities, an airline would examine
employee training programs.
criteria for lease versus purchase decisions.
the effectiveness of its lobbying activities.
Answer: B – baggage handling involves transfer of service to buyer and is part of airline operations
Value-Chain Analysis Support Activities
Support activities either add value by themselves or add value through important relationships with both primary activities & other support activities.
Human resource management
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
Exhibit 3.1 The Value Chain: Primary and Support Activities
Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The Free Press.
To get the most out of value-chain analysis, view the concept in its broadest context, without regard to the boundaries of your own organization – place your organization within a more encompassing value chain that includes your firm’s suppliers, customers, and alliance partners. This helps identify how value is created for other organizations in the overall supply chain or distribution channel. For an interesting example, look at Case General Motors. (Remember the strategic groups discussion from Chapter 2? What does GM have to do to compete with other groups in its industry? How important might the value chain be in this industry?)
Primary Activity: Inbound Logistics
Inbound logistics are primarily associated with receiving, storing & distributing inputs to the product.
Returns to suppliers
Factors to consider include:
Location of distribution facilities
Inbound logistics = receiving, storing, and distributing inputs of a product. Example = Toyota’s just-in-time (JIT) inventory systems where parts deliveries arrive at the assembly plants only hours before they are needed. This allows Toyota to fill a buyer’s new car order in just 5 days. Inbound logistics includes location of distribution facilities, design of material and inventory control systems, warehouse layout and design, and efficient systems to return products to suppliers.
Primary Activity: Operations
Operations include all activities associated with transforming inputs into the final product form.
Packaging & Assembly
Testing or quality control
Factors to consider include:
Efficient plant operations & layout
Incorporation of appropriate process technology
Operations = all activities associated with transforming inputs into the final product form. Example = Shaw Industries’ ability to reduce expenses associated with the disposal of dangerous chemicals used in the manufacture of floor coverings. Operations includes assessment of efficiency of plant operations, incorporation of appropriate process technology, efficient plant layout and workflow design, degree of automation, extent of appropriate quality control systems.
Primary Activity: Outbound Logistics
Outbound logistics includes collecting, storing, & distributing the product or service to buyers.
Finished goods & warehousing
Delivery vehicle operation
Order processing, scheduling & distribution
Factors to consider include:
Effective shipping processes
Minimizing shipping costs by grouping goods into large lot sizes
Outbound logistics = collecting, storing, and distributing the product or service to buyers. Example = Campbell Soup uses an electronic network so retailers can inform Campbell of product needs and inventory levels. This allows Campbell to forecast future demand and determine which products to replenish, delivering inventory the same day. The retailer gains efficiency, and therefore has an incentive to carry a broader line of Campbell products. Outbound logistics includes effective shipping processes to provide quick delivery and minimize damages, efficient finished goods warehousing processes, the ability to ship goods in large lot sizes to minimize transportation costs, and the use of quality material handling equipment. (See also Case Campbell Soup.)
Primary Activity: Marketing & Sales
Marketing & sales activities involve purchases of products & services by end users and includes how to induce buyers to make those purchases.
Advertising & promotion
Sales force management
Pricing & price quoting
Channel selection & channel relations
Factors to consider include:
Innovative approaches to promotion & advertising
Proper identification of customer segments & needs
Marketing and sales = activities associated with purchases of products and services by end users and the inducements used to get them to make purchases. Example = the Mercedes-Benz AMG got premiere “product placement” as a fleet of these showed up to pick up James Bond in the 2016 Spectre movie. Marketing and sales includes the development of a highly motivated and competent sales force, innovative approaches to promotion and advertising, selection of the most appropriate distribution channels, proper identification of customer segments and needs, and effective pricing strategies.
Primary Activity: Service
Service includes all actions associated with providing service to enhance or maintain the value of the product.
Installation & repair
Factors to consider include:
Quick response to customer needs
Quality of service personnel, ongoing training
Service = actions associated with providing service to enhance or maintain the value of the product. Example = Nordstrom service reps can take control of the customer’s web browser and lead her to the specific product she wants. Service includes effective use of procedures to solicit customer feedback and to act on information, quick response to customer needs and emergencies, ability to furnish replacement parts, effective management of parts and equipment inventory, quality of service personnel and ongoing training, and warranty and guarantee policies.
Support Activity: Procurement
Procurement involves how the firm purchases inputs used in its value chain.
Procurement of raw material inputs
Optimizing quality & speed
Minimizing associated costs
Development of collaborative win-win relationships with suppliers
Analysis & selection of alternative sources of inputs to minimize dependence on one supplier
SUPPORT ACTIVITIES are those functions that support the value chain. Each industry might have distinct value activities that are unique to that industry, but here are some common ones. 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. Example = Microsoft does formal reviews of its outside suppliers, including a feedback system that helps clarify expectations. In addition to the above activities, procurement includes effective procedures to purchase advertising and media services, and the ability to make proper lease versus buy decisions.
Support Activity: Technology Development
Technology development is related to a wide range of activities.
Effective R&D activities for process & product initiatives
Collaborative relationships between R&D and other departments
State-of-the-art facilities & equipment
Excellent professional qualifications of personnel
Use of data analytics
Technology development = activities associated with the development of new knowledge that is applied to the firm’s operations. The array of technologies employed in most firms is very broad, ranging from technologies used to prepare documents and transport goods, to those embodied in processes and equipment or the product itself. Technology development related to the product and its features supports the entire value chain, while other technology development is associated with particular primary or support activities. Example = the French firm Techniq is a global leader in the energy industry, focusing on pipelines. In collaboration with Schlumberger, Techniq has developed “intelligent” pipes that add significant value for customers, while increasing Techniq’s margins. Technology development includes activities related to the process as well as the product, such as enhancing the ability to meet critical deadlines. Strategy Spotlight 3.2 discusses how Coca-Cola has used data analytics to meet the taste demands of its global customers.
Support Activity: Human Resource Management
Human resource management consists of activities involved in recruitment, hiring, training & development, & compensation of all types of personnel.
Effective employee recruiting, development, & retention mechanisms
Quality relations with trade unions
Reward & incentive programs to motivate all employees
Human resource management = activities involved in the recruiting, hiring, training, development and compensation of all types of personnel. It supports both individual primary and support activities such as the hiring of engineers and scientists, as well as supporting the entire value chain through activities such as negotiations with labor unions. Example = JetBlue recruited flight attendants with a one-year contract so they could travel, meet lots of people, then decide what else they might like to do. Human resource management includes creating a quality work environment to maximize overall employee performance and minimize absenteeism.
Support Activity: General Administration
General administration involves:
Effective planning systems to attain overall goals & objectives
Excellent relations with diverse stakeholder groups
Effective information technology to coordinate & integrate value-creating activities across the value chain
Ability of top management to anticipate & act on key environmental trends & events, create strong values, culture & reputation
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. These activities can be among the most important activities for competitive advantage. Example = how a telephone operating company effectively negotiates and maintains ongoing relations with regulatory bodies. General administration also includes, for instance, the ability to obtain low-cost funds for capital expenditures and working capital. Leadership plays a critical role here as well: Mark Zuckerberg and Jack Ma have been critical to the success of their respective companies, Facebook and Alibaba.
Interrelationships Among Value-Chain Activities
Managers must not ignore the importance of relationships among value-chain activities.
What are the interrelationships among activities within the firm?
What are the relationships among activities within the firm and with other stakeholders such as customers & suppliers?
Consider integrating customers into the value chain.
Creating individualized products
Soliciting ideas for products & services
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. Example = within the firm, how effective human resource practices can support the entire value chain. Example = between the firm and stakeholders, how teaming up with customers through a “prosumer” or crowdsourcing relationship can help the firm gain insight into customer needs and leverage the wisdom of the customer to create value for all. However, be careful, because customers can use this forum to criticize the company and its products. Research has shown that crowdsourcing can backfire half the time.
Example: The Value Chain in Service Organizations
Exhibit 3.4 Some Examples of Value Chains in Service Industries
The value chain might be configured differently depending on the type of business a firm is engaged in. For instance a travel agent adds value by creating an itinerary that includes transportation, accommodations, and activities customized to the client’s budget and travel dates, while a law firm provides services specific to the client’s circumstances. Both involve work “operations” dependent on the application of specialized knowledge based on the specifics, the “inputs” of the situation, and the outcome, the “output” the client desires. In retail, a firm adds value by developing expertise in the procurement of finished goods and by displaying these goods in stores in a way that enhances sales. Therefore procurement is a primary activity rather than a support activity. In an engineering services firm, research and development are primary activities, providing inputs to the engineering process, while innovative designs are the outputs. How the primary and support activities of a given firm are configured and deployed will often depend on industry conditions and whether the company is service and/or manufacturing oriented. (For more discussion in a service context, see Case United Way.)
Resource-Based View of the Firm
The resource-based view of the firm (RBV) integrates two activities.
An internal analysis of phenomena within a company
An external analysis of the industry & its competitive environment
Resources can lead to a competitive advantage.
If they are valuable, rare, hard to duplicate
If tangible resources, intangible resources, & organizational capabilities are combined
A firm’s strengths and capabilities – no matter how unique or impressive – do NOT necessarily lead to a competitive advantage. Resource-based view of the firm (RBV) = perspective that firms’ competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute. Without these unique resources, the firm can only attain competitive parity. RBV goes beyond a SWOT analysis to integrate internal and external perspectives in a broader competitive context. RBV can reveal how core competencies embedded in a firm can help it exploit new product and market opportunities.
Types of Tangible Firm Resources
Tangible resources are assets that are relatively easy to identify.
Physical assets: plant & facilities, location, machinery & equipment
Financial assets: cash & cash equivalents, borrowing capacity, capacity to raise equity
Technological resources: trade secrets, patents, copyrights, trademarks, innovative production processes
Organizational resources: effective planning processes, evaluation & control systems
Firm resources are all assets, capabilities, organizational processes, information, knowledge, etc. controlled by a firm – resources that enable it to develop and implement value-creating strategies. Tangible resources = organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources. These include assets that the firm uses to create value for its customers: physical resources such as the plant’s proximity to customers and suppliers; financial resources such as accounts receivables; organizational resources such as employee development, evaluation and reward systems; technological resources such as trade secrets and patents.
Types of Intangible Firm Resources
Intangible resources are difficult for competitors to account for or imitate. They are embedded in unique routines & practices.
Human resources: trust, experience & capabilities of employees; managerial skills & effectiveness of work teams, firm specific practices & procedures
Innovation resources: technical & scientific expertise & ideas; innovation capabilities
Reputation resources: brand names, reputation for fairness with suppliers, non-zero sum relationships; reputation for reliability & product quality with customers
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. Example = Harley-Davidson’s strong brand image. A firm’s specific practices and procedures, and the firm’s culture, may also be resources that provide competitive advantage.
Types of Firm Resources: Organizational Capabilities
Organizational capabilities are competencies or skills that a firm employs to transform inputs into outputs. It is the capacity to combine tangible & intangible resources to attain desired ends.
Outstanding customer service
Excellent product development capabilities
Superb innovation processes & flexibility in manufacturing processes
Ability to hire, motivate, & retain human capital
Organizational capabilities = the competencies and skills that a firm employs to transform inputs into outputs. Capabilities involve an organization’s capacity to deploy tangible and intangible resources over time and generally in combination, and to leverage those capabilities to bring about a desired end. Example = Apple’s ability to combine and package technological components in new and innovative ways while also seeking to integrate the value chain. See Case Apple.
Question (2 of 2)
Gillette combines several technologies to attain unparalleled success in the wet-shaving industry. This is an example of their
strong primary activities.
Answer: C, organizational capabilities in combining technologies in innovative ways
Firm Resources and Sustainable Competitive Advantages
Strategic resources have four attributes.
Valuable in formulating & implementing strategies to improve efficiency or effectiveness
Rare or uncommon; difficult to exploit
Difficult to imitate or copy due to physical uniqueness, path dependency, causal ambiguity, or social complexity
Difficult to substitute with strategically equivalent resources or capabilities
Strategic resources (also firm resources or organizational resources) = firms’ capabilities that are valuable, rare, costly to imitate, and costly to substitute. Firm attributes must be valuable in order to be considered resources and potential sources of competitive advantage. These valuable resources enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. If competitors or potential competitors also possessed the same valuable resource, it is not a source of competitive advantage unless it is uncommon or rare. Inimitability or being difficult to imitate is the key to value creation because it constrains competition. Having a resource that competitors can easily copy generates only temporary value. Non-substitutability means there is no strategically equivalent valuable resources that are themselves not rare or inimitable. However, even though a company cannot exactly imitate someone else’s resource, it may be able to develop an equivalent resource from another source, such as Amazon internet capabilities allows it to compete against prime brick-and-mortar Barnes & Noble locations.
Sources of Inimitability
Physical uniqueness are resources that are physically unique, therefore impossible to duplicate.
Path dependency: hard to duplicate because of all that has happened along the path followed in the development and/or accumulation of resources.
Causal ambiguity: impossible to explain what caused a resource to exist or how to re-create it.
Social complexity: resources that result from social engineering such as interpersonal relations, culture.
Physical uniqueness = a beautiful resort location, mineral rights, or patents. Path dependency = a characteristic of resources that is developed and or accumulated through a unique series of events. See Strategy Spotlight 3.4 for an example. Causal ambiguity = a characteristic of the firm’s resources that is costly to imitate because a competitor cannot determine what the resource is and/or how it can be re-created. Google is given as an example. Social complexity = a characteristic of a firm’s resources that is costly to imitate because the social engineering required is beyond the capability of competitors, including interpersonal relations among managers, organizational culture, and reputation with suppliers and customers.
Criteria for Sustainable Competitive Advantage
Is a resource or capability . . .
|Valuable?||Rare?||Difficult to Imitate?||Without Substitutes?||Implications for Competitiveness?|
|Yes||Yes||No||No||Temporary competitive advantage|
|Yes||Yes||Yes||Yes||Sustainable competitive advantage|
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source: Adapted from Barney, J.B. 1991. Firm Resources and Sustained Competitive Advantage. Journal of Management, 17:99 – 120.
Resources and capabilities must be rare and valuable as well as difficult to imitate or substitute in order for a firm to attain competitive advantages that are sustainable over time. If resources and capabilities do not meet any of the four criteria it would be difficult to develop any type of competitive advantage in the short or long run. If resources and capabilities are not difficult for competitors to imitate or substitute firms could attain some level of competitive parity. Only when all four criteria are satisfied will competitive advantages be sustained over time.
The Generation and Distribution of the Firm’s Profits
Four factors help explain the extent to which employees and managers will be able to obtain a proportionately high level of the profits that they generate
Employee bargaining power
Employee replacement cost
Employee exit costs
Manager bargaining power
The resource based view of the firm is useful in determining when firms will create competitive advantages and enjoy high levels of profitability. These profits can be retained or appropriated by employees or managers (and not owners or shareholders) by various methods: employee bargaining power allows employees to earn disproportionately high wages; if employee skills are rare it will be costly to replace them; if an employee’s expertise is firm-specific or of limited value it would be difficult for the employee to explain his or her specific contribution to the firm, therefore, would be costly for that employee to exit; if managers have sources of information that may not be readily available to others they will have bargaining power. See Chapter 9 for a discussion of how corporate governance can be a critical control mechanism here.
Evaluating Firm Performance
Balanced Scorecard Analysis
Innovation, learning & improvement activities
Financial Ratio Analysis
Comparison with industry norms
Comparison with key competitors
Financial ratio analysis = a technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation. When performing a financial ratio analysis, you must take into account the firm’s performance from a historical perspective (not just at one point in time) as well as how it compares with both industry norms and key competitors. Balanced scorecard = a method of evaluating a firm’s performance using performance measures from the customers’ perspectives, as well as internal, innovation and learning, and financial perspectives.
Financial Ratio Analysis
Five types of financial ratios:
Short-term solvency or liquidity
Long-term solvency measures
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