The Internal Environment

The Strengths and Weakness of the Firm

A Firm’s Tangible & Intangible Resources combine with Firm’s Capabilities to create Distinctive Competencies

Distinctive Competencies – those activities that a firm performs better than any competing firm

The Internal Environment

The Strengths and Weakness of the Firm

Sustained Competitive Advantage – firms that possess and exploit costly to imitate, rare, and valuable resources & capabilities in choosing and implementing their strategies may enjoy a period of sustained competitive advantage and above normal economic profit.

The Internal Environment

The Strengths and Weakness of the Firm

Tangible Resources: Dow Chemical’s research laboratory and

facilities Intel’s semiconductor fabrication facilities AT&T’s network of wire, cable, and satellites…

The Internal EnvironmentThe Strengths and Weakness of the Firm

Intangible Resources: Toyota’s well-known and trusted brand names, New Season’s good reputation, Intel’s knowledgeable and creative workforce, Sun Microsystems’ unifying corporate culture, Subway’s international experience with different country’s

regulations on franchising, Norm Thompson Outfitters’ visionary leader with strong

motivation and communications skills,…

The Internal EnvironmentThe Strengths and Weakness of the Firm

CapabilitiesEmerge over time through complex interaction between and among tangible and intangible resources.Become stronger and more valuable strategically through repetition and practice.Skills and knowledge of firm’s employees, including functional expertise (human capital)

The Internal Environment

The Strengths and Weakness of the Firm

CapabilitiesExamples:• Toyota’s efficient distribution systems - Just-in-time (JIT)

delivery, strong supplier relationships, and well-trained inventory specialists.

• L.L. Bean’s customer segmentation procedures and systems - database management systems, effective market research efforts and strong supplier relationships.

• Nike’s new product development procedures – creative workforce and innovation-driven culture, strong leadership, and effective market research.

The Internal EnvironmentThe Strengths and Weakness of the Firm

Distinctive Competencies: The VRIO Framework

Question of Value: Do a firm’s resources and capabilities enable the firm to respond to neutralize external threats and/or capitalize on external opportunities?

Example: Are InFocus’ engineers and marketing staff able to develop and sell home-based projector systems before its competitors?

The Internal Environment

The Strengths and Weakness of the Firm

Distinctive Competencies: The VRIO Framework Question of Rarity: Is a resource or capability currently

controlled by only a small number of competing firms? Example: Does InFocus have the technical expertise and

market access that other firms do not have to innovate and sell home-based projector systems?

The Internal Environment

The Strengths and Weakness of the Firm

Distinctive Competencies: The VRIO Framework Question of Inimitability: Do firms without the resource

or capability face a cost disadvantage in obtaining or developing it?

Example: Is it quite expensive for Toshiba to internally develop the expertise to manufacture home-based projector systems?

The Internal Environment

The Strengths and Weakness of the Firm

Distinctive Competencies: The VRIO Framework Question of Organization: Are a firm’s other policies

and procedures organized to support the use of its valuable, rare, and costly to imitate resources and/or capabilities?

Example: Are InFocus’ organizational structure and compensation policies appropriate to support its efforts to develop, manufacture and distribute home-based projector systems?

The Internal Environment

The Strengths and Weakness of the Firm

Value Chain Analysis Examines contributions of individual activities to overall

level of customer value and ultimately financial performance.

Customer value: product differentiation, low cost, and/or responsiveness

The Internal Environment

Primary ActivitiesInbound LogisticsOperationsOutbound LogisticsMarketing and SalesCustomer Service

Secondary Activities Firm Infrastructure Human Resource

Management Technology Development Procurement

Value Chain AnalysisThe Strengths and Weakness of the Firm

InboundLogistics Operations

OutboundLogistics

Marketing & Sales CustomerService

Soundness ofmaterial andinventorycontrolsystems

Efficiency ofraw materialwarehousingactivities

Productivity ofequipmentcompared tothat of keycompetitors

Appropriateautomation ofproductionprocesses

Effectivenessof productioncontrol systemsto improvequality andreduce costs

Efficiency ofplant layoutand work-flowdesign

Timeliness andefficiency ofdelivery offinished goodsand services

Efficiency offinished goodswarehousingactivities

Effectiveness ofmarket research toidentify customersegments & needs

Innovation in sales& promotion

Evaluation ofalternatedistributionchannels

Motivation andcompetence of salesforce

Development ofimage of quality anda favorablereputation

Extent of brandloyalty amongcustomers

Extent of marketdominance withinthe market segmentor overall market

Means to solicitcustomer inputfor productimprovements

Promptness ofattention tocustomercomplaints

Appropriatenessof warranty andguaranteepolicies

Quality ofcustomereducation andtraining

Ability toprovidereplacement partsand repair service

Primary Activities and Factors for Assessment

FirmInfrastructure

HumanResource

TechnologyDevelopment

Procurement

Capability toidentify newproduct marketopportunities andpotentialenvironmentalthreats

Quality of thestrategic planningsystem to achievecorporate objectives

Coordination andintegration of allvalue chainactivities

Ability to obtainrelatively low costfunds for capitalexpenditures andworking capital

Timely & accurateinformation ongeneral andcompetitiveenvironments

Effectiveness ofprocedures forrecruiting,training, andpromoting alllevels ofemployees

Appropriatenessof reward systems

Relations withtrade unions

Levels ofemployeemotivation andjob satisfaction

Success of R&Dactivities in leadingto product andprocess innovations

Quality of workingrelationship betweenR&D personnel andother departments

Timeliness oftechnologydevelopmentactivities in meetingcritical deadlines

Qualifications &experience oflaboratorytechnicians andscientists

Ability of workenvironment toencourage creativityand innovation

Development ofalternate sources forinputs to minimizedependence on asingle supplier

Procurement of rawmaterials on timelybasis at lowestpossible cost and atacceptable levels ofquality

Development forcriteria for lease-vs.-buy decisions

Good, long-termrelationships withsuppliers

Secondary Activities and Factors for Assessment

The Internal Environment So strengths and weaknesses are based on how well

value chain activities are performed Resources and capabilities determine the performance

of value chain activities. Look at… Corporate culture and Leadership Marketing management issues Financial management issues R&D management issues HR management issues Operations management issues Information systems management issues Stakeholder management issues

The Internal Environment

The Strengths and Weakness of the Firm

Is a resource or capability…Costly to Exploited Competitive

Valuable? Rare? Imitate? By Firm? ImplicationsNo -- -- No Comp. Disadv.

Yes No -- Comp. Parity

Yes Yes No Temp Comp. Adv.

Yes Yes Yes Yes Sustained Comp. Adv.

The Internal EnvironmentLife Expectancy of Sustained Competitive

Advantage

Length of Innovation Cycle the faster the cycle, the easier it is to take away competitive advantage

Example: New generation of cameras born about every 10 months

Number of Dimensions of Customer Value the more dimensions, the easier it is for competitors to find ways of eroding competitive advantage

Example: An I-beam is an I-beam, but an automobile comes in many shapes, sizes, etc.

The Internal Environment

Life Expectancy of Sustained Competitive Advantage

Switching Costs Between Rivals: the easier it is to switch, the easier it is to take away competitive advantage

Example: Difficulty in switching between office systems management service providers versus ease of switching between office supplies provider.

Internal Factor Analysis SummaryInternal Factors Weight Rating

Weighted

Score

Comments

Strengths

Weaknesses

Total 1.00 ????

Internal Factor Analysis Summary

Same basic procedure as the External Factor Analysis Summary.

See page 101 and 102 of the text for more discussion of the IFAS.

Internal ScanningExample: Proctor & Gamble (circa 1992)

Resources

Research and Development

P&G invests 4% of worldwide sales in research and development ahead of most of its global competitors. In 1997-98 this amounted to $1.5 billion.

P&G has a world class, global research and development organization, with over 7,500 scientists working in 22 research centers in 12 countries around the world.

Innovative Workforce

P&G holds more than 24,000 active patents worldwide, and on average, receives about 3,800 more patents per year. This makes P&G among the world's largest holders of U.S. and global patents, putting it on a par with Intel, Lucent and Microsoft.

Proctor & Gamble

Capability

Directed growth and maximized chances of success by leveraging considerable technical competencies across product categories and national boundaries.

Competencies

A deep understanding of consumers, their habits and product needs.

The ability to acquire, develop and apply technology across P&G's broad array of product categories.

The ability to make "connections" between consumers' wants and what technology can deliver

Strategic Issue

Market research revealed brand loyal consumers were paying $725/year more than families buying private-label or store brands.

Need new strategy to reduce costs and better meet consumer demand

Factors for Assessment: Technology Development (R&D): was the initiator of product development,

produced technologically superior productS Firm Infrastructure: Relationship between R&D and Marketing & Sales --

Marketing released new products under new brand names Marketing & Sales: complex with 17 pricing brackets for 34 product

categories Manufacturing: Capacity utilization averaged about 55%, with excess needed

to handle bubble demand brought on by occasional price wars Outbound Logistics: heavily paper-laden

Methods for Assessment:

Organizational Perspective: Superior products no longer matched needs of marketplace, particularly in developing markets. Devolve products – less technology, lower price. Put marketing research in charge of setting initial new product development guidelines. Improve internal processes for product development.

Methods for Assessment:

Customer value: Brand equity for existing brands is high (e.g. Ivory). Release new

developments under existing brand names rather than creating new ones.

Improve customer value by strengthening brand relationship to new products.

Financial Perspective: Outbound logistics unnecessarily expensive. Work with industry stakeholders,

including competitors, to simplify delivery system through standardization and

computerization. Improves industry’s profitability.

Reduce number of brands and product lines. Simplifies manufacturing

process and eliminate slack in capacity utilization. Better ROA, and hopefully

better P/E ratio.