Module 4
Internal Analysis and Business Level Competitive Strategy
Chapter Outline
In traditional approaches to assessing a firm’s internal environment, a manager’s primary goal would be to determine her firm’s relative strengths and weaknesses. Such is the role of SWOT analysis, wherein a manager analyzes her firm’s Strengths and Weaknesses as well as the Opportunities and Threats in the external environment. This may be a good starting point but hardly the best approach to performing a sound analysis. There are many limitations of SWOT analysis, including its static perspective, its potential to overemphasize a single dimension of a firm’s strategy, and the likelihood that a firm’ strengths do not necessarily help the firm create value or competitive advantages.
There are two useful frameworks that serve to complement SWOT analysis in assessing a firm’s internal environment: value chain analysis and the resource-based view of the firm. In conducting a value chain analysis, you first divide the firm into a set of value creating activities. As depicted in Figure 1, these include primary activities such as inbound logistics, operations, outbound logistics, marketing and sales, service as well as support activities such as procurement, technology development, human resources management, and general administration. Then you analyze how each activity adds value as well as how interrelationships among value activities in the firm and among the firm and its customers and suppliers add value. Thus, instead of merely determining a firm’s strengths and weaknesses per se, we analyze them in the overall context of the firm and its relationships with customers and suppliers, the value system.
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The resource-based view of the firm (RBV) combines two perspectives: (1) the internal analysis of phenomena within a company, and (2) an external analysis of the industry and its competitive environment. It extends SWOT analysis by combining internal and external perspectives and provides a useful framework for exploring why some firms are more successful than others. Specifically, the RBV considers the firm as a bundle of resources: tangible resources, intangible resources, and organizational capabilities. Competitive advantages that are sustainable over time generally arise from the creation of bundles of resources and capabilities. For advantages to be sustainable, four criteria must be satisfied: rareness, valuable, difficulty in imitation, and difficulty in substitution. Such an evaluation requires a sound knowledge of the competitive context in which the firm exists.
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An internal analysis of the firm would not be complete unless you evaluated its performance and made the appropriate comparisons. Determining a firm’s performance requires an analysis of its financial situation as well as a review of how well it is satisfying a broad range of stakeholders, including customers, employees, and stockholders. We discuss the concept of the balanced scorecard, in which four perspectives must be addressed: customer, internal business, innovation and learning, and financial. Central to the balanced scorecard is the idea that the interests of various stakeholders can be interrelated. We provide examples of how indicators of employee satisfaction lead to higher levels of customer satisfaction, which in turn lead to higher levels of financial performance. Thus, improving a firm’s performance does not need to involve making tradeoffs among different stakeholders. Assessing the firm’s performance is also useful if it is evaluated in terms of how it changes over time, compares with industry norms, and compares it with key competitors.
Key Terms and Concepts
Value Chain Analysis - sequential process of value-creating activities in an organization useful for understanding the building blocks of competitive advantage. In competitive terms, value is the amount that buyers are willing to pay for what a firm provides for them. And, a firm is profitable to the extent that the value that it receives exceeds the total costs involved in creating the product or service.
Resource-based View–a perspective of the firm in which the internal resources are matched with external environmental opportunities.
Inbound Logistics- receiving, storing, and distributing of inputs to the product which includes material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers.
Operations - all activities associated with transforming the final product form, such as machining, assembly, equipment, testing, printing, and facility operations.
Marketing and Sales- activities associated with purchases of products and services by end users and the inducements to get them to make purchases, including advertising, promotion, sales force, quoting, channel selection, channel relations, and pricing.
Outbound Logistics- activities associated with the collecting, storing, and distributing a product or service to buyers, including goods warehousing, material handling, delivery vehicle operations, order processing, and scheduling.
Service- all activities associated with providing service to enhance the value of products such as installation, repair, training, parts supply, and product adjustment.
Procurement- the function [jj1]of purchasing inputs used in a firm’s value chain such as raw materials, supplies, consumables as well as assets such as laboratory equipment, office equipment and buildings.
Technology Development -broad array of technologies included with every value activity employed in most firms, ranging from those used to prepare documents and transport goods to those embodied in processes and equipment for the product itself; technology related to the product and its features supports the entire value chain; other technology development is associated with particular primary or support activities.
Human Resources Management.- activities involved in the recruitment, hiring, training, development, and compensation of all types of personnel that support both individual primary and support activities (e.g., hiring of engineers and scientists) and the entire value chain (e.g., negotiations with labor unions).
General Administration- firm infrastructure consisting of a number of activities, including general management, planning, finance, accounting, legal, government affairs, quality management, and information systems; typically supports the entire value chain and not individual activities.
Tangible Resources- assets that are relatively easy to identify and include financial, physical, organizational, and technological resources that an organization uses to create value for its customers.
Intangible Resources –resources difficult for competitors to account for or imitate such as human resources, innovation resources, and reputation resources.
Organizational Capabilities - competencies or skills that a firm employs to transform inputs into outputs [jj2]such as outstanding customer service, excellent product development processes, and superb innovation processes.
Rareness - uncommon resources relative to other competitors that give the firm a competitive advantage.
Valuable- resources that enable a firm to formulate and implement strategies to improve its efficiency or effectiveness, e.g., SWOT framework suggests that firms improve their performance only when they either exploit opportunities or neutralize (minimize) threats.
Difficulty in Imitation- key to value creation when imitability constrains competition; inimitable resources are more likely to generate sustainable profits than imitable ones.
Difficulty in Substitution– when substitution of another firm’s resource with a similar resource for enabling it to develop and implement the same strategy is difficult or when difficult for very different firm resources to become strategic substitutes.
[jj1]Example of function would be niceere??
[jj2]Example would be nice here?