Chapter 6 Internal Analysis

0Chapter Summary
This chapter looks at several ways managers achieve greater objectivity and rigor as they analyze their companys internal resources and capabilities. Managers often start their internal analysis with questions like, how well is the current strategy working !hat is our current situation !hat are our strengths and weaknesses "!#T analysis is a traditional approach that has been in use for decades to help structure managers pursuit of answers to these questions. "!#T does have some limitations related to depth and the risk of overlooking key considerations. Two techniques for internal analysis have emerged that overcome some of the limitations of "!#T analysis, offering more comprehensive approaches that can help managers identify and assess their firms internal resources and capabilities in a more systematic, objective, and measurable manner. $alue chain analysis has managers look at and disaggregate their business as a chain of activities that occur in a sequential manner to create the products or services they sell. The third approach covered in this chapter is the resource%based view &'($). '($ is based on the premise that firms build competitive advantage based on the unique resources, skills, and capabilities they control or develop, which can become the basis of unique, sustainable competitive advantages that allow them to craft successful competitive strategies. *inally, the chapter covers four ways objectivity and realism are enhanced when managers use meaningful standards for comparison regardless of the particular analytical framework they employ in internal analysis. The chapter is followed by two appendi+es. The first provides a useful inventory of the types of activities in different functional areas of a firm that can be sources of competitive advantage. The second covers traditional financial analysis to serve as a refresher and reminder about this basic internal analysis tool.

0Learning Objectives
,. -nderstand how to conduct a "!#T analysis, and be able to summarize its limitations. .. -nderstand value chain analysis and how to use it to disaggregate a firms activities and determine which are most critical to generating competitive advantage. /. -nderstand the resource based view of a firm and how to use it to disaggregate a firms activities and resources to determine which resources are best used to build competitive advantage. 0. 1pply four different perspectives for making meaningful comparisons to assess a firms internal strengths and weaknesses. 2. 3valuate 1pple 4omputers core competence and consider whether it has a sustainable competitive advantage in that regard. 5. 'efamiliarize yourself with ratio analysis and basic techniques of financial analysis to assist you in doing internal analysis to identify a firms strengths and weaknesses.

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0Lecture Outline
67. "!#T 1nalysis8 1 Traditional 1pproach to 6nternal 1nalysis 17. 4onsider Exhibit 6.1 !"p Strategist, which describes 9ohn !. :enry, 43# of the .770 !orld "eries%winning (oston 'ed "o+. (. S#O! is an acronym for the internal Strengths and #eaknesses of a firm and the environmental Opportunities and !hreats facing that firm. S#O! analysis is a historically popular technique through which managers create a quick overview of a companys strategic situation. ,7. 6t is based on the assumption that an effective strategy derives from a sound ;fit< between a firms internal resources &strengths and weaknesses) and its e+ternal situation &opportunities and threats). .. /. 1 good fit ma+imizes a firms strengths and opportunities and minimizes its weaknesses and threats. 3nvironmental and industry analysis in 4hapters / and 0 provides the information needed to identify opportunities and threats in a firms environment, the first fundamental focus in "!#T analysis. #pportunities a) 1n "pp"rtunity is a major unfavorable situation in a firms environment. &,) =ey trends are one source of opportunities. &.) 6dentification of a previously overlooked market segment, changes in competitive or regulatory circumstances, technological changes, and improved buyer or supplier relationships could represent opportunities for the firm. 2. Threats a) 1 threat is a major unfavorable situation in a firms environment. &,) Threats are key impediments to the firms current or desired position. &.) The entrance of new competitors, slow market growth, increased bargaining power of key buyers or suppliers, technological changes, and new or revised regulations could represent threats to a firms success. b) >arge national residential home builders have seen lower interest rates as a major opportunity driver in single%family housing developments nationwide.

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&,) These same residential home builders have had to face an increasing threat of rapidly accelerating energy and materials costs brought on both by their collective, fast%paced development activities, further e+acerbated by the e+ploding demand for these dame building supplies in the 4hinese marketplace. &.) "o these large national home builders had to craft strategies built around these opportunities and threats among perhaps several others. c) #nce managers agree on key opportunities and threats facing their firm, they have a frame of reference or conte+t from which to evaluate their firms ability to take advantage of opportunities and minimize the effect of key threats. &,) 1nd vice versa8 #nce managers agree on their firms core strengths and weaknesses, they can logically move to consider opportunities that best leverage their firms strengths while minimizing the effect certain weaknesses may present until remedied. 5. "trengths a) 1 strength is a resource or capability controlled by or available to a firm that gives it an advantage relative to its competitors in meeting the needs of the customers it serves. &,) "trengths arise from the resources and competencies available to the firm. ?. !eaknesses a) 1 $ea%ness is a limitation or deficiency in one or more of a firms resources or capabilities relative to its competitors that create a disadvantage in effectively meeting customer needs.

4. -sing "!#T 1nalysis in "trategic 1nalysis ,. The most common use of "!#T analysis is as a logical framework guiding discussion and reflection about a firms situation and basic alternatives. a) b) c) d) e) f) This often takes place as a series of managerial group discussions. !hat one manager sees as an opportunity, another may see as a potential threat. >ikewise, a strength to one manager may be a weakness to another. The "!#T framework provides an organized basis for insightful discussion and information sharing, which may improve the quality of choices and decisions managers subsequently make. 4onsider what initial discussions among 1pple 4omputers management team might have been that led to the decision to pursue the rapid development and introduction of the i@od. 1 brief "!#T analysis of their situation might have identified8

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&,) "trengths "izable miniature storage e+pertise -ser%friendly engineering skill 'eputation and image with youthful consumers (rand name !eb%savvy organization and people 9obss @i+ar e+perience &.) !eaknesses 3conomies of scale versus computer rivals Maturing computer markets >imited financial resources >imited music industry e+pertise &/) #pportunities 4onfused online music situation 3merging file%sharing restrictions *ew core computer%related opportunities Aigitalization of movies and music &0) Threats Browing global computer companies Major computer competitors .. Exhibit 6.& S#O! Analysis 'iagram, illustrates how "!#T analysis might take managerial planning discussions into a slightly more structured approach to aid strategic analysis. a) b) The objective is identification of one of four distinct patterns in the match between a firms internal resources and e+ternal situation. 4ell , is the most favorable situationC the firm faces several environmental opportunities. &,) This situation suggests growth%oriented strategies to e+ploit the favorable match. &.) The i@od e+ample is the result of a favorable match of its strong technical e+pertise, early entry, and reputation resources with an opportunity for impressive market growth as millions of people sought a legally viable, convenient way to obtain, download, store, and use their own customized music choices. /. 0. Exhibit 6.( Strategy in Acti"n, shows how "un Microsystems used a "!#T analysis to target frustrated :@ customers in .772. 4ell 0 is the least favorable situation, with the firm facing major environmental threats from a weak resource position.

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a) b) 2.

This position clearly calls for strategies that reduce or redirect involvement in the products or markets e+amined by means of "!#T analysis. Te+as 6nstruments is a good e+ample of a cell 0 firm.

6n cell ., a firm that has identified several key strengths faces an unfavorable environment. a) 6n this situation, strategies would seek to redeploy those strong resources and competencies to build long%term opportunities in more opportunistic product markets.

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1 firm in cell / faces impressive market opportunity but is constrained by weak internal resources. a) The focus of strategy for such a firm is eliminating the internal weaknesses so as to more effectively pursue the market opportunity.

A. >imitations of "!#T 1nalysis ,. 1 "!#T analysis can overemphasize internal strengths and downplay e+ternal threats. a) b) "trategists in every company have to remain vigilant against building strategies around what the firm does well now &its strengths) without due consideration of the e+ternal environments impact on those strengths. 1pples success with the i@od and its iTunes dowloadable music !eb site provides a good e+ample of strategists who placed a major emphasis on e+ternal considerationsDthe legal requirements for downloading and subsequently using individualDsongs, what music to make available, and the evolution of the use of the !eb to download musicDas a guide to shaping 1pples eventual strategy.

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1 "!#T analysis can be static and can risk ignoring changing circumstances. a) 1 frequent admonition about the downfall of planning processes says that plans are one%time events to be completed, typed, and relegated to their spot on a managers shelf while sEhe goes about the actual work of the firm. "o, it is not surprising that critics of "!#T analysis, with good reason, warn that it is a one%time view of a changing, or moving, situation. "!#T analysis, along with most planning techniques, must avoid being static and ignoring change.

b) c) /.

1 "!#T analysis can overemphasize a single strength or element of strategy. a) b) The :ewlett%@ackardD4ompaq merger created the worlds largest @4 company, and its strategy for @4 success was built around the economies of scale afforded by that size. That strategy has failed to work.

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c)

The strength afforded by created by creating one of the largest @4 computer companies in the world, while a potential strength, proved to be an oversimplified basis around which to base the companys strategy for survival and growth in the global @4 industry of the last five years.

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1 strength is not necessarily a source of competitive advantage. a) b) c) d) 4isco "ystems 6nc. has been a dominant player in providing switching equipment and other key networking infrastructure items around which the global computer communications system has been able to proliferate. 6t has substantial financial, technological, and branding e+pertise. 4isco "ystems twice attempted to use its vast strengths in these areas as the basis to enter and remain in the market for home computer networks and wireless home%networking devices. 6t failed both times and lost hundreds of millions of dollars in the process, because none of its strengths were sources of sustainable competitive advantage in that industry.

2.

6n summary, "!#T analysis is a longtime, traditional approach to internal analysis among many strategists. a) b) c) 6t offers a generalized effort to e+amine internal capabilities in light of e+ternal factors, most notably key opportunities and threats. 6t has limitations that must be considered if "!#T analysis is to be the basis for any firms strategic decision%making process. 1nother approach to internal analysis that emerge, in part, to add more rigor and depth in the identification of competitive advantages around which a firm might build a successful strategy is value chain analysis.

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$alue 4hain 1nalysis 1. The term value chain describes a way of looking at a business as a chain of activities that transform inputs into outputs that customers value. ,. 4ustomer value derives from three basic sources8 activities that differentiate the product, activities that lower its cost, and activities that meet the customers need quickly. a) )alue chain analysis &$41) attempts to understand how a business creates customer value by e+amining the contributions of different activities within the business to that value.

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$41 takes a process point of view. a) 6t divides &sometimes called disaggregates) the business into sets of activities that occur within the business, starting with the inputs a firm receives and finishing with the firms products &or services) and after% sales service to customers. $41 attempts to look at its costs across the series of activities the business performs to determine where low%cost advantages or cost disadvantages e+ist.
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b)

c)

d)

6t looks at the attributes of each of these different activities to determine in what ways each activity that occurs between purchasing inputs and after%sales service helps differentiate the companys products and services. @roponents of $41 believe it allows managers to better identify their firms competitive advantages by looking at the business as a processDa chain of activitiesDof what actually happens in the business rather than simply looking at it based on arbitrary organizational dividing lines or historical accounting protocol.

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Exhibit 6.* !he )alue Chain, shows a typical value chain framework. a) b) c) +rimary activities &sometimes called line functions) are those involved in the physical creation of the product, marketing and transfer to the buyer, and after%sale support. Supp"rt activities &sometimes called staff or overhead functions) assist the firm as a whole by providing infrastructure or inputs that allow the primary activities to take place on an ongoing basis. The value chain includes a profit margin because a markup above the cost of providing a firms value%adding activities is normally part of the price paid by the buyerDcreating value that e+ceeds cost so as to generate a return for the effort.

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9udgment is required across individual firms and different industries because what may be seen as a support activity in one firm or industry may be a primary activity in another. a) b) 4omputer operations might typically be seen as infrastructure support, for e+ample, but may be seen as a primary activity in airlines, newspapers, or banks. Exhibit 6., Strategy in Acti"n, describes how *ederal 3+press reconceptualized its company using a value chain analysis that ultimately saw its information support become its primary activity and source of customer value.

(. 4onducting a $alue 4hain 1nalysis ,. 6dentify 1ctivities a) The initial step in value chain analysis is to divide a companys operations into specific activities or business processes, usually grouping them similarly to the primary and support activity categories show earlier in 3+hibit 5.0. !ithin each category, a firm typically performs a number of discrete activities that may be key to the firms success. "ervice activities, for e+ample, may include such discrete activities as installation, repair, parts distribution, and upgradingDany of which could be a major source of competitive advantage or disadvantage. The managers challenge at this point is to be very detailed attempting to ;disaggregate< what actually goes on into numerous distinct, analyzable activities rather than settling for a broad, general categorization.
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b) c) d)

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1llocate 4osts a) The ne+t step is to attempt to attach costs to each discrete activity. &,) 3ach activity in the value chain incurs costs and ties up time and assets. &.) $alue chain analysis requires managers to assign costs and assets to each activity, thereby providing a very different way of viewing costs than traditional cost accounting methods would produce. &/) Exhibit 6.6 !he 'i--erence bet$een !ra.iti"nal C"st Acc"unting an. Activity/0ase. C"st Acc"unting, helps illustrate this distinction. b) $41 proponents hold that the activity%based $41 approach would provide a more meaningful analysis of the procurement functions costs and consequent value added. &,) The activity%based side of the e+hibit shows that appro+imately ., percent of the procurement cost or value added involves evaluating supplier capabilities. &.) 1 rather sizable cost, .7 percent, involves internal administration, with an additional ,? percent spent resolving problems and almost ,2 percent spent on quality control efforts. &/) $41 advocates see this information as being much more useful than traditional cost accounting information, especially when compared with the cost information of key competitors or other ;benchmark< companies.

4. 'ecognizing the Aifficulty in 1ctivity%(ased 4ost 1ccounting ,. 6t is important to note that e+isting financial management and accounting systems in many firms are not set up to easily provide activity%based cost breakdowns. a) >ikewise, in virtually all firms, the information requirements to support activity%based cost accounting can create redundant work because of the financial reporting requirements that may force firms to retain the traditional approach for financial statement purposes. The time and energy to change to an activity%based approach can be formidable and still typically involve arbitrary cost allocation decisions Dtrying to allocate selected asset or people costs across multiple activities in which they are involved. 4hallenges dealing with a cost%based use of $41 have not deterred use of the framework to identify sources of differentiation. 4onducting a $41 to analyze competitive advantages that differentiate the firm is compatible with the resource%based views e+amination of intangible assets and capabilities as sources of distinctive competence.

b)

c) d)

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6dentify the 1ctivities That Aifferentiate the *irm

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a) b)

"crutinizing a firms value chain may not only reveal cost advantages or disadvantages, it may also bring attention to several sources of differentiation advantage relative to competitors. Exhibit 6.1 +"ssible 2act"rs -"r Assessing S"urces "- 'i--erentiati"n in +rimary an. Supp"rt Activities, suggests some factors for assessing these activities differentiation and contribution.

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3+amine the $alue 4hain a) b) c) #nce the value chain has been documented, managers need to identify the activities that are critical to buyer satisfaction and market success. 6t is those activities that deserve major scrutiny in an internal analysis. Three considerations are essential at this stage in the value chain analysis. &,) *irst, the companys basic mission needs to influence managers choice of activities to be e+amined in detail. &.) "econd, the nature of value chains and the relative importance of the activities within them vary by industry. &/) Third, the relative importance of value activities can vary by a companys position in a broader value system that includes the value chains of its upstream suppliers and downstream customers or partners involved in providing products or services to end users. d) 6t is important that mangers take into account their level of vertical integration when comparing their cost structure for activities on their value chain to those of key competitors. &,) 4omparing a fully integrated rival with a partially integrated one requires adjusting for the scope of activities performed to achieve meaningful comparison. &.) 6t also suggests the need for e+amining costs associated with activities provided by upstream or downstream companiesC these activities ultimately determine comparable, final costs to end users. &/) "aid another way, one companys comparative cost disadvantage &or advantage) may emanate more from activities undertaken by upstream or downstream ;partners< than from activities under the direct control of that companyDtherefore suggesting less of a relative advantage or disadvantage within the companys direct value chain.

666. 'esourced%(ased $iew of the *irm 1. The 4oke%@epsi situation provides a useful illustration for understanding several concepts central to the res"urce/base. vie$ &'($) of the firm. ,. The '($ is a method of analyzing and identifying a firms strategic advantages based on e+amining its distinct combination of assets, skills, capabilities, and intangibles as an organization.

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The '($s underlying premise is that firms differ in fundamental ways because each firm possesses a unique ;bundle< of resourcesDtangible and intangible assets and organizational capabilities to make use of those assets. 3ach firm develops competencies from these resources, and, when developed especially well, these become the source of the firms competitive advantages.

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(. Three (asic 'esources8 Tangible 1ssets, 6ntangible 1ssets, and #rganizational 4apabilities ,. 3+ecutives charting the strategy of their business historically concentrated their thinking on the notion of a ;core competence.< a) b) 4ore competence was seen as a capability or skill running through a firms business thatDonce identified, nurtured, and deployed throughout the firmDbecame the basics for lasting competitive advantage. 3+ecutives, enthusiastic about the notion that their job as strategists was to identify and leverage core competencies, encountered the notion that their job as strategists was to identify and leverage core competencies, encountered difficulty applying the concept because of the generality of its level of analysis. The '($ emerged as a way to make the core competency concept more focused and measurableDcreating a more meaningful internal analysis. 4entral to the '($s ability to do this is the delineation of three basic types of resources, some of which may become the building blocks for distinctive competencies. These resources are defined below and illustrated in Exhibit 6.3 Examples "- 'i--erent 45es"urces.6

c) d) e) ..

!angible assets are the easiest ;resources< to identify and are often found on a firms balance sheet. a) b) They include production facilities, raw materials, financial resources, real estate, and computers. Tangible assets are the physical and financial means a company uses to provide value to its customers.

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Intangible assets are ;resources< such as brand names, company reputation, organizational morale, technical knowledge, patents and trademarks, and accumulated e+perience within an organization. a) !hile they are not assets that you can touch or see, they are very often critical in creating competitive advantage.

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Organi7ati"nal capabilities are not specific ;inputs< like tangible or intangible assetsC rather, they are the skillsDthe ability and ways of combining assets, people, and processesDthat a company uses to transform inputs into outputs.

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a)

4apabilities enable a firm to take the same input factors as rivals and convert them into products and services, either with greater efficiency in the process or greater quality in the output, or both.

4. !hat Makes a 'esource $aluable ,. #nce managers identify their firms tangible assets, intangible assets, and organizational capabilities, the '($ applies a set of guidelines to determine which of those resources represent strengths or weaknessesDwhich resources generate core competencies that are sources of sustained competitive advantage. a) These '($ guidelines derive from the idea that resources are more valuable when they &,) 1re critical to being able to meet a customers need better than other alternatives. &.) 1re scarceDfew others if any possess that resource or skill to the degree you do. &/) Drive a key portion of overall profits, in a manner controlled by your firm. &0) 1re durable or sustainable over time. b) .. 'esources are most valuable when they meet all four of these guidelines.

'($ Buideline,8 6s the resource or skill critical to fulfilling a customers need better than that of the firms competitors a) b) Two restaurants offer similar food, at similar prices, but one has a location much more convenient to downtown offices than the other. The tangible asset, location, helps fulfill daytime workers lunch%eating needs better than its competitor, resulting in greater profitability and sales volume for the conveniently located restaurant.

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'($ Buideline .8 6s the resource scarce 6s it in short supply or not easily substituted for or imitated a) "hort "upply &,) !hen a resource is scarce, it is more valuable. &.) !hen a firm possesses a resource and few if any others do, and it is central to fulfilling customers needs, then it can become the basis of a competitive advantage for the firm. &/) >iteral physical scarcity is perhaps the most obvious way a resource might meet this guideline. &0) $ery limited natural resources, a unique location, skills that are truly rareDall represent obvious types of scarce resource situations. b) 1vailability of "ubstitutes

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&,) !e discussed the threat of substitute products in 4hapter / as part of the five forces model for e+amining industry profitability. &.) This basic idea can be taken further and used to gauge the scarcity% based value of particular resources. c) 6mitation &,) 1 resource that competitors can readily copy can only generate temporary value. &.) 6t is ;scarce< for only a short time. &/) 6t cannot generate a long%term competitive advantage. d) The scarcity that comes with an absence of imitation seldom lasts forever. The '($ identifies four characteristics, called is"lating mechanisms that make resources difficult to imitate8 &,) Physically unique resources are virtually impossible to imitate. &.) Path-dependent resources are very difficult to imitate because of the difficult ;path< another firm must follow to create the resource. &/) Casual ambiguity is a third way resources can be very difficult to imitate. This refers to situations in which it is difficult for competitors to understand e+actly how a firm has created the advantage it enjoys. &0) Economic deterrence is a fourth source of inimitability. This usually involves large capital investments in capacity to provide products or services in a given market that are scale sensitive. e) !hile we may be inclined to think of the ability to imitate a resource as a yes%or%no situation, imitation is more accurately measured on a continuum that reflects difficulty and time. "ee Exhibit 6.8 5es"urce Imitati"n.

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'($ Buideline /8 1ppropriability8 !ho actually gets the profit created by a resource a) "ports teams, investment services, and consulting businesses are e+amples of companies that generate sizable profits based on resources &e.g., key people, skills, contacts) that are not ine+tricably linked to the company and therefore do not allow the company to easily capture the profits. Exhibit 6.10 #al/9art:s 5es"urce/0ase. C"mpetitive A.vantage, demonstrates !al%Marts success in appropriating profits associated with five key resources or capabilities.

b)

2.

'($ Buideline 08 Aurability8 :ow rapidly will the resource depreciate a) b) c) The slower a resource depreciates, the more valuable it is. Tangible assets, such as commodities or capital, can have their depletion measured. 6ntangible resources, such as brand names or organizational capabilities, present a much more difficult depreciation challenge.
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e)

6n the hypercompetitive global economy of the twenty%first century, distinctive competencies and competitive advantages can fade quickly, making the notion of durability a critical test of the value of key resources and capabilities. "ome believe that this reality makes well%articulated visions and associated cultures within organizations potentially the most important contributor to long%term survival.

A. -sing the 'esource%(ased $iew in 6nternal 1nalysis ,. To use the '($ in internal analysis, a firm must first identify and evaluate its resources to find those that provide the basis for future competitive advantage. 6t is helpful to8 a) Disaggregate resources F break them down into more specific competenciesDrather than stay with broad categorizations. Exhibit 6.11 'isaggregating #hitbrea. 5estaurant:s Cust"mer Service 5es"urce, provides a good e+ample. tili!e a functional perspective. >ooking at different functional areas of the firm and disaggregating tangible and intangible assets and organizational capabilities that are present can begin to uncover important value%building resources and activities that deserve further analysis. "ee Appen.ix 6A. "oo# at organi!ational processes and combinations of resources and not only at isolated assets or capabilities. se the value chain approach to uncover organizational capabilities, activities, and processes that are valuable potential sources of competitive advantage.

b)

c) d)

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#nce the resources are identified, managers apply the four '($ guidelines for uncovering ;valuable< resources. a) The objective for managers at this point is to identify resources and capabilities that are valuable for most if not all of the reasons our guidelines suggest a resource can be valuable.

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6f a resource creates the ability to meet a unique customer need, it has value. a) b) (ut if it is not scarce, or if it is easily imitated, it would be unwise to build a firms strategy on that resource or capability unless that strategy included plans to build scarcity or inimitability into it. 6f a resource provided the basis for meeting a unique need, was scarce, was not easily imitated, and was easily sustainable over time, managers would be attracted to build a strategy on it more than likely.

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The key point here is that applying '($ analysis should focus on identifying resources that contain all sources of value identified in our four guidelines. a) b) 4onsider the diagram in Exhibit 6.1& Applying the 5es"urce/0ase. )ie$ t" I.enti-y the 0est S"urces "- C"mpetitive A.vantage. 3ach circle in the diagram represents one way resources have value.
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c) d) e)

The area where all circles intersect or overlap would represent resources that derive value in all four ways. "uch resources are the ones managers applying the '($ should seek to identify. These are powerful sources around which to build competitive advantage and craft successful strategies. 1nd resources that possess some but not all sources of value become points of emphasis by a management team able to identify ways to build the missing source of value into that resource over time.

2.

(y using '($, value chain analysis, and "!#T analysis, firms are virtually certain to improve the quality of internal analysis undertaken to help craft a companys competitive strategy. a) 4entral to the success of each technique is the strategists ability to make meaningful comparisons.

6$. 6nternal 1nalysis8 Making Meaningful 4omparisons 1. Managers need objective standards to use when e+amining internal resources and value%building activities. ,. !hether applying the "!#T approach, $41, or the '($, strategists rely on three basic perspectives to evaluate how their firms stack up on internal capabilities. These three perspectives are discussed in this section.

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(. 4omparison with @ast @erformance ,. .. "trategists use the firms historical e+perience as a basis for evaluating internal factors. Managers are most familiar with the internal capabilities and problems of their firms because they have been immersed in the financial, marketing, production, and 'GA, activities. Hot surprisingly, a managers assessment of whether a certain internal factor Dsuch as production facilities, sales organization, financial capacity, control systems, or key personnelDis a strength or a weakness will be strongly influenced by his or her e+perience in connection with that factor. 1lthough historical e+perience can provide a relevant evaluation framework, strategists must avoid tunnel vision in making use of it.

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4. (enchmarking8 4omparison with 4ompetitors ,. 1 major focus in determining a firms resources and competencies is comparison with e+isting &and potential) competitors.

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*irms in the same industry often have different marketing skills, financial resources, operating facilities and locations, technical know% how, brand images, levels of integration, managerial talent, and so on. These different internal resources can become relative strengths &or weaknesses) depending on the strategy a firm chooses. 6n choosing a strategy, managers should compare the firms key internal capabilities with those of its rivals, thereby isolating its key strengths and weaknesses.

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0enchmar%ing, or comparing the way ;our< company performs a specific activity with a competitor or other company doing the same thing, has become a central concern of managers in quality commitment companies worldwide. a) @articularly as the value chain framework has taken hold in structuring internal analysis, managers seek to systematically benchmark the costs and results of the smallest value activities against relevant competitors or other useful standards because it has proven to be an effective way to continuously improve that activity. The ultimate objective in benchmarking is to identify the ;best practices< in performing an activity and to learn how lower costs, fewer defects, or other outcomes linked to e+cellence are achieved. 4ompanies committed to benchmarking attempt to isolate and identify where their costs or outcomes are out of line with what the best practices of a particular activity e+perience &competitors and noncompetitors) and then attempt to change their activities to achieve the new best practices standard.

b) c)

A. 4omparison with "uccess *actors in the 6ndustry ,. .. 6ndustry analysis &see 4hapter 0) involves identifying the factors associated with successful participation in a given industry. 1s was true for the evaluation methods discussed earlier, the key determinants of success in an industry may be used to identify a firms internal strengths and weaknesses. (y scrutinizing industry competitors as well as customer needs, vertical industry structure, channels of distribution, costs, barriers to entry, availability of substitutes, and suppliers, a strategist seeks to determine whether a firms current internal capabilities represent strengths or weaknesses in new competitive arenas. The discussion in 4hapter 0 provides a useful frameworkDfive industry forcesDagainst which to e+amine a firms potential strengths and weaknesses. Exhibit 6.1( Strategy in Acti"n, describes a major emerging strategic success factor in the global consumer products industry for companies such as @GB, -nilever, and "ara >ee, just to mention a few, as a result of the emergence of a few major global retailers.
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'iscussi"n ;uesti"ns an. Case ;uesti"ns -"r 'iscussi"n

,7. Aescribe "!#T analysis as a way to guide internal analysis. :ow does this approach reflect the basic strategic management process "!#T analysis is covered in pages ,2/%,2I. 6t is a widely used technique where managers create a quick overview of a companys strategic situation. The basic premise behind "!#T analysis is that an effective strategy derives from a sound ;fit< between a firms internal strengths and weaknesses and its e+ternal situation &threats and opportunities). The idea is to leverage the companys strengths in light of the opportunities and minimize its weaknesses and threats. "!#T analysis is an integral part of the strategic management process because strategy is derived after a sound analysis of the firms internal and e+ternal environment is completed. .. !hat are potential weaknesses of "!#T analysis 'efer to the section in the te+t titled ;>imitations of "!#T 1nalysis< on pages ,2?%,2I for help with this discussion. 4onsider four key limitations. *irst, a "!#T analysis can overemphasize internal strengths and downplay e+ternal threats. "trategists have to be vigilant in giving due consideration to the e+ternal environments impact on the firms strengths. "econd, a "!#T analysis can be static and can risk ignoring changing circumstances. Therefore, strategic managers must be aware of change when doing "!#T analysis or other planning techniques. Third, a "!#T analysis can overemphasize a single strength or element of strategy. >astly, a strength is not necessarily a source of competitive advantage. /. Aescribe the difference between primary and support activities using value chain analysis. The value chain framework divides a firms activities into two broad categories8 primary activities and support activities. @rimary activities are those involved in the physical creation of the product, marketing and transfer to the buyer, and after%sale support. "upport activities, on the other hand, assist the firm as a whole by providing infrastructure or inputs that allow the primary activities to take place on an ongoing basis. The value chain includes a profit margin because a markup above the cost of providing a firms value%adding activities is normally part of the price paid by the buyer Dcreating value that e+ceeds costs so as to generate a return for the effort. !hat is a support activity in one firm may be a primary activity in another, depending on the product or industry. The te+t discusses value chain analysis and its components on pages ,2I%,57. 0. :ow is $41 different from "!#T analysis *undamentally, both $41 and "!#T analysis are internal analysis techniques that strategic managers can use to evaluate their firms position. $41 differs from "!#T analysis, however, in that it takes a process point of view. 6t divides &or disaggregates) the business into sets of activities that occur within the business, starting with the inputs a firm receives and finishing with the firms products or services and after%sale service

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to customers. "!#T analysis considers the firms strengths in relation to e$ternal opportunities and weaknesses with regard for additional e$ternal threats. $41 focuses on the firms chain of activities and the value added by each activity. 2. !hat is the resource%based view Bive e+amples of three different types of resources. @ages ,50%,?. describe the resource%based view &'($) of the firm in which the basic premise is that firms differ in fundamental ways because each firm possesses a unique ;bundle< of resources, which are used to develop competencies. These competencies provide a competitive advantage to the firm when certain conditions are met. 1n e+ample of a tangible asset, the first type of resource, would be the fleet of cars owned by :ertz 'ent%1%4ar 4ompany. 1n e+ample of an intangible asset would the 4oca%4ola brand name owned by the company. 1bility to effectively miniaturize electronic products that "ony has is an e+ample of organizational capability. 5. !hat are three ways resources become more valuable @rovide an e+ample of each. The following are the characteristics that make a resource more valuable8 ?. water 6nimitability F Marks and "pencers human resources practices and supply chain management 3+plain how you might use $41, '($, and "!#T analysis to get a better sense of what might be a firms key building blocks for a successful strategy. !hether applying the "!#T approach, $41, or the '($, strategists rely on three basic perspectives to evaluate how their firms stack up on internal capabilities. The first is making a comparison of current performance with the firms past performance. "till, strategists must avoid using tunnel vision in making use of evaluating past performance. The second perspective is benchmarking, or comparing the companys performance of a specific activity against another competitor or company doing the same thing. >astly, industry analysis involves identifying the factors associated with successful participation in a given industry. The key determinants of success in an industry may be used to identify a firms internal strengths and weaknesses. *or more information on this discussion, refer to the section titled ;6nternal 1nalysis8 Making Meaningful 4omparisons< on pages ,?/%,?5. I. 1ttempt to apply "!#T, $41, and '($ to yourself and your career aspirations. !hat are your major strengths and weaknesses :ow might you use your knowledge of these strengths and weaknesses to develop your future career plans 4ompetitive superiority F e+ample, "outhwest 1irlines low cost structure 'esource scarcity F e+ample, Molson 4oors access to 'ocky Mountain spring

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"!#T analysis is a good tool to use for self%evaluation. 6t allows for a systematic evaluation of ones strengths and weaknesses and helps one see how they can be used to develop ones career. *or e+ample, let us say that a student identifies that heEshe has a major weakness in hisEher lack of computer knowledge, but knows that such a gap is a major threat in the job arena. The student can use this analysis to take one or more computer courses that would help in that students future career.

'iscussi"n Case < 4Apple:s 0lueprint -"r =enius6 Case Summary

This case is about how "teve 9obs turned 1pple back into an innovative, successful tech company. 1pple is at its core a product companyDone that would never give up control of how its products are created. 6n this age of commodity tech products, design is what makes 1pple 1pple. This focus is apparent to anyone who has used one of its trailblazing products. The pioneering company sells only a few dozen models, compared to the hundreds offered by many of its rivals, many of those are startling departures from the normDand they often set the direction for the rest of the industry. 1pple treats its product%development processes like state secretsDgoing so far as to string black drapes around the production lines at the factories of the contract manufacturers it hires to assemble its products. 6t has even done its manufacturing at night when ;fewer prying eyes< might be around. The general themes are clear. 1pples "teve 9obs believes his companys ultimate advantage comes from its ability to make unique, or as he calls them, ;insanely grate< products. 9obss entire company is focused on that task. This means while rivals outsource e+pensive design tasks to outsourced design manufacturers &#AMs), 9obs keeps most of those tasks in%house. :e does rely on #AMs for manufacturing, but all big decisions, and almost all engineering and design decisions, are made in "ilicon $alley. 9obs is himself a crucial part of the formula. :es unique for his hands%on involvement in the design process. Typically, a new 1pple product starts with a big idea for an unmet customer need. 6t largely starts from the outside and works its way in, figuring out what the product should look like and what features it shouldDand should notDhave. 6mage is a huge part of the design and ranks high with functionality. 1pples products are also designed to run a particular set of programs or services. (y contrast, a Aell or Bateway @4 must be ready for whatever new features Microsoft comes out with or whatever !indows program a customer opts to install. 1pple makes must of its own software, however, from its operating system to applications such as i@hoto and iTunes. The #AMs do not have the capabilities at this time to make easy to use software like 1pple can.

Intervie$>4)"ices "- Inn"vati"n? An Intervie$ $ith Steve @"bs6

Juestion8 "teve 9obs8 !hat can we learn from 1pples struggle to innovate during the decade before your return in ,KK? ;Lou need a very product%oriented culture. 1pple had a monopoly on the graphical user interface for almost ,7 years. :ow are monopolies lost "ome very good product people invent some very good products, and the company achieves a monopoly. M(utN whats the point of

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focusing on making the product even better when the only company you can take business from is yourself "o a different group of people starts to move up. 1nd who usually ends up running the show The sales guy. Then one day the monopoly e+pires, for whatever reason . . . but by then, the best product people have left or they are no longer listened to. 1nd so the company goes through this tumultuous time, and it either survives or it doesnt.< Juestion8 "teve 9obs8 :ow do you systematize innovation ;Lou dont. Lou hire good people who will challenge each other every day to make the best products possible. Thats why you dont see any big posters on the walls around here, stating our mission statement. #ur corporate culture is simple.< "o the key is to have good people with a passion for e+cellence. ;!hen 6 got back, 1pple had forgotten who we were. 'emember that OThink Aifferent ad campaign we ran 6t was certainly for customers, but it was even more for 1pple. That ad was to remind us of whom our heroes are and who we are. 4ompanies sometimes do forget. *ortunately, we woke up. 1nd 1pple is doing the best work in its history.<

Juestion8 "teve 9obs8

Aey Issues A..resse.

-nderstand the internal and e+ternal factors that help shape 1pples strategy. @lease refer to the section titled ;-sing "!#T 1nalysis in "trategic 1nalysis< on pages ,20%,2?. -nderstand the value chain and value chain analysis. 4an you identify 1pples value chain @lease refer to the section titled ;$alue 4hain 1nalysis< on pages ,2I%,50. This case can demonstrate some elements of the resource%based view of internal analysis. @lease refer to the section titled ;!hat Makes a 'esource $aluable < on pages ,52%,?7. 6dentify some ways that the firms current performance can be compared to past performance, and how this can improve strategy. @lease refer to the section titled ;6nternal 1nalysis8 Making Meaningful 4omparisons< on pages ,?/%,?5.

Case 'iscussi"n ;uesti"ns

,. 1pply the three internal analysis frameworksD"!#T analysis, value chain analysis, and the resource%based viewDas a way to e+plain and evaluate aspects of 1pples internal environment highlighted in the 4hapter 4ase about 1pple and the interview with "teve 9obs. a. !hat are 1pples strengths and weaknesses, opportunities and threats

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b% 'oughly what would 1pples value chain look like, and how might it differ from other companies mentioned in this case c% !hat are 1pples key resources and capabilities !hich are most valuable !hy a% 1pples strengths are its products and the product design process that is built into the company culture. 6nnovation is a key strength. "teve 9obs himself is also a key strength because of the cohesion, inspiration, and insight he brings to the firm. The firm also has a solid foundation in technology and engineering. #ther strengths are the firms own operating system and other software that allow it more independence from Microsoft software requirements. #ne of 1pples strengths may invite a weakness. 6n the interview, "teve 9obs indicates how a monopoly loses its position in the industry. 1pple is product% focused now, but it must remain so to stay competitive. #ther weaknesses could include the high e+pense of keeping design and engineering in%house instead of outsourcing more &refer to the case interview). 1pples e+ternal opportunities include customer needs. @articularly, 1pple is good at capitalizing on unmet customer needs that its technologies can fulfill. 1 general opportunity right now is the trend toward more technology in consumers everyday lives and the increasing demand for more consumer tech products. The companys e+ternal threats include rivals who could threaten market share by producing similar products for much lower prices. #ther threats include the customers who do not buy based on features or design, but rather on price and basic function alone. b% 1pples value chain can be divided into primary activities and support activities. @rimary activities will include the market identification, marketing &branding and positioning), design engineering, product engineering, sales, and after%sales service. The companys support activities include general administration activities, human resources management, research, and possibly procurement. 1pples value chain might differ from other companies mentioned in this case in that its manufacturing operations are largely outsourced, but the #AMs who are contracted to do the work do not have very much say in how the product is put together, how it is assembled, packaged, or engineered. #ther firms outsource the e+pensive design elements of production, whereas 1pple keeps it in%house. &"ee the case, page ,?I, paragraphs K%,,.) c% 1pples key resources and capabilities include its culture, "teve 9obs, its focus on the product and being need%driven, and its unique operating system and easy%to%use software. #ne important capability is that ability to design products that fit with the companys image and meet its target customers needs. The ones that are most invaluable to the firm include "teve 9obs, who provides managerial talent, cohesion, leadership, and that product%focus all with a hands%on commitment to the design process. 1nother key capability is this ability to do all the important product design functions in%house, which allows for consistency and ensures the companys control over those key image decisions.
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!hich is the most meaningful type of comparison you make use of in conducting each approach to internal analysis at 1pple 6n conducting the "!#T analysis, it is most meaningful to compare the company with success factors in the industry. This is because this comparison considers the five industry forces framework for evaluating the companys relative positioning and potential. 1pples industry is changing at a rapid pace, but 1pple is currently leading most of the changes and setting new standards by which others in the industry are judged. The industry factors are most relevant in the "!#T analysis. &*or more on this topic, refer to the section in the te+t titled ;4omparison with "uccess *actors in the 6ndustry< on pages ,?2%,?5.) 6n conducting the value chain analysis and the '($, the most meaningful comparison is the one between 1pples current performance and its competitors current performances. This type of comparison, called benchmarking, is the most relevant in this situation for 1pple in particular because its vertical integration of the design function, its proprietary software, and its approach to product%development are all unique to the company versus competitors. &*or more on this, refer to the section in the te+t titled ;(enchmarking8 4omparison with 4ompetitors< on pages ,?0%,?2.)

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!hich approach to internal analysis works best in your internal analysis of the aspects about 1pple covered in this case !hy The "!#T analysis really takes into account the fact that the companys strategy is driven by an element from the e+ternal environment8 customer needs. This is the approach that works best for this particular case, because it identifies 1pples key competitive strengths and aligns them with the opportunities presented in todays market for tech solutions to everyday needs.

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6n your opinion, would it be best to use that approach &your answer to question /) alone or to use it along with the other two approaches if you were a manager responsible for conducting an internal analysis of your company as part of its strategic management process 1 blend of approaches will yield the most thorough understanding of the companys internal strengths while still recognizing the e+ternal factors that can drive internal focus. !hile "!#T analysis does contribute the e+ternal understanding, $41 justifies the firms emphasis on certain primary activities, and the '($ can identify those resourcesEcapabilities that are scarce, difficult to imitate, durable, and that are controlled directly by the company &entitling them to the appropriate share of profits generated).

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