1

Chapter 5
Internal Analysis

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Chapter Topics

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Resource-based View of the Firm

Value Chain Analysis
SWOT Analysis
Internal Analysis: Making Meaningful
Comparisons

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Ingredients Critical to Successful

Strategy
Be consistent with
conditions in the
competitive
environment
Place
Placerealistic
realistic
requirements
requirementson
on
the
thefirms
firmsresources
resources

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Strategy must

Be carefully
executed

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What is the Resource-based View of

the Firm?
Firms differ in fundamental ways
because each firm possesses a
unique bundle of resources
tangible and intangible assets and
organizational capabilities to make
use of those assets

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The Three Basic Resources

Tangible assets
Easiest to identify and often found on a firms balance
sheet
Include physical and financial assets
Examples: production facilities, raw materials, financial
resources

Intangible assets
Cannot be seen or touched
Often very critical in creating competitive advantage
Examples: brand names, company reputation, company
morale

Organizational capabilities
Involve skills ability to combine assets, people, and
processes used to transform inputs into outputs

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Ex. 5-2: Examples of Different

Resources (selected)
Tangible Assets

Intangible Assets

Hampton Inns
reservation system

Budweisers brand
name

Dell Computers
customer service

Ford Motors cash

reserves

Dell Computers
reputation

Wal-marts purchasing
and inbound logistics

3Ms patents

Nikes advertising with Sonys product

LeBron James
development process

Georgia Pacifics land

holdings

Katie Couric as NBCs Cokes global

Today host
distribution
coordination

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Organizational
Capabilities

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What Makes a Resource Valuable?

Competitive superiority:
Does the resource help
fulfill a customers need
better than those of the
firms competitors?
Resource scarcity: Is the
resource in short supply?
Inimitability: Is the
resource easily copied or
acquired?

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Appropriability: Who
actually gets the profit
created by a resource?
Durability: How rapidly
will the resource
depreciate?
Substitutability? Are
other alternatives
available?

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Isolating Mechanisms
Physically unique resources
Resources virtually impossible to imitate
E.g., one-of-a-kind real estate location, mineral
rights, patents

Path-dependent resources
Resources that must be created over time in a
manner that is often expensive and difficult to
accelerate
E.g., Dell Computers system of direct sales of
customized PCs via the Internet, Coca-Colas
brand name, Gerber Baby Foods reputation for
quality
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Isolating Mechanisms
Causal ambiguity
Situations where it is difficult for competitors to
understand how a firm has created its advantage
E.g., Southwest Airlines approach
Same plane, routes, gate procedures, number of
attendants
Culture of fun, family, and frugal yet focused
service

Economic deterrence
Involves large capital investments in capacity to
produce products or services in a given market
that are scale sensitive
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10

Ex. 5-4: Resource Inimitability

(Adapted)

Easy to imitate
Cash, commodities

Can be imitated (but may not be)

Capacity preemption, economies of scale

Difficult to imitate
Brand loyalty, employee satisfaction,
reputation for fairness

Cannot be imitated
Patents, unique locations, unique assets
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11

Guidelines: Using the RBV in Internal

Analysis
Disaggregate resources break them down
into more specific competencies rather than
use broad categories
Utilize a functional perspective in
disaggregating tangible and intangible assets
and organizational capabilities
Look at organizational processes and
combinations of resources, not only at
isolated assets or capabilities
Use the value chain approach to uncover
potentially valuable capabilities, activities,
and processes
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12

Ex. 5-6: Key Resources Across

Functional Areas (Selected)

Marketing
Firms products/services
Concentration of sales in a few
products or a few customers
Ability to gather needed
information about markets
Market share
Product-service mix and
expansion potential
Channels of distribution
Effective sales organization

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Financial and Accounting

Ability to raise short-term and
long-term capital; debt-equity
Corporate-level resources
Cost of capital relative to
competitors
Tax considerations
Relations with owners, investors,
and stockholders
Leverage position
Cost of entry and barriers to entry

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13

Ex. 5-6 (contd.)

Production, Operations, Technical

Raw materials cost and
availability, supplier relationships
Inventory control systems
Location, layout, and use of
facilities
Economies of scale
Technical efficiency of facilities
Effectiveness of subcontracting
use
Degree of vertical integration

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Personnel
Management personnel
Employees skills and morale
Labor relations costs compared
to competitors
Efficiency and effectiveness of
personnel policies
Effectiveness of incentives used
to motivate performance
Ability to level peaks and
valleys of employment

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14

Ex. 5-6 (contd.)

Quality Management
Relationships with suppliers,
customers
Internal practices to enhance
quality of products and services
Procedures for monitoring
quality

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Information Systems
Timeliness and accuracy of
information about sales,
operations, cash, and suppliers
Relevance of information for
tactical decisions
Information to manage quality
issues, customer service
Ability of people to use
information provided

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15

Ex. 5-6 (contd.)

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Organization and General Management

Organizational structure
Firms image and prestige
Firms record in achieving objectives
Organization of communication system
Organizational climate and culture
Use of systematic procedures in decision
making
Top management skills, capabilities, and
interest
Strategic planning system
Intra-organizational synergy
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16

What is a Value Chain?

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

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17

What is Value Chain Analysis?

Focuses on how a business creates customer
value by examining contributions of
different internal activities to that value
Divides a business into a set of activities
within the business
Starts with inputs a firm receives
Finishes with firms products or services and
after-sales service to customers

Allows for better identification of a firms

strengths and weaknesses since the business
is viewed as a process
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18

General Administration
n
gi
ar
M

Human Resource Management

Research, Technology, and Systems Development

Procurement
Inbound Operations Outbound Marketing
Logistics
Logistics and Sales

Service

M
ar
gi
n

Support Activities

Ex. 5-7: The Value Chain

Primary Activities
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Conducting a Value Chain Analysis

Identify activities
Allocate costs
Recognize the difficulty in activity-based cost accounting
Identify the activities that differentiate the firm
Examine the value chain
Develop meaningful comparisons to use when evaluating
value activities

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20
Ex. 5-10: Possible Factors for Assessing Sources of
Differentiation in Primary and Support Activities of the Value
Chain (selected items)

General Administration
Capability to identify new
product market opportunities
and potential environmental
threats
Quality of strategic planning
system to achieve corporate
objectives
Ability to obtain relatively lowcost funds for capital
expenditures and working
capital

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Human Resource Management

Effectiveness of procedures for
recruiting, training, and
promoting all levels of
employees
Appropriateness of reward
system for motivating and
challenging employees
A work environment
minimizing absenteeism and
keeping turnover low

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21

Ex. 5-10 (contd.)

Technology Development
Success of R&D activities in
leading to product and process
innovation
Quality of working
relationships between R&D
personnel and other
departments
Timeliness of technology
development activities in
meeting critical deadlines

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Procurement
Development of alternate
sources for inputs to minimize
dependence on a single supplier
Procurement of raw materials
(1) on a timely basis, (2) at
lowest possible cost, and (3) at
acceptable levels of quality
Procedures for procurement of
plant, machinery, and buildings

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22

Ex. 5-10 (contd.)

Inbound Logistics

Operations

Outbound Logistics

Soundness of material
and inventory control
systems

Productivity of equipment Timeliness and efficiency

compared to key
of delivery of finished
competitors
goods and services

Efficiency of raw
material warehousing
activities

Appropriate automation
of production processes

Efficiency of finished
goods warehousing
activities

Effectiveness of
production control
systems to improve
quality and improve costs

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23

Ex. 5-10 (contd.)

Marketing and Sales

Effectiveness of research to
identify customer segments and
needs
Innovation in sales promotion
and advertising
Evaluation of alternate
distribution channels
Motivation and compensation
of sales force
Development of quality image
and favorable reputation

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Service
Means to solicit customer input
for product improvements
Promptness of attention to
customer complaints
Appropriateness of warranty
and guarantee policies
Quality of customer education
and training
Ability to provide replacement
parts and repair services

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24

SWOT Analysis
Based on assumption an effective strategy derives from a sound
fit between a firms internal resources and its external situation

Opportunities

Threats

A major favorable situation in

a firms environment

A major unfavorable situation in a

firms environment

Strengths

Weaknesses

A limitation or deficiency in one or

A resource advantage relative
to competitors and the needs of more resources or competencies
relative to competitors
markets firm serves
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25

Ex. 5-12: SWOT Analysis Diagram

Numerous environmental
opportunities
Cell 3: Supports a
turnaround-oriented
strategy

Cell 1: Supports
an aggressive
strategy

Critical internal
weaknesses
Cell 4: Supports a
defensive strategy

Cell 2: Supports a
diversification
strategy

Substantial
internal
strengths

Major environmental threats

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26

Internal Analysis: Making Meaningful

Comparisons
1. Comparison with past
performance

2. Stages of
industry evolution

Perspectives
to use

4. Comparison with
success factors in
industry

3. Benchmarking
comparison with competitors

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27

Ex. 5-13: Sources of Distinctive Competence at

Different Stages of Industry Evolution
Functional
Area
Marketing

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Introduction Growth

Maturity

Decline

Resources/skills to
create widespread
awareness and find
acceptance from
customers ;
advantageous
access to
distribution

Skills in
aggressively
promoting
products to new
markets and
holding existing
markets; pricing
flexibility; skills
in differentiating
products and
holding
customer loyalty

Cost effective
means of
efficient access
to selected
channels and
markets; strong
customer loyalty
or dependence;
strong company
image

Ability to
establish brand
recognition,
find niche,
reduce price,
solidify strong
distribution
relations, and
develop new
channels

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28

Ex. 5-13 (contd.)

Functional
Area
Production
operations

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Introduction

Growth

Maturity

Decline

Ability to
expand capacity
effectively, limit
number of
designs, develop
standards

Ability to add
product variants,
centralize
production, or
otherwise lower
costs; ability to
improve product
quality; seasonal
subcontracting
capacity

Ability to
improve product
and reduce
costs; ability to
share or reduce
capacity;
advantageous
supplier
relationships;
subcontracting

Ability to prune
product line;
cost advantage
in production,
location or
distribution;
simplified
inventory
control;
subcontracting
or long
production runs

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29

Ex. 5-13 (contd.)

Functional
Area
Finance

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Introduction

Growth

Maturity

Decline

Resources to
support high net
cash overflow
and initial
losses; ability to
use leverage
effectively

Ability to
finance rapid
expansion, to
have net cash
outflows but
increasing
profits;
resources to
support product
improvements

Ability to
generate and
redistribute
increasing net
cash inflows;
effective cost
control systems

Ability to reuse
or liquidate
unneeded
equipment;
advantage in
cost of facilities;
control system
accuracy;
streamlined
management
control

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30

Ex. 5-13 (contd.)

Functional
Area
Personnel

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Introduction

Growth

Maturity

Decline

Flexibility in
staffing and
training new
management;
existence of
employees with
key skills in new
products or
markets

Existence of an
ability to add
skilled
personnel;
motivated and
loyal workforce

Ability to cost
effectively,
reduce
workforce,
increase
efficiency

Capacity to
reduce and
reallocate
personnel

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31

Ex. 5-13 (contd.)

Functional
Area
Engineering and
R&D

Introduction

Growth

Maturity

Decline

Ability to make
engineering
changes, have
technical bugs
in product and
process resolved

Skill in quality
and new feature
development;
ability to start
developing
successor
product

Ability to
reduce costs,
develop
variants,
differentiate
products

Ability to
support other
grown areas or
to apply product
to unique
customer needs

Sales: consumer
loyalty; market
share

Production
efficiency:
successor
products

Finance:
maximum
investment
recovery

Key functional
Engineering:
area and strategy market
focus
penetration

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