Internal Analysis

Strategic Assessing the

Management Internal
Environment of the
Firm

STRATEGIC MANAGEMENT
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 Review: Strategic Direction

Company vision
• Massively inspiring
Company vision
• Overarching
• Long-term
• Driven by and evokes
passion
• Fundamental statement of the
organization’s Hierarchy of Goals
• Values
• Aspiration
• Goals

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 Review: Strategic Direction

Mission statements
• Purpose of the company Company vision
• Basis of competition and
competitive advantages Mission statements
• More specific than vision
• Focused on the means by
which the firm will compete
Hierarchy of Goals

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 Review: Strategic Direction

Strategic objectives
• Operationalize the mission Company vision
statement
• Measurable, specific, Mission statements
appropriate, realistic, timely,
challenging, resolve conflicts Strategic objectives
that arise, and yardstick for
rewards and incentives Hierarchy of Goals

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 Value-Chain Analysis

• Sequential process of value-creating

activities
• The amount that buyers are willing to pay
for what a firm provides them
• Value is measured by total revenue
• Firm is profitable to the extent the value it
receives exceeds the total costs involved
in creating its product or service

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 The Value Chain

General administration

Human resource management

Technology development

Procurement

Inbound Outbound Marketing

Operations Service
logistics logistics and sales

Source: Adapted from Competitive Advantage: Creating and Sustaining

Superior Performance by Michael E. Porter.
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 Interrelationships among Value-Chain
Activities within and across Organizations

• Importance of relationships among value

activities
• Interrelationships among activities within the
firm
• Relationships among activities within the
firm and with other organizations (e.g.,
customers and suppliers)

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 Resource-Based View of the Firm

• Two perspectives
• The internal analysis of phenomena within a
company
• An external analysis of the industry and its
competitive environment
• Three key types of resources
• Tangible resources
• Intangible resources
• Organizational capabilities

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 Types of Resources
Tangible Relatively easy to identify, and
Resources include physical and financial assets
used to create value for customers
• Financial resources
◼ Firm’s cash accounts
◼ Firm’s capacity to raise equity
◼ Firm’s borrowing capacity
• Physical resources
◼ Modern plant and facilities
◼ Favorable manufacturing locations
◼ State-of-the-art machinery and
equipment

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 Types of Resources
Tangible Relatively easy to identify, and
Resources include physical and financial assets
used to create value for customers
• Technological resources
◼ Trade secrets
◼ Innovative production processes
◼ Patents, copyrights, trademarks
• Organizational resources
◼ Effective strategic planning
processes
◼ Excellent evaluation and control
systems

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 Types of Resources
Tangible Difficult for competitors (and the firm
Resources itself) to account for or imitate,
typically embedded in unique
Intangible routines and practices that have
Resources evolved over time
• Human
◼ Experience and capabilities of
employees
◼ Trust
◼ Managerial skills
◼ Firm-specific practices and
procedures

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 Types of Resources
Tangible Difficult for competitors (and the firm
Resources itself) to account for or imitate,
typically embedded in unique
Intangible routines and practices that have
Resources evolved over time
• Innovation and creativity
◼ Technical and scientific skills
◼ Innovation capacities
• Reputation
◼ Effective strategic planning processes
◼ Excellent evaluation and control
systems

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 Types of Resources
Tangible Competencies or skills that a firm
Resources employs to transform inputs to
outputs, and capacity to combine
Intangible tangible and intangible resources to
Resources attain desired end
• Outstanding customer service
Organizational
• Excellent product development
Capabilities
capabilities
• Innovativeness of products and services
• Ability to hire, motivate, and retain
human capital

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 How Resources and Capabilities Lead to
Advantages

Source: Adapted from “Competing on Resources: Strategy in the 1990’s” by D. J. Collis and C. Montgomery,
Harvard Business Review, 73, no. 4 (1995).
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 Firm Resources and Sustainable
Competitive Advantages

Is the resource or Implications

capability…
Valuable • Neutralize threats and exploit
opportunities
Rare • Not many firms possess

Difficult to imitate • Physically unique

• Path dependency
• Causal ambiguity
• Social complexity
Difficult to substitute • No equivalent strategic
resources or capabilities

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 Is the Resource Valuable?

Organizational resources can be a source

of competitive advantage only when they
are valuable
• Enable a firm to formulate and implement
strategies that improve its efficiency or
effectiveness

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 Is the Resource Rare?

Organizational resources also possessed

by competitors are not sources of
competitive advantage
• Common strategies based on similar resources
give no one firm an advantage
• Competitive advantages are gained only from
uncommon resources, resources that are rare
to other competitors

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 Can the Resource be Imitated?

Difficulty in imitating resources is key to

value creation because it constrains
competition
• Profits generated from inimitable resources are
more likely to be sustainable
◼ Physical uniqueness
◼ Path dependency

◼ Causal ambiguity

◼ Social complexity

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 Are Substitutes Readily Available?

There must be no strategically equivalent

valuable resources that are themselves not
rare or inimitable
• Substitutability may take at least two forms
◼ Competitor may be able to substitute a similar
resource that enables it to develop and
implement the same strategy
◼ Very different firm resources can become
strategic substitutes (such as e-business as a
substitute for physical retail facility)

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 Criteria for Sustainable Competitive
Advantage and Strategic Implications

Is a resource or capability…
Valuable Rare Difficult Without Implications
to Imitate Substitutes for Competitiveness
No No No No Competitive disadvantage
Yes No No No Competitive parity
Yes Yes No No Temporary competitive
advantage
Yes Yes Yes Yes Sustainable competitive
advantage

Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of
Management 17 (1991), pp. 99-120.
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 The Balanced Scorecard

• Provides a meaningful integration of many

issues that come into evaluating a firm’s
performance
• Four key perspectives
• How do customers see us? (customer perspective)
• What must we excel at? (internal perspective)
• Can we continue to improve and create value?
(innovation and learning perspective)
• How do we look to shareholders? (financial
perspective)

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 The Balanced Scorecard
Customer • Time
Perspective
• Quality
• Performance and service
• Cost

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 The Balanced Scorecard
Customer • Processes
Perspective
• Cycle time
Internal Business • Quality
Perspective
• Employee skills
• productivity
• Decisions
• Actions
• Coordination
• Resources and capabilities
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 The Balanced Scorecard
Customer • Introduction of new products
Perspective and services
Internal Business • Greater value for customers
Perspective
• Increased operating
Innovation and efficiencies
Learning Perspective
• Leadership

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 The Balanced Scorecard
Customer • Profitability
Perspective
• Growth
Internal Business • Shareholder value
Perspective
• Increased market share
Innovation and
Learning Perspective • Reduced operating expenses

Financial
• Higher asset turnover
Perspective

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 Financial Ratio Analysis

• Five types of financial ratios

• Short-term solvency or liquidity
• Long-term solvency measures
• Asset management (or turnover)
• Profitability
• Market value
• Meaningful ratio analysis must include
• Analysis of how ratios change over time
• How ratios are interrelated

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 Financial Ratio Analysis: Historical
Comparisons

Exhibit 3.8 Historical Trends: Return on Sales (ROS) for a Hypothetical Company
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 Financial Ratio Analysis: Comparison with
Industry Norms

Grocery Skilled-Nursing
Financial Ratio Semiconductors Store Facilities

Quick Ratio (times) 1.5 0.5 1.1

Current ratio (times) 3.2 1.6 1.9
Total liabilities to net worth (%) 34.8 114.0 93.0
Collection period (days) 54.8 2.9 40.2
Assets to sales (%) 98.1 21.2 108.7
Return on sales (%) 3.1 0.9 2.0

Exhibit 3.9 How Financial Ratios Differ across Industries

Source: Dun & Bradstreet, Industry Norms and Key Business Ratios, 1999-2000, Desktop Edition, SIC #0100-
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Copyright 28
 Financial Ratio Analysis: Comparison with
Key Competitors

Sales* R&D budget

Company (or division ($ billions) ($ billions)

P&G Drug Division $ 0.8 $ 0.38

Bristol-Myers Squibb 20.2 1.80
Pfizer 27.4 4.00
Merck 32.7 2.10

*Most recently completed fiscal year. Data: Lehman Brothers, Procter

& Gamble Co.

Source: R. Berner, “Procter & Gamble: Just Say No to Drugs,” Business Week, October 9, 2000, p. 128; data
courtesy of Lehman Brothers and Procter & Gamble.
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