Chapter 5: The internal analysis

After Studying the internal analysis,

you should be able to:

• Understand value chain analysis

• Understand resource based view

Value chain- a linked set of value creating activities that
begin with basic raw materials coming from suppliers,
moving on to a series of value-added activities
involved in producing and marking a product or
service, and ending with distributors getting the final
goods into the hands of the ultimate consumer
 Value chain analysis
• It describes the way of looking at the business as a chain
of activities that transfer input into outputs that customer
value
• It divides the business into sets of activities start from
input and finish with after sale service.
• It looks at
– Cost of each activity
– Business performance
– Attributes of each activity to help in differentiation
 Customer value
 It is derived from three basic sources
Activities that differentiate the product
Activities that lower the cost
Activities that meet the customer needs
quickly
 VCA attempts to understand how a
business creates customer value by
examining the contribution of different
activities within the business to that value
 Value chain framework
 It divides activities into two broad
categories:
Primary activities, activities involved in the physical
creation of the product, marketing, transfer to buyers,
and after sales support
Support activities, assist the firm as a whole by
providing infrastructure or inputs that allow the
primarily activities to take place
 What might be seen as a support activity in one
firm might be a primary activity in another firm
 Primary activities
 Inbound logistics: activities, cost and assets associated with obtaining
(fuel, energy, raw materials, merchandising, inputs, and inventory)

 Operations: activities, cost and assets associated with converting

inputs into final outputs (production, assembly, packing, equipments,
operation)

 Outbound logistics: activities, cost and assets dealing with physical

distribution of the product to the buyer(finished goods, orders, packing,
shipping and delivery)

 Marketing and sales: activities, cost and assets related to sales effort
(advertising, promotion, distribution, and market research)

 Service: activities, cost and assets associated with providing assistance

to buyers (buyer inquiries and complaints, maintenance, spare parts,
repair)
 Support Activities
 General administration: activities, cost and assets related to
(management, accounting, finance, safety, security)

 HR management: activities, cost and assets associated with

(recruitment, hiring, personnel compensation, training
development)

 Research, technology: activities, cost and assets related to (R&D,

design, software, database)

 Procurements: activities, cost and assets associated with

(purchasing, providing raw materials, supplies, services)
Conducting value chain analysis
1. Identify activities
2. Allocate costs
3. Recognize difficulties in activity based
cost accounting
4. Identify activities that differentiate the firm
5. Examine the value chain
 1.Identify activities
• Divide a company operations into specific
activities or business processes
• Group them to primary and support
• Select activities based on their major
source of competitive advantage or
disadvantages (refer to customer value)
• Be specific and do not set broad activities
categorization
 2. Allocate costs
• Attach cost, time and assets to each
activity
• Provide meaningful analysis of activities
cost and added value
• Drive information that support advantages
and disadvantages (benchmark with
competitors, industry and best in class)
 3. Recognize difficulties in activity
based cost accounting
• Changes could be costly, and required a
lot of time and information.

• Changes require enough information

about competitors activities performance
4.Identify activities that differentiate
the firm
• Value chain analysis may reveal existing
cost advantage (to stress), and cost
disadvantages (to improve).
• It may bring attention to several sources
for differentiation advantages relative to
competitors. (much more vital)
• Refer to your mission, strategy, and
competitors
4.Identify activities that differentiate the firm (cont.)
Inbound logistic Operations Outbound logistic Marketing Service
•Soundness of •Productivity of •Timeliness and •Effectiveness of •Means to solicit
material and equipment efficiency of delivery market research to customer input for
inventory control compared to that of of finished goods identify customer product
systems key competitors and services segments and improvement
•Efficiency of raw •Appropriate •Efficiency of needs •Promptness of
material automation of finished goods •Innovation in sales attention to
warehousing production warehousing promoting and customer
activities processes activities advertising complaints
•Effectiveness of •Evaluation of •Appropriateness of
production control alternate warranty and
systems to improve distribution guarantee policies
reality and reduce channels •Quality of customer
costs •Motivation and education and
•Efficiency of plant competence of training
layout and workflow sales force •Ability to provide
design •Development of an replacement parts
image of quality and and repair services
a favorable
reputation
• Extent of brand
loyalty among
customers
•Extent of market
dominance within
the market segment
or overall market
4.Identify activities that differentiate the firm
(cont.)
• General Administration

• Quality of the strategic planning system to achieve corporate

objectives

• Coordination and integration of all value chain activities among

organization subunits

• Ability to obtain relatively low-cost funds for capital expenditures and

working capital

• Timely and accurate management information on general and

competitive environments

• Relationships with public policymakers and interest groups

• Public image and corporate citizenship

4.Identify activities that differentiate the firm
(cont.)
• Human Resource Management

• Effectiveness of procedures for recruiting ,training, and promoting all levels

of employees

• Appropriateness of reward systems for motivating and challenging

employees

• A work environment that minimizes absenteeism and keeps turnover at

desirable levels

• Relations with trade unions

• Active participation by managers and technical personnel in professional

organizations

• Levels of employee motivation and job satisfaction

4.Identify activities that differentiate the firm
(cont.)
• Technology Development

• Success of research and development activities in leading to

product and process innovations

• Quality of working relationships between R&D personnel and

other departments

• Timeliness of technology development activities in meeting

critical deadlines

• Quality of laboratories and other facilities

• Qualification and experience of laboratory technicians and

scientists
 4.Identify activities that differentiate the
firm (cont.)
• 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, (3) at acceptable levels of quality

• Procedures for procurement of plant, machinery, and

buildings

• Good, long-term relationships with reliable suppliers

 5. Examine the value chain
 Value chain had to be documented
 Managers need to identify the activities that are
critical to:
Buyer satisfaction
and market success.
 Three consideration is essential at this stage:
Firm mission need to influence managers choice of
activities to be examined in details
The nature of value chains and the relative
importance of the activities within them vary by
industry.
Relative importance of value activities can vary by
firm position in a broader value system.
 Resources based view of the firm
 It is a method of analyzing and identifying a
firm strategic advantages based on
examining its different combination of:
Assets: (warehouses, processes facility)
Capabilities: (effective use of assets, influencing
retailers, speed decision making)
intangibles: (reputation, brand name, competitive
culture)
 Each firm develop its competences from its
resources
 Three basic resources
• Tangible assets
• Intangible assets
• Organization capabilities
• Note: RBV (resource based view) aims to
make the core competence concept more
focused and measurable
 Tangible assets

• Easiest resources to identify

• Found in the firm balance sheet
• Include production facilities, raw materials,
financial resources.
• It is the physical and financial means a
company uses to provide value to its
customers.
 Intangible assets
• Brand name, company reputation, and
organization morale, patent and
trademarks.
• They are not tangible but they are core in
creating organization advantages
 Organization capabilities
 Are not specific inputs like tangible and intangible
 They are the abilities and way of combining
assets, people, and processes that a company
uses to transform inputs into outputs.
 Org capabilities enable the firm to take the same
input factors and convert them into products or
services
either with greater efficiency
or greater quality in the outputs
 What makes a resources valuable
• Once tangible, intangible and capabilities
are identified the resource based view of
the firm applies a set of guidance to
identify:
– Which resources represent strengths or
weakness
– Which resources generate core competences
The RBV guideline derived from
• Resources are more valuable when they
are:
– Critical to meet customers need better than
other alternatives.
– Are scarce, Few others have that resource or
skill to the degree you do
– Drive a key part of overall profits
– Durable or sustainable overtime
 Recourses Based View Guidelines'
• Resources are most valuable when the
meet all four of the mentioned below
guidelines:
– Is the resource or skill critical to fulfilling a
customer need better than that of the firm
competitors.
– Is the resource scarce?
– Recource is Appropriate to generate
competitive advantage
– Durability. How rapidly will the resource
depreciate? (the slower the better)
SWOT analysis
 Review of Mission and Objectives

A re-examination of an organization’s current

mission and objectives must be made
before alternative strategies can be
generated and evaluated

Performance problems can derive from

inappropriate (narrow or too broad) mission
statements and objectives
 Long-term objectives (LTO)
Strategic planners establish LTO in seven areas,
to achieve long term prosperity:
1.Profitability
2.Productivity
3.Competitive position
4.Employee development
5.Technological leadership
6.Employee relations
7.Social responsibility
 The qualities of LTO
• Suitable
• Flexible
• Motivating
• Acceptable
• Measurable
• Achievable
• Understandable
• Honest