McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 3
Analyzing the Internal
Environment of the Firm
Learning Objectives
After reading this chapter, you should have a good
understanding of:
 How an awareness of strategic goals can help an
organization achieve coherence in its strategic direction.
 The primary and support activities of a firm’s value chain.
 How value-chain analysis can help managers create value by
investigating relationships among activities within the firm and
between the firm and its customers and suppliers.
 The usefulness of financial ratio analysis, its inherent
limitations, and how to make meaningful comparisons of
performance across firms.
 The value of recognizing how the interests of a variety of
stakeholders can be interrelated.
3-3
Question
Which of the following is not included in the
hierarchy of goals of strategic direction?
a)
b)
c)
d)
Mission Statement
Company Vision
SWOT analysis
Strategic objectives
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Coherence in Strategic Direction
 Company vision
Massively inspiring
Overarching
Long-term
Driven by and evokes
passion
Fundamental statement
of the organization’s
Values
Aspiration
Goals
Company vision
Hierarchy of Goals
3-5
Coherence in Strategic Direction
 Mission statements
Purpose of the
company
Basis of competition
and competitive
advantages
More specific than
vision
Focused on the
means by which the
firm will compete
Company vision
Mission statements
Hierarchy of Goals
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Coherence in Strategic Direction
3-7
Coherence in Strategic Direction
 Strategic objectives
Operationalize the
mission statement
Provide guidance on how
the organization can fulfill
or move toward the
“higher goals”
More specific
Cover a more welldefined time frame
Company vision
Mission statements
Strategic objectives
Hierarchy of Goals
3-8
Coherence in Strategic Direction
 Strategic objectives
Measurable
Specific
Appropriate
Realistic
Timely
Challenging
Resolve conflicts that
arise
Yardstick for rewards and
incentives
Company vision
Mission statements
Strategic objectives
Hierarchy of Goals
3-9
Coherence in Strategic Direction
3-10
Question
Value is measured by:
a)
b)
c)
d)
supply of a firm’s product/service
a firm’s net worth
A firm’s customer base
A firm’s total revenue
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Value-Chain Analysis
 Second key tool to understanding an
organization’s internal environment
 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
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Value-Chain Analysis
 Firm is profitable to the extent the value it receives
exceeds the total costs involved in creating its
product or service
 Porter describes two different categories of
activities:
Primary – inbound logistics, operations, outbound
logistics, marketing and sales, and service
Support activities – procurement, technology
development, human resource management, general
management
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Example - IBM Electronics
Value Chain Management
 Helps companies save money
 The benefits of streamlining a business with value chain
management include:
Lower infrastructure costs associated with collaboration.
Create commonality in parts and suppliers.
Control inventory by getting the supply chain talking to the
demand chain.
Cut transaction costs by integrating with public and private
exchanges.
Deliver products to market faster while minimizing risk and
capital investment.
Source: www.ibm.com
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The Value Chain
3-15
Primary Activity: Inbound
Logistics
 Associated with receiving, storing and
distributing inputs to the product
Location of distribution facilities
Material and inventory control systems
Systems to reduce time to send “returns” to
suppliers
Warehouse layout and designs
3-16
Primary Activity: Operations
 Associated with transforming inputs into
the final product form
Efficient plant operations
Appropriate level of automation in
manufacturing
Quality production control systems
Efficient plant layout and workflow design
3-17
Primary Activity: Outbound Logistics
 Associated with collecting, storing, and
distributing the product or service to buyers
Effective shipping processes
Efficient finished goods warehousing processes
Shipping of goods in large lot sizes
Quality material handling equipment
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Primary Activity: Marketing and Sales
 Associated with purchases of products and
services by end users and the inducements used
to get them to make purchases
Highly motivated and competent sales force
Innovative approaches to promotion and advertising
Selection of most appropriate distribution channels
Proper identification of customer segments and needs
Effective pricing strategies
3-19
Example: Pizza’s Global Footprint
 Domino Pizza store described as "more a logistics
company than food service, since supply chain
management is the factor that differentiates the
winners from the losers" in this business
 Domino's Pizza has 8,000 stores in 54 countries and
sales of $4.6 billion
known for development of centralized ingredient logistics
systems
 Outbound logistics make use of scooters, bikes,
fleet-footed delivery boys and vans
www.forbes.com/logistics/2007/02/20/pizza-shipping-logistics-biz-logistics-cx_rm_0221pizza.html
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Primary Activity: Service
 Associated with providing service to enhance or
maintain the value of the product
Effective use of procedures to solicit customer feedback
and to act on information
Quick response to customer needs and emergencies
Ability to furnish replacement parts
Effective management of parts and equipment inventory
Quality of service personnel and ongoing training
Warranty and guarantee policies
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Support Activity: Procurement
 Function of purchasing inputs used in the firm’s
value chain
Procurement of raw material inputs
Development of collaborative “win-win” relationships
with suppliers
Effective procedures to purchase advertising and media
services
Analysis and selection of alternate sources of inputs to
minimize dependence on one supplier
Ability to make proper lease versus buy decisions
3-22
Question
Which support activity is related to a wide range of
activities and those embodied in processes and
equipment and the product itself?
a)
b)
c)
d)
Technology Development
Human Resource Management
General Management
Procurement
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Support Activity:
Technology Development
 Related to a wide range of activities and those
embodied in processes and equipment and the
product itself
Effective R&D activities for process and product
initiatives
Positive collaborative relationships between R&D and
other departments
State-of-the art facilities and equipment
Culture to enhance creativity and innovation
Excellent professional qualifications of personnel
Ability to meet critical deadlines
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Support Activity:
Human Resource Management
 Activities involved in the recruiting, hiring, training,
development, and compensation of all types of
personnel
Effective recruiting, development, and retention
mechanisms for employees
Quality relations with trade unions
Quality work environment to maximize overall employee
performance and minimize absenteeism
Reward and incentive programs to motivate all
employees
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Support Activity:
General Administration
 Typically supports the entire value chain and not
individual activities
Effective planning systems
Ability of top management to anticipate and act on key
environmental trends and events
Ability to obtain low-cost funds for capital expenditures
and working capital
Excellent relationships with diverse stakeholder groups
Ability to coordinate and integrate activities across the
value chain
Highly visible to inculcate organizational culture,
reputation, and values
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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 organization (e.g., customers and
suppliers)
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Applying the Value Chain to Service
Organizations
 What are the “operations” or transformation
processes, of service organizations?
In service, need to provide a customized solution
rather than mass production
Value chain to service industry suggests that the
value-adding process may be different depending on
type of business
3-28
Value Chain in Service Industry
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Evaluating Firm Performance
 Two approaches for evaluating firm performance
Financial ratio analysis
Balance sheet
Income statement
Historical comparison
Comparison with industry norms
Comparison with key competitors
Balanced scorecard (stakeholder perspective)
Employees
Customers
Owners
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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
3-31
Financial Ratio Analysis
3-32
Question
What provides a meaningful integration of many
issues that come into evaluating a firm’s
performance?
a)
b)
c)
d)
Balance Scorecard
Customer Perspective
Internal Business Perspective
Innovation and Learning Prospective
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The Balance Scorecard
 Provides a meaningful integration of many issues
that come into evaluating a firm’s performance
 Four key perspectives
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The Balance Scorecard
3-35
Customer Perspective
 Time
 Quality
 Performance and service
 Cost
3-36
Internal Business Perspective
 Processes
Cycle time
Quality
Employee Skills
Productivity
 Decisions
 Actions
 Coordination
 Resources and capabilities
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Innovation and Learning Perspective
 Introduction of new products and
services
 Greater value for customers
 Increased operating efficiencies
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Example
 The world’s 10 most innovative companies, according
to Business Week in 2007 are:
1. Apple
2. Google
3. Toyota Motor
4. General Electric
5. Microsoft
6. Proctor & Gamble
7. 3M
8. Walt Disney Co.
9. IBM
10.Sony
Source: www.businessweek.com
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Financial Perspective
 Profitability
 Growth
 Shareholder value
 Increased market share
 Reduced operating expenses
 Higher asset turnover
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Potential Limitations of the
Balanced Scorecard
 Lack of a clear strategy
 Limited or ineffective executive sponsorship
 Too much emphasis on financial measures rather
than non-financial measures
 Poor data on actual performance
 Inappropriate links to scorecard measures to
compensation
 Inconsistent or inappropriate Terminology
3-41