PEMBA Strategy Course – BUSI 7136
Internal Analysis & Strategy Formulation
Dr. Garry Adams
Management Professor
Auburn University
1/9/2009
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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PEST Analysis, Internal Analysis
& Strategy Formulation
• PEST Analysis (www.quickmba.com)
• Value Chain Analysis
• Resource-Based View of the Firm
• Knowledge-Based View/Organizational
Learning
• TOWS Matrix/Strategy Formulation
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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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
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Value Chain
General administration
Human resource management
Technology development
Procurement
Inbound
logistics
Operations
Outbound
logistics
Marketing
and sales
Service
Adapted from Exhibit 3.1 The Value Chain: Primary and Support Activities
Source: Adapted with permission of The Free Press, a division of Simon &
Schuster, Inc., from Competitive Advantage: Creating and Sustaining
Superior Performance by Michael E. Porter.
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Primary Activities
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
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Primary Activities
Inbound
Logistics
Associated with transforming inputs
into the final product form
• Efficient plant operations
Operations
• Appropriate level of automation in
manufacturing
• Quality production control systems
• Efficient plant layout and workflow
design
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Primary Activities
Inbound
Logistics
Operations
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
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Primary Activities
Inbound
Logistics
Associated with purchases of products
and services by end users and the
inducements used to get them to
make purchases
Operations
• Highly motivated and competent sales
force
Outbound
Logistics
• Innovative approaches to promotion and
advertising
Marketing and
Sales
• Selection of most appropriate distribution
channels
• Proper identification of customer segments
and needs
• Effective pricing strategies
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Primary Activities
Inbound
Logistics
Associated with providing service to
enhance or maintain the value of the
product
Operations
• Effective use of procedures to solicit
customer feedback and to act on information
Outbound
Logistics
Marketing and
Sales
Service
• 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
Adapted from Exhibit 3.2 The Value Chain: Some Factors to Consider in Assessing a Firm’s Primary Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Support Activities
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
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Support Activities
General
Administration
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 absenteeisn
• Reward and incentive programs to
motivate all employees
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Support Activities
General
Administration
Human Resource
Management
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
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Support Activities
General
Administration
Human Resource
Management
Function of purchasing inputs
used in the firm’s value chain
• Procurement of raw material inputs
• Development of collaborative “win-win”
relationships with suppliers
Technology
Development
• Effective procedures to purchase
advertising and media services
Procurement
• Analysis and selection of alternate
sources of inputs to minimize
dependence on one supplier
• Ability to make proper lease versus buy
decisions
Adapted from Exhibit 3.3 The Value Chain: Some Factors to Consider in Assessing a Firm’s Support Activities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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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)
• Restructuring of activities to gain advantages
(Dell Computers)
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Disintermediation and
Reintermediation
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Value Chain Analysis
Questions for Discussion
• How does the Value Chain Primary Activity
order and content differ for a medical service
provider?
• What are the primary mechanisms for Value
delivery in the Medical Services industry?
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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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
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Types of Resources
Tangible
Resources
Relatively easy to identify, and
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
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Types of Resources
Tangible
Resources
Relatively easy to identify, and
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
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Types of Resources
Tangible
Resources
Intangible
Resources
Difficult for competitors (and the firm
itself) to account for or imitate,
typically embedded in unique
routines and practices that have
evolved over time
• Human




Experience and capabilities of
employees
Trust
Managerial skills
Firm-specific practices and
procedures
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Types of Resources
Tangible
Resources
Intangible
Resources
Difficult for competitors (and the firm
itself) to account for or imitate,
typically embedded in unique
routines and practices that have
evolved over time
• Innovation and creativity


Technical and scientific skills
Innovation capacities
• Reputation


Effective strategic planning processes
Excellent evaluation and control
systems
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Types of Resources
Tangible
Resources
Intangible
Resources
Organizational
Capabilities
Competencies or skills that a firm
employs to transform inputs to
outputs, and capacity to
combine/bundle tangible & intangible
resources to attain desired end
• Outstanding customer service
• Excellent product development
capabilities
• Innovativeness of products and services
• Ability to hire, motivate, and retain
human capital
Adapted from Exhibit 3.4 The Resource-Based View of the Firm: Resources and Capabilities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Firm Resources and Sustainable
Competitive Advantages
Is the resource or
capability…
Implications
Valuable
• Neutralize threats and exploit
opportunities
Rare
• Not many firms possess
Difficult to imitate
• Physically unique
• Path dependency
• Causal ambiguity
• Social complexity
Organizationally Activatable
• Does the firm possess
important supporting
resources?
Adapted from Exhibit 3.6 Four Criteria for Assessing Sustainability of Resources and Capabilities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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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
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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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

Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Is the Resource Activatable?
•Does the firm possess complementary
resources to maximize capability potential?
• Examples of Complementary Resources
Include:
Financial Capital
 Human Capital
 Plant & Equipment
 Developed Distribution Channels

Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Criteria for Sustainable Competitive
Advantage and Strategic Implications
Is a resource or capability…
Valuable
Rare Difficult
Activatable Implications
to Imitate
for Competitiveness
No
No
No
No
Competitive disadvantage
Yes
No
No
Yes
Competitive parity
Yes
Yes
No
Yes
Temporary competitive
advantage
Yes
Yes
Yes
Yes
Sustainable competitive
advantage
Exhibit 3.7 Criteria for Sustainable Competitive Advantage and Strategic Implications
Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of
Management
pp. 99-120.
Copyright © 200517
by (1991),
The McGraw-Hill
Companies, Inc. All rights reserved.
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Questions for Discussion
• What are the primary tangible resources
you possess in your practice?
• What are the important intangible
resources to your practice?
• How are these tangible & intangible
resources bundled into capabilities?
• What capabilities do competitors possess
that you would like to build/acquire?
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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Ratio of Market Value to Book Value
for Selected Companies
Company
eBay
Annual
Market
Book
Ratio of
Sales
Value
Value
Market to
($ billions) ($ billions) ($ billions) Book Value
1.2
30.8
3.9
7.9
Microsoft
28.4
254.1
58.3
4.4
Intel
26.8
142.1
35.4
4.0
182.1
20.0
9.4
2.1
Nucor (Steel)
4.8
3.9
2.3
1.7
J. C. Penney
32.3
5.0
6.4
General Motors Corp.
.78
Note: The data on market valuations are as of June 16, 2003. All other financial
data is based on the most recently available balance sheets and income
statements.
Exhibit 4.1 Ratio of Market Value to Book Value for Selected Companies
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Central Role of Knowledge in
Today’s Economy
•Creation of wealth in a knowledge
economy
• Effective management of knowledge workers
• Intellectual capital
• Assets such as
Reputation & Brand Value
 Employee loyalty and commitment
 Customer relationships
 Company values
 Experience and skills of employees

Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Central Role of Knowledge in
Today’s Economy
Intellectual capital = Market value of firm – Book value of firm
How do companies create value in the knowledgeintensive economy?
• Human capital (individual capabilities, knowledge,
skills, and experience of the company’s employees
and managers)
• Social capital (the network of relationships that
individuals have within & across organizations)
• Knowledge
• Explicit knowledge
• Tacit knowledge
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Learning Organizations
A Learning Organization Is Defined as:
An organization skilled at creating,
acquiring, and transferring
knowledge and at modifying its
behavior to reflect new knowledge
and insights.
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The Balanced Scorecard
Customer
Perspective
• Time
• Quality
• Performance & After
Sales Service
• Relative Value Delivered
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The Balanced Scorecard
Customer
Perspective
• Processes
• Cycle time
• Quality
Internal Business
Perspective
• Employee skills
• productivity
• Decisions
• Actions
• Coordination
• Resources and capabilities
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Balanced Scorecard
Customer
Perspective
Internal Business
Perspective
Innovation and
Learning Perspective
• Introduction of new products
and services
• Greater value for customers
• Increased operating
efficiencies
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The Balanced Scorecard
Customer
Perspective
Internal Business
Perspective
• Profitability
• Growth
• Shareholder value
• Increased market share
Innovation and
Learning Perspective
Financial
Perspective
• Reduced operating expenses
• Higher asset turnover
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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TOWS Matrix
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TOWS Matrix
SO Strategies
• Strategies that enable competitive
advantage, external opportunities
match well with internal strengths,
allows for competitive advantage to
be built and maintained.
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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TOWS Matrix
ST Strategies
• Mitigation Strategies, firm possesses
internal strengths that facilitates
neutralization of external threats,
may lead to temporary advantage if
competitors are impacted by
environmental threats.
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TOWS Matrix
WO Strategies
• Acquisition/Development Strategies,
situation where strategies are
formulated to acquire or develop new
resources/capabilities to take
advantage of external opportunities.
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TOWS Matrix
WT Strategies
• Consolidation/Exit Strategies, if firms
can’t find ways to convert
weaknesses to strengths via
acquisition/development, exit from
market is recommended.
Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
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