CHAPTER 3

Assessing the Internal

Environment of the
Firm

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 Value-Chain Analysis

-Value-chain analysis (Michael Porter) views the

organization as a sequential process of value-
creating activities. The approach is useful for
understanding the building blocks of competitive
advantage.
- Value is the amount that buyers are willing to pay
for what a firm provides them. Creating value for
buyers that exceeds the costs of production is a key
concept used in analyzing a firm’s competitive
position.
- Porter described two different categories of value-
chain activities: Primary activities & Support
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 Value-Chain Analysis
Primary Activities and Support Activities

- Primary activities contribute to the (a) physical creation of the

product or service (b) sale & transfer to the buyer the product or service
and (c) service after the sale . Primary activities include :-
• Inbound logistics.
• Operations.
• Outbound logistics.
• Marketing & sales.
• Service.
- Support activities either add value by themselves or add value
through relationships with both primary activities & other support
activities. Support activities include:-
• Procurement.
• Technology development.
• Human resource management.
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•
 The Value Chain

Exhibit 3.1 The Value Chain: Primary and Support Activities

Adapted from Competitive Advantage: Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985, 1998 by The Free Press.

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 Primary Activity: Inbound Logistics

-Inbound logistics: include activities associated with receiving, storing & distributing
inputs of the product . Such as:-
• Material handling.
• Warehousing.
• Inventory control.
• Vehicle scheduling.
• Returns to suppliers.
-Factors to consider include:
1. Location of distribution facilities , design of material and inventory control systems
to minimize shipping times.
2. Efficient systems to return products to suppliers.
3. Warehouse layout and design to increase efficiency of operations for incoming
materials.
-For example , Toyota Just-in-time (JIT) inventory systems, designed to achieve efficient inbound
logistics. Their inventory systems allow parts deliveries arrive at the assembly plants only hours
before they are needed. This allows Toyota to fill a buyer’s new car order in just 5 days. The 5
days represent the time from the company’s receipt of an order to the time the car leaves the
assembly plant. Actual delivery may take longer, depending on where a customer lives.
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 Primary Activity: Operations

- Operations: include activities associated with

transforming inputs into the final product form. Such as:
• Machining.
• Packaging & Assembly.
• Testing or quality control.
• Printing.
• Facility operations.
-Factors to consider include:
1.Efficient plant operations to minimize costs.
2.Efficient plant layout and workflow design.
3.Incorporation of appropriate process technology.
(Degree of automation, extent of appropriate quality
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 Primary Activity: Outbound Logistics

-Outbound logistics includes collecting, storing and

distributing product or service to buyers . Such as:-
• Finished goods & warehousing.
• Material handling.
• Delivery vehicle operation.
• Order processing, scheduling and distribution
-Factors to consider include:
1. Effective shipping processes to provide quick delivery
and minimum damages.
2. Efficient finished goods warehousing processes.
3. Shipping of goods in lot sizes to minimize
transportation costs.
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 Primary Activity: Marketing & Sales

- Marketing & sales activities: includes purchases of

products and services by buyers. It includes the incentives
used to get them make purchases . Such as:-
• Advertising & promotion.
• Sales force management.
• Pricing & price quoting.
• Channel selection & channel relations.
- Factors to consider include:
1. Innovative approaches to promotion and advertising.
2. Proper identification of customer segments and needs
and effective pricing strategies.
3.Development of motivated and competent sales force.
4. Appropriate selection of distribution channels.
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 Primary Activity: Service

-Services: includes all activities associated with providing

service to enhance or maintain the product value. Such as:-
• Installation & repair.
• Training.
• Parts supply.
• Product adjustment.
-Factors to consider include:
1. Quick response to customer needs & emergencies.
2. Ability to furnish replacement parts, effective
management of parts and equipment inventory.
3. Quality of service personnel and ongoing training,
warranty and guarantee policies.
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 Support Activity: Procurement

-Support activities can be divided into four generic

categories. Each category is divisible into a number of
distinct activities that are specific to a particular industry.
-Procurement: involves how the firm purchases inputs used
in its value chain. Inputs include raw materials, supplies ,
machinery, laboratory equipment, office equipment, and
buildings. It also includes effective procedures to purchase
advertising and media services. Tactic activities include:-
1. Procurement of raw material inputs to optimize quality
and speed and to minimize associated costs.
2. Development of collaborative win–win relationships with
suppliers.
3. Selection of alternative sources of inputs to minimize
dependence on one supplier.
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Support Activity: Technology
Development
• Technology development: are activities associated
with the development of new knowledge applied to the
firm’s operations. The range of technologies employed
range from those used to prepare documents , goods
and transport, to those embodied in processes and
equipment or the product itself. Tactic activities
include:-
• Collaborative relationships between R&D and other
departments.
• Effective R&D activities for process & product initiatives.
• State-of-the-art facilities & equipment.
• Excellent professional qualifications of personnel.
• Use of data analytics.
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 Support Activity: Human Resource Management

-Human Resource Management: consists of activities

involved in the recruiting, hiring, training, development,
and compensation of all types of personnel. It supports
both individual primary and support activities. HRM
activities also support the entire value chain through
activities such as negotiations with labor unions.
- Factors to consider :
1.Effective employee recruiting, development and
retention mechanisms.
2.Quality relations with trade unions.
3.Reward & incentive programs to motivate employees.
4.Creating quality work environment to maxi. overall
employee performance and minimize absenteeism.
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 Support Activity: General Administration

-General Administration: consists of activities,

including general management, planning, financing,
accounting, legal and government affairs, and
information systems. Administration supports the entire
value chain and not individual activities. G.M involves:
1.Effective planning systems to attain overall goals &
objectives.
2.Excellent relations with diverse stakeholder groups.
3.Effective information technology to coordinate &
integrate value-creating activities across the value
chain.
4.Ability to act on key environmental trends & events,
create strong values, culture & reputation.
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 Interrelationships Among Value-Chain Activities

-Interrelationships are the collaborative

and strategic exchange relationships
among value-chain activities either:-
(1) Within firms or
(2) With other outside stakeholders.(e.g.,
customers, suppliers and firms).
-Strategic exchange relationships involve
exchange of resources such as people
information, technology, or money that
contribute to the success of the firm.
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Integrating Customers into the Value Chain

- Firms can do this in one of two ways:-

1. First, firms can use the “ prosumer ” concept where
consumer becomes involved with designing or customizing
products for their own needs. As the firm develops individualized
products , it can benefit from greater customer satisfaction and
loyalty. Also, the interactions with customers can generate
insights that lead to cost-saving initiatives and more innovative
ideas for the firm.
2. Second, firms can use “Crowdsourcing”. Crowdsourcing
occurs when firms tap into the knowledge and ideas of a large
number of customers and other stakeholders, typically through
online forums. In contrast to prosumer interactions (individual
focus), Crowdsourcing offers the opportunity to influence the
wisdom of a larger crowd. Examples, encouraging customers to
participate in value-creating activities, such as brainstorming
advertising or product ideas.
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 Resource-Based View of the Firm

- The resource-based view (RBV) of the firm combines two

perspectives: (1) the internal analysis of phenomena within a
company and (2) an external analysis of the industry and its
competitive environment. The ability of a firm’s resources to confer
competitive advantage(s) cannot be determined without taking into
consideration the broader competitive context
- A firms’ resources and capabilities must be evaluated in terms of
how valuable, rare, and hard they are for competitors to duplicate.
Otherwise, the firm attains only competitive parity.
- A firm’s strengths and capabilities—no matter how unique or
impressive—do not necessarily lead to competitive advantages in
the marketplace.
- Thus, the RBV is a very useful framework for gaining insights as to
why some competitors are more profitable than others. RBV is
helpful in developing strategies for businesses by revealing how
core competencies embedded in a firm can help it exploit new
product & market opportunities.
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 Types of Tangible Firm Resources

-Tangible resources are assets used to create value

for customers and are relatively easy to identify.
• Physical assets: plant and facilities, location,
machinery , equipment ,proximity to customers and
suppliers.
• Financial assets: cash and cash equivalents,
receivables , borrowing capacity and capacity to raise
equity.
• Technological resources: trade secrets, patents,
copyrights, trademarks and innovative production
processes.
• Organizational resources: effective planning
processes, evaluation & control and reward systems,
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 Types of Intangible Firm Resources

-Intangible resources are difficult for competitors to

account for or imitate. They are embedded in the unique
routines & practices that a firm have evolved and
accumulated over time. These include:
• Human resources: trust, experience & capabilities of
employees, managerial skills & effectiveness of work
teams, firm specific practices & procedures.
• Innovation resources: technical & scientific expertise
& ideas, innovation capabilities.
• Reputation resources: brand names, reputation for
fairness with suppliers and customers, reputation for
reliability & product quality with customers.
• A firm’s culture may also be a resource that
provides competitive advantage
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 Types of Firm Organizational
Capabilities

-Organizational capabilities are competencies

or skills that a firm use to transform inputs into
outputs. They are organization’s capacity to
organize tangible and intangible resources over
time. Examples of organizational capabilities:-
1.Outstanding customer service.
2.Excellent product development capabilities.
3.Outstanding innovation processes & flexibility
in manufacturing processes.
4. Ability to hire, motivate, & retain human
capital.
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 Firm Resources and Sustainable
Competitive Advantages
- Firm resources or capabilities may be the basis for
competitive advantage. However, the firm derives only a
temporary advantage if competitors imitate or have a
substitute for it.
-A strategic resource or capability to provide a potential
for a sustainable competitive advantage, must have four
attributes:-
1. Valuable
2. Rare.
3. Inimitable .
4. Non-substitutability.

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 Is the Resource Valuable?

-Resources can be a source of

competitive advantage only when
they are valuable in formulating and
implementing strategies to improve
efficiency or effectiveness.
-The SWOT framework suggests that
firms improve their performance only
when they exploit opportunities or
neutralize (or minimize) threats .
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 Is the Resource Rare?

-If competitors also possess the same valuable resource,

then it is not a source of a competitive advantage. So,if
competitors have the capability to exploit a resource in
the same way then such a resource would give no one
firm an advantage.
-Some strategies require a mix of multiple types of
resources—tangible assets, intangible assets, and
organizational capabilities. If a particular bundle of firm
resources is not rare, then relatively large numbers of
firms will be able to visualize and implement the
strategies in question. Thus, such strategies will not be a
source of competitive advantage, even if the resource in
question is valuable.
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 Can the Resource Be Imitated
Easily?
-Inimitability (difficulty in imitating) is a key to value
creation because it constrains competition. If a resource
is inimitable, then profits generated are more likely to
be sustainable.
- Accordingly, managers can sustain profits by
developing strategies around resources that have at
least one of the following four characteristics:-
1. Physical uniqueness.
2. Path dependency.
3. Causal ambiguity.
4. Social complexity.

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 Sources of Inimitability

1. Physical uniqueness. Ex. a beautiful resort location,

mineral rights, or Pfizer’s pharmaceutical patents simply
cannot be imitated.
2. Path Dependency means that resources are
developed or accumulated and built overtime.
Competitors cannot go out and buy these resources
quickly and easily.
3. Causal Ambiguity means that it may be impossible
to sort out the causes of either what the valuable
resource is or how it can be created.
4. Social Complexity it is difficult for other firms to
imitate. Examples include interpersonal relations among
firm managers , its culture and reputation with suppliers
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 Are Substitutes Readily Available?

-Substitutability may take two forms:-

1. First, firms may be able to substitute a similar
resource that enables them to develop and implement the
same strategy.( Ex. a firm seeking to imitate another firm’s
high-quality TMT would be unable to copy the team exactly.
However, it might be able to develop its own unique
management team. Although, these two teams would have
different ages, functional backgrounds, experience, etc., they
could be strategically equivalent and thus substitutes for one
another.
2. Second, different firm resources can become strategic
substitutes. Ex. several pharmaceutical firms have seen the
value of patent protection erode in the face of new drugs that
are based on different production processes and act in different
ways, but can be used in similar treatment regimes.
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