chapter 3 - assessing the internal environment of the firm

Question 1

value-chain analysis

Answer 1

Value-chain analysis views the organization as a sequential process of value-creating activities. The approach is useful for understanding the building blocks of competitive advantage and was described in Michael Porter’s seminal book Competitive Advantage

Question 2

value

Answer 2

value is the amount that buyers are willing to pay for what a firm provides them and is measured by total revenue, a reflection of the price a firm’s product commands and the quantity it can sell. A firm is profitable when the value it receives exceeds the total costs involved in creating its product or service.

Creating value for buyers that exceeds the costs of production (i.e., margin) is a key concept used in analyzing a firm’s competitive position.

Question 3

porter’s two different categories of activities:

five primary activities (5) ON EXAM

Answer 3

inbound logistics,
operations,
outbound logistics,
marketing and sales, and
service

Question 4

porter’s two different categories of activities:

support activities (4) ON EXAM

Answer 4

procurement,
technology development,
human resource management,
and general administration

Question 5

how to get the most out of value-chain analysis

Answer 5

To get the most out of value-chain analysis, view the concept in its broadest context, without regard to the boundaries of your own organization. That is, place your organization within a more encompassing value chain that includes your firm’s suppliers, customers, and alliance partners.

Thus, in addition to thoroughly understanding how value is created within the organization, be aware of how value is created for other organizations in the overall supply chain or distribution channel

Question 6

primary activities (5) - 1: inbound logistics

Each category is divisible into a number of distinct activities that depend on the particular industry and the firm’s strategy

Answer 6

Inbound Logistics- Inbound logistics is primarily associated with receiving, storing, and distributing inputs to the product. It includes material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers.

Many firms have implemented just-in-time (JIT) inventory systems to improve the efficiency of their inbound logistics.

Question 7

primary activities (5) - 2: operations

Each category is divisible into a number of distinct activities that depend on the particular industry and the firm’s strategy

Answer 7

Operations include all activities associated with transforming inputs into the final product form, such as machining, packaging, assembly, testing, printing, and facility operations.

Creating environmentally friendly manufacturing is one way to use operations to achieve competitive advantage

Question 8

primary activities (5) - 3: outbound logistics

Each category is divisible into a number of distinct activities that depend on the particular industry and the firm’s strategy

Answer 8

Outbound logistics is associated with collecting, storing, and distributing the product or service to buyers. These activities include finished goods, warehousing, material handling, delivery vehicle operation, order processing, and scheduling.

The importance of outbound logistics is reflected in Costco’s willingness to spend $1 billion to acquire Innovel, a logistics firm, to enhance its ability to stock, deliver, and install big-ticket items for customers

Question 9

primary activities (5) - 4. marketing and sales

Each category is divisible into a number of distinct activities that depend on the particular industry and the firm’s strategy

Answer 9

Marketing and sales activities are associated with purchases of products and services by end users and the inducements used to get them to make purchases. They include advertising, promotion, sales force, quoting, channel selection, channel relations, and pricing.

Consider product placement. This is a marketing strategy many firms are increasingly adopting to reach customers without resorting to traditional advertising.

Question 10

primary activities (5) - 5. service

Each category is divisible into a number of distinct activities that depend on the particular industry and the firm’s strategy

Answer 10

The service primary activity includes all actions associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment.

Let’s examine how two retailers are providing exemplary customer service. At Sephora.com, a customer service representative taking a phone call from a repeat customer has instant access to what shade of lipstick the customer likes best.

Question 11

support activities

Answer 11

Support activities in the value chain can be divided into four generic categories:
general administration,
human resource management technology development,
and procurement

Question 12

support activities - 1. procurement

Answer 12

Procurement refers to the function of purchasing inputs used in the firm’s value chain, not to the purchased inputs themselves.

Purchased inputs include raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings.

Question 13

support activities - 2. technology development

Answer 13

every value activity embodies technology.

The array of technologies employed in most firms is very broad, ranging from technologies used to prepare documents and transport goods to those embodied in processes and equipment or the product itself.

Technology development related to the product and its features supports the entire value chain, while other technology development is associated with particular primary or support activities.

Question 14

support activities - 3. human resource management

Answer 14

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 (e.g., hiring of engineers and scientists) and the entire value chain (e.g., negotiations with labor unions

Question 15

general administration

Answer 15

Consists of a number of activities, including general management, planning, finance, accounting, legal and government affairs, quality management, and information systems. Administration (unlike the other support activities) typically supports the entire value chain and not individual activities

Question 16

interrelationships

Answer 16

Interrelationships among value-chain activities within and across organizations

“We have defined each of the value-chain activities separately for clarity of presentation. Managers must not ignore, however, the importance of relationships among value-chain activities.There are two levels:

(1) interrelationships among activities within the firm and
(2) relationships among activities within the firm and with other stakeholders (e.g., customers and suppliers) who are part of the firm’s expanded value chain”

Question 17

connected strategies

Answer 17

Connected Strategies. To better leverage the value of value-chain activities across organizations and between a firm and its customers, a number of firms are drawing on the potential of connected strategies. Having a connected strategy involves moving away from having episodic interactions with suppliers and customers to having ongoing connected relationships with them.

The advent of a range of technologies has facilitated new ways of connectivity, involving regular, low-friction, and customized interactions with suppliers and customers. These interactions increase the firm’s ability to anticipate supplier challenges and customer needs, customize supply and delivery options to meet these challenges and needs, and even create new business models to optimally deliver value to customers

Question 18

four Rs of connected relationships

Answer 18

Recognize a customer need
Request a desired option, the identification and selection of a product or service that satisfies the need
Respond by creating a customized customer experience
Repeat these interactions with customers

Question 19

the resource-based view (RBV)

Answer 19

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.29 It goes beyond the traditional SWOT (strengths, weaknesses, opportunities, threats) analysis by integrating internal and external perspectives

Thus, the RBV is a very useful framework for gaining insights as to why some competitors are more profitable than others

Question 20

types of firm resources - tangible resources

Answer 20

Tangible Resources Tangible resources are assets that are relatively easy to identify.

They include the physical and financial assets an organization uses to create value for its customers.

Among them are financial resources (e.g., a firm’s cash, accounts receivable, and its ability to borrow funds); physical resources (e.g., the company’s plant, equipment, and machinery as well as its proximity to customers and suppliers); organizational resources (e.g., the company’s strategic planning process and its employee development, evaluation, and reward systems); and technological resources (e.g., trade secrets, patents, and copyrights).”

Question 21

types of firm resources - intangible resources

Answer 21

Intangible Resources Much more difficult for competitors (and, for that matter, a firm’s own managers) to account for or imitate are intangible resources, which are typically embedded in unique routines and practices that have evolved and accumulated over time.

These include human resources (e.g., experience and capability of employees, trust, effectiveness of work teams, managerial skills), innovation resources (e.g., technical and scientific expertise, ideas), and reputation resources (e.g., brand name, reputation with suppliers for fairness and with customers for reliability and product quality).

Question 22

types of firm resources - organizational capabilities

Answer 22

Organizational capabilities are not specific tangible or intangible assets, but rather the competencies or skills that a firm employs to transform inputs into outputs.

In short, they refer to an organization’s capacity to deploy tangible and intangible resources over time and generally in combination and to leverage those capabilities to bring about a desired end.

Examples of organizational capabilities are outstanding customer service, excellent product development capabilities, superb innovation processes, and flexibility in manufacturing processes

Question 23

four criteria that a sustainable advantage and how value created can be appropriated by employees and managers

Answer 23

For a resource to provide a firm with the potential for a sustainable competitive advantage, it must have four attributes.

First, the resource must be valuable in the sense that it exploits opportunities and/or neutralizes threats in the firm’s environment.

Second, it must be rare among the firm’s current and potential competitors.

Third, the resource must be difficult for competitors to imitate.

Fourth, the resource must have no strategically equivalent substitute

Question 24

sustainable advantage - is the resource valuable?

Answer 24

Is the Resource Valuable? 

Organizational resources can be a source of competitive advantage only when they are valuable. Resources are valuable when they enable a firm to formulate and implement strategies that improve its efficiency or effectiveness. The SWOT framework suggests that firms improve their performance

Question 25

sustainable advantage - is the resource rare?

Answer 25

Is the Resource Rare? 

If competitors or potential competitors also possess the same valuable resource, it is not a source of a competitive advantage because all of these firms have the capability to exploit that resource in the same way. Common strategies based on such a resource would give no one firm an advantage. For a resource to provide competitive advantages, it must be uncommon, that is, rare relative to other competitors

Question 26

sustainable advantage - can the resource be imitated easily?

Answer 26

Can the Resource Be Imitated Easily? Inimitability (difficulty in imitating) is a key to value creation because it constrains competition.42 If a resource is inimitable, then any profits generated are more likely to be sustainable.43 Having a resource that competitors can easily copy generates only temporary value.44 This has important implications. Since managers often fail to apply this test, they tend to base long-term strategies on resources that are imitable

Question 27

sustainable advantage - path dependency

Answer 27

Path Dependency A greater number of resources cannot be imitated because of what economists refer to as path dependency. This simply means that resources are unique and therefore scarce because of all that has happened along the path followed in their development and/or accumulation. Competitors cannot go out and buy these resources quickly and easily; they must be built up over time in ways that are difficult to accelerate

Question 28

sustainable advantage - casual ambiguity

Answer 28

Causal Ambiguity The third source of inimitability is termed causal ambiguity. This means that would-be competitors may be thwarted because it is impossible to disentangle the causes (or possible explanations) of either what the valuable resource is or how it can be re-created. What is the root of 3M’s innovation process? You can study it and draw up a list of possible factors. But it is a complex, unfolding (or folding) process that is hard to understand and would be hard to imitate

Question 29

sustainable advantage - social complexity

Answer 29

Social Complexity A firm’s resources may be imperfectly inimitable because they reflect a high level of social complexity. Such phenomena are typically beyond the ability of firms to systematically manage or influence. When competitive advantages are based on social complexity, it is difficult for other firms to imitate them.

A wide variety of firm resources may be considered socially complex.

Question 30

sustainable advantage - are substitutes readily available

Answer 30

The fourth requirement for a firm resource to be a source of sustainable competitive advantage is that there must be no strategically equivalent valuable resources that are themselves not rare or inimitable. Two valuable firm resources (or two bundles of resources) are strategically equivalent when each one can be exploited separately to implement the same strategies.

two forms
- First, though it may be impossible for a firm to imitate exactly another firm’s resource, it may be able to substitute a similar resource that enables it to develop and implement the same strategy”
- “Second, very different firm resources can become strategic substitutes. For example, internet retailers, such as Amazon.com, compete as substitutes for brick-and-mortar stores.

Question 31

sustainable advantage - leveraging artificial intelligence to increase the sustainability of an advantage

Answer 31

Increasingly, firms are using artificial intelligence and leveraging data to better understand customer preferences, the use of products, and the operations of the firm to build a foundation for sustainable advantage. In effectively using data on customer preferences, efficient procedures, and other aspects of business, firms are able to build an understanding of markets and firm operations that existing competitors and new firms will find difficult to attack

Question 32

Four factors help explain the extent to which employees and managers will be able to obtain a proportionately high level of the profits that they generate:

Answer 32

1. Employee bargaining power - If employees are vital to forming a firm’s unique capability, they will earn disproportionately high wages. For example, marketing professionals may have access to valuable information that helps them to understand the intricacies of customer demands and expectations, or engineers may understand unique technical aspects of the products or services.
2. Employee replacement cost - If employees’ skills are idiosyncratic and rare (a source of resource-based advantages), they should have high bargaining power based on the high cost required by the firm to replace them.
3. Employee exit costs - This factor may tend to reduce an employee’s bargaining power. An individual may face high personal costs when leaving the organization. Thus, that individual’s threat of leaving may not be credible.
4. Manager bargaining power -Managers’ power is based on how well they create resource-based advantages. They are generally charged with creating value through the process of organizing, coordinating, and leveraging employees as well as other forms of capital such as plant, equipment, and financial capital (addressed further in Chapter 4).

Question 33

evaluating firm performance: two approaches - 1:financial ratio analysis

Answer 33

The first is financial ratio analysis, which, generally speaking, identifies how a firm is performing according to its balance sheet, income statement, and market valuation.

As we will discuss, when performing a financial ratio analysis, you must take into account the firm’s performance from a historical perspective (not just at one point in time) as well as how it compares with both industry norms and key competitors

Question 34

evaluating firm performance: two approaches - 2. stakeholder view

Answer 34

The second perspective takes a broader stakeholder view. Firms must satisfy a broad range of stakeholders, including employees, customers, and owners, to ensure their long-term viability

Question 35

financial ratio analysis

Answer 35

The beginning point in analyzing the financial position of a firm is to compute and analyze five different types of financial ratios:

Short-term solvency or liquidity
Long-term solvency measures
Asset management (or turnover)
Profitability
Market value

Question 36

historical comparisons

Answer 36

Historical Comparisons - When you evaluate a firm’s financial performance, it is very useful to compare its financial position over time. This provides a means of evaluating trends. For example, Apple Inc. reported revenues of $366 billion and net income of $95 billion in 2021. Virtually all firms would be very happy with such remarkable financial success

Question 37

comparison with industry norms

Answer 37

Comparison with Industry Norms When you are evaluating a firm’s financial performance, remember also to compare it with industry norms. A firm’s current ratio or profitability may appear impressive at first glance. However, it may pale when compared with industry standards or norms.

Comparing your firm with all other firms in your industry assesses relative performance. Banks often use such comparisons when evaluating a firm’s creditworthines

Question 38

comparison with key competitors

Answer 38

Comparison with Key Competitors 

Recall from Chapter 2 that firms with similar strategies are members of a strategic group in an industry. Furthermore, competition is more intense among competitors within groups than across groups. Thus, you can gain valuable insights into a firm’s financial and competitive position if you make comparisons between a firm and its most direct rivals. Consider a firm trying to diversify into the highly profitable pharmaceutical industry

Question 39

the balanced scorecard

Answer 39

The Balanced Scorecard: Description and Benefits To provide a meaningful integration of the many issues that come into evaluating a firm’s performance, Kaplan and Norton developed a balanced scorecard. This gives top managers a fast but comprehensive view of the business.

In a nutshell, it includes financial measures that reflect the results of actions already taken, but it complements these indicators with measures of customer satisfaction, internal processes, and the organization’s innovation and improvement activities—operational measures that drive future financial performance.

Question 40

the balanced scorecard enables managers to consider their business from four key perspectives….

Answer 40

customer, internal, innovation and learning, and financial.

• how do customers see us?
• what must we excel at?
• can we continue to improve and create value?
• how do we look to shareholders?

Question 41

the balanced scorecard: customer perspective

Answer 41

Clearly, how a company is performing from its customers’ perspective is a top priority for management. The balanced scorecard requires that managers translate their general mission statements on customer service into specific measures that reflect the factors that really matter to customers. For the balanced scorecard to work, managers must articulate goals for four key categories of customer concerns: time, quality, performance and service, and cost

Question 42

the balanced scorecard: internal business perspective

Answer 42

Customer-based measures are important. However, they must be translated into indicators of what the firm must do internally to meet customers’ expectations. Excellent customer performance results from processes, decisions, and actions that occur throughout organizations in a coordinated fashion, and managers must focus on those critical internal operations that enable them to satisfy customer needs”

” These include factors that affect cycle time, quality, employee skills, and productivity.”

Question 43

the balanced scorecard: innovation and learning perspective

Answer 43

Given the rapid rate of markets, technologies, and global competition, the criteria for success are constantly changing. To survive and prosper, managers must make frequent changes to existing products and services as well as introduce entirely new products with expanded capabilities.

A firm’s ability to do well, from an innovation and learning perspective, is more dependent on its intangible than tangible assets. Three categories of intangible assets are critically important: human capital (skills, talent, and knowledge), information capital (information systems, networks), and organization capital (culture, leadership).

Question 44

the balanced scorecard: financial perspective

Answer 44

Measures of financial performance indicate whether the company’s strategy, implementation, and execution are indeed contributing to bottom-line improvement. Typical financial goals include profitability, growth, and shareholder value. Periodic financial statements remind managers that improved quality, response time, productivity, and innovative products benefit the firm only when they result in improved sales, increased market share, reduced operating expenses, or higher asset turnover”

Question 45

of the balanced scorecard, a key implication is that…

Answer 45

managers need not see their primary responsibility as balancing stakeholder demands.

They must avoid the following mind-set: “How many units in employee satisfaction do I have to give up to get some additional units of customer satisfaction or profits?””

Question 46

limitations and potential downsides

Answer 46

There is general agreement that there is nothing inherently wrong with the concept of the balanced scorecard. The key limitation is that some executives may view it as a quick fix that can be easily installed. If managers do not recognize this from the beginning and fail to commit to it long term, the organization will be disappointed. Poor execution becomes the cause of such performance outcome