Chapter 3: Internal Environment

What are the 5 types of financial ratios?

- Short-term solvency or liquidity - Long-term solvency measures - Asset management (or turnover) - Profitability - Market value (come from balance sheet & income statement)

What are the 4 disadvantages of swot?

- Strengths may not lead to an advantage - focus on external environment is too narrow - gives a one-shot view of a moving target - overemphasize a single dimension of strategy

Examples of capabilities

- outstanding customer service - excellent product development capabilities - superb innovation processes - flexibility in manu. processes

Why use value chain analysis?

- provides greater insights into analyzing a firms competitive position than SWOT analysis does by itself.

Limitation of balanced scorecard

- some executives may view it as a quick fix that can be easily installed

What is value chain analysis?

- strategic analysis of an organization that uses value creating activities

Short term solvency, or liquidity ratios

-current ratio -quick ratio -cash ratio

Asset utilization, or turnover ratio

-inventory turnover -days sales in inventory -receivables turnover -days sales in receivables - total asset turnover - capital intensity

Market value ratios

-price earnings ratio -market to book ratio

Profitability ratios

-profit margin -ROA -ROE

Long term solvency, or financial leverage ratios

-total debt ratio -debt equity ratio -times int. earned ratio - cash coverage ratio

What are the two approaches of evaluating a firms performance?

1. Financial ratio analysis 2. Balanced scorecard

Firm's resources can provide a firm with a sustainable advantage if it has this 4 attributes:

1. Valuable - resource is valuable when they enable a firm to formulate and implement strategies that improve efficiency or effectiveness. 2. Rare - when competitors do not have the capability to exploit that resource in the same way. 3. Costly to imitate - Inimitability* if resource is inimitable then any profits generated are more likely to be sustainable 4. Hard to substitute - impossible for a firm to imitate exactly another firms resource

What are the support activities of the value chain?

1. general administration 2. human resource management 3. technology development 4. procurement

What are the primary activities of the value chain?

1. inbound logistics 2. operations 3. outbound logistics 4. marketing and sales 5. service

What is the balanced scorecard?

A method of evaluating a firm's performance using performance measures from the customers', internal, innovation and learning, and financial perspectives

What is a resource?

A resource is a firm's assets, capabilities, organizational processes, information, knowledge etc controlled by a firm that enables it to develop and implement value creating strategies. Tangible: Financial, Physical, Technological, Organizational Intangible: Human, Innovation & creativity, Reputation

What is a core competency?

Attributes that makes a company unique and helps companies have a sustainable competitive advantage.

Why it is important for a firm to understand the internal environment?

By studying the internal environment firms can determine what they CAN do. (examine unique resources, capabilities and competencies)

Describe the primary activities.

Contribute to the physical creation of the product, or service, its sale and transfer to the buyer, and its service after the sale. 1. inbound (loc. of distribution facilities, warehouse layout) 2. operations (efficient plant ops. & plant layout & process) 3. outbound (effective shipping process, min. trans. cost) 4. Mktg & sales (innovative prom. & adver., proper ID of cust. needs & segments) 5. Service (quick response to cust. needs, quality of serv. personnel & ongoing training)

Describe support activities.

Either add value by themselves or add value through important relationships with both primary activities and other support activities 1. Gen. Admin. - (attaining goals & objectives, relationships w/ stakeholders) 2. Human Resource mgmt - (effective recruiting, development, retention, rewards & incentives) 3. Tech. development - (R&D activities) 4. Procurement - (relationships w/ suppliers, activities completed to purchase the inputs needed to produce a firm's products)

How do financial ratios help understand the firm's internal environment?

Financial ratios help understand the firms internal environment because it provides: - historical comparisons - comparison w/ industry norms - comparison w/ key competitors

What is a capability?

Organizations capacity to deploy tangible & intangible resources over time & to leverage those capabilities to bring about a desired end.

What are the tangible resources?

Relatively easy to identify, include financial, physical, technological, organizational

What is the Internal environment?

Strengths & weaknesses

Benefit of balanced scorecard.

The balance scorecard enables managers to consider their business from four key perspectives, this provides top managers with a fast but comprehensive view of the business.

What are the intangible resources?

organizational assets that are difficult to identify and account for and are typically embedded in unique routines and practices, including human resources, innovations resources and reputation resources