Ch. 3 Assessing the Internal Environment of the Firm
5. Because primary activities like inbound logistics, operations, and outbound logistics are applicable only to tangible goods, value-chain analysis is not appropriate for service organizations. A) True B) False
B) False; The concepts of inbound logistics, operations, and outbound logistics suggest managing raw materials that are manufactured into finished products and delivered to customers. However, these steps do not apply only to manufacturing. They correspond to any transformation process in which inputs are converted into outputs that add value.
3. How can managers create value by establishing important relationships among the value-chain activities both within their firm and between the firm and its customers and suppliers?
Relationships among value chain activities can improve firm operations, leading to better quality products or lower costs. For example, the HR mgmt practice of encouraging transfer of employees across divisions can improve employee morale, transfer of information and ideas across divisions, and thereby improve operations. A relationship between inbound logistics and suppliers can lead to implementation of just-in-time mgmt, which can reduce inventory cost and improve product quality.
Inbound logistics
receiving, storing, and distributing inputs of a product.
Primary activities
sequential activities of the value chain that refer to the physical creation of the product or service, its sale and transfer to the buyer, and its service after sale, including inbound logistics, operations, outbound logistics, marketing and sales, and service.
6. What are the advantages and disadvantages of conducting a financial ratio analysis of a firm? 7. Summarize the concept of the balanced scorecard. What are its main advantages?
Financial ratios enable a firm to obtain a quick assessment of its overal performance. There are three comparisons that lend themselves to financial ratio analysis. First is historical comparisons, or the trend in various financial ratios over time. Second is comparison with industry norms, which enables a firm to determine whether or not it looks competitive within the industry. Third is comparison with competitors, which provides a set of benchmarks that track the firm's competitiveness. Financial ratio analysis has limitation. First is the quality of the accounting data on which the ratios are calculated. Second, the ratios do no provide any direction as to how managers should invest resources to generate future sustainable competitive advantages.
2. Briefly describe the primary and support activities in a firm's value chain.
A firm's value chain consists of a firm's value-creating activities. Primary activities are sequential activities that pertain to the physical creation of the product or service, its sale and transfer to the buyer, and its service after sale; including inbound logistics, operations , outbound logistics, marketing and sales, and service. Support activities either add value by themselves or add value through important relationships with both primary activities and other support activities; including procurement, technology development, HR mgmt, and general administration.
10. An important implication of the balanced scorecard is that managers do not need to look at their job as primarily balancing stakeholder demands. A) True B) False
A) True; A key implication is that managers do not need to look at their job as balancing stakeholder demands. The balanced scorecard provides a win-win approach, increasing satisfaction among a wide variety of organizational stakeholders, including employees (at all levels), customers, and stockholders.
9. Most experts agree that Dell has a weak and non-sustainable competitive advantage over its rivals in the personal computer industry. A) True B) False
A) True; For many years, it looked as if the Dell competitive advantage over its rivals would be sustainable for a very long period of time. By early 2007, however, Dell was falling behind its rivals in market share. This led to a significant decline in its stock price, followed by a complete shake-up of the top management team.
6. Intangible resources are more difficult for competitors to imitate as tangible ones. A) True B) False
A) True; Much more difficult than tangible resources for competitors to account for or imitate are intangible resources, which are typically embedded in unique routines and practices that have evolved and accumulated over time.
*PRACTICE QUIZ* 1. In value-chain analysis, support activities include human resource management and procurement. A) True B) False
A) True; Support activities in value-chain analysis include procurement, technology development, human resource management, and general administration.
7. Pfizer pharmaceutical patents provide ________ which supports inimitability. A) physical uniqueness B) path dependency C) causal ambiguity D) social complexity
A) physical uniqueness; One source of inimitability is physical uniqueness, which is inherently difficult to copy. A beautiful resort location, mineral rights, or Pfizer pharmaceutical patents simply cannot be imitated.
8. Which of these is not an example of socially complex organizational phenomena? A) poor firm culture B) interpersonal relations among firm managers C) firm reputation with its suppliers D) good reputation with customers
A) poor firm culture; A wide variety of firm resources may be considered socially complex. Examples include interpersonal relations among the managers in a firm, its culture, and its reputation with its suppliers and customers.
4. Microsoft has improved the ________ part of its value chain by providing formal reviews of its suppliers, which has helped to clarify expectations for them. A) general administration B) procurement C) human resource management D) technology development
B) procurement; Microsoft has improved its procurement process (and the quality of its suppliers) by providing formal reviews of its suppliers. The evaluation system that Microsoft developed helped clarify its expectations to suppliers.
2. Toyota uses Just-in-time systems. These are considered part of which primary activity in the value chain? A) service B) operations C) inbound logistics D) outbound logistics
C) inbound logistics; Just-in-time (JIT) inventory systems, for example, were designed to achieve efficient inbound logistics. Toyota epitomizes JIT inventory systems, in which parts deliveries arrive at the assembly plants only hours before they are needed.
3. All activities associated with transforming inputs into the final product form, such as machining, packaging and assembly, are known as ______ in the value chain. A) Just-in-time inventory management B) Outbound logistics C) Inbound logistics D) Operations
D) Operations; Operations include all activities associated with transforming inputs into the final product form, such as machining, packaging, assembly, testing, printing, and facility operations.
5. Under what conditions are employees and managers able to appropriate some of the value created by their firm?
Employees and managers sometimes have the capability to consume a firm's earnings in the form of salary and perks. 4 conditions that determine their ability to do so are 1) employee bargaining power, due to their unique skills and abilities; 2) employee replacement cost, due to the rareness of employee skills; 3) employee exit cost, which is the ability of the employee to find alternative employment, and associates with lower ability to appropriate earnings, and 4) manager bargaining pwoer, due to managers' information about the integrated understanding of the firm's total operations.
*SUMMARY REVIEW QUESTIONS* 1. SWOT analysis is a technique to analyze the internal and external environment of a firm. What are its advantages and disadvantages?
SWOT provides a useful starting point for improving firms and better positioning them for success. However, SWOT is a limited techinique with at least 4 problems. First, SWOT may identify strengths, but these do not always translate into competitive advantages. To generate competitive advantages, firms have to understand the source of their strengths and focus resources on developing them. Second, SWOT has a too narrow focus on the external environment. Often, a firm's future growth comes from peripheral or emerging parts of the market. Third, SWOT is static. Over time, all aspects of a firm's environment may change, and SWOT does not offer insights into the processes that cause the change, or how a firm needs to adapt to a dynamic environment. Fourth, SWOT may overemphasize single strategic dimension. This overemphasis may lead to neglect of other important factors that affect a firm's performance.
4. Briefly explain the four criteria for sustainability of competitive advantages.
Strategic resources that lead to firms' sustainable competitive advantages must be valuable, rare, costly to imitate, and costly to substitute. Resources must be valuable in order to give the firms competitive advantages. They must be rare, or else competitors will be able to obtain the advantages too. The resources must be costly imitate, or else competitors will be able to replicate the competitive advantages. 4 factors that limit resource imitation are physical uniqueness, path dependency, causal ambiguity, and social complexity. And they must be costly to substitute, or else competitors will be able to create a similar competitive advantage that serves the same function.
Causal ambiguity
a characteristic of a firm's resources that is costly to imitate because a competitor cannot determine what the resource is and/or how it can be re-created.
Path dependency
a characteristic of resources that is developed and/or accumulated through a unique series of events.
Balanced scorecard
a method of evaluating a firm's performance using performance measures from the customers', internal, innovation and learning, and financial perspectives.
*KEY TERMS* Value-chain analysis
a strategic analysis of an organization that uses value-creating activities.
Financial ratio analysis
a technique for measuring the performance of a firm according to its balance sheet, income statement, and market valuation.
Service
actions associated with providing service to enhance or maintain the value of the product.
Marketing and sales
activities associated with purchases of products and services by end users and the inducements used to get them to make purchases.
Technology development
activities associated with the development of new knowledge that is applied to the firm's operations.
Human resource management
activities involved in the recruiting, hiring, training, development and compensation of all types of personnel.
Support activities
activities of the value chain that either add value by themselves or add value through important relationships with both primary activities and other support activities; including procurement, technology development, human resource management, and general administration.
Operations
all activities associated with transforming inputs into the final product form.
Interrelationships
collaborative and strategic exchange relationships between value-chain activities either (a) within firms or (b) between firms. Strategic exchange relationships involve exchange of resources such as information, people, technology, or money that contribute to the success of the firm.
Outbound logistics
collecting, storing, and distributing the product or service to buyers.
General administration
general management, planning, finance, accounting, legal and government affairs, quality management, and information systems; activities that support the entire value chain and not individual activities.
Innovation and learning perspective
measures of firm performance that indicate how well firms are changing their product and service offerings to adapt to changes in the internal and external environments.
customer perspective
measures of firm performance that indicate how well firms are satisfying customers' expectations.
Internal business perspective
measures of firm performance that indicate how well firms' internal processes, decisions and actions are contributing to customer satisfaction.
Financial perspective
measures of firms' financial performance that indicate how well strategy, implementation and execution are contributing bottom-line improvement.
Intangible resources
organizational assets that are difficult to identify and account for and are typically embedded in unique routines and practices, including human resources, innovation resources, and reputation resources.
Tangible resources
organizational assets that are relatively easy to identify, including physical assets, financial resources, organizational resources, and technological resources.
Resource-based view of the firm
perspective that firms' competitive advantages are due to their endowment of strategic resources that are valuable, rare, costly to imitate, and costly to substitute.
organizational capabilities
the competencies and skills that a firm employs to transform inputs into outputs.
Procurement
the function of purchasing inputs used in the firm's value chain, including raw materials, supplies, and other consumable items as well as assets such as machinery, laboratory equipment, office equipment, and buildings.