PEMBA Strategy Course BUSI 7136 PEST

PEMBA Strategy Course – BUSI 7136 PEST & Internal Analysis for Strategy Formulation Dr. Garry Adams Management Professor Auburn University 1/8 & 1/9/2011 Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -1

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -2

The General Environment • Segments of the general environment include: • Political/Legal • Economic • Sociocultural/Demographic • Technological General Environment • (Some include International) Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -3 4 -3

The General Environment • General environmental trends and events: • Little ability to predict them • Even less ability to control them • Can vary across industries & firms Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. General Environment 3 -4 4 -4

Political/Legal Segment • Tort reform • Americans with Disabilities Act (ADA) • Health care legislation & reform • Deregulation of utility and other industries • Increases in minimum wages • Taxation at local, state, federal levels • Legislation on corporate governance reforms (Sarbanes-Oxley Act) Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 4 -5 3 -5

Economic Segment • Interest rates • Unemployment • Consumer Price index • Trends in GDP • Changes in stock market valuations Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -6 4 -6

Sociocultural/Demographic Segment • More women in the workforce/More single-family homes/Postponement of family formation • Greater concern for fitness & environment • Greater disparities in income levels • Increased aging population • Greater ethnic diversity Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -7 4 -7

Demographic Segment • Aging population • Rising affluence • Changes in ethnic composition • Geographic distribution of population • Greater disparities in income levels Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -8 4 -8

Technological Segment • Genetic engineering • Emergence of Internet technology • Computer-aided design/computer-aided manufacturing systems (CAD/CAM) • Research in synthetic and exotic materials • Pollution/global warming • Miniaturization of computing technologies • Wireless communication • Nanotechnology Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -9 4 -9

PEST Analysis Goals • Identify emerging trends across dimensions that are most likely to impact your industry • Focus on trend: 1. Direction (positive or negative) 2. Magnitude (small or large effect) 3. Scope (segments, industry, across industries) 4. Timing (immediate impact, delayed impact) Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -10

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -11

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -12

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -13

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -14

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -15

Primary Activities Inbound Logistics Operations Outbound Logistics Marketing and Sales Associated with purchases of products and services by end users and the inducements used to get them to make purchases • Highly motivated and competent sales force • Innovative approaches to promotion and advertising • 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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -16

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -17

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -18

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -19

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -20

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -21

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -22

Disintermediation and Reintermediation Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -24

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -25

Types of Resources Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers • Financial resources n n n Firm’s cash accounts Firm’s capacity to raise equity Firm’s borrowing capacity • Physical resources n n n 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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -26

Types of Resources Tangible Resources Relatively easy to identify, and include physical and financial assets used to create value for customers • Technological resources n n n Trade secrets Innovative production processes Patents, copyrights, trademarks • Organizational resources n n 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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -27

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 n n 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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -28

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 n n Technical and scientific skills Innovation capacities • Reputation n n 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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -29

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -30

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -31

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 Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -32

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -33

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 n Path dependency n Causal ambiguity n Social complexity n Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -34

Is the Resource Activatable? • Does the firm possess complementary resources to maximize capability potential? • Examples of Complementary Resources Include: Financial Capital n Human Capital n Plant & Equipment n Developed Distribution Channels n Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -35

Criteria for Sustainable Competitive Advantage and Strategic Implications Is a resource or capability… Valuable Rare Difficult Activatable Implications to Imitate for Competitiveness Yes No No No Competitive disadvantage Yes No No Yes Competitive parity Yes No Yes Temporary competitive advantage Yes Yes Sustainable competitive advantage Source; Adapted from J. Barney, “Firm Resources a Sustained Competitive Advantage, ‘ Journal of Management 17 (1991), pp. 99 -120. Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -36

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -37

Ratio of Market Value to Book Value for Selected Companies Company e. Bay Annual Market Book Ratio of Sales Value Market to ($ 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 . 78 General Motors Corp. 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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -38

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 n Employee loyalty and commitment n Customer relationships n Company values n Experience and skills of employees n Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -39

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 Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -40

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. Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -41

Balanced Scorecard Design Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights

The Balanced Scorecard Customer Perspective • Time • Quality • Performance & After Sales Service • Relative Value Delivered Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -43

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -44

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 Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -45

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -46

TOWS Matrix Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -48

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. Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -49

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. Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -50

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 Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -51

Applying SWOT/TOWS Analysis 1. Review Case Material 2. Identify the Primary Problems/Issues 3. Analyze Internal/External Environments 4. Develop Strategic Alternatives 5. Make Strategy Formulation & Implementation Recommendations Copyright © 2005 by The Mc. Graw-Hill Companies, Inc. All rights reserved. 3 -52