Chapter 3 Firm Capabilities Assessing Strengths ad Weaknesses

Chapter 3 Firm Capabilities: Assessing Strengths ad Weaknesses by Robert Pitts & David Lei Slides prepared by John P. Orr Cameron University Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 1

What you will learn… Slide 1 of 2 • The strategic management tool known as the value chain. • The use of the value chain in evaluating an organization’s internal strengths and weaknesses. • The difference between primary and support value-adding activities Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 2

What you will learn… Slide 2 of 2 • The concept of competitive advantage • The concept of distinctive competence • Some important economic sources of competitive advantage Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 3

Firm Capabilities Pizza Hut Advantages General Motors Challenges • • • Design • Process technology • Workforce motivation • Procurement costs Location Reputation Purchase discounts Interrelationships Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 4

The Value Chain • An analytical tool that describes all activities that make up the economic performance and capabilities of the firm. • It is used to analyze and examine activities that create value for a given firm. Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 5

SUPPORT ACTIVITIES Ex. 3 -1. The Value Chain Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing / Sales Service Reprinted/Adapted with the permission of The Free Press, a division of Simon & Shuster, Inc. , from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright © 1985 by Michael E. Porter. Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 6

The Value Chain • Primary Activities – Activities which relate directly to the actual creation, manufacture, distribution, and sale of a product or service to the firm’s customers. • Secondary Activities – Economic activities which assist the firm’s primary activities. Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 7

The Value Chain • Upstream Activities – Economic activities that occur close to the firm’s suppliers but far away from the customers. • Downstream Activities – Economic activities that occur close to the customer but far away from the firm’s suppliers. Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 8

Support Activities • Product Development – The conception, design, and commercialization of new products. • Process Development – The design and use of new procedures, technologies, techniques, and other steps to improve the -adding process. Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. value 9

SUPPORT ACTIVITIES Ex. 3 -2. Pizza Restaurant Industry Value Chain Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Obtain funds, carry out accounting and payroll functions, and perform other administrative tasks for each activity Supervise truck drivers & warehouse personnel Improve truck routing & warehouse methods Supervise kitchen personnel Supervise advertising personnel Supervise waiters Develop new menu items, improve oven design Discover new promotional materials Improve restaurant layout Buy trucks, lease warehouse space Haul dough, cheese, etc. to restaurants Buy dough, cheese, ovens, and supplies Buy TV time Cook pizzas, make salads, etc. Develop advertising copy Inbound Logistics Operations Outbound Logistics Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. Marketing / Sales Buy tables, chairs, silverware to equip restaurant Serve food to restaurant customers Service 10

Ex. 3 -3. Automotive Industry Value Chain SUPPORT ACTIVITIES Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Obtain funds, carry out accounting and payroll functions, and perform other administrative tasks for each activity. Supervise truck drivers, warehouse personnel Improve truck routing & warehouse methods Buy trucks, lease warehouse space Transport components to assembly facility Inbound Logistics Supervise assembly workers (Same as inbound logistics) Improve product design & assembly process Buy components, assembly equipment Assemble components into autos (Same as inbound logistics) Supervise advertising & sales personnel Improve selling methods (Same as inbound logistics) Hire advertising Buy tools for agency, buy maintenance media time personnel Transport autos to dealers Advertise, promote, & sell autos Operations Outbound Logistics Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. Marketing / Sales Supervise maintenance personnel Improve maintenance procedures Maintain, repair autos Service 11

Ex. 3 -4. Pizza Hut’s Business System SUPPORT ACTIVITIES Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Key: Operations = Extensive activity Outbound Logistics Marketing / Sales = Modest activity Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. Service = No activity 12

Ex. 3 -5: GM’s Business System SUPPORT ACTIVITIES Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Key: Operations = Extensive activity Outbound Logistics Marketing / Sales = Modest activity Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. Service = No activity 13

Ex. 3 -6. Common First-Mover Advantages Patents Channel Access License Supply Access Location Reputation

Cost per unit of output Ex. 3 -7. Economies of Scale of activity (plant

Ex. 3 -8. Major Contributors to Economies of Scale Specialization Purchase Discounts Fixed-Cost Spreading Vertical Integration Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 16

Cost per unit of output Ex. 3 -9. Economies of Experience Cumulative volume * * Number of unit produced (or sold, serviced, developed, etc. ) since commencing an activity. Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 17

Ex. 3 -10. Major Contributors to Experience Benefits Employee learning Product redesign Process improvement

SUPPORT ACTIVITIES Ex. 3 -11. Activities Frequently Benefitting From First Mover Advantages Infrastructure Human Resource Management Reputation Patent protection; license Technology Development Supply access Procurement Patent protection PRIMARY ACTIVITIES License Location, channel access, reputation Outbound Logistics Marketing / Sales License Inbound Logistics Operations Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. Reputation; license Service 19

Ex. 3 -12. Requirements for Achieving Scale and Experience Advantage • Centralization - Activity must be centralized • Susceptibility - Activity must be susceptible to to the processes which produce scale and experience benefits • Implementation - Activity must be properly implemented • Proprietary - Benefits of scale and experience must be proprietary Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 20

SUPPORT ACTIVITIES Ex. 3 -13. Pizza Hut’s Sources of Competitive Advantage Infrastructure Human Resource Management Technology Development Procurement of food (S) PRIMARY ACTIVITIES Procurement of TV time (S, I) Reputation (FM): advertising (S, I) Inbound Operations Outbound Marketing Service Logistics / Sales Key: FM = First Mover Advantages; S = Scale Advantage; I = Interrelationship Advantage Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 21

Ex. 3 -14. Comparative Financial Analysis: Key Ratios Type Examples Measures Indicators Productivity of Profitability Return on Equity (ROE) Profit after taxes firm’s value-adding Shareholder’s equity activities Liquidity Current Ratio Current Assets Current Liabilities Measure of financial solvency Asset Turnover Sales_____ Total Assets Asset use efficiency Activity Inventory Turnover Sales_____ Inventory Leverage Debt/Equity Ratio Turnaround of inventory Corporate Liabilities______ financing; financial Shareholders’ equity risk; default risk Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 22

Ethical Issues: Assessing Rivals • Examining competitors’ products • Questioning competitors’ employees • Using consultants • Engaging in industrial espionage • ‘Raiding’ employees Copyright © 2003 by South-Western, a division of Thomson Learning. All rights reserved. 23