978-1259278211 Chapter 3 Solution Manual Part 1

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Chapter 3

Assessing the Internal Environment of the Firm…………………. 74 (3-2)

Value-Chain Analysis………………………………………………………….……….…. 76 (3-3)

Primary Activities……………………………………………………………………….….……….………... 77 (3-4)

Support Activities………………………………………………………………………………….…….…….. 80 (3-7)

Interrelationships among Value-Chain Activities

within and across Organizations…………………………………………….……….……….. 85 (3-9)

Integrating Customers into the Value Chain………………………………………………………….. 85 (3-10)

Applying the Value Chain to Service Organizations………………………………………..……... 87 (3-11)

Resource-Based View of the Firm………………………………………………….… 88 (3-11)

Types of Firm Resources………………………………………………………………………….……….… 88 (3-12)

Firm Resources and Sustainable Competitive Advantages………………………………………. 90 (3-12)

The Generation and Distribution of a Firm’s Profits:

Extending the Resource-Based View of the Firm………………………………….….….. 95 (3-18)

Evaluating Firm Performance: Two Approaches……………………………… 97 (3-18)

Financial Ratio Analysis………………………………………………………………………………….…. 97 (3-18)

Integrating Financial Analysis and Stakeholder

Perspectives: The Balanced Scorecard…………………………………………………….… 99 (3-20)

Issue for Debate……………………………………………………………..…….………... 102 (3-22)

Reflecting on Career Implications……………………………………..…….……… 102 (3-23)

Summary……………………………………………………………………………….………. 103 (3-25)

Chapter 3

Assessing the Internal Environment of the Firm

Summary/Objectives

The purpose of this chapter is to help students understand the importance of the internal

environment of the firm. Chapter 2 focused on assessing the external environment; we turn our

attention in this chapter to managing value-creating activities within the company.

Introduce the chapter by reminding students of the limitations of SWOT analysis

mentioned in Chapter 2. SWOT analysis was suggested as a starting point for analysis, but not an

ending destination. This chapter adds value-chain analysis, the resource based view of the firm,

and the balanced scorecard as methods for analyzing the firm’s internal environment. The

chapter is organized into three sections.

1. Value-Chain Analysis: The firm’s activities are divided into a series of value-

creating steps. Both individual activities as well as the interrelationships among

activities within the firm—and between the firm and its suppliers, customers, and

alliance partners—add value to the firm.

2. Resource based view of the firm: We analyze the firm as a collection of tangible

and intangible resources and organizational capabilities. The key to the

sustainability of advantages is the creation of bundles of activities that satisfy four

criteria: rare, valuable, difficult to imitate, and difficult to substitute. We also

discuss how value can be appropriated by an organization’s stakeholders, such as

employees.

3. Two approaches to evaluating firm performance: We emphasize both the inclusion

of the analysis of financial resources, as well as the interests of multiple

stakeholders. Central to our discussion is Kaplan and Norton’s concepts of the

“balanced scorecard.”

Lecture/Discussion Outline

In LEARNING FROM MISTAKES, we begin the chapter with the example of BYD,

originally a low-cost manufacturer of rechargeable lithium batteries for cellphones that began in

1995. Seven years later, its founder, Wang Chuanfu, decided to buy a state-owned automobile

maker. He envisioned a central role for battery technologies.

As one might expect, things didn’t work out in the long run. It got a boost in 2008 when

Warren Buffett bought 10 percent of the company. And, by 2010, sales hit a peak of about

500,000 units.

However, BYD began to falter. There were a myriad of problems. The firm overestimated

the demand for electric vehicles and it engaged far too much in vertical integration (producing

many components for the car such as braking systems and CD player). But the source of most of

its problems was a failure to produce sophisticated capabilities in a variety of value-creating

activities such as new product development, demand forecasting, capacity planning, inventory

management, and customer insight.

In the end, the shareholders suffered. By the end of 2014, shares were half of what they

were in 2010.

Discussion Question 1: What were BYD’s key strategic mistakes? How could they have

been avoided?

Response guidelines: This question should generate a lot of responses that draws on the text that

is in italics above (and in the textbook as well). The key point is that it is not enough to be

The problems could have been avoided by not diversifying into the automobile business in the

first place, of course! Here, the firm (as a manufacturer of rechargeable lithium batteries) had

Prior to moving on to value-chain analysis, discuss STRATEGY SPOTLIGHT 3.1. It

highlights the advantages and limitations of SWOT analysis. We revisit the failed firm—ProCD

I. Value-Chain Analysis

Value-chain analysis views the organization as a sequential process of value-creating

activities. Such an approach is very useful for understanding the building blocks of competitive

Value-chain analysis is described in Michael Porter’s seminal book, Competitive

Advantage. EXHIBIT 3.1 illustrates Porter’s value chain—which consists of both primary and

support activities.

Discussion Question 2: What changes in the value chain would be necessary if the CEO

of a manufacturing firm decided to dramatically improve the delivery time of his or her

products?

Discussion Question 3: What are some examples of organizations that perform “very

well” or “very poorly” with respect to the items in this exhibit?

Point out that when using value-chain analysis one needs to view the concept in its

The balance of this section will address primary activities, support activities, and the

A. Primary Activities

There are five categories of primary activities in an organization that is competing within

any industry. These are included in EXHIBIT 3.2—along with examples of each activity.

Discussion Question 4: What are some examples of firms with which you are familiar

that are successful (or unsuccessful) in each of the primary activities? Why?

Now, we will address each of the five primary activities.

1. Inbound Logistics

Inbound logistics are associated with the receiving, storing, and distributing of inputs to

We provide the example of Toyota’s exemplary use of JIT inventory systems—in which

Discussion Question 6: How does this JIT system help Toyota to enhance its competitive

advantages?

The SUPPLEMENT below illustrates how Weyerhaeuser was able to enhance its

competitive advantages by improving its customers’ inbound logistics.

2. Operations

Operations include all activities associated with transforming the final product form, such

We discuss how Shaw Industries (now part of Berkshire Hathaway), the world’s largest

Discussion Question 6: What other companies are you aware of that have distinguished

themselves by becoming known for their concern about the natural environment?

Discussion Question 7: What automobile firms do you feel have been most successful in

sustaining a “green” strategy? Why?

STRATEGY SPOTLIGHT 3.2 discusses Chipotle’s unique approach to improving its

operational efficiency.

3. Outbound Logistics

The activities of outbound logistics are associated with the collecting, storing, and

Our example is the use of electronic data interchange (EDI) for Campbell Soup, whereby

Discussion Question 8: How does the use of EDI help Campbell Soup to enhance its

competitive advantages in the marketplace? (Drawing on our discussion from Chapter 2,

mention that it also increases its customers’ switching costs.)

4. Marketing and Sales

Marketing and sales activities are associated with purchases of products and services by

We provide the example of BMW’s effective use of product placement in the film

Mission Impossible: Ghost Protocol.

Discussion Question 9: How does BMW benefit from such product placement?

STRATEGY SPOTLIGHT 3.3 addresses how Frito-Lay has effectively used

crowdsourcing to get several award-winning Super Bowl ads. (Students, of course, will likely be

The SUPPLEMENT below points out how Harley Davidson, a brand traditionally

targeted at males, is offering new products customized for females. To support this new product

 Extra Example: Harley Shows Its Feminine Side

With motorcycle sales in a slump, Harley-Davidson is boosting its efforts to attract more female riders. To help

attract women, in 2008, Harley hired Marissa Miller, who modeled for Victoria’s Secret and Sports Illustrated’s

swimsuit edition, as a spokesperson. In addition to appealing to men, Miller, whose riding skills can be seen on

YouTube, helps Harley draw female riders.

Harley and its dealers are also working to overcome some women’s apprehension about safety. A few evenings a

year, many of Harley’s 650 U.S. dealers close their stores to men and hold women-only parties where staffers try to

demystify a 700-pound motorcycle. The company held about 500 such events in March of 2010, attracting 27,000

women, 11,000 of whom were in a Harley dealership for the first time. The company says it sold 3,000 bikes from

the events that month.

Source: Clothier, M. 2010. Harley shows its feminine side. Bloomberg Businessweek. October 4: 26.

Discussion Question 10: While such actions might increase the company’s customer

base do they risk alienating some of its male customers, who represent the loyal base?

Why/why not?

Discussion Question 11: Given the amounts spent in marketing activities to attract

female riders is there a risk that the firm had not properly identified female riders as a

viable customer segment?

Discussion Question 12: Besides painting the bikes in colors appealing to women, how

else might Harley customize the bikes to appeal to women?

The SUPPLEMENT below provides an interesting insight on compensation systems for

sales professionals.

 Extra Example: Insights on Compensating Sales Professionals

Andris Zoltners is the founder of one of the world’s largest sales consultancies, ZS Associates, with 3,500

employees worldwide. He is an authority on the best ways to manage and pay a sales force—and author of six books

on the subject, including The Power of Sales Analytics, published in 2014.

Below is his response to a question posed by a Harvard Business Review editor: Do most companies have the

right degree of “leverage” or risk-at-pay in their incentive plans? Some companies don’t really understand how

leveraged their plans are, because of “free sales”—sales that occur this year but are due to past effort in the territory.

In many product categories, if you sell something one year, there’s a high probability you’ll make residual sales the

next year without any effort. If a sales person is paid a commission or bonus for free sales, we call that a “hidden

salary,” since it’s an incentive paid for something that’s nearly automatic. Many companies don’t account for hidden

salaries when they design their comp plans and set goals. A company may think that it’s paying salespeople 60

percent in salary and 40 percent in commissions, so people have strong incentives to sell. But, if the salespeople

have a lot of free sales, they may really be earning 85 percent in salary and 15 percent in commissions, which is a

lower incentive.

Source: McGinn, D. 2015. Getting beyond “Show me the month,” Harvard Business Review. 93(4): 78–79.

5. Service

This includes all activities associated with providing service to enhance the value of

We discuss the importance of service for Internet-based retailers (e-tailers). In particular,

Discussion Question 13: What has your experience been with customer service when

patronizing Internet firms? How can/should it be improved?

B. Support Activities

Support activities in the value chain are involved with competing in any industry and can

be divided into four generic categories, as shown in EXHIBIT 3.3.

Discussion Question 14: What firms are you familiar with that excel in some of the items

included in Exhibit 3.3? How does such excellence enhance their competitive position in

their industry? How hard would it be for competitors to copy?

We will now discuss each of the four support activities.

1. Procurement

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

the purchased inputs themselves. Purchased inputs include raw materials, supplies, and other

We discuss the example of how Microsoft improved their procurement operations by

Discussion Question 15: What are some of the benefits of such evaluation for both

Microsoft and its suppliers?

2. Technology Development

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

We discuss how a French firm, Technig, has succeeded by using technology to create

3. Human Resource Management

Human resource management consists of activities involved in the recruiting, hiring,

training, development, and compensation of all types of personnel. It supports both individual,

In this section, we address JetBlue Airways’ innovative “family friendly” initiative and

Discussion Question 16: What are the advantages of JetBlue Airways’ innovative

approach to human resource management? Could this type of program be used at

companies with which you are familiar? Why? Why not?

Teaching Tip: While discussing the various support activities, ask those students who

have some work experience (or organizations they are familiar with) whether or not the

Human Resource Management function at their organization was well integrated with

On pages 83–84, we conduct an interview with Ms. Lise Saari, former Director of Global

Employee Research, IBM. She provides many useful insights on the importance of HRM

The SUPPLEMENT below provides some interesting research findings—and a

cautionary note!—on performance evaluation practices.

 Extra Example: A Core Problem with Performance Evaluation Systems!

According to a recent article in HBR, the most comprehensive research on what performance ratings actually

measure was undertaken by Michael Mount, Steve Scullen, and Maynard Goff and published in the Journal of

Applied Psychology in 2000. In their study, 4,492 managers were rated on certain performance dimensions by two

bosses, two peers, and two subordinates. The findings revealed 62 percent of the variance in the ratings could be

accounted for by individual raters’ peculiarities of perception. Actual performance accounted for only 21 percent of

the variance. This led the authors to conclude: Although it is implicitly assumed the ratings measure the performance

of the rate, most of what is being measured by the ratings is the unique rating tendencies of the rater. Thus ratings

reveal more about the rater than they do about the rate.

Source: Buckingham, M. & Goodall, A. 2015. Reinventing performance management. Harvard Business Review.

93(4): 43–44.

4. General Administration

General Administration consists of a number of activities, including general management,

planning, finance, accounting, legal, government affairs, quality management, and information

This section addresses how general administration can be used as a source of competitive

STRATEGY SPOTLIGHT 3.4 discusses how Schmitz Cargobull, a German truck and

C. Interrelationships among Value-Chain Activities within and across Organizations

Up to now, we have addressed value-chain activities separately. Here, we discuss: (1)

We briefly review Lise Saari’s interview and Campbell Soup’s Electronic Data

The SUPPLEMENT below addresses Timberland’s detoxification initiative. It serves to

show how an energy efficient supply chain can both enhance environmental sustainability and

 Extra Example: Timberland’s Detoxification Initiative

Making shoes is a surprisingly toxic business. Both the materials and the adhesives that connect them are made of

chemicals that are known dangers to the cardiac, respiratory, and nervous systems. One pair of running shoes will

hardly harm you. However, workers in the industry face real risks.

Timberland, the second largest company in the outdoor industry with $1.3 billion in revenues, realized that

it needed to rethink the industry’s traditional reliance on toxic chemicals. It became the first footwear company to

test new water-based adhesives on non-athletic shoes. (Nike and others had already taken the initiatives in the

“white shoe,” or athletic, part of the industry). Making such a change required the firm to work very closely with

Asian suppliers. According to Timberland’s website, the company released its long-term strategy in 2008, which

included its goal to create products at lower cost and with less harm to the environment. The strategy included the

elimination of polyvinylchloride (PVC) from its product line and increasing the use of water-based adhesives in its

footwear in order to reduce the use of solvents.

Common sense would suggest that Timberland’s detoxification efforts would be very costly for its

suppliers. And, during the test phase it was quite expensive. The new adhesives cost more because economies of

scale hadn’t yet been achieved. However, over time, Timberland fully expects the process to be at least cost neutral

for its business and a money saver for the full value chain.

Why? Water-based adhesives eliminate almost entirely the supplier’s expense for handling hazardous

materials, including waste disposal, insurance, and training. Manufacturing expenses had already declined during the

testing phase because water-based adhesives go on with one coat instead of two, and the application equipment

requires less cleaning. Thus, suppliers can run longer without interruption. The change also improves worker safety

as well as reduces both labor costs and time.

Sounds good. But will Timberland be able to capture these supplier savings down the road? Probably not,

but over time this strategy should help the firm win market share and drive revenues.

Sources: Esty, D. C. & Winston, A. S. 2009. Green to Gold. Hoboken, NJ: Wiley, p: 112-113;

http://community.timberland.com/; and, www.finance.yahoo.com

Discussion Question 17: Do you think that Timberland will eventually capture the

supplier savings? Why? Why not?

D. Integrating Customers into the Value Chain

One approach is to apply the “prosumer” concept. It is considered a customer/producer

who is even more extensively integrated into a firm’s value chain. It stands in sharp contrast to

A second approach is crowdsourcing, a concept introduced in Chapter 2. Here, firms can

We discuss the “perils” of crowdsourcing, include how customers can “hijack” a firm’s

initiative. Examples from General Motors and McDonald’s are provided. Research has identified

E. Applying the Value Chain to Service Organizations

We added this section on how to apply the value-chain concept to service organizations in

order to help show how it can be applied to firms other than manufacturing firms (which is

Ask:

Discussion Question 18: What would be some of the important support activities for

these two firms?

Discussion Question 19: What are the key relationships among the primary and support

activities to create value for these firms?