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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?
