Students

Chapter 5

Chapter Outlines

Organizational Strengths and Weaknesses

This chapter discusses strategic analysis from the internal point of view of the organization. Tools such as the resource based view and the value chain help firms to determine their own strengths and weaknesses (the first two letters of SWOT) against the competition in their environment.

Harley-Davidson

Harley-Davidson Homepage

Harley-Davidson History
A detailed timeline of Harley-Davidson over the past century

Harley-Davidson is a great American success story. It was able to grow from a small shed with a few motorcycle parts into a multibillion dollar organization. Harley has a strong public image built through consistently good products and customer service. People are buying that image when they make a Harley-Davidson purchase.

Introduction to Organizational Analysis

Tutor2u Explains Consumer Surplus
A detailed explanation of the importance of consumer surplus and its ramifications

Use value, exchange value, and consumer surplus are concepts central to competitive advantage. Use value is the value of a product or service in the eyes of the consumer, exchange value is the actual price at which a transaction occurs, and consumer surplus is the difference between the two. Thus, consumer surplus is the value left to the customer after the exchange value has been paid. Providing a high consumer surplus is the key to gaining competitive advantage. Internal, organizational analysis focuses on how a firm is able to affect changes in these values, so as to increase value to the customer as well as competitive advantage for itself.

The Resource-Based View

Is the Resource Based View a Useful Resource for Strategic Management Research? Yes
Jay B. Barney points out the positive aspects of the resource based view

Toward the Development of Measure of Distinctive Competencies among Small Independent Retailers
Mark Peterson's publication in the Journal of Small Business Management highlights the importance of distinctive competencies using the example of small, independent retailers

The competition between rival firms for individual transactions lies at the heart of strategic management. Therefore, it is imperative that a firm makes their products or services more attractive in the eyes of customers. A product is more attractive to the extent that it is valuable and rare, and that attractiveness will continue until that value and rareness are either imitated or substituted.

A valuable resource is anything that brings a company profit. These resources can be either tangible or intangible. It is important to look closely when analyzing a firm so as not to overlook intangible resources.

Rarity focuses on availability to the consumer. A product may have high use value, but if every firm has it, then it is unlikely to lead to competitive advantage. However, even seemingly similar products may be seen very differently by consumers; so it is important to consider value and rarity in the eyes of the customer.

Inimitability is another major issue in gaining competitive advantage. Even a great product can quickly lose its competitive advantage if it is easily imitated by a rival. A major issue concerning inimitability is diffusion. Firms are sometimes too quick to outsource certain aspects of their process, and this can undermine the uniqueness of their product. This is also a tricky area to analyze since it can only be truly determined by the consumer whether an imitation is effective.

Non-substitutability is closely related to inimitability. A product may not be easily imitated, so a rival firm may try instead to substitute a new product or service in its place; this too can undermine competitive advantage.

Since there are so many factors to take into account when pursuing competitive advantage, firms will often carve out a niche on which to focus and maintain as their one area of superiority. This is known as a firm's distinctive competencies.

The Value Chain

The Value Chain
Quickmba.com's detailed explanation of Porter's Value Chain

Value Chain Illustration
Picture of the Value Chain

Value Chain Analysis
Video from the University of Kent explains the process of a value chain analysis

The value chain was a tool developed by Porter for categorizing an organization's value-adding activities. The primary value generating activities are those which contribute directly to the creation, manufacture, marketing, sales, and service of products and services. These are related to a firm's direct costs. There are also support activities which are related to the indirect costs. These may not be as directly related to the product and marginal profit, but they are no less important to the firm's overall operation in production. The value chain is very helpful in analyzing both primary and supporting activities.

Competitive Profile Analysis

Competitive profile analysis uses the value chain and combines environmental analysis with the internal, resource based analysis to provide a clear assessment of the firm's strengths, weaknesses and strategic priorities, in the context of its environment.

Concluding Thoughts and Caveats
  • A firm can have a great product or service, but that doesn't necessarily mean great profits. All the primary and supporting activities must work together to support the competitive advantage.
  • No product or service remains valuable forever. So, a firm cannot maintain competitive advantage forever based on just one product. Sustainability must be a constant goal, and firms must be willing to change and adapt in pursuit of it.
  • Competitive advantage is rarely the result of just one asset or resource. Rather, competitive advantage emerges from a combination of interacting resources; this is the idea of casual ambiguity. Social complexity is a related concept. Together, they suggest that competitive advantage is illusive and difficult to achieve. Or, as Barney states, “firms cannot purchase sustained competitive advantage on open markets.”

Casual Ambiguity, Barriers to Imitation, and Sustainable Competitive Advantage
Richard Reed and Robert J. Defillipi's article discusses casual ambiguity and its relation to sustained competitive advantage

Summary

With this chapter the SWOT model introduced earlier is complete. Chapter Four dealt with the OT (opportunities and threats), which involves an external look at a firm's environment. This chapter looked at the SW (strengths and weaknesses), which involves an internal look at a firm's resources. These two analyses, when fit together, become a powerful tool in analyzing a firm and its competitive advantage.

Back to top

Key Terms

Diffusion

Describes the process by which innovations are adopted and spread by firms and individuals other that the original innovator. The process was formally identified in 1962 by Everett Rodgers, who noted that diffusion occurs at different rates over the course of the introduction of a new product.

Direct costs

The costs incurred by a firm's primary activities — in other words, the activities that contribute directly to its revenue-generating activities.

Distinctive competencies

The specific capabilities of a firm that exceed the capabilities of its competitors. A unique location, a strong reputation, or a key technology are all examples of competencies that would be distinctive to a particular firm.

Exchange value

The price paid by the customer and realized by the producer. It is the value at which the purchase or the exchange takes place.

Indirect costs

Costs that relate to the support functions — in other words, the activities that contribute indirectly to the revenue-generating functions of a firm.

Intangible resources

Those that cannot be seen and measured in an objective fashion. Reputation, culture, or visionary leadership are all intangible resources, neither immediately obvious nor easily measured or replicated, but still very important to organizational performance.

Primary activities

Those activities in the value chain that contribute directly to the products and services that customers see and buy. In the most common depiction of the value chain, the primary activities are inbound logistics, operations, outbound logistics, sales, and service.

Support activities

Those activities in the value chain that do not contribute directly to revenue but rather support those functions, such as operations, sales, or service, that do contribute directly.

Tangible resources

Those that can be seen and measured in an objective fashion. Locations, facilities, technologies, and finances are all examples of tangible, measurable resources.

Use value

Relates to the qualities of a product or service as perceived by the customers and in relation to their needs. These customer judgments about the value, attractiveness, and desirability are subjective and bound to the context in which they occur.

Value chain

Made popular by Michael Porter (1985), value chain is a framework for illustrating the sequential activities in which firms engage to create value for the customers. However, it is a common and highly generalizable framework that applies in a multitude of settings.

Back to top