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Administrative Studies
ADMS 4900
You- Ta Chuang

Session 3 Analyzing Internal Environment Internal environment analysis looks at how the bundles of internal resources and activities drive firm performance.  External environment accounts for 30% of firm performance. Firm performance is driven by position in the industry.  Internal environment accounts 50% of firm performance. The resources and capability drive firm performance.  Residual is up for luck. The Value Chain Value is the price buyers are willing to pay for what a firm provides them. This can be measured by total profit; a firm is profitable to the extent that the value it receives exceeds to total costs involved. Increasing value can be either increases revenue, by either increasing sales or decreasing costs. It can be adding features to charge a premium or decreasing costs to increase your margin. You need to look at not only your firm, but only your competitors and what they are doing to increase their products value. Effects can extend outside your firm e.g. Magna  Car manufacture start-up Resource-Based view of the firm (RBV/VRIO model) Why do firms in the same industry vary in performance over time? 2 conditions for firms to account for performance differentials 1. Resource heterogeneity: all firms have different resources and capability; therefore there will be a performance difference 2. Resource immobility: resources and capability cannot move around easily within an industry, which will crease a performance difference Types of Firm Resources 1. Tangible resources: easy to identify, measure and value. Seldom provide competitive advantage because they are easy to identify, describe and imitate 2. Intangible resources: hard to quantify or identify. More difficult to imitate human resources, innovation resources, reputation resources and firm culture. 3. Organizational capabilities: the competencies and skills that a firm employees to transform those assets into outputs. Resources and Capability  Sustainable Competitive Advantage  Performance  Assess a firm’s SCA through a VRIO analysis Valuable: Are the resources you possess relevant and useful? Do they contribute to the fulfillment of customers needs at a price the customers are willing to pay? Rare: Are your resources unique? Do other firms have this resource, or can they possess them easily? Imitation: Your resources cannot be imitated easily by your competitors:  Imitation Barriers: o History dependent: A product with a history is hard to replicate because you cannot back in time and possess the unique resources and capabilities that allowed it to be successful o Casual ambiguity: Difficulty to determine why the product is successful o Social complexity: Difficult to imitate the different relationships a firm has between suppliers, buyers, employees etc. o Legal condition: Regulations and patents making it difficult for a firm to imitate a product Organization: Does the firm have the ability to foster the efficient use of resource usage? Depends on culture, structure, policy, incentive. Example of a VRIO model List V R I O SCA Customer Y Y Y Y SCA Loyalty Financial Y N N N ? Capital The model requires a lot of judgment leading it to be very subjective. Model also requires information you need to take from the external environment, which may be imperfect. Capabilities Firms allocate resources differently even if they have the same resources. So, the key factor contributing to differential firm performance is capabilities. Capabilities take time to develop. Where do capabilities come from? And how are capabilities developed? Capabilities come from:  Human capital: knowledge comes from founder team, employee and employee mobility. Capabilities developed through:  Intra-organizational learning; learning by doing  Learning from other firms and organizations; imitation Social capital: web of relationships, which allow actors to achieve desired outcome. Social capital comes from repeated interaction, which leads to mutual understanding. Mutual understand will hopefully lead to trust. Because you have trust, you will be willing to share information or resources; joint problem solving. Relational social capital: strength of ties matters. Strong ties will be more willing to transfer tacit knowledge in comparison to weak ties. Structural social capital: 1. Position: in the centre, you have more information access in comparison to if you were an outlier. It is important not to make friends with everyone to gain on the information, but to make friends with the important people (centre of the structure) Structural hole has the most access to all the information, and the structural hold can also become the broker, and gains a benefit for information control. 2. Network Structure: a network can either be closed vs. open. a. A benefit of the closed network is that information travels very fast, and the members share a common standing, which increases ease of governance. If you were a manager you just need to talk to one person and you will know all the information in the network. b. Open network benefits you because you will get access to different information in comparison to the same information travelling around a closed network. Human Capital and Social Capital will only lead to performance if you have the right organization.  Organization Structure  Policy  Culture  Incentive Chapter 3 Value Chain Value Chain is the building blocks of competitive advantage. Competitive Advantage derives from the value a firm can create  value is the amount buyers are willing to pay. Primary Activities: 1. Inbound Logistics: associated with receiving, storing and distributing inputs to the product. 2. Operations: concern all the activities associated with transforming inputs into the final product form. 3. Outbound logistics: associated with collecting, storing and distributing the produce or service to buyers. 4. Marketing and sales: includes the efforts a firm engages in to gather market intelligence and understand its customers, the activities associated with purchases by end users and the inducements used to get them to make purchases. 5. Service: the range of activities associated with enhancing or maintaining the value of the product e.g. installation, support, repair etc. Support Activities: provide for and facilitate primary activities 1. Procurement: purchasing inputs 2. Technology Development: Improves operations within the firms and supports the entire value chain. E.g. prepare documents, transport goods 3. Human Resource Management: consists of activities involved in the recruiting, hiring, training, development and compensation of all types of personnel. 4. General Administration: management, planning, finance, accounting etc. A firm needs resources to carry out activities of its value chain. The resources a firm has and its ability to use them allows a firm to gain a competitive advantage. Resource Based View of the Firm Look at session summary. RBV explicitly directs managers to integrate the internal and external perspectives and helps them develop strategies that build on core competencies and enable the firm to achieve sustainable competitive advantages. Firms resources and a sustainable competitive advantage For a resource or a capability to provide a firm with the potential for a sustainable competitive advantage, it must meet four criteria 1. Is the resource valuable?  Contribute to the fulfillment of customer’s needs 2. Is the resource rare?  In relation to its competitors 3. Can the resource be imitated easily? a. Physical uniqueness (difficult to copy) b. Path depende
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