55 CHAPTER OUTLINE CASE 1: Pizza Hut CASE 2: General Motors Corporation Introduction The Value Chain Primary Activities Support Activities Pizza Industry Value Chain Primary Activities Support Activities Automobile Industry Value Chain Primary Activities Support Activities The Value Chain as Part of a Business System Pizza Hut General Motors Capability Drivers First-Mover Status Scale of Operation Experience Interrelationships Assessing Competitive Advantage First-Mover Advantages Scale and Experience Advantages The Growth of the Internet and Competitive Advantage Diagnosing Pizza Hut’s Capabilities First-Mover Advantages Scale Advantages Experience Benefits Interrelationships Achilles’ Heel of Established Firms Assessing the Financial Position of Competitors Firm Capabilities: Assessing Strengths and Weaknesses Ethical Issues Examining Competitors’ Products Questioning Competitors’ Employees Using Consultants Engaging in Industrial Espionage “Pirating” Employees Conclusion Summary Exercises and Discussion Questions WHAT YOU WILL LEARN • The strategic tool known as the value chain • The use of the value chain in evaluating an organization’s internal strengths and weaknesses • The differences between primary and supporting value-adding activities • The concept of competitive advantage • The concept of distinctive competence • Some important economic sources of competitive advantage 56 PART 1 Building Competitive Advantage Pizza Hut, a division of Tricon Global Restaurants, is the largest seller of pizza in the world. As such, it enjoys unique advantages not available to smaller rivals. These advantages have contributed significantly to its success in recent years, enabling it to outperform the industry by a considerable mar- gin in both revenue and growth. Among the most important advantages Pizza Hut enjoys as a result of its leadership posi- tion are the following: • Location: As the first competitor to establish a facility in many high-traffic areas, it has been able to preempt some of the most desirable restaurant locations. • Reputation: It is better known by consumers than are rivals. This distinction provides it an important marketing edge. • Advertising clout: Because it can spread TV advertising costs over so many units, it can afford to advertise on nationwide TV; most rivals, having fewer units, are effectively barred from this important advertising medium. • Purchase discounts: Its large-scale purchase of advertising time and food ingredients enables it to enjoy quantity discounts not available to smaller competitors. • Interrelationships: Its interrelationships with other units of Tricon Global Restaurants, including Kentucky Fried Chicken (KFC) and Taco Bell, enable Pizza Hut to gain significant negotiation leverage with advertising firms to conduct jointly sponsored marketing campaigns. In addition, all three restaurant chains were once part of PepsiCo, the nation’s second largest provider of beverages and the leader in snack foods through Frito-Lay. Even though all three restaurants are now formally separated from PepsiCo, they still closely work with Pepsi to secure lower cost beverages and other supplies from their former parent. These advantages are not available to smaller rivals operating as single business firms. Even with these many strengths, Pizza Hut has suffered its share of setbacks in the past. Perhaps the most serious resulted from its refusal for many years to supply the growing demand for home delivery of cooked pizza. This policy left the home delivery niche open to competitors. Pizza Hut has since changed its stance and is now making a concerted effort to build market share in this area by opening up a series of pizza prepa- ration facilities that are solely dedicated to home delivery. How- ever, it faces a series of formidable competitors—Domino’s Pizza, Pizza Inn, Little Caesar’s—all of whom have made seri- ous inroads into this market. (Case 1) Pizza Hut 1 Despite its status as the world’s largest auto manufacturer, General Motors has performed poorly in recent years, suffer- ing a steady decline in market share (from 50 percent in 1979 to 35 percent in 1997), closing many factories, enduring numerous strikes at its auto and parts plants, and laying off thousands of workers. Why has GM performed so poorly over the past two decades? The most likely factors are several weak- nesses that continue to plague General Motors, despite numer- ous attempts to revitalize and improve its operations. High Wage Costs Even with steep appreciation in the value of the Japanese yen during the 1990s, GM’s wage costs per hour still remained higher than those of its Japanese competitors until very recently. This differential was particularly wide during the 1970s when Japanese companies first began their assault on the U.S. market. The wage gap resulted in part from the historically lower wages paid to Japanese workers. However, GM’s rela- tively high wage costs resulted mainly from its failure to improve productivity and to accurately assess the growing strengths of its foreign competitors. When compared with Ford and Chrysler as recently as 1998, GM’s employee productivity per car was still anywhere from 40 percent to 60 percent lower. The comparatively low productivity of GM resulted from the company’s inability to adjust to massive changes in the auto- mobile industry environment over the past two decades. During the 1970s, GM, along with Ford and Chrysler, oper- ated in a relatively predictable environment that was insulated from significant foreign competition. Within this safe cocoon, U.S. firms were able to charge high prices and enjoy handsome profits. Workers soon demanded a share in this prosperity in the form of higher wages and benefits. Because foreign competition (Case 2) General Motors Corporation 2 CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses 57 appeared limited and current productivity levels appeared satis- factory, GM management allowed personnel costs to rise to high levels. The net result was wage costs much higher than those of Japanese auto makers, putting GM at a serious disadvantage just at the time when it most needed competitive strength to ward off growing amounts of foreign competition. However, Chrysler and Ford were pushed much closer to the brink of bankruptcy during several downturns in the 1980s and 1990s than GM; some ana- lysts have noted that this “taste of death” has forced important changes in the way that both Chrysler and Ford design and build their cars for a more demanding market. GM, on the other hand, was still large enough to avoid almost complete collapse. Disgruntled Work Force Despite high wages, GM workers have remained generally unsatisfied in recent years. Employees at GM felt alienated from management, resulting in high absenteeism, shoddy work, union rules limiting the tasks workers can perform, and general hostility towards management. These factors have led GM workers to be less diligent and less enthusiastic about seeking improvements in production methods than their counterparts in other firms. As a result, GM’s productivity dropped signifi- cantly below that of competitors. Lack of Focus in Manufacturing GM makes more (and buys less) of the components it uses to assemble cars than its rivals. GM must therefore spend more on factories, plants, and equipment than its competitors to build these components. General Motors’ internal parts-making unit, known as Delphi Automotive Systems, produces a whole range of different components and parts, ranging from automotive electronics to powertrains and engines. However, Delphi faces many of the same labor-related and productivity problems that plague GM’s automotive assembly operations. While a high degree of self-contained manufacturing can sometimes be an advantage, it turned out to be a weakness for GM. High wages and worker alienation also plague GM’s component facilities, so the components they supply are often more expensive, less well designed, and less conveniently delivered than similar items available from outside suppliers. Oftentimes, outside sup- pliers can make components at far less cost and better quality than GM can. Bureaucratic Delays Because of its large size, GM experiences greater difficulty making and implementing decisions than its smaller competi- tors, often slowing its adaptation to changes in the industry environment. For example, it lagged behind Japanese rivals in seizing new opportunities for engine computerization and fuel efficient automobiles. Even routine changes such as new model introduction pose difficulties for GM. Its introduction of the Cadillac Seville in the early 1990s, for example, was delayed for almost a year because of difficulties with the design, paint system, and quality control. INTRODUCTION To identify opportunities and to neutralize threats in the external environment, managers must thoroughly evaluate their firm’s potential capabilities to compete. A significant part of successful strategy formulation depends on a careful assessment of the firm’s strengths and weaknesses. This requires each firm to conduct an internal analysis to determine those activities it can perform better than its competitors. Finding those activities or resources that allow the firm to perform in ways that other competitors cannot do as well is one key to developing effective strategies. Even though numerous rivals may compete in the same industry environment, some firms are likely to perform some activities better than others. Thus, each firm has its own particular set of strengths and weaknesses that influences how it competes. This chapter examines the concept of firm capabilities and internal analysis of strengths and weaknesses. Developing effective strategies requires managers to under- stand how each firm’s strengths and weaknesses may differ from those of competitors. These differences lay the foundation on which each firm bases its own strategy in the competitive environment. We begin by examining the concept of the value chain. The value chain is an analytical tool that helps firms understand how their primary and sup- porting activities can be used to create value. It is the starting point for helping firms identify their strengths and weaknesses. We will then apply the value chain analysis tool to examine the types of activities that occur in two different industries: pizzas and 58 PART 1 Building Competitive Advantage automobiles. In a later section, we discuss other issues related to developing firm capa- bilities outside of the value chain, such as financial analysis and internal organization. THE VALUE CHAIN To understand how a firm builds its capabilities to compete, one must identify the specific types of activities that make up the firm’s competitive posture. Every firm engages in numerous activities that, in sum, determine its competitiveness in serving customers in the marketplace. These activities create economic value. A useful analytical tool for portray- ing and analyzing these activities is the value chain shown in Exhibit 3-1. 3 The value chain describes all of the activities that make up the economic performance and capabilities of the firm. It portrays activities required to create value for customers of a given product or service. As such, the value chain is an excellent means by which managers can determine the strengths and weaknesses of each activity vis-a-vis the firm’s competitors. The value chain classifies each firm’s activities into two broad categories: primary activities and support activities. Primary activities relate directly to the actual creation, development, manufacture, distribution, sale, and servicing of the product or service offered to the firm’s customer. These activities represent the key tasks a firm performs to produce and deliver a product or service to a customer. Support activities refer to those tasks that contribute to or assist the firm’s primary activities. In other words, support activ- exhibit(3-1) The Value Chain S U P P O R T A C T I V I T I E S Infrastructure Human Resource Management Technology Development Procurement PRIMARY ACTIVITIES Inbound Logistics Operations Outbound Logistics Marketing/ Sales Service value chain: an analytical tool that describes all activities that make up the economic performance and capabilities of the firm; used to analyze and examine activities that create value for a given firm. primary activities: economic activities that relate directly to the actual creation, manufacture, distribution, and sale of a product or service to the firm’s customer (see support activities). support activities: economic activities that assist the firm’s primary activities (see primary activities). Reprinted/Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc. from COMPETITIVE ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E. Porter. Copyright © 1985 by Michael E. Porter. CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses 59 ities work to enhance or to help the functioning of primary value-adding activities. The combination of both primary and support activities determines the firm’s basis for adding value. By breaking up the firm’s value chain into discrete, isolated centers of activity, man- agers can assess whether they are performing each activity in ways that are better than that of their competitors (for example, lower cost, better quality, faster delivery). In other words, it is not enough to say that one firm is better than another in some overall way; the value chain allows managers to compare their firm’s specific activities with the same activ- ities performed by competitors. Thus, comparing a firm’s chain with that of competitors can provide valuable insight on each firm’s individual strengths and weaknesses. Activities in the value chain can be characterized as being upstream or downstream. Upstream activities occur far away from the consumer, closer to the firm’s suppliers. In other words, upstream activities are performed in the early stages of the value-adding process. Downstream activities occur closer to the firm’s buyers. Downstream activities add value to those inputs that were processed through earlier upstream value-adding activities. Primary Activities The sequence of activities through which raw materials are transformed into benefits enjoyed by customers are called primary activities. These activities are shown along the bottom row of Exhibit 3-1. Five major activities make up this sequence: inbound logistics, operations, outbound logistics, marketing/sales, and service. Working together, these five activities determine the key operational tasks surrounding the product or service. • Inbound logistics: In most industries, the transformation process begins with conveyance or delivery of raw materials to a firm’s manufacturing (or service) facilities. • Operations: Inputs are transformed into products. • Outbound logistics: Products are shipped to distributors or to final users. • Marketing/sales: Users are informed about products and encouraged to buy them. • Service: Once in the customers’ hands, products are installed, repaired, and maintained. Let us now examine more closely the specific tasks and operational procedures that make up these five primary activities. Inbound Logistics. As the words imply, inbound logistics deal with the handling of materials and inventory received from the firm’s suppliers. The typical operational proce- dures and tasks surrounding inbound logistics include warehousing, storage, and control of raw materials or managing component flows from different suppliers. Inbound logistics are considered a primary activity because they represent the beginning of the firm’s value- adding conversion of inputs. Inbound logistics represent a major source of direct costs to the firm; thus, new techniques and improvements in inventory control, storage, and mate- rials handling can dramatically improve a firm’s cost position in this activity. Differences in storage and inventory costs relative to one’s competitors can add up to a significant com- petitive strength or weakness. In many firms, inbound logistics require significant capital investment. The location and management of warehouses, and the inventory held in them are important areas in which to focus cost control and efficiency. Many manufacturers around the world have taken numerous steps in recent years to improve the efficiency and reduce costs involved with inbound logistics activities. At General Electric, for example, the huge dishwasher and refrigerator plant at Louisville, Kentucky, uses highly automated bar-coding, sorting, upstream activities: economic activities that occur close to the firm’s suppliers but far away from the consumer. Examples include inbound logistics, procurement, manufacturing, and operations (see also downstream activities). downstream activities: economic activities that occur close to the customer but far away from the firm’s suppliers. Examples include outbound logistics, distribution, marketing, sales, and service (see also upstream activities). 60 PART 1 Building Competitive Advantage and inventory checking systems that enable GE to move components and parts quickly from the railhead to its factory. Parts and components do not sit idle in warehouses for long. Fast movement of components and inventory greatly reduces the operating costs for the entire Major Home Appliance Group business. Improvements in inbound logistics activities are not confined to manufacturing firms. For example, both United Parcel Service (UPS) and Federal Express (now FedEx) have built strong competitive positions by using techniques that promote super-efficient, time- responsive sorting of packages and overnight mail. Both firms expect their business to grow with the rise of on-line through the Internet and e-commerce. Banks and financial service firms depend on extremely automated, real-time, and efficient inbound logistics to manage, coordinate, and track the flow of payments and funds that enter their systems for different purposes such as credit card payments, investments, and cash management. Operations. Operations are the activities and procedures that transform raw materials, components, and other inputs into finished end products. In other words, operations con- cerns itself with the generation, manufacture, and/or production of products and services. Specific task activities in the operations realm include stamping, machining, testing, fab- rication, and assembly. In a broader sense, any type of processing activity that results in a product or service is the heart of the firm’s operations. Operations also represents the dom- inant upstream activity in many firms. Success in managing and improving upstream oper- ations over time represents a critical source of leverage in building or reinforcing a firm’s ability to compete in a sustained manner. Differences between firms conducting similar types of operations may result from relative age of equipment, type of technology used, size of plant, economies of scale, productivity levels and gains, wage rates, and possible improvements resulting from longer experience. In many ways, how a firm manages its production/transformation operations will strongly influence the entire firm’s competitive posture. For example, in the chemical, oil refining, and paper industries, the dominant production mode is that of continuous flow processes. Continuous flow processes are characterized by rigid and dedicated production systems geared to the standardized production of a single or limited range of products. These capital-intensive processes are costly to operate and hard to switch between prod- ucts; they represent very large fixed costs for the firm. Any disruption of a continuous flow process generates enormous down-time costs for the firm. As a result, firms in industries whose dominant production mode is that of continuous flow processes are likely to develop strategies that recognize the nature of the production process’s high fixed costs, rigidity, and lack of flexibility in switching to alternative products. The considerable focus and effort that firms have placed on implementing total qual- ity improvement (TQM) in manufacturing and service spawned new technologies and practices that allow firms to improve the efficiency and quality of their operations-based activities. Consider, for example, the illustration of Nucor in the steel industry. Unlike integrated steel mills such as Bethlehem Steel, USX, and National, Nucor built up a sig- nificant competitive position in the steel industry by focusing on mini-mills. These mills are super-efficient and can produce a ton of steel of significantly better quality for less cost than older integrated mills. Investment in highly responsive and efficient mini-mills has enabled Nucor to sustain its profitability for many years, even when the industry moved into downturns and recessions. The focus on improving operations has certainly not been limited to the heavy manufacturing sector. Motorola, a leading manufacturer of semiconductors, electronic components, and cellular telephones, has made enormous strides by simultaneously improving the responsiveness, cost efficiency, and quality of its manufacturing process. Motorola views sustained investment and improvement in CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses 61 advanced manufacturing technologies as central to its ability to compete. This highly admired U.S. firm has built up substantial manufacturing capabilities that allow the firm to produce winning new products every year against Japanese competitors in the semi- conductor, communications equipment, and electronics business. Outbound Logistics. Outbound logistics refer to the transfer of finished end product to the distribution channels. The focus in outbound logistics is on managing the flow and dis- tribution of products to the firm’s immediate buyers, such as wholesalers and retailers. Activities and procedures associated with outbound logistics include inventory control, warehousing, storage, and transport of finished products. As is the case with inbound logis- tics and operations, improvements in efficiency and responsiveness of outbound logistics can greatly aid the firm’s competitive posture. Firms can build competitive strengths based on their ability to lower the costs of outbound distribution and to enhance responsiveness. Procter and Gamble over the past several years has made major efforts to improve the efficiency and turnaround of its outbound logistics activities. By linking up more closely with key wholesalers and retailers (Wal-Mart Stores, for example), P&G has accelerated the timely delivery of goods that retailers have trouble stocking. By making extensive use of bar-coding technology, P&G and its key buyers balance the flow of inventory and goods between P&G’s warehouses and the retailers’ store shelves. This responsive distribution system becomes an overwhelming competitive strength for P&G and helps the company track which products are in particularly high demand. Conversely, a close understanding of how its products are distributed gives P&G a better understanding of how to work with its buyers to improve everyone’s margin over time. Marketing and Sales. Marketing and sales activities include advertising, promotion, product mix, pricing, specific distribution channels, working with wholesalers, and sales force issues. Marketing is vital in helping the firm determine the competitive scope of its value-adding activities. For example, some firms may decide to concentrate their efforts on a specific market segment or niche, while other firms may want to pursue a more broad- line product strategy. Thus, marketing becomes a vehicle by which the firm can develop specific competitive postures and strategies to serve a variety of segments or niches within the industry. Marketing activities deal extensively with pricing issues as well. The price of a firm’s product can be an important signal or indicator of the firm’s value-creating capa- bilities; a product’s price becomes a surrogate measure of what value the firm is deliver- ing to the market. Marketing activities also represent a central part of the firm’s down- stream value-adding activities; planning in these activities is oriented toward meeting the needs of immediate buyers and the final consumer. Clearly, numerous companies have built extensive competitive positions and strengths based on their superior approaches to managing marketing activities. Companies such as Coca-Cola, McDonald’s, Burger King, PepsiCo, American Home Products, Bristol- Myers Squibb, Schering-Plough, and American Express come to mind as leading corpo- rate examples of firms that have built effective competitive strengths based on excellence in marketing activities. Service. Customer service is a central value-adding activity that a firm can seek to improve over time. During the 1990s, an increasing number of companies are redefining the way they manage their customer service activities. Value is more often defined in the eyes of the customer rather than by what the firm thinks it has created. Thus, customer service has become a vital means to compete in any industry environment. Customer service includes such activities and procedures as warranty, repair, installation, customer support, 62 PART 1 Building Competitive Advantage product adjustment and modification, and immediate response to customer needs. Customer service is so important as a competitive weapon because it enables a firm to create value immediately before the customer’s eyes. How well the firm conducts these tasks will strongly impact the customer’s preference for buying from the firm again in the future. Both FedEx and UPS thrive in the overnight delivery business because of their superior approaches to customer service. Conversely, the U.S. Postal Service, which offers a similar overnight delivery service, has comparatively fewer customers in this segment than both FedEx and UPS, despite the enormous size and reach of the postal system. Lingering con- cerns (albeit declining) over the Postal Service’s reputation for service quality have limited its ability to seize a big portion of this profitable market. Companies in every industry ranging from telecommunications to hotels, industrial equipment to aerospace, are rethinking and reinventing the ways they perform customer service activities. For example, many current reengineering efforts are devoted to improving how firms meet their customers’ needs. Reengineering means redefining the way firms organize their operations to improve responsiveness to customer needs. For example, at GTE, customers can now call one number and get all of the information they need about their account from one customer service representative. In the past, cus- tomers had to dial separate numbers for different requests, such as telephone installation, equipment repair, leasing, purchase, and account adjustments. Now, one phone call to GTE enables a customer to have all of his/her questions and concerns addressed by a customer service representative who can provide assistance and service on almost any aspect of telecommunications that GTE provides. Other telecommunications companies, such as SBC Communications, AT&T, Sprint, MCI Worldcom, and U.S. West, are mov- ing in the same direction to improve the speed, accuracy, and delivery of their customer service operations. Perhaps the most important source of technological change that has transformed the very notion of fast and responsive customer service is the Internet. Barnes & Noble, L. L. Bean, Xerox, IBM, General Electric, Dell Computer, Fidelity Investments, Charles Schwab, and Wells Fargo are among the firms that have begun to lead the way in using the Internet as a competitive weapon to dramatically improve their customer service operations. By creating sophisticated home pages on the World Wide Web, many com- panies are encouraging their current and potential customers to use the Internet as a means to gather information, select their desired products, and order products through on-line, instantaneous transactions. In the financial services industry, for example, many securities brokerage operations (e.g., Fidelity, Schwab, Merrill Lynch, Morgan Stanley Dean Witter) are building state-of-the-art, secure Internet sites that enable customers to set up accounts, transfer funds, and invest in stocks and other investment vehicles from their computer screens. In fact, entirely new companies with names such as Ameritrade and E * Trade have become thriving, vibrant competitors to existing financial service firms by offering customers low-cost commissions and transactions fees through the Internet to trade stocks. In the most advanced form of Internet-driven customer service, companies such as IBM, Intel, Dell, General Electric, and Amazon.com link up their customers’ orders directly to their distribution facilities for immediate transaction processing. These compa- nies are using the Internet to link up directly and transfer a customer’s order to their dis- tribution centers, factories, and even suppliers for immediate processing, billing, and deliv- ery. Dell Computer, for example, can receive and process a customer’s order for a highly customized personal computer over the Internet and have it shipped and delivered in less than four days. Amazon.com, a company that did not exist as recently as 1996, has become a major retailer of books, compact discs (CDs), videos, toys, and other items through the reengineering: the complete rethinking, reinventing, and redesign of how a business or set of activities operates. CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses 63 Internet. By allowing customers to order any book or music CD in print, Amazon.com offers customers a fast, secure, and easy way to purchase these items (often at prices lower than those of existing “brick-and-mortar” competitors) without leaving the comforts of their home. The Internet is becoming a powerful tool that companies and organizations in every industry are using to make themselves more responsive to the needs of their cus- tomers. The Internet has become an important economic driver of distribution, marketing, and service for all types of firms, even those in less technologically intensive industries. For example, grocery store chains are beginning to harness the power of the Internet to enable customers to order food and other items for fast delivery. Some analysts are pre- dicting that by the middle of the next decade, on-line transactions on the Internet may become anywhere from 25 to 33 percent of total revenues. Support Activities The remaining activities of the value chain are undertaken to support primary activities. They are therefore referred to as support activities. Support activities help the firm improve coordination across and achieve efficiency within the firm’s primary value-adding activities. Support activities are located across the first four rows in Exhibit 3-1 and include procurement, technology development, human resource management, and firm- level infrastructure. • Procurement: Inputs are secured for primary activities. • Technology development: Methods of performing primary activities are improved. • Human resource management: Employees who will carry out primary activities are recruited, trained, motivated, and supervised. • Infrastructure: Activities such as accounting, finance, legal affairs, and regulatory compliance are carried out to provide ancillary support for primary activities. Since each primary activity generally requires assistance in each of these four areas, the value chain includes four cells above each primary activity, one for each category of sup- port activity. Let us examine how each of these four support activities contributes to build- ing the capabilities of the firm. Procurement. Procurement refers to purchasing the necessary inputs, resources, or com- ponents for the firm’s primary value-adding activity. The purchasing function involves spe- cific procedures such as billing systems, methods for dealing with suppliers and vendors, and information systems about different components and parts. Even though it is a support activity, the purchasing function can significantly enhance the firm’s cost position relative to its competitors. Improved procurement practices enable the firm to gain significant economies of scale and higher bargaining power over suppliers if the firm coordinates its procurement across different functions and even businesses. Technology Development. Technology is found in every value-adding activity within the firm. Given the rapid technological changes that are present in almost every indus- try (e.g., new forms of communications, software, Internet), this support activity has assumed enormous importance in every firm. Technology in firms today transcends the conventional wisdom that it is primarily focused on research and development (R&D). Although most firms still have engineering and R&D staffs devoted to exploring and using new sources of technology, in practice, technology is developed and used in count- less ways throughout the firm. It can be the software found in computers, the standard operating procedures used to manage a factory, the human know-how employed in support activities: economic activities that assist the firm's primary activities (see primary activities). 64 PART 1 Building Competitive Advantage developing, manufacturing, and selling products, the layout of the factory, the sophisti- cated nature of the firm’s Internet capabilities, and the laboratory equipment involved in the firm’s value-adding activities. Technology is pervasive in both upstream and down- stream activities of the firm. Technology is concerned with both product development and process development. Product development refers to the conception, design, and commercialization of new products. For example, the design of new aircraft, more sophisticated microchips, better- tasting potato chips, and faster-heating, microwave-oriented convenience foods all repre- sent different types of product development. Even though the end products are completely different, they all come from the firm’s ability to conceive and design new product ideas. Process development, on the other hand, refers to the development and use of new pro- cedures, practices, or equipment to improve the value-adding activity itself. For example, the development of new assembly and packaging techniques, the use of new factory lay- outs to reduce work-in-process (WIP), the creation of a new medium to deliver advertis- ing, and the improvement of inventory tracking systems represent different ways to con- duct process development. The aim of process development is to adapt new techniques or to improve existing methods of conducting value-adding activities. Many companies have refocused efforts on technology development to improve their value-adding activities. For example, Allen-Bradley (a unit of Rockwell International), a leading U.S. producer of motor controls, has developed new techniques to use factory automation that have dramatically reduced the unit costs of new motor components. Frito- Lay is currently investigating the potential of developing a new microwave-oriented potato chip. These chips could be heated in the customer’s home microwave oven to provide a fresher taste that is different from conventionally bagged potato chips. General Electric has invested large sums to introduce new forms of flexible automation and materials handling that lower the production costs and improve the quality of its dishwashers and refrigera- tors. These firms are investing steadily in technology—product and process—to find new sources of competitive strength. Human Resource Management. Human resource management refers to working with people throughout the firm. These activities focus on recruiting, hiring, compensating, and training people to perform their jobs within the firm. As with technology development, human resource development receives considerable attention from top management because of its strategic role in helping the firm learn and build new types of competitive skills. Human resource management activities thus affect every aspect of the firm’s value-adding activities. When conducted properly, human resource management enables the firm to cultivate the skills necessary for competitive success. Although managers typically tend to think of investments in terms of capital budgets and physical, durable assets, continuous investment in the firm’s people represents a more enduring way to build the firm’s capabilities. Man- agers and employees are the most flexible and capable assets firms have. By providing the right levels of training, firms can assign people to perform different tasks, thus enhancing job satisfaction, efficiency, and quality. However, assessing the direct costs of investing in human resource activities is often difficult, since factors such as employee turnover and morale are hard to measure. Successful human resource management is often a key factor in determining a firm’s com- petitive strengths. As a result, hotels and restaurants need to ensure that their employees are well trained and know the correct procedures for treating guests. Direct customer service activities, in particular, require extensive training. Professional service firms, such as account- ing, architecture, management consulting, and legal firms, depend heavily upon the human resource function to recruit, select, and hire the right people that make up the workforce. 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 value-adding activities. [...]... strategies • The activities of all firms in an industry can be studied through an analytical tool known as the value chain A value chain identifies and isolates the various economic, value-adding activities that occur in some way in every firm CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses • The value chain can highlight the strengths and weaknesses of firms competing in • • • the industry... opportunities and threats appearing in the firm s external environment must therefore also be first identified How to go about making this identification and how to match a firm s strengths and weaknesses to opportunities and threats presented to it are topics explored in depth in subsequent chapters SUMMARY • Firms need to undertake a thorough analysis of their own internal strengths and weaknesses to... them to another firm CONCLUSION The concepts and tools described in this chapter are useful for identifying a firm s strengths and weaknesses relative to competitors Such information is not the only input needed to formulate strategy, however As noted in Chapter 1, strategy formulation involves finding an appropriate fit between strengths and weaknesses on the one hand and opportunities and threats on...65 Firm Capabilities: Assessing Strengths and Weaknesses CHAPTER 3 Firm Infrastructure Infrastructure include such activities as finance, accounting, legal affairs, information systems, and payroll These activities assist all of a firm s value-adding functions, so it is difficult to put an accurate dollar figure on their worth to the firm Since infrastructure costs are... service In particular, Dell and Cisco Systems are using their Web sites as a way to collect data about their customers’ information needs and purchases, thereby tracking what their future needs are likely to be for computer equipment and technical services These on-line systems not only help Dell and Cisco reduce their cost 81 Firm Capabilities: Assessing Strengths and Weaknesses CHAPTER 3 of operations,... in more detail in later chapters on sustaining and redefining advantage ASSESSING THE FINANCIAL POSITION OF COMPETITORS The strategic tools and concepts presented in this chapter can only go so far in assessing a firm s strengths and weaknesses relative to competitors’ A more thorough assessment of the firm s capabilities also requires analysis of the firm s financial position 83 84 PART 1 e x h i... enjoys several benefits from interrelationships with other Tricon businesses, such as KFC and Taco Bell It can pool certain procurement activities—obtaining silverware, CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses restaurant furnishings, ovens, and other materials—with those of other Tricon businesses and achieve purchase discounts It can draw on marketing expertise from PepsiCo’s beverage... 1997, pp 1510–1519; C Nehrt, “Timing and Intensity of Environmental Investments,” Strategic Management Journal, vol 17, no 7, 1996, pp 535–547 CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses 6 See, for example, Buzacott, Cantley, Glagolev, and Tomlinson (eds.), Scale in Production Systems (New York: Pergamon Press, 1982) An excellent examination of scale and related effects in promoting... ADVANTAGE: Creating and Sustaining Superior Performance, by Michael E Porter Copyright © 1985 by Michael E Porter 69 Firm Capabilities: Assessing Strengths and Weaknesses CHAPTER 3 performs no outbound logistics at all since customers come to its facilities to be served However, Pizza Hut is extensively involved in operations (food preparation), marketing/sales (mainly advertising), and service (serving... available to firms arriving later These benefits are referred to as first-mover advantages.5 Common benefits in 71 Firm Capabilities: Assessing Strengths and Weaknesses CHAPTER 3 Common First-Mover Advantages • Patents • License • Location • Channel access • Supply access • Reputation this category are patent protection, a government license, superior location, channel access, supply access, and reputation . the concept of firm capabilities and internal analysis of strengths and weaknesses. Developing effective strategies requires managers to under- stand how each firm s strengths and weaknesses may. the design and use of new procedures, technologies, techniques, and other steps to improve value-adding activities. CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses 65 Firm Infrastructure previously. CHAPTER 3 Firm Capabilities: Assessing Strengths and Weaknesses 67 Procurement. Trucks and warehouse space must be procured to perform inbound and out- bound logistics; machinery, raw materials, and