6 Internal Capability Analysis

7/12/23, 6:00 AM CGMA LMS Tailor Preview
SKILL SET
Apply tools to collect and interpret data to analyse the
internal environment and the value chain
TOPIC
Internal Capability Analysis
Course learning objective

After completing this topic, you should be able discuss and apply the frameworks for establishing
an organisation’s core competencies, source of potential competitive advantage, and strengths
and weaknesses.
Introduction
When analysing an organisation’s internal strengths and weaknesses, it is useful to perform a
resource audit to determine the resources available and the strength of that resource base when
beginning the process of identifying competencies. The main technique reviewed in this topic is
known as the 9Ms framework.
Other models, such as Porter’s Value Chain and portfolio analysis, can also be used to assess an
organisation’s strengths and weaknesses and the development of competencies for competitive
advantage.
Internal analysis and the strategy process

The internal analysis, together with the external environmental analysis, is a part of the strategic
analysis step of the strategy process. The internal analysis identifies strengths and weaknesses,
and the environmental analysis identifies opportunities and threats. This is usually formulated in
the form of a strengths, weaknesses, opportunities, and threats statement, commonly referred to
as SWOT analysis. This analysis then enables organisations to develop the strategy by building
on the strengths, addressing the weaknesses, grasping the opportunities, and avoiding or
minimising the threats in ways that are consistent with the mission and objectives.
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Resources, capabilities, and competencies

Resources, capabilities, and competencies in an organisation contribute to its long-term growth
and are key to sustaining a competitive advantage.
Generally, there are many types of resources that a company can draw upon. Tangible resources
of a company include physical and financial assets; intangible resources are non-physical and
often less obvious.
● Tangible resources – The physical assets of an organisation, such as plant, labour,

and finance
● Intangible resources – Non-physical assets, such as information, reputation, and
knowledge
In a competitive perspective, the resources also can be categorised as either being basic or
unique. Basic resources include those that any competitor already has or can easily obtain. On
the other hand, unique resources will be different from what competitors have or those that will
be hard to attain. Obviously, the more unique resources a company holds, the stronger the
competitive position would be.
It is important to remember that there is a lot more to achieving strategic goals than just having
the resources available. How organisations use their resources creates their capabilities (for
example, exploiting the resources using their competencies, systems and processes). Developing
capabilities is vital if an organisation is to:
● gain competitive advantage,

● survive and prosper in constantly changing markets, and
● consistently deliver value to customers.
All companies operate within the same external environment and markets, so the only
distinctions between them are the assets and resources they hold internally and what they do
with them using the organisational competencies. This is what differentiates between companies
that excel and those that flounder within the same environment.
The resource audit, as the name would suggest, identifies the resources available to an
organisation through internal analysis. It considers key features of the resources, such as the
nature, quantity, and quality so that management can determine if any additional resources are
needed to follow their chosen strategy.
It also serves as a tool to identify the strengths and weaknesses of a company. An abundance of
one resource might be a strength, whereas a lack of a resource might be a weakness.
Competencies
Following the identification of resources and possible limiting factors, the organisation needs to
look at the ability to use the resources—the competencies. In an internal analysis, competencies
can be classified as core or threshold competencies.
Core or distinctive competencies
● Core or distinctive competencies are those things that a company does better than
competitors. Distinctive competencies are required to achieve a competitive
advantage. The crucial part is that these competencies need to be difficult to
imitate if they are to remain a competitive advantage.
Threshold competencies
● Threshold competencies are those things that are simply needed to meet the
minimum customer requirements to compete in an industry or market. They are
required for an organisation to continue to exist.

● Threshold competencies don’t create any competitive advantage. Any organisation
would fail if the skills associated with threshold competencies were not either in-
house or accessible through outsourcing.
Over time, it’s common for what were originally distinctive competencies to become threshold
competencies (especially in an age of fast-developing technology) as expectations develop and
become more sophisticated, and competitors begin to imitate distinctive competencies.
Watch this Harvard Business Review video on core competence.
Knowledge check
Group items by dragging them into their corresponding boxes.
Question
You work for a company that supplies a range of products to help with caring for elderly
people in their own homes. Drag and drop the following competencies to the appropriate
threshold competencies or Core/distinctive competencies.
Solution
Ability to attract employees with a flair for thinking of innovative solutions to problems
Ability to supply products within a short time frame Ability to finance ongoing operations
Ability to tailor products specifically to individual customer requirements
Ability to attract new employees as business grows
Ability to meet growing demand for product
Core/distinctive
Threshold competencies
competencies
Submit
Knowledge check feedback
Remember that a core/distinctive competency can be developed for competitive advantage and
can act as a differentiator from other organisations in the same sector. The elements of tailoring
individual customer requirements, attracting employees with a flair for innovative solutions, and
supplying products within a short time frame can all be used as a source of competitive
advantage.
All organisations in the sector would need to be able to finance operations, meet growing
demand, and attract new employees to survive in the sector.
Competencies and critical success factors
A further development to competencies is the subject of critical success factors (CSFs). These
can be applied through several areas of your strategic level studies but the clear link with this
topic is the connection of CSFs and core competencies.
A CSF is an element of organisational activity which is central to its future success.

CSFs may change over time, and may include items such as product quality,
employee attitudes, manufacturing flexibility and brand awareness.
In simple terms, they are factors which are especially valued by customers or provide a
significant advantage, such as a cost advantage. They are, therefore, an important source of
competitive advantage. It makes sense to know what our CSFs are when carrying out an internal
analysis or resource audit by knowing what we must be good at to outperform our competitors.
Only a small number of key operational goals that are vital to our success should be identified.
Otherwise, the danger is that everyone chases their tails trying to measure performance of CSFs
instead of getting their jobs done!
The CSFs should also tie into corporate objectives.
Let’s review an example. RPS is a company that produces ballet and opera performances. It has
as its mission statement, ‘To be the best ballet and opera performance company in the world’.
In order to identify the CSFs, we need to identify the objectives that will help us achieve the
mission.
Objectives might include:
● to achieve audience growth of 10% per year during the next five years;
● to perform in all the capital cities across six continents during the next five years;
● to win the two key performance awards for critically acclaimed productions at least
once within the next three years; and,
● to sustain financial viability of the company during the next five years.
The CSFs can then be determined by asking, what do we need to be good at in order to achieve
our objectives?
These CSF might include the following:
● Attracting and developing performers of international standing

● Marketing effectively in terms of brand recognition and performance venues
● Managing finances to ensure financial stability
The CSFs are then linked closely with performance measures, as once we know what we need to
be good at, we can then measure it. We could measure the financial position of the company on
a regular basis by normal financial controls.
In some instances, however, we might measure a few interrelated measures. For example, we
might monitor the number of international performers that we manage to attract and retain
during the year, plus monitor those performers who gain international recognition. We might then
need to define how we measure international recognition, which might be via positive critical
reviews by certain critics. This will also link to audience attendance as people will want to come
and see performers who are internationally recognised. We could measure the number of awards
easily, which could then be used in marketing, which would, in turn, have a knock-on effect on the
audience numbers and brand recognition. Our CSFs and measures interlink to help achieve the
objectives. This example demonstrates the integrative nature of the objectives, the CSFs, and
performance measures.
Core competencies are significant when organisations are planning strategies such as
diversification. The following example of how supermarkets entered the market for petrol
retailing illustrates this point.
Example
Using Porter’s Five Forces to identify core competencies in an industry and

identifying an opportunity
The oil companies dominated the petrol retailing business up until the 1980s when supermarkets
began to enter the market. For the supermarkets, it was a diversification away from food that had
predominately represented the traditional product range. But why would they enter an essentially
low margin business to compete against large oil companies that had very powerful brands, such
as ESSO, BP, and Shell?
Porter’s Five Forces model provides some explanation of the rationale behind this decision and
illustrates how the use of the model in conjunction with a company’s core competencies can
uncover new opportunities for some, while creating threats for others.
If we take a view that there is a petrol retailing industry, the Five Forces model might highlight the
following influences on its profitability.
Five forces operating on petrol retailing in the 1980s.
The operation of the forces on the industry meant that it was a low margin business due to
upward pressure on costs and the downward pressure on prices, together with the competitive
environment. However, due to the incidence of the barriers to entry it was not an attractive
industry sector for new entrants who did not have links with the oil industry.
Therefore, the oil companies concentrated on fighting each other and primarily utilising brand
loyalty schemes as a means of maintaining market share. It was an extremely price sensitive
market. If one company reduced price, the others would follow, which merely served to reduce
the profitability of the whole industry. (This example, of course, ignores the impact that the petrol
duty has on the price levels in the industry.)
Key competencies
The key competencies at this stage of the existing petrol retailers can be identified as follows:
● Strong presence in strategic locations, for example, city centre, urban, rural,
motorway
● Unique access to supply markets
● Integrated supply chain management
● Powerful brand recognition
● High volume sales producing economies of scale
● Established track record of petrol retailing
So, who in their right mind would enter this business?
You may have guessed it by now, but in the early 1980s the out-of-town supermarket was
beginning to take on a new significance. These were in large locations, obviously out-of-town, and
people went in their cars. The incremental costs of obtaining the necessary licence to sell fuel, to
create a petrol station in the corner of the vast car parking area and staff it, probably with staff
that already worked for the supermarket, was negligible, when added to the cost of establishing
the superstore. Fuel was available in the spot market and most supermarkets now buy fuel from
whoever is selling it at a cheap price. Also, the fact that the customer travelled to the store in their
car to do the weekly shopping found them filling up the car with fuel at the same time―the
convenience factor. This created the volume and gave the supermarkets the economies of scale.
In strategic terms, we can match the competencies required of the industry to those of the new
emerging superstore companies and see that they largely attacked on location and convenience,
created by the trend in shopping habits.
Competencies of petrol retailing Competencies of supermarket retailing
Strong presence in strategic

locations
Unique access to supply markets
Integrated supply chain Supply chain management

management expertise
Powerful brand recognition Recognised brand

Competencies of petrol retailing Competencies of supermarket retailing

High volume sales - economies Buying power of supermarket
of scale
Petrol retail experience Retailing experience
Supermarkets already possessed quite a few competencies that were close to those required
within the petrol retailing industry. In fact, because of the common factor of retailing there was
bound to be some match. Creating the location of convenience gave them the opportunity to
apply their existing competencies gained from operating in retail food and consumer goods
markets to break the hold the petrol retailers had over the strategic locations.
As the petrol consumers (buyers) were not particularly loyal and were happy to switch to the
lower prices offered by the supermarkets, [supermarkets purchased petrol from lesser-known oil
companies who were pleased to supply them] the supermarkets managed to successfully take
the advantage away from the oil companies. As a result, they obtained the volume sales, up to
four times the weekly volume of a previously typical petrol retail outlet, which enabled them to
obtain the economies of scale and keep prices down.
This example also highlights that in competitor analysis you need to watch potential competitors,
while in an environmental analysis you need to watch trends that change the nature of the
industry in which you are operating.
Of course, this will change over time and we can already see a move towards more
environmentally friendly fuels. The impact on petrol retailing, although not widespread at present,
will change the demand for fuel. In some countries there is a move back towards convenience
stores and away from out-of-town superstores, so the supermarkets need to maintain a careful
watch on developments in shopping habits.
Resource audit: 9Ms framework

The 9Ms framework is used as an aid to internal analysis. Using nine categories, the company
identifies its strengths and weaknesses to assist in establishing what the company has and is
good at and, conversely, any elements that are missing.
click the video to begin.
Consider these 9Ms framework additional questions.
Click each folder to learn more.
Make-up
Culture and structure of the organisation
● Is the organisation entrepreneurial or bureaucratic?

● Is the management structure tall or wide?
● How are these elements strengths or weaknesses for our organisation?
● What are the other intangibles, such as branding, intellectual property, and
goodwill?
Management
Experience and expertise of the senior management
● What skills do members of management possess?

● What vision does management hold for the future of the organisation?
● Is the organisation well managed?
● What career paths into management are available for others?
● How effective is the company’s leadership?
Management information
Ability of the organisation to generate relevant, accurate, and timely information
● What information systems are available for use?

● What input is required into the system to generate management information?
● Is the information system able to generate relevant, accurate, and timely
information to support strategic decision-making?
Manpower
Human resources of the organisation
● Have all employees (skilled and unskilled) been evaluated as resources?

● What are the wage costs to the organisation?
● How are employees used? What is their efficiency rate?
● What is the labour turnover?
● How is staff morale?
● Does the company have good industrial relations?
Markets
Markets in which the organisation currently operates
● How does the company’s market share compare to competitors?

● Into which markets is the organisation looking to expand?
● What position do the products and services hold within those markets?
● Is the company involved in growth markets or mature and declining markets?
Materials
Relationships with suppliers
● What is the quality and reliability of inputs?

● Are new materials available?
● What is the future provision?
● Is supply of materials frequent?
● What is the cost of inputs?
● Do we offer value for money?
Methods
Processes adopted by the organisation
● How are the activities carried out – automation or labour intensive?

● What other methods are there – outsourcing, just-in-time, or off-shoring?
● Is the company ethical?
● Are the company’s purpose and objectives clearly stated?
● Are the company objectives known to people responsible for delivering them?
Money
The organisation’s liquidity position
● What is the level of debt or gearing?

● Do they hold short-term or long-term finance?
● What are the credit and turnover periods adopted?
● Are there any cash surpluses or deficits?
● What are the long-term investment plans?
● What are the profit records and earnings per share records over the past few
years?
● Are there any ‘difficult’ shareholders?

● What is the capability to raise finance in the future?
Machinery
Physical assets of the organisation
● What is the use rate of the assets?

● When were they last replaced?
● What are the costs – replacement and running costs?
● Is the technology up to date?
What is the quality of outputs?
Scenario
Natural Foods Inc. is a company based in the United Kingdom that has been trading for the last
seven years. The company was set up by Ingrid Walker, a former chef, who had identified a gap in
the market of convenience foods for nutritionally balanced, organic ready meals.
Ingrid continues to hold the position of chief executive. The remainder of the board comprises a
management team that has been employed within the company in varying roles since its
inception.
Initially, the meals were distributed through a chain of supermarkets. However, two years ago, a
significant investment was made in the development of an online store from which customers
can purchase the meals and have them delivered directly the next day. The company outsources
delivery to a national courier that specialises in transporting refrigerated goods. The company
has also continued to use the supermarket chain as a distribution channel.
Originally, the meals were all produced in an industrial kitchen by a team of four chefs (including
Ingrid). These employees continue to work at the company and are now responsible for product
development.
Natural Foods experienced significant growth in its first five years of operation and, after
successfully obtaining bank finance, acquired a food production plant a year ago from which it
now operates 24 hours a day. The food manufacturing and packaging process in the production
plant is highly automated with few employees requiring specific culinary skills and training. In
fact, 70% of the workforce is now classified as unskilled. Despite this, because the company is
operated with a family-run culture, the workforce is motivated and has low employee turnover
levels. The organic ingredients for the ready meals are all supplied by a single supplier who
provides high quality produce in line with all certification requirements using ethical and
sustainable methods.
The board is keen to expand operations following a period of slowing growth in revenue. There is
increasing competition in the easily replicated organic food market. Ingrid has an entrepreneurial
approach and has identified potential opportunities for expansion into product ranges for
specialist dietary needs including gluten-free, sugar-free, dairy-free and vegan-ready meals.
You work in the finance function of Natural Foods Inc as a finance manager reporting to Michael
Zhong, the senior finance manager.
On Tuesday morning, you see Michael in the kitchen.
I am glad you’re here. I just came out of a board meeting where we were discussing
long-term strategies for the company. The chief executive and the board are keen
to move into the new ‘free-from’ product ranges but want to evaluate our current
internal position to establish our key competencies, strengths, and weaknesses
before formulating a strategic approach. I would like you to use the 9Ms model to
determine the strength of our current resource base and any potential weaknesses.
Knowledge check
As part of your internal analysis, you have identified the following features of Natural Foods Inc.
Using your knowledge of the 9Ms model framework, choose the appropriate category from the
drop-down menu for each of the features of this internal analysis of Natural Foods Inc.
Natural Food Inc. feature 9Ms model fram
Production process is highly automated Select one
Chief executive is entrepreneurial Select one
Annual employee turnover levels of 4.6 Select one
Family-run culture Select one
Production machinery uses up-to-date technology Select one
Single supplier of organic ingredients Select one
Product mix reviewed quarterly by the senior management team Select one
Plans for expansion into ‘free-from’ product ranges Select one
High levels of debt finance obtained to fund production facility Select one
Try again
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Production process is highly automated

Methods
The automated nature of production may provide cost efficiencies that can be treated as a
competency.
Chief executive is entrepreneurial

Management
This factor may also be classified within the make-up category because it demonstrates the
attitude of the organisation’s leader.
Annual employee turnover levels of 4.6

Manpower
Low employee turnover levels is a strength to Natural Foods. Although no comparator is given,
the overall employee satisfaction and motivation levels provide a competency to the company in
terms of reduced training and recruitment costs.
Family-run culture
Make-up
This demonstrates the approach used in terms of leadership and management.
Production machinery uses up-to-date technology

Machinery
This may be considered a strength—using cutting edge technology in production to maximise
efficiency in production creating cost efficiencies that can be used in the new product ranges.
Single supplier of organic ingredients

Materials
This is a strength in terms of quality and consistency of supply; however, it may become an issue
if the supplier is unable to meet the demands of Natural Foods, particularly when growth is
planned.
Product mix reviewed quarterly by the senior management team

Management information
A regular review of the product mix to establish successful and unsuccessful products suggests
an informed management team.
Plans for expansion into ‘free-from’ product ranges

Markets
There are plans for growth and diversification into new markets.
High levels of debt finance obtained to fund production facility

Money
High levels of debt finance may limit the company’s ability to raise further finance for expansion
both through additional debt financing or raising funds through equity. High levels of gearing can
dissuade potential investors.
Knowledge check
Select the choice(s) that best answers the question below.
Question
Following the 9Ms model analysis, identify THREE potential limitations of Natural Foods
Inc.’s future growth and expansion into the new ‘free-from’ product ranges.
Solution
A. Inability to employ a skilled workforce.
B. Inability to raise finance to expand operations.
C. Lack of management experience and expertise.
D. Inability to source ingredients from ethical and sustainable suppliers.
E. Insufficient machinery to expand product range.
F. Inadequate distribution channels from which products can be sold.
Submit
Feedback
A Incorrect. Seventy per cent of the workforce is unskilled labour. It is unlikely that this
. would create a limitation to source should further employees be required.
B Correct. Natural Foods has high levels of debt finance which adversely affect the
. gearing ratio and may inhibit the company’s ability to raise further finance for growth.
C Incorrect. The management team is highly experienced in the sector and with the
. company.
D Correct. The current sole supplier may not have the resources to supply Natural Foods
. expansion. It may prove difficult to source another supplier with the same ethical
mindset and quality produce.
E Correct. The current machinery used is almost at full capacity. Acquiring new machinery
. may be difficult if finance is difficult to raise.
F Incorrect. There are currently two distribution channels—an online store and a
. supermarket chain—both of which could be used to distribute the new product ranges.
Conclusion
The internal analysis is not just about assessing the resource position of the organisation but
about understanding the core competencies and identifying sources of competitive advantage.
There are generally many types of resources that a company can draw upon. A common
categorisation into physical and financial assets of an organisation (that is, tangible assets, as
well as intangible assets) which are those that are non-physical and less obvious.
● Tangible resources – The physical assets of an organisation, such as plant, labour,

and finance
● Intangible resources – Non-physical assets, such as information, reputation, and
knowledge
Competencies can be defined as follows:
● Threshold competencies – Threshold competencies are those things that are

simply needed to meet the minimum customer requirements to compete in a given
industry or market.
● Core or distinctive competencies – Core or distinctive competencies are those
things that a company does better than competitors. Distinctive competencies are
required to achieve a competitive advantage. The crucial part is that these
competencies need to be difficult to imitate if they are to remain a competitive
advantage.
CSFs help determine what the organisation needs to be good at in order to achieve its objectives
and can be a source of competitive advantage. CSFs also help identify key measures of
performance.
A model that aids the internal analysis is the 9Ms model that provides a framework for reviewing
the resource capability of an organisation. It includes analysis of machinery, make-up,
management, management information, manpower, markets, materials, methods, and money.
TOPIC
Value Chain Analysis

After completing this topic, you should be able to analyse an organisation’s value and cost drivers
using a value chain.
Introduction
The theory of the value chain is straight forward. It’s a model for combining products or services
with the capabilities and support of the organisation to provide value to the end -user. There are
also critical links with profitability for the organisation, as well as obtaining a competitive
advantage within the industry to be successful. Sounds simple, right?
Where it gets tricky is the real-life application. How can managers use the value chain model to
contribute to achieving an organisation’s overall strategic goals? How can Porter’s value chain be
used as an internal analysis tool?
Porter’s value chain

In addition to understanding what resources and competencies are available internally in the
strategic analysis, the organisation also needs to understand which activities and business
processes are undertaken to deliver the product and value to the customers.
Porter’s value chain is an internal analysis tool used to determine whether activities performed by
a company do or do not add value. The goal is to identify activities where in which cost
efficiencies can be established and where improvements in the activities can be made to create
competitive advantage. Porter argues that competitive advantage can be obtained by the way an
organisation configures its activities. The model is very customer focussed because we are
looking at how the organisation can add value to the customer.
The outside line is represented by revenue, (that is, a measure of value in the eyes of the
customer), and the inner line is representative of costs. The difference between the two
represents the margin. The value chain is often used as a means of exploring ways to reduce the
cost without changing the value added to customers. This, then, increases the margin.
It is often illustrated using the following diagram.
The activities are separated into two categories:
● Primary activities
● Support activities
Primary activities
Primary activities are involved in the creation of the product or service. Primary activities include
the following:
● Inbound logistics – All activities relating to receiving, storing and handling inputs
● Operations – All activities involved in the creation of outputs from inputs
● Outbound logistics – All activities relating to the collection, storage, and distribution
of outputs to customers – In the situation of a service company where the
customer goes to the company (e.g.for example, a restaurant, hairdresser, theatre)
the location is part of the outbound logistics decision (i.e.that is, making sure that
the customer can get to the venue to enjoy the service and get home again)
● Sales and marketing – All activities to encourage and facilitate the purchase of
outputs
● Service – All activities relating to the efficient working of the output after the point
of sale
Support activities
Support activities assist the primary activities to operate more efficiently. Support activities
include the following:
● Infrastructure – Incorporates the management of the company and departments

(including finance, legal, quality assurance, and planning) and relates to the way the
organisation is structured.
● Technology development – Relates to all elements of IT – including hardware,
software, equipment, and technologies such as information technology (In some
instances, this will also include research and development activities where in which
technology development is involved.)
● Human resources management – Relates to all aspects of personnel – including
recruitment, training, appraisal, and development.
● Procurement – Relates to the acquisition of resources for the organisation.
Value chains and value network
Today, few if any companies operate alone and include all parts of the value chain. Instead, they
are part of a network, a system of suppliers, distributers, resellers, and other partners.
This is called the value network and is the set of inter-organisational links and relationships
needed to create a product or service. A key benefit of the value chain is that we are looking at
adding value to the customer; therefore, its use encourages management teams to focus on
providing what the customer wants.
Value chain analysis in strategy formulation

The internal analysis done in the strategy process also needs to look outside of the organisation
and the full process. Part of developing competitive strategy is to identify which of the parts of
the value chain the organisation should undertake and which it should outsource. The strategic
analysis also needs to assess how to manage these linkages and relationships to improve
customer value and gain efficiencies or other competitive advantages. This includes strategies
around partnering, make or buy decisions, or focussing on the parts of the value chain where it
can add significant value to the customer. Note that the organisation does not have to undertake
every activity in the value chain but can select those that add value to their target customers and
those that give a competitive advantage.
The value chain also enables an organisation to identify those activities that are critical to its
success as well as those that provide a competitive advantage. The key benefit is that the model
enables a management team to see the organisation as a whole and to ensure that all activities
add value. Therefore, the model enables management to identify activities that do not add value.
However, it is not always possible to simply stop undertaking any non-value- adding activities
because some may be essential (for example, administration). An organisation that has no
administrative functions would not be well managed; but, in most cases, this activity might not
directly add value to the customer. So, the focus should be on undertaking the activity as cost
effectively and efficiently as possible.
Real world examples
Consider the case of Dell, a company that sells computers via online sales, and contrast this with
a company that predominantly sells computers via a high street store.
The value chain of Dell might look like this. Dell has a strong customer focus with the ability to
meet individual customer needs. Their main sales channel is online and telesales.
Notice how the customer begins the process. The customer places an order, and the
organisation was principally set up to build the computer to customer requirements. This
indicates that there is an information flow, backwards through the value chain. Because Dell
operates in a market that suffers from technological obsolescence, it would not wish to hold
large quantities of component parts in inventory. Therefore, Dell develops strong relationships
with suppliers. This also illustrates the importance of links through the value network. If your
competitive advantage is that you can build products to customer requirements quickly, you need
suppliers that are also able to provide the competent parts quickly. In reality, many customer
requirements will be similar; therefore, some inventory will be held to facilitate the process. The
essence of Dell’s added value is understanding their customers and spotting trends in purchasing
so that they can satisfy customers’ requirements quickly.
If we compared this situation with a high street retailer of computers, we can imagine that there
will be a higher cost base due to the need for retail premises and also more staff physically in the
store. It is possible to buy a computer online for less than you would pay in a store, but
customers who use the store value the fact that they can see and try the products and ask for
advice from a person face-to-face. Therefore, the value chain will have a slightly different
configuration to a provider who sells only through online channels but is still configured to
provide the customer with added value.
This also extends to the example of an out-of-town furniture store that sells only flat- pack
furniture. This was the premise of IKEA – a Scandinavian company that operates in around 50
countries including the United States, China, Japan, and Russia – in that the customers typically
take the products home and assemble them themselves. Therefore, customers are adding
significant value to the product. Therefore, IKEA can sell the products for a lower price. It adopts
the same strategy in every country in which it operates.
Knowledge check
Using your knowledge of Porter’s value chain, identify the supporting activity category that
corresponds to each of the activities at a manufacturing company.
Once you are finished, click ‘Submit’ to check your answers.
Activity Category of
supporting activity
Sourcing a single, out-of-town production facility for Select one

manufacture
Implementation of a management development Select one

programme for employees demonstrating
entrepreneurial attributes
Investment in an online store to increase Select one

accessibility of products
Acquisition of production machinery with cutting Select one

edge technology to minimise wastage
Centralising all business support functions Select one

including finance, legal, and quality assurance
Try again Submit
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Review the correct answers.
Activity Category of supporting

activity
Sourcing a single, out-of-town production facility for manufacture Procurement
Implementation of a management development programme for employees Human resource

demonstrating entrepreneurial attributes management
Investment in an online store to increase accessibility of products Technology development
Acquisition of production machinery with cutting edge technology to minimise wastage Technology development
Centralising all business support functions including finance, legal, and quality assurance Infrastructure
(Embedded page: https://media.aicpa.org/Association/CGMA/E3/19F2/table/CAE3_19F2_040.htm)
Performing value chain analysis

To achieve competitive advantage by delivering value, a business needs to understand exactly
what it is that they do well that creates value and what doesn’t. It is linked to how the company
organises and performs activities. This comes from every part of the organisation. Competitive
advantage is gained from the use of resources and how raw material is converted into finished
goods. It’s the processes and the capabilities that your organisation has which will determine the
overall success of the business. If a process is not essential, and doesn’t add value, an
organisation needs to get rid of it.
This value chain analysis sounds very simple in this way; but, in reality, it is not so simple. In
reality, the real work comes in interrogating the base data. The analysis needs to rely on
management information and be sure that the conclusions are accurate, and in line with the
overall vision of the organisation. Once you fully understand how all the processes link together,
you could look at the inbound logistics and operations in detail first; then look at the outbound
logistics, sales, and service separately; and finally identify what the cost drivers are and what the
value drivers are at each stage.
● Cost drivers – are factors that cause change in the costs. Economies of scale,
automation, and learning curve would bring costs down over time; whereas faulty
machinery or poor quality materials would increase the cost due to reworking or
skilled intervention.
● Value drivers – are factors that enhance the perceived value of your products in the
eyes of your customers. This might be better quality raw material, skilled
craftsmanship, or after-care service and warranties. They’re not always obvious, and
they don’t have to be tangible either. Value drivers might be the knowledgeable
employees, the convenient location for onward distribution, or the brand name.
An organisation can achieve a competitive advantage by adding more value to internal

processes, for example by being more efficient than our competition or add value by the way in
which the organisation combines activities. If you’re able to create a product that is unique,
difficult to replicate, or difficult to obtain elsewhere, that can also be seen as valuable, and your
customers will happily pay for it.
Resources are of no value unless they’re organised into processes and systems. A value chain
analysis should give an organisation a good starting point. The following is a simple structure to
perform a value chain analysis. There are other methods, and they can be tailored to different
businesses and industries.
1. Identify sets of value activities – Are there any significant in delivering strategy or
achieving advantage?
2. Assess activity costs internally – Are there any significant in terms of cost? Which
add the most value? Which are linked to other departments?
3. Assess the importance of activities externally – In other words, consider
resourcing, marketing, and processes, if applicable.
4. Identify where and how costs can be reduced – Is the balance of costs in line with
strategic goals? Can costs be reduced without affecting the value created for
customers?
Knowledge check
Select one choice that best answers the question below.
Question
Consider the case of a company that manufactures and sells entry level computer
systems to small businesses and personal computers to individuals. You have been
recently appointed to the management team and, as part of a future potential review, you
are leading a team to identify the core competencies of the company.
The company works closely with suppliers to ensure that the latest technology is available
and that the component parts can be sourced on a just-in-time (JIT) basis. The production
facility is extremely flexible ensuring that customer requirements can also be met on a JIT
basis (i.e. in other words, products made to customer requirements). This is a key element
of the marketing strategy and the differentiating factor. The sales are conducted via
telesales or the internet. The company does not sell via any other means. This helps to
reduce costs, which is fed through into and affects the pricing of the products. Highly
trained telesales staff operate the telephones and are available for customer support
before and after purchase. The company maintains a customer database that facilitates a
high level of customer product support. Also, sales are closely monitored and analysed to
inform marketing, production, and suppliers of trends in customer preferences.
Based on the example, above, which option best describes the distinctive capability that
underpins the computer company’s success?
Solution
A. Providing high levels of customer service while keeping prices low.
B. Maintaining excellent links with suppliers.
C. Effective use of technology to aid sales and production systems.
D. Effective management of the whole value chain.
E. Using JIT operations coupled with a low-cost sales medium.
Submit
Feedback
A Incorrect. This is one aspect of the capability of the company, but is it the only aspect of
. the value chain that gives it the distinctive capability?
B Incorrect. The company needs excellent links with suppliers to satisfy customer needs
. quickly, but this is only part of the competence that gives it the distinct advantage.
C Incorrect. The technology aids sales and production, but there are also other activities
. that underpin the overall success.
D Correct. The key to the company’s success is the management of the whole value chain
. because each element is configured to provide an excellent overall service to the
customer.
E Incorrect. Keeping costs low undoubtedly helps, but it is only part of the competitive
. strategy of the company and its distinctive competence.
The scenario explains several activities and areas of the business that could provide the
competitive advantage for success. However, you should be able to identify that the activities
described form different parts of the value chain; therefore, the aspect in which the company
really excels is its management of the whole value chain. The scenario describes activities in
which the company excels but also highlights elements of the value chain that are combined to
create a highly efficient operation. This indicates that management has not just focussed on one
activity but has focussed on configuring the whole value chain for optimum performance. You
might have identified just one activity, such as JIT, because the scenario states this is a key
element in the differentiating factor. However, the links back from the customer sales to inform
operations and purchasing indicates much more than JIT.
Value shop model – Value chain for service businesses

It is possible to adapt the value chain model for service businesses. Imagine a firm of lawyers, for
example. The firm provides a service, but there is usually still a physical product that results from
the work the lawyers do, whether that’s an approved tenancy agreement, shareholders
agreement, or contract and deed for sale of property. The inbound logistics would be the details
needed to complete those documents, evidence of identification of key parties, and such the like.
It’s not so obvious, but the processes are still there. And they obviously still need support
activities, such as infrastructure and human resource management.
There is an alternative model for service-based businesses called a value shop. It’s better suited
for service or network-based organisations and focusses on the use of resources to address
customers’ issues or solve problems. Expertise is the principal asset, and it’s built by experience
of key staff.
Value shop is a model developed by Stabell and Fjeldstad (1998) to deal with service- or network-
based organisations. The traditional value chain is geared towards use within a manufacturing
organisation.
Value shop assumes that the organisation uses resources to address customer’s issues or to
solve problems. The support activities are identical to those in a traditional value chain, but the
primary activities differ as follows:
1. Problem finding and acquisition

2. Problem solving
3. Choice between solutions
4. Solution implementation
5. Control and feedback
If necessary, after step 5 the process starts again depending on whether problems and issues
have been resolved or not.
Scenario
Natural Wood Company S.A.
Your role
You work for Natural Wood Company S.A. (NWC), a wooden furniture manufacturing company
that is based in Brazil. The company is known for its quality products and ships the finished
goods worldwide.
As a senior finance manager, you routinely review management accounts and complete reports
for profitability and budgetary requirements. These reports form part of the monthly documents
reviewed by the board of directors.
Company background
NWC is located near forests and the local sawmill to minimise the carbon footprint prior to
distribution of finished goods. The properties consist of extensive storage facilities for both raw
materials and finished goods, treatment areas for finishing wooden furniture, factory space for
the production processes, and administrative office space.
The company is led by a CEO who has been in post for many years and has worked in the
industry since graduating from school. All the individual directors have been hand selected by
him because of their experience and knowledge of the industry. In fact, all employees are
selected for their experience, and are given extensive training in the relevant processes with
which they work. They are also taught the importance of the ‘“customer is king’.”
The CEO of NWC believes that its niche is in hand-finished and bespoke pieces of furniture made
from the best quality materials. These are high-end, expensive and design-led products. NWC has
avoided the temptation of going down the route of mass-producing flat-pack furniture and
become differentiators in the market instead. There are other companies in the region that
produce wooden furniture, but none make hand-finished or bespoke pieces. They go for cheaper,
more readily available off-cuts of wood and make ‘“wood-effect’,” flat-packed furniture for home
assembly.
Because of the quality of raw materials, inventory control is taken very seriously, and it’s
important that good inventory control is maintained. The stock is managed manually, and all
items of inventory are bar coded and then scanned each time they’re moved — either for
production or storage as finished goods. Warehouse temperature and ambient humidity is critical
to ensure that the wood is kept in prime condition prior to manufacturing and shipping. Also,
termite infestation would be disastrous, so quarantines and access rights to the raw material are
very strict.
NWC currently sells to a distribution network of world-wide buyers as well as a small number of
retailers. Distributors and retailers sometimes send furniture designs in for production, and they
are allocated an account manager to look after the whole process. Otherwise, their regular
designs are pushed out to their contacts each time a new design is developed, which is roughly
twice a year.
There are low barriers to entry to the market, with efficiency improving all the time in the mass-
produced market. NWC remains unique and boasts the advantage of being the only wooden
furniture manufacturer that hand-finishes its pieces and ships internationally.
Knowledge check
Match items by dragging and dropping each item into the corresponding box.
Question
NWC deals with many processes during the day-to-day operations of the business.
Following is a list of some key internal activities for NWC. Match each internal NWC
activity to its corresponding value chain activity identifier. After you have completed the
exercise, click the submit button to reveal the correct answers.
NWC internal activities Value chain activity
Preparing wood from storage for the cutting Operations

machines
Distributing lacquer and fixings from inventory

to production
Infrastructure
Wrapping finished pieces of furniture ready
for transit
Central quality control to ensure the finished

item is as requested or expected by the Outbound logistics
distributor
Inbound logistics
Submit
Outbound logistics
Wrapping finished pieces of furniture ready for transit is part of outbound logistics.
Inbound logistics
Distributing lacquer and fixings from inventory to production is part of inbound logistics. It is
often confused with operations. Distributing inputs to the production system is still inventory
handling, so it is part of the inbound logistics process.
Operations
Preparing wood from storage for the cutting machines is operations. This might be confused
with inbound logistics because the example refers to raw material from storage. This is actually
preparing the material for the production process, so it is part of operations.
Infrastructure
Central quality control to ensure that the finished item is as requested or expected by the
distributor is part of infrastructure. This is a central quality control component rather than part of
a check within the operations part of the value chain.
Using the value chain activities to gain competitive advantage

In the table that follows, reflect on how NWC could use each activity in Porter’s value chain to
achieve competitive advantage. Try to think of examples from NWC for each of the nine activities
in the value chain and how each one of them could add value for NWC.
Where appropriate, also consider any limitations that NWC currently suffers, where appropriate,
and consider how these could negatively affect competitive advantage. Click on each question to
review a suggested solution. The solutions provided are just suggestions of points to raise.
However, it is important that you understand why they are raised.
Primary activities and competitive advantage
Primary activities are involved in the creation of the product or service. How could NWC use
these to achieve competitive advantage?
Click each folder for more details.
How could NWC use inbound logistics to achieve competitive advantage?
With premises close by to local sawmills and forests, the company can support local workers
and build a close and mutually beneficial relationship with the sawmills. The sawmills can get
to understand more closely what the requirements are for NWC and can therefore provide
more of what they need, with less rejects.
Inventory management is manual and movement of materials is logged using bar codes. This
system sounds to be very labour intensive, which is expensive and will require management
too.
How could NWC use operations to achieve competitive advantage?
An experienced manufacturing director or operations director will be able to operate the

processes smoothly and will have good working knowledge of NWC customers and their
requirements. Experienced managers can pass their expertise down to more junior
employees, who can learn while working. This will provide excellent service and contribute to
the overall strong relationship with customers.
Experienced employees who have an understanding of the importance of customer care will
ensure that they bear this focus in mind when they are performing their duties. The emphasis
is not on cost saving money but on providing what quality that the customer needs. The level
of quality can also be achieved by implementing a ‘“lean’” approach and continuously
identifying improvement opportunities across its operations. This will make staff performance
better than that of competitors in the equivalent areas of operations.
NWC produces limited new designs of high quality furniture, as well as some bespoke pieces.
This method of production is very time consuming, and close control over costs is necessary
to ensure that the margins are adequate. A lot of time may be lost in the ‘“creative’” process,
and customers may want more choice.
How could NWC use outbound logistics to achieve competitive advantage?

Finished goods are shipped internationally to NWC’s distribution network, which increased the
cost and carbon footprint of the products. If customers are prepared to wait for their hand-
finished furniture to be shipped long-distance, they will be willing to incur the cost as part of
the value they perceive in their new items of furniture. This is something they wouldn’t have
access to otherwise, so the value here is the high quality furniture.
Storing as well as packing of high value finished goods must be quite rigid and professionally
managed. If furniture is damaged in storage or transit in route to customers, this will affect
not only the value of the item but the relationship with customers as well.
How could NWC use sales and marketing to achieve competitive advantage?
Marketing is done through the established network of distributors and small number of
retailers. There are no details of marketing initiatives, however the close relationship between
agents and NWC is a strength in the value chain, and the close relationship should be
nurtured.
How could NWC use service to achieve competitive advantage?
All employees are trained to understand that the ‘“customer is king’,” so the relationships with
the distribution networks are taken very seriously.
NWC is reliant on distribution networks to promote its furniture and submit regular orders as
well as develop its relationships with smaller retailers. Fostering relationships, then, will
ensure that NWC can continue to work with the same distributors and keep those distributors
happy.
NWC makes bespoke furniture, and each customer or distributor who orders a bespoke piece
is assigned an account manager to oversee the development of it. This ensures that the
customer has a point of contact for any queries or progress updates. Providing prompt,
reliable, and outstanding customer service is a key differentiator for NWC. This is a service
that won’t be offered elsewhere in the market.
Support activities and competitive advantage
Support activities assist the primary activities to operate more efficiently. How could NWC use
these to achieve competitive advantage.
How could NWC use infrastructure to achieve competitive advantage?
The administrative side of the company is unlikely to generate any competitive advantage on
its own. But we do know that all employees are recruited for their experience, so quality
individuals all contribute to the overall running of the organisation. Ensuring above average
working conditions that meet or even exceed employees’ needs is a competitive advantage.
NWC needs a suitable departmental structure, management structure, and management

information to support its primary activities. Planning, finance, and quality control will be
important to NWC’s strategic capability in its primary activities. If this structure could be
organised any better, this could be a source of competitive advantage. Perhaps not all
members of staff need to have years of experience, depending upon their role.
In addition to the above, the physical infrastructure of having NWC premises located near
forests and the local sawmill potentially allows NWC to operate more efficiently and more
cheaply (due to less transportation costs for raw materials) than its competitors.
How could NWC use technology development to achieve competitive advantage?
Inventory management is manual, furniture pieces are hand-finished, and, in some cases,
specially designed. This is part of the service purchased by the customer. However, it is very
labour intensive and could be a limitation in the value chain.
In the future, NWC could consider developing technology that allowed customers to design
their custom furniture using an online tool to help streamline the process and offer a better
customer experience. Customers might also be able to track the development of their unique
piece at various stages of the process from design through completion. It also could invest in
technology to improve visibility throughout its distribution network, offering customers a
better view into the status of their order.
How could NWC use human resource management to achieve competitive

advantage?
We know that new staff are recruited for their experience in the relevant field of their expertise.
We also know that they are given extensive training and taught the importance of customer
service. Customers appreciate good service, and this is often the reason why they will retain
the services of a company that understands their needs and is able to assist in the purchasing
process. This will definitely be a competitive advantage for NWC.
How could NWC use procurement to achieve competitive advantage?
A limitation here is the sustainability of the raw material. The forests are a finite resource, so
contingencies need to be made for maintaining their supply of timber. Losing access to quality
raw material will have a huge impact on the value chain and on relationships with customers.
We know that there are low barriers to entry, and efficiency is improving in the mass-produced
market. This might not be a threat to NWC at the moment, but this may not always be the
case. There is nothing stopping another company deciding to compete in the same area of the
market. Cultivating close relationships with the local sawmill and local forestry is vital to NWC
maintaining a regular supply of quality raw material.
Reflection exercise
Building on your preceding value chain analysis, reflect over some ways in which NWC could
improve its competitive advantage position. Think of some ideas and then click the question to
reveal a suggested solution.
How can NWC improve its competitive advantage position?
Due to the barriers to entry into the industry being low, and technology improving rapidly, NWC
may not be able to keep its competitive advantage just because it has always had it. Other
companies could produce hand-finished furniture from the same supply. NWC should try to
continue to differentiate in new ways and be innovative in the areas of research and
development, product development, and technology.
The production and inventory management process is very labour intensive. Perhaps there
are ways the manufacturing process could be streamlined and made more efficient with a
more robotic or automatic inventory system in order to remove unnecessary processes and
manual intervention. Whilst the furniture can continue to be hand-finished, perhaps there are
new manufacturing methods that could be adopted to improve the efficiency of the overall
process and add more value.
The raw materials are a finite source for NWC and are continually being depleted with each
tree felled in the process of furniture production. Perhaps the manufacturing process could be
adapted to use different types of wood; perhaps younger trees could be used; or a replanting
scheme could be introduced to ensure that, as each tree is felled, a new tree is planted in its
place. This could be used as part of the company’s marketing strategy to contribute to the
brand.
In addition to the preceding and to assist with the corporate social responsibility for NWC, we
could use a website to promote our quality furniture and raise environmental awareness at the
same time. The case doesn’t mention one. NWC could post updates of its manufacturing
process and its relationship with the forestry business and local sawmills. The company could
use social media to help push this out and perhaps even use videos of the felling and planting
process and share the general environment of where the furniture is made. Again, this could
support the brand of the company.
The website could also be used for general marketing and to raise awareness of NWC.
Orders could be taken online directly from consumers to reduce the steps in the value chain
and provide more value to customers by reducing the overall cost of the traditional process.
The website could also be used to provide virtual tours of the factory to showcase the care
taken in the manufacturing process and to make customers feel like they are part of the
process, despite being so far away.
Care would need to be taken to preserve the relationships with the distribution network
agents. They may not be happy that they are being removed from the sales process.
Scenario (continued)
NWC conclusion
One thing that stands out in the value chain analysis process is the reliance placed on external
businesses. The company relies on suppliers to get the raw materials they need to the correct
specification, otherwise it affects the quality of the furniture. They rely on the network agents to
distribute our finished goods out to retailers. There are also areas within the infrastructure that
are performed in-house (for example, payroll) that possibly could be done more efficiently if they
were outsourced, such as payroll for example. In reality, it is a value system instead of just a
value chain. Just as NWC, as you’ve seen, has its value chain, so do your customers and
suppliers. The combination of all the value chains from the initial forestry business in the wooden
furniture industry through to the final consumer form part of the value system.
To have an effective value chain coordination is critical. Organisations need to work really closely
with the supplier so that they could both anticipate when material is needed to minimise the risk
of this happening. Because of the bespoke nature of NWC products, this is less likely to be an
issue than for mass-producers in the industry.
Improved control and efficiency can be done via either by partnering with suppliers and
distributors to work more closely together or by outsourcing some elements. Sometimes it just
isn’t possible to improve value internally, so your only option is to look outside the business for
assistance. Alternatively, you could even vertically integrate with them to streamline the process
even more. This is where a business may acquire or merge with suppliers or distributors,
upstream or downstream. This would mean that the business could take advantage of the
expertise that already exists, rather than trying to branch out into those areas of the industry. It all
contributes towards meeting the needs of the end user, and gaining the overall competitive
advantage of the business.
A full understanding of the external environment is also needed, because political or

technological changes are likely to affect your suppliers and distributors as much as they affect
NWC.
Conclusion
Porters’ value chain can be used to aid the development of competitive advantage because
Porter suggests that competitive advantage can be gained by the way an organisation configures
its activities. The model is focussed on adding value to the customer.
Primary activities are:
● inbound logistics,
● operations,
● outbound logistics,
● marketing and sales, and
● after sales service.
Support activities are:
● procurement,
● human resource management,
● technology development, and
● infrastructure.
The theory behind Porter’s value chain, and extended value system, is straight forward. The key to
success is in the application of the model to businesses and its use to secure competitive
advantage. This can be done in the following ways:
● Finding new or better ways to perform activities

● Combining activities in new or better ways
● Managing linkages in one’s own value chain to increase efficiency
● Managing linkages externally in the value system
It is critical that the tool is used to identify possible areas for improvement before investigating
fully for feasibility of being used in practice.
Technology advances can totally transform a value chain, so research and development into new
methods and developments in the industry are essential to maintaining long-term competitive
advantage. As we’ve seen in other topics, competitive advantage can be achieved, but the actions
of competitors in response to a business’s success could prove that advantage to be short-lived.
TOPIC
Supply Chain Management

After completing this content, you should be able to recognise how strategic supply chain
management supports strategy.
Introduction
A supply chain involves the entire process from sourcing the procurement of raw materials,
through the manufacturing and distribution of inventories, to the final sale of the goods to the
end customer.
Supply chain management is addressed at three levels of a business: strategic, tactical, and
operational. At the strategic level, supply chain management includes making key supply chain
decisions that are critical for the whole business. This may involve working with new suppliers or
outsourcing activities currently within the business. There is a direct connection between the
corporate strategy and the decisions related to supply chain – management of the supply chain
is fundamental to implementing an organisation’s strategy.
By implementing effective supply chain management solutions, organisations can benefit from
cost savings from increased synergies, improved customer service and value, and improved
preparedness for operating in difficult economic conditions.
The value system and supply chain management

Organisations do not always operate alone; rather, they operate as part of a value system or
supply chain.
Having a well-coordinated and managed supply chain is often a source of competitive advantage.
For example, a company that is able to meet customer demand within 24 hours by building a
computer to the customer’s specifications would have a distinct competitive advantage over
competitors that either have to maintain huge inventory to meet customer demand or that have
to source suppliers every time a custom order is placed. Because technology changes frequently,
the company does not want to hold too much inventory; therefore, it needs to know that its
suppliers are capable of supplying the component parts very quickly. Similarly, distribution
channels, which may be outsourced, need to be equally efficient. This leads us into supply chain
management.
Defining the supply chain

A supply chain represents the process from the procurement of raw materials to the final
distribution of goods to the end customer. If the company addressing its supply chain is the
manufacturer of the product, the upstream supply chain relates to the manufacturer’s suppliers.
The downstream supply chain relates to the manufacturer’s customers.
There are several considerations when developing a supply strategy:
Source of supply
Consideration needs to be given to what options are available and where they are located
geographically. Should large or small suppliers be used? How quickly can the goods be
delivered?
Number of suppliers
Will one supplier will be able to meet the company’s needs? This may allow the price to be
reduced for bulk purchasing. Or does this create too significant a risk of failed supply or create
a reliance on one supplier?
Quality
There is likely to be a trade-off between cost and quality where the appropriate balance must
be established for your company. Higher quality often leads to higher costs. However, if this is
what the end consumer desires from the product, it may be a necessity.
Make or buy decision
Consideration needs to be given to whether the supply of the goods required for manufacture
can be completed in-house. If the skills and resources are available, and if it is cost-effective
to do so, a manufacturer may decide to produce the raw materials itself to retain control over
the quality and production processes used.
The most successful approach used in supply chain management in a modern business
environment occurs when organisations work in partnership with one another. Traditional
methods of exerting buyer power over suppliers to negotiate the lowest prices and applying
penalty clauses into contracts are less effective in a customer-driven ‘pull’ supply chain
environment. Collaboration with suppliers can lead to new and innovative products focussed on
customer needs with a collective desire to improve customer service and value for money.
Examples of the benefits of creating strong relationships with suppliers include the following:
● Bridges the gap from supplier to customer

● Saves money through economies of scale and synergies
● Creates a customer-driven focus to improve value for money and customer service
● Collaborations resulting in innovative products and new designs
Learn more
Listen to this short clip in which Carmel Giblin, chief executive of Sedex, discusses the
importance of understanding suppliers in a value chain, and shares her top tips to manage risk in
the supply chain.
Scenario
You have recently been appointed as the senior finance manager for CFE Trading, reporting
directly to Jon Ryan, the CFO.
CFE Trading process coffee beans that are sold to independent coffee houses throughout the
United States. The coffee plant cherries are grown and harvested in South America by a local
company and purchased by CFE Trading under the terms of a sole supplier agreement. CFE
Trading negotiated the terms of this agreement a number of years ago with the local company,
securing the lowest possible price per pound due to the large volumes being purchased by CFE
Trading. The sole supplier agreement includes penalty clauses for any late delivery of orders
made by the supplier to CFE Trading.
The harvested cherries are transported by a specialist logistics company to CFE Trading’s
processing plant located in a southern province of the Canada for drying and milling before being
distributed nationally to independent coffee houses on receipt of a sales order.
The processed coffee beans are then freshly ground by the coffee house baristas on demand to
create the coffee ordered by the end customer.
CFE Trading has operated successfully for the last eight years and two years ago was the leading
supplier of coffee beans to independent coffee houses in North America. However, sales orders
have recently started to decline.
You are asked to meet with the sales manager to discuss the recent decline in revenue.
Sales manager
I have spoken to some of our key clients who have been our customers since we
started trading, and they commented about a shift in their customer’s demands.
The end customer is now much more conscious of the methods used to produce
and source the coffee beans in their hot drinks. Feedback from coffee house
owners has indicated their customers are now demanding coffee beans that are
from sustainable sources with a strong emphasis on fair and ethical trading
conditions for coffee plant farmers. Low cost is no longer the highest priority for
these coffee houses who now have a more ethically conscious end customer.
You
It seems to me that the type of supply chain we are operating in has now changed.
When CFE Trading originally started supplying these coffee houses, a ‘push’ supply
chain was in place. The coffee beans were grown, harvested and processed with
the customer exerting no control over the coffee beans that were used in their cup
of coffee. Now, the emphasis has shifted, the end customer is demanding a
specific type of product, ethically-sourced, sustainable coffee beans. This is known
as a ‘pull’ supply chain. The supply chain is now customer-driven with the end
customer pulling what they want from the system. If we don’t adapt our supply
chain management to reflect this, we will experience further decline.
The CFO confirms your feedback that a review of supply chain management is necessary.
Knowledge check
Match items by dragging and dropping each item into the corresponding box.
Question
Match each group or organisation to the correct position in the new CFE Trading supply
chain.
Organisation CFE Trading supply chain
The coffee growers are the starting point of 1

the supply chain, being the raw material
producers.
CFE Trading is the coffee bean processor (in

other words, the manufacturer of the product
2
that will be distributed to the independent
coffee houses).
The logistics company that transports the

harvested coffee bean cherries to CFE is the
next stage of the supply chain. 3
The end customers are the coffee house

customers who are purchasing the final
product at the end of the supply chain.
4
Independent coffee houses are CFE Trading’s
main customers and the distribution channel
for the coffee beans.
Submit
The coffee growers are the starting point of the supply chain, being the raw material producers.
(Coffee growers)
The logistics company that transports the harvested coffee bean cherries to CFE is the next
stage of the supply chain. (Specialist logistics company)
CFE Trading is the coffee bean processor (in other words, the manufacturer of the product that
will be distributed to the independent coffee houses). (CFE Trading)
Independent coffee houses are CFE Trading’s main customers and the distribution channel for
the coffee beans. (Independent coffee houses)
The end customers are the coffee house customers who are purchasing the final product at the
end of the supply chain. (Coffee house customers)
Follow up
You receive an email from the CFO the following morning.
Email from Jon
To: Senior finance manager

From: Jon Ryan, CFO
Subject: Re: Upstream supply chain management presentation
Good morning,
I would like you to speak with our procurement manager about how we source the coffee
plant cherries moving forward to better meet the needs of the end customer. This is the area
of the upstream supply chain that we really need to address.
Kind regards,
Jon
You visit the office of the procurement manager to discuss this further.
Procurement manager: Hi there. Jon said you may be coming to see me. I have recently visited
the coffee plantation in South America and have spoken with our supplier’s chief executive.
At the moment, the working conditions and pay of the local workers would certainly not be
considered fair or ethical. The chief executive there is adamant that the low prices we negotiated
several years ago make it extremely difficult for him to operate as he would like to. The local
community relies on the employment provided by the plantation but the wage rates are low. The
threat of penalties for late delivery means that long hours are needed to fulfil the orders.
We have a couple of options. There is another plantation approximately 200 miles from the
current supplier. It is already operating with fair pay and working conditions for employees and
grow sustainable crops. The price is higher; however, it would be a straightforward transition.
Alternatively, we can support our current supplier by amending our terms with them to
incorporate fair prices for the coffee plant cherries and develop initiatives to support the local
community. Our current supplier is keen to grow organic coffee plants which, with our assistance,
could provide an additional product line for us to promote to our customers in line with the
current market focus.
Knowledge check
Enter text into the empty field below and submit your answer to see the suggested
answer.
Question
Following your meeting with the procurement manager, recommend which of the options
is the most suitable for CFE Trading to take in relation to the supply of coffee plant
cherries.
● Option A: Change to a new supplier that provides ethically sourced,

sustainable coffee plant cherries.
● Option B: Continue to obtain the supply from the current supplier but amend
the terms of the supply and invest in ethical initiatives.
Pick your option and give one reason why you have chosen this option.
Solution
Submit
Feedback
Continue to obtain the supply from the current supplier but amend the terms of the supply
and invest in ethical initiatives.
Reason for recommendation:

The customer-driven focus is on ethically sourced products. The most ethical solution in
this situation would be to support the current loyal supplier of the coffee plant cherries to
improve the working conditions and pay of their workers rather than transferring to a new
supplier and creating unemployment in the local community. This, if made public, could
adversely affect CFE Trading’s reputation and likely lead to a further decline in revenues.
Downstream supply chain management

The board of CFE Trading has now approved the recommendations to work more closely in
partnership with its upstream supply chain to produce ethically sourced, sustainable coffee
beans. In addition, an organic range will be available for distribution next year, once the organic
coffee plants have been harvested, to expand the range.
The company is now looking to review its downstream supply chain strategy to ensure the sale
and distribution of the revised and new products are effectively managed.
The current downstream supply chain of CFE Trading comprises the independent coffee houses
that ultimately supply the end customer.
You receive a voicemail from the sales manager on Friday morning.
Sales Manager: Good morning, I have contacted all of our current customers to make them
aware of the changes to our product range, including our focus on ethically sourced coffee and
the new organic product range that will be available next year.
I am conscious in a competitive market that we need to ensure that our products are the
preferred choice, and I’m considering initiatives that we can adopt for our downstream supply
chain. We asked two of our main retailers to collate consumer segmentation data focussing on
purchasing characteristics and age demographic. I will email you this data along with some
suggestions of ideas the sales and marketing team have had.
Please look over the data and let me know which you think are most appropriate for our current
client base.
Knowledge check
Select the choice(s) that best answers the question below.
Question
You have received the email from the sales manager containing some suggestions for
initiatives to improve the downstream supply chain. The consumer segmentation data is
outlined as follows.
Consumer segmentation data
Retailer 1 Retailer 2
Age demographic
16–35 52% 58%
36–55 29% 32%
55 and over 19% 10%
Average frequency of visits
Once a day 15% 23%
Once a week 47% 49%
Twice a month 16% 12%
Once a month 17% 10%
Less frequently 5% 6%
Recommend the three most appropriate initiatives to promote the ethically sourced
coffee.
Solution
A. Providing displays to retailers with details of the new coffee range.
B. Giving exclusivity rights to a national coffee house chain.
C. Use of social media advertising on relevant forums.
D. Creating an online store to enable direct sales to the end customer.
E. Acquiring a chain of coffee houses to distribute the product from.
Submit
Feedback
ACorrect. Almost two-thirds of both retailers’ that carried out the consumer segmentation
. analysis have customers who visit them at least once a week. A visual display promoting
the new products would be seen by a large proportion of the end customers creating a
‘pull’ demand for CFE Trading’s products.
B Incorrect. This would change the current customer base and restrict sales to one large
. retailer. There is no indication that there is to be a revision of the strategy adopted by the
board of CFE Trading.
CCorrect. More than half of the end customers for both retailers are between the ages of
. 16 and 35. The most appropriate form of advertising will occur via social media
platforms that are frequently used by this age demographic.
DCorrect. For those end customers who less frequently visit the retailers, a direct
. distribution channel eliminating the coffee house intermediary will provide an
opportunity to make the product available to a wider market audience.
E Incorrect. This is an example of forward integration. It would require significant

. investment to grow the organisation by acquisition and may not be appropriate currently
as CFE Trading are investing in the upstream supply chain.
Supplier analysis
As discussed earlier, each organisation is part of a wider value system, and evaluation and
selection of suppliers can be a significant factor in satisfying the end customers. When the
suppliers are not performing, there will be an impact on an organisation’s ability to provide
products to customers in need. Additionally, when a supplier is not in line with laws or what is
expected of business, the seller and owner of the brand can pay a high price for what happens in
the supply chain.
It is worth taking a few moments to review the supplier analysis and selection process. The three
elements related to supplier analysis are appraisal, approval, and rating.
● Supplier appraisal – Supplier appraisal is an assessment of a potential supplier’s

capability of meeting and maintaining the key elements contained within the
contract, such as quality standards, delivery commitments, quantity, and price.
● Supplier approval – Once the supplier has been assessed and found to be capable
of meeting the contract requirements, the suppler is placed on an approved supplier
list.
● Supplier rating – The performance of the supplier is monitored against the terms of
the contract. An index can be created that ranks suppliers in terms of performance
to determine the preferred supplier list. Large organisations often maintain an
approved supplier list to which suppliers may be seeking access.
In terms of supplier-buyer power relationships, it is worth remembering that an organisation is a

supplier’s customer, and the supplier may well have undertaken customer profitability analysis to
determine the status of the organisation as a customer. Therefore, there is value in making the
organisation attractive to suppliers in order to develop and maintain a good working relationship.
The mutual benefit can be a determining factor in the success of a profitable, long-term
relationship between parties.
As with customers, it is possible to rate the supplier performance and ascertain the strategic
importance of the relationship. Performance factors that can be monitored include those that
typically come to mind – such as delivery performance and price – but may also include factors
like the supplier’s ability to respond to changes in demand. If an organisation’s competitive
advantage is based on its ability to respond to customer demand, the same degree of
responsiveness and flexibility needs to be present in the supply chain. One way to deal with this
might be to dual source with the suppliers’ full knowledge of why the organisation chooses to do
so. This can be the basis of deciding the strategic importance of various suppliers and can lead
to the development of supplier relationships that are conducive to both parties. The balance of
negotiating power becomes relevant in the discussion about price and contract terms.
Developing strong supplier relationships can mitigate against the supplier having too much
power.
Other aspects of supplier analysis can include an estimate of the likely costs in the event of a
breakdown in the supply chain. World events such as natural disasters that disrupt global supply
chains can affect organisations that rely on those supply chains. The number of suppliers that
can provide a product or service, the degree of competition in the demand-supply market (for
example, competition for scarce resources), and substitution possibilities all affect the supplier
relationship. Accountants can aid organisations in evaluating the strategic and financial risks
these factors pose. Other factors, such as make-or-buy decisions, which could be the basis of a
competitive advantage, also provide opportunities for accountants to contribute.
Supplier evaluation, however, is situational and there may be instances in which it is imperative,
such as in the negotiation of a service-level agreement. The aspects that the evaluation focusses
on will relate to the requirements of the particular relationship, but all evaluations will probably
take into account factors such as finance, production capacity and facilities, information
technology, human resources, quality, performance, and environmental and ethical
considerations.
Conclusion
A supply chain involves the entire production and distribution process, from sourcing the
procurement of raw materials, through the manufacturing and distribution of inventories, to the
final sale of the goods to the end customer.
Supply chain management includes many strategic supply chain decisions that are critical for the
whole business. Decisions about the management of the supply chain are directly linked to
corporate strategy.
There are several considerations when developing a supply strategy:
● Should the organisation make or buy the parts or services?

● Which suppliers should the organisation select?
● How many suppliers are needed?
● How to ensure good quality from suppliers?
Analysing and selecting specific suppliers is a critical part of the supply chain management
process; this includes:
● supplier appraisal,
● supplier approval, and
● supplier rating.
When the supply chain is managed effectively, the organisation maximises its chances that
strategic goals will be reached.

6 Internal Capability Analysis

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7/12/23, 6:00 AM CGMA LMS Tailor Preview

Course learning objective

Internal analysis and the strategy process

Resources, capabilities, and competencies

● Tangible resources – The physical assets of an organisation, such as plant, labour,

● gain competitive advantage,

Core or distinctive competencies

required for an organisation to continue to exist.

Watch this Harvard Business Review video on core competence.

Group items by dragging them into their corresponding boxes.

Ability to tailor products specifically to individual customer requirements

Ability to attract new employees as business grows

Ability to meet growing demand for product

Knowledge check feedback

Competencies and critical success factors

A CSF is an element of organisational activity which is central to its future success.

The CSFs should also tie into corporate objectives.

Objectives might include:

These CSF might include the following:

● Attracting and developing performers of international standing

Using Porter’s Five Forces to identify core competencies in an industry and

Five forces operating on petrol retailing in the 1980s.

So, who in their right mind would enter this business?

Competencies of petrol retailing Competencies of supermarket retailing

Strong presence in strategic

Unique access to supply markets

Integrated supply chain Supply chain management

Powerful brand recognition Recognised brand

Competencies of petrol retailing Competencies of supermarket retailing

Petrol retail experience Retailing experience

Resource audit: 9Ms framework

click the video to begin.

Consider these 9Ms framework additional questions.

Click each folder to learn more.

Culture and structure of the organisation

● Is the organisation entrepreneurial or bureaucratic?

Experience and expertise of the senior management

● What skills do members of management possess?

Ability of the organisation to generate relevant, accurate, and timely information

● What information systems are available for use?

Human resources of the organisation

● Have all employees (skilled and unskilled) been evaluated as resources?

Markets in which the organisation currently operates

● How does the company’s market share compare to competitors?

Relationships with suppliers

● What is the quality and reliability of inputs?

Processes adopted by the organisation

● How are the activities carried out – automation or labour intensive?

The organisation’s liquidity position

● What is the level of debt or gearing?

● Are there any ‘difficult’ shareholders?

Physical assets of the organisation

● What is the use rate of the assets?

What is the quality of outputs?

On Tuesday morning, you see Michael in the kitchen.

Natural Food Inc. feature 9Ms model fram

Production process is highly automated Select one

Chief executive is entrepreneurial Select one

Annual employee turnover levels of 4.6 Select one