2Lecture Objectives(1) Define internal analysis and discuss why it is important.(2) Describe the relationship between organizational resources, organizational capabilities, core competencies, and distinctive organizational capabilities.(3) Explain what organizational strengths and weaknesses are.(4) Define the value chain and describe the primary and support activities on the value chain.(5) Explain the strategic options for correcting cost competitiveness on the value chain system.(6) Discuss the steps in conducting a competitive strength assessment(7) Explain how to use the internal audit process(8) Discuss the features of an internal environmental analysis process(9) Describe the steps in capabilities assessment profile
3What is Internal Analysis? The process of identifying and evaluating an organization’s specific characteristicsResources, capabilities, and core competenciesLooks at organization’sCurrent visionMission(s)Strategic & financial objectivesStrategies
4Why Do an Internal Analysis? Enables a firm to identify its strengths and weaknesses.Enables a firm to make good strategic decisions.Information from internal environment provides basis for developing strategic alternatives.
5A Quick Review of Organizational Resources Organizational resources are assets an organization has for carrying out work activities and processesFinancial resourcesCurrent debt, credit lines, equity, cash reserves, etc.Physical resourcesPlant & equipment, inventories, supplies, fixtures, etc.Human resourcesManagement & employee skills, training, experiences, etc
6A Quick Review of Organizational Resources Intangible resourcesBrand names, patents, trademarks, copyrights, etc.Structural-cultural resourcesCulture, history, work systems policies, formal reporting structures, etcHuman, intangible, and structural-cultural resources can be a source of competitive advantagePlay important role in determining capabilities or competencies and core competencies
7Organizational Capabilities Organizational capabilities/competenciesThe complex and coordinated network of company routines and processes that determines how efficiently and effectively the organization transforms its resources into products (goods & services)Involves complex pattern of coordination between people, & between people and resourcesIt’s an internal activity that a company performs better than other internal activities
8Organizational Capabilities Organizational routines & processes:Regular, predictable, and sequential patterns of work activity by organizational membersSustainable Competitive Advantage (CA):The prolonged maintenance of competitive advantageCapabilities that are capable of leading to CA today may not continue to do so as conditions & rivals changeDynamic capabilitiesAn organization’s ability to build, integrate and reconfigure capabilities to address rapidly changing environments over time.
9Core Competencies Core competencies A well-performed internal activity that is central, not peripheral, to a company’s strategy, competitiveness, and profitabilityMajor value-creating skills and capabilities thatare shared across multiple product lines or multiple businessesResults from the collaboration among different parts of an organizationGives a company a potentially valuable competitive capability
10Core Competencies Types of Capabilities/Core Competencies Skills in manufacturing a high quality productSystem to fill customer orders accurately and swiftlyFast development of new productsBetter after-sale service capabilitySuperior know-how in selecting good retail locationsInnovativeness in developing popular product featuresMerchandising and product display skillsExpertise in an important technologyExpertise in integrating multiple technologies to create whole families of new products
11From Core Competencies to Distinctive Capabilities Special and unique capabilities that distinguish the organization from its competitorsA competitively valuable activity that a company performs better than its rivalsAllow a company to develop a sustainable competitive advantage and outperform its competition
12From Core Competencies to Distinctive Capabilities Characteristics of distinctive capabilities:(1) Contribute to superior customer value and offers real benefits to customers(2) Difficult for competitors to imitate(3) Allow the organization to use that capability in a variety of waysWhat’s the relationship between organizational capabilities, core competencies and distinctive capabilities?
13Examples of Distinctive Capabilities Sharp CorporationExpertise in flat-panel display technologyToyotaLow-cost, high-quality manufacturing capability and short design-to-market cyclesIntel CorporationAbility to design and manufacture ever more powerful microprocessors for PCsMotorolaDefect-free manufacture (six-sigma quality) of cell phones
14Strengths and Weaknesses Resources that an organization possesses and capabilities that the organization has developedBoth can be exploited and developed into a sustainable competitive advantageWeaknessesResources and capabilities that are lacking or deficient; and thatPrevents an organization from developing a sustainable competitive advantage
15How to Do an Internal Analysis Approaches to internal analysis(1) Value Chain Analysis(2) Competitive Strength Assessment(3) An Internal Audit(4) Internal Environmental Analysis Process(5) Capabilities Assessment Profile
16(1) Value Chain Analysis Customers want (demand) some type of value from the goods and services they purchase or obtainCustomer value arises from(1) Uniqueness of product or service(2) Low-priced product/service(3) Quick response to specific or distinctive customer needsAllow assessment of cost competitiveness of organization with those of its rivals
17The Value ChainThe value chain identifies the separate activities and business processes performed to design, produce, market, deliver, and support a product/service and how well they create customer value.Consists of two types of activitiesPrimary activities : create customer valueInbound logistics, Operations; Outboard logistics; Sales & Marketing; & Customer ServiceSupport activities: Support primary activitiesProcurement; Technological development; HRM; General Administration (Firm infrastructure)
18A Typical Value Chain Primary Activities and Costs OutboundLogisticsOperationsInboundSales andMarketingServiceProfitMarginProcurement; Product R&D, TechnologyHuman Resources ManagementGeneral Administration (Firm Infrastructure)Primary Activities and CostsSupportActivitiesand Costs
19Downstream Value Chains The Value Chain SystemUpstreamValue ChainFirm’s OwnValue ChainDownstream Value ChainsActivities,Costs, &Margins ofSuppliersInternallyPerformedActivities,Costs, &MarginsActivities,Costs, &Margins ofForwardChannelAllies &StrategicPartnersBuyer/UserValueChains
20Examples of Key Value Chain Activities Soft Drinks IndustryProcessing of basic ingredientsSyrup manufactureBottling & can fillingWholesale distributionRetailingComputer Software IndustryProgrammingDisk LoadingMarketingDistribution
21The Value Chain SystemA company’s cost competitiveness depends on how well it manages its value chain relative to competitorsThree areas contribute to cost differences1. Suppliers’ activities2. The company’s own internal activities3. Forward channel activities
22The Value Chain SystemAssessing a company’s cost competitiveness involves comparing costs along the industry’s value chainSuppliers’ value chains are relevant becauseCosts, quality, and performance of inputs provided by suppliers influence a firm’s own costs and product performanceForward channel allies’ value chains are relevant becauseForward channel allies’ costs and margins are part of price paid by ultimate end-userActivities performed affect end-user satisfaction
23Strategic Options for Correcting Costs Competitiveness Supplier-related costs disadvantages:Negotiate more favorable prices with suppliersWork with suppliers to achieve lower costsIntegrate backwardUse lower-priced substitute inputsDo a better job of managing linkages between suppliers’ value chains and firm’s own chainMake up difference by initiating cost savings in other areas of value chain
24Strategic Options for Correcting Costs Competitiveness Forward channel allies’ costs disadvantages:Push for more favorable terms with distributors and other forward channel alliesWork closely with forward channel allies and customers to identify win-win opportunities to reduce costsChange to a more economical distribution strategyMake up difference by initiating cost savings earlier in value chain
25Strategic Options for Correcting Costs Competitiveness Firm’s own internal cost disadvantages:Reengineer performance of high-cost activities or business processesEliminate some cost-producing activities altogether by revamping value chain system (VCS)Relocate high-cost activities to lower-cost geographic areasSee if high-cost activities can be performed cheaper by outside vendors/suppliersInvest in cost-saving technologySimplify product designAchieving savings in backward or forward portions of VCS
26From Value Chain Analysis to Competitive Advantage A company can create competitive advantage by managing its value chain so as toIntegrate the knowledge and skills of employees in competitively valuable waysLeverage economies of learning or experience curve effectsCoordinate related activities in ways that build valuable capabilitiesBuild dominating expertise in a value chain activity critical to customer satisfaction or market success
27From Value Chain Analysis to Competitive Advantage The strategy-making lesson of value chain analysis is that sustainable competitive advantage can be created by:(1). Managing the value chain activities better than competitors; and(2). Developing distinctive capabilities to serve the needs of customers better
28(2) Assessing Organization’s Competitive Strength How does the firm rank relative to key rivals on each industry KSF and relevant measure of competitive strength (capabilities or core competencies)?Does the firm have a sustainable competitive advantage or disadvantageWhat is the ability of the firm to defend its position in light ofIndustry driving forcesCompetitive pressuresAnticipated moves of rivals
29Assessing Organization’s Competitive Strength 1. List industry key success factors and other relevant measures of competitive strength2. Rate firm and key rivals on each factor using rating scale of (1 = weak; 10 = strong)3. Decide whether to use a weighted or unweighted rating system4. Sum individual ratings to get overall measure of competitive strength for each rival5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage
30Assessing Organization’s Competitive Strength A weighted competitive strength analysis is conceptually stronger than an unweighted competitive strength analysis becauseAll the strength measures are not equally important.E.g., in an industry with strong product differentiation, the significant strength measures may beBrand awarenessReputation for qualityAmount of advertisingDistribution capability, etc.
32Assessing Organization’s Competitive Strength What does a high competitive strength rating relative to rivals mean?Strong competitive position & possession of competitive advantagesOpportunity for company to improve its long-term market positionGood strategy entailsLooking for opportunities to leverage company strengths into competitive advantageUsing company strengths to attack the competitive weaknesses of rivals
33Why Do a Competitive Strength Assessment? Reveals strength of firm’s competitive positionShows how firm stacks up against rivals, measure-by-measure -- pinpoints the company’s competitive strengths and competitive weaknessesIndicates whether firm is at a competitive advantage / disadvantage against each rivalIdentifies possible offensive attacks (pit company strengths against rivals’ weaknesses)Identifies possible defensive actions (a need to correct competitive weaknesses)
34(3) Using an Internal Audit A thorough assessment of an organization’s various internal functional areasStrategic decision makers use the internal audit to assess the organization’s resources and capabilities from the perspectives of its different functions
35Using an Internal Audit Six primary functional areasProduction-operationsMarketingResearch & developmentFinancial and accountingManagement, including HRMInformation SystemDepending on products, markets, and industries, individual organizational structures may vary and, therefore, may emphasize different sets of functional areas
36(4) Using an Internal Environmental Analysis Process Assesses an organization’s internal activitiesStep 1: Survey strengths and weaknessesStep 2: Categorize these strengths & weaknesses (S&W) in terms of resources & capabilitiesStep 3: Investigate the potential of strengths to lead to competitive advantageStep 4: Evaluate the ability of these competitively resources & capabilities to serve as the basis for an appropriate competitive strategy
37(5) Capabilities Assessment Profile Resembles the internal environmental analysisSimilarity: Focuses on deeper evaluation of S&WDifference: Focuses only on an firm’s capabilitiesAnalysis of capabilities is complexNot as easily identified as organization’s function or even the value creating primary & support activitiesComplex nature of capabilities makes it hard for competitors to imitate
38Capabilities Assessment Profile Analysis Consists of two phases:Phase I: Identify distinctive capabilitiesPhase II: Develop and leverage distinctive capabilitiesIdentifying Distinctive Organizational CapabilitiesStep 1: Prepare current product-market profileEmphasize organization-customer interactionsWhat is the organization selling?Who are the organization selling to?Is the organization providing superior customer value & desirable benefits?
39Capabilities Assessment Profile Step 2: Identify sources of competitive advantage & disadvantage in the main product-market segmentDetermine why customers choose the organization’s products vs. those of competitorsInvolves information on cost, product, and service attributesWhen customers purchaseWhat they’re actually purchasingWhat bundle of attributes satisfies their needs
40Capabilities Assessment Profile Step 3: Describe all organizational capabilities & competenciesExamine resources, skills, & abilities of the various divisionsDetermine which resources, skills, & abilities lead to a competitive advantageStep 4: Sort the core capabilities/competencies according to strategic importanceCan capability provide wide access to a number of different markets?Does the capability provide tangible customer benefits?Is the capability difficult for competitors to imitate?
41Capabilities Assessment Profile Step 5: Identify and agree on the key capabilities or competenciesProvide basis for resource allocationClassifying an Organization’s S&WPast performance trendsMeasures such as financial ratios, operations efficiency, etc,Specific goal or targetsOrganization’s goals are statements of desired outcomesComparison against competitorsHow are competitors doing?Personal opinions of decision makers & consultants