Chapter Four: Analyzing an Industry By: Lauren Sterna, Collin Gillaspie, Clint Chapman, Craig Crowell, Jennifer Eccles, & Scott Addison

What is an Internal Analysis? Evaluates an organization’s resources and capabilities, and core competencies Resources include financial, physical, human, intangible, and structural-cultural. Provides information on assets, skills, and work activities

Organizational Capabilities Definition: The various routines and processes that transform those inputs (resources) into outputs (physical goods and services) These organizational routines and processes are the regular and predictable work activities done by organizational members Delta Air Lines vs. Southwest Airlines

Sustainable Competitive Advantage Capabilities that lead to a competitive advantage now may not do so in the future as conditions and competitors change Dynamic Capabilities: an organizations ability to build, integrate, and reconfigure capabilities to address rapidly changing environments

Figure 4.2 Performance Results Competitive Advantage Unique Resources The Strategic Role of Organizational Resources and Organizational Capabilties Performance Results Competitive Advantage Unique Resources Distinctive Organizational Capabilities Organizational Resources Core Competencies Organizational Capabilities Financial assets Physical assets Human Resources Intangible Assets Structural-Cultural Organizational processes and routines Accumulated knowledge Actual work activities

Organizational Capabilities, Core Competencies & Distinctive Capabilities Core Competencies-Any major value-creating capabilities organizations have that are essential to their business. Nokia-Product design, customer research Dordstrom-customer service What comes first out of the 3? Organizational Capabilities Fundamental building blocks for developing core competencies Distinctive Organizational Capabilities-the special and unique capabilities that distinguish an organization from its competitors. Southwest-Processes and routines(turnaround, ticketing, and interaction)

Distinctive Capabilities Three Characteristics First, a distinctive capability contributes to superior customer value and offers real benefits to customers. Second, the should be difficult to imitate. Third, should be able to be used in a variety of ways. Ex. Honda

Strengths & Weaknesses Internal Analysis-Find S&W Strengths-resources that the organization possesses and capabilities that it has developed which can be turned into a competitive advantage. Not every strength will lead to a sustainable competitive advantage, but an organization’s strengths should be nurtured and reinforced as its main competitive weapons Weaknesses-resources and capabilities that are lacking or deficient and prevent the organization from developing a sustainable competitive advantage. To be corrected if they’re in critical areas that are preventing the organization from developing a sustainable competitive advantage. Most organizations simply minimize the impact of the weakness.

Value Chain Analysis A systematic way of examining all the organization’s functional activities and how well they create customer value. Value comes from 3 broad categories: Product is unique and different Product is low priced Product meets the needs of a specific group of customers quickly and efficiently

Assessing the Activities in the Value Chain Primary Activities Support Activities Inbound logistics Procurement Operations Technological development Outbound logistics Marketing and sale Human resource management Customer service Firm infrastructure

Assessing the Primary Activities in the Value Chain Inbound Logistics Materials control system, inventory control system, raw materials Operations Plant layout, productive equipment as compared to competitors Outbound logistics Finished products Marketing and Sales Marketing research, brand loyalty, alternative distribution channels Customer Service Customer input, product warranty, employee training, repair and replacement services

Assessing the Support Activities in the Value Chain Procurement Alternate resources, long-term relationships and reliable suppliers Technological Development R & D activities, organizational culture, trained technicians Human Resource Management Effective recruiting, and training programs, promotion policies, reward systems, employee motivation Firm Infrastructure External opportunities and threats, organizational goals, public image, stakeholder relationships

Overview Value chain analysis is important because it creates the varying levels of customer value and organizational costs. They assess the organization’s ability to create customer value through its work activities. The advantage of the value chain analysis is that it emphasizes the importance of how well an organization performs the primary and support activities in creating customer value

Internal Audit A thorough examination of an organization’s internal areas. Begins with the premise that every organization has functions it must perform, and strengths and weaknesses are based on how well they are performed. Looks at six organizational functional areas and measures the efficiency of each area. Central theme of auditing is looking for competencies in each area.

Organizational functional areas Production and operations Marketing Research and Development Financial and Accounting Management Information systems and Information technology

3 Additional Organizational Elements Strategic Managers-board of directors and top managers Organizational Structure Organizational Culture

Capabilities Assessment Profile CAP is an in-depth evaluation of an organization’s capabilities. Assessing capabilities can be complex since they arise from the ways that resources are combined in the organization’s basic work processes and routines. Capabilities assessment consists of two phases: Identify distinctive capabilities Developing and leveraging these distinctive capabilities

Capabilities Assessment Profile The first step in assessing organizational capabilities is preparing a current product- market profile. Emphasizes organization-customer interactions. Identifies what we’re selling, who we’re selling to, and whether we’re providing superior customer value and offering the customer desirable benefits.

Capabilities Assessment Profile In order to prepare a current product-market profile we need: Information about specific products and markets Principal competitors in each of these product- market segments Performance measures for each product-market segment. Sales growth rate Market share Competitive position Contribution to sales and earnings

Capabilities Assessment Profile The next step is identifying sources of competitive advantage and disadvantage in the main product-market segments. We need to know why customers choose our products instead of our competitors. Identify specific costs, product, and service attributes. When someone buys our product they are buying a bundle of attributes that they believe will satisfy their needs. We need to know what these attributes are!!!

Capabilities Assessment Profile The third step involves describing organizational capabilities and competencies. Examine the resources, skills, and abilities of your organizations different divisions. Uncover what resources and capabilities lead to your competitive advantage.

Capabilities Assessment Profile The last step involves sorting these capabilities and competencies according to their strategic importance. Which capabilities are most important for building the organization’s future. We should evaluate each category according to three criteria: Does the capability provide tangible customer benefits? Is the capability difficult for competitors to imitate? Can the capability provide wide access to a number of different markets? By sorting organizational capabilities according to level of strategic importance, strategic decision makers gain an understanding of their organization’s critical strengths and weaknesses.

Capabilities Assessment Profile The final step involves identifying and agreeing on the key competencies and capabilities. By ranking key competencies and capabilities, decision makers can easily identify the key ones. The hard part is agreeing with competencies and departments deserve future resource allocation.

Determining Strengths and Weaknesses The first criteria used to determine strengths and weaknesses is past performance. Financial ratios Operational efficiency statistics Employee productivity statistics Quality control data Is market share increasing or decreasing? Are liquidity ratios going up or down? Ect…

Determining Strengths and Weaknesses The second criteria is how actual performance measures up against specific performance goals. Organizational goals are statements of desired outcomes. Looking at performance trends and organizational goals isn’t enough, we need something to compare them to.

Determining Strengths and Weaknesses The third criteria is comparing resources and capabilities against competitors. To do this you use SEC fillings, industry association newsletters, annual reports, customer contacts, and the competitor's web page. However it’s unethical to go through someone’s garbage cans.

Determining Strengths and Weaknesses The fourth and last criterion for judging organizational strengths and weaknesses is personal or subjective opinions. These can come from decision makers or consultants from inside or outside the company.

Summary Internal Analysis Strengths and Weaknesses Evaluating a company based on its resources and capabilities Strengths and Weaknesses Capabilities Assessment Profile