Dickson K.W. Chiu PhD, SMIEEE COMP5331: Web Pub and Web Ad 7. Internal Analysis Dickson K.W. Chiu PhD, SMIEEE

What is an Internal Analysis? Looks at the organization’s Vision Mission Strategic objectives Identifies and evaluates resources, capabilities, and core competencies The resource-based view (RBV) was introduced in chapter 2. Internal analysis identifies a company’s resources, capabilities, and core competencies. It also focuses on the four items listed above. Dickson Chiu 2006

Company Vision Hierarchy of Goals Massively inspiring Overarching Long-term Driven by and evokes passion Fundamental statement of the organization’s Values, Aspiration, Goals E.g., Disneyland: “To be the Happiest place on earth” Hierarchy of Goals Company vision Dickson Chiu 2006

Mission Statements Hierarchy of Goals Purpose of the company Basis of competition and competitive advantages More specific than vision Focused on the means by which the firm will compete E.g., FedEx: “To produce superior financial returns for our shareholders as we serve our customers with the highest quality transportation, logistics, and e-commerce.” Hierarchy of Goals Company vision Mission statements Dickson Chiu 2006

Strategic Objectives Hierarchy of Goals Company vision Operationalize the mission statement Provide guidance on how the organization can fulfill or move toward the “higher goals” More specific, a more well-defined time frame, measurable (yardstick for rewards and incentives), consistent with vision and mission, realistic (challenging but doable), timely E.g., P&G: “Increase sales growth 6% to 8% in each of the next five years” Hierarchy of Goals Company vision Mission statements Strategic objectives Dickson Chiu 2006

A Quick Review of Organizational Resources Organizational Resources (assets) Financial resources: debt capacity, credit lines, etc. Physical assets: buildings, equipment and fixtures Human resources: experience, knowledge, etc. of employees Intangible resources: brand names, patents Structural-cultural resources: culture, work systems Examples of financial resources: debt capacity, credit lines, etc. Examples of physical assets: buildings, equipment and fixtures Examples of human resources: experience, knowledge, etc. of employees Examples of intangible resources: brand names, patents Examples of structural-cultural resources: culture, work systems Dickson Chiu 2006

Competitive Advantage Distinctive Organizational The Strategic Role of Organizational Resources and Organizational Capabilities Performance Results Competitive Advantage Distinctive Organizational Capabilities Organizational Capabilities Organizational Resources Core Competencies Although an organization’s tangible and intangible resources can be a source of competitive advantage, they play a more important role (as the figure indicates) in determining an organization’s capabilities and core competencies. Financial assets Physical assets Human resources Intangible assets Structural-cultural assets Organizational processes and routines Accumulated knowledge Actual work activities Dickson Chiu 2006

From Resources to Organizational Capabilities Competencies or skills that a firm employs to transform inputs to outputs, and capacity to combine tangible and intangible resources to attain desired end Outstanding customer service Excellent product development capabilities Innovativeness of products and services Ability to hire, motivate, and retain human capital Organizational routines and processes Capabilities – patterns of coordination Sustainable competitive advantage Dynamic capabilities It is important that the terms listed above are thoroughly understood, for they form the basis of internal analysis. Organizational capabilities can be defined as the network of organizational routines and processes that determine how efficiently and effectively the organization transforms its inputs (resources) into outputs. Organizational routines and processes are the regular, predictable, and sequential patterns of work activities performed by organizational members. Dynamic capabilities refer to an organization’s ability to build, integrate, and reconfigure capabilities to address rapidly changing environments. Dickson Chiu 2006

Characteristics of Distinctive Organizational Capabilities • Contributes to Superior Customer Value Distinctive Organizational Capabilities These are the 3 characteristics that make capabilities truly distinctive. Example of the first (superior customer value): Timex’s easy to use alarm clocks Example of the second (difficult to imitate): Anheuser-Busch’s data mining Example of the third (used in a variety of ways): Honda’s engine design • Can Be Used in a Variety of Ways • Is Difficult for Competitors to Imitate Dickson Chiu 2006

The Role of Strengths and Weaknesses Strengths: Resources that an organization possesses and capabilities that an organization has developed. Both can be exploited and developed into a sustainable competitive advantage Weaknesses: Resources and capabilities that are lacking or deficient. Prevent an organization from developing a sustainable competitive advantage The whole reason for doing an internal analysis is to assess what the organization has or doesn’t have (resources) and what it can and can’t do (capabilities) – i.e., its strengths and weaknesses. The slide links both strengths and weaknesses to sustainable competitive advantage. Dickson Chiu 2006

How to do an internal analysis: value chain Using a value-chain analysis The premise behind value chain analysis is that customers demand value from goods and services they obtain Customer value Product is unique and different Product is low priced Quick response to specific or distinctive customer needs A value chain is a systematic way of examining organization’s functional activities The value chain is an important technique for analyzing an organization’s internal situation. It views an organization’s work as a series of value-creating activities. Michael Porter (the same person who created the five forces model – chapter 3 ) developed the concept of the value chain. Dickson Chiu 2006

Primary and Support Activities in the Value Chain { Firm Infrastructure Human Resource Management Support Activities MARGIN Technological Development Procurement Operations Service { MARGIN Inbound Logistics Outbound Logistics Marketing and Sales The 9 activities of the value chain are divided into five primary and four support activities. Tables 4.1 and 4.2 (in the text) lists some questions to ask in assessing the primary and support activities of the value chain. Primary Activities Dickson Chiu 2006

How to do an internal analysis – internal audit Using an internal audit Thoroughly assesses an organization's various internal functional areas Are the necessary resources available so that the people in these functional areas can perform their assigned work activities and how well do they perform these assigned work activities? An internal audit is the second approach to assessing strengths and weaknesses of an organization. Table 4.3 (in the text) provides a detailed list of important internal audit questions in each of the six areas listed above. Dickson Chiu 2006

Using an internal audit Six Primary Functional Areas Productions-Operations Marketing Research and Development Financial and Accounting Management (including HRM) Information Systems Dickson Chiu 2006

How to do an internal analysis – Capabilities Assessment Profile Complex Analysis of Capabilities Not as easily identifiable as organizational functions Hard for competitors to imitate Two-phased Capability Assessment Phase I: Identify distinctive capabilities Phase II: Develop and leverage these distinctive capabilities The third and final approach for doing an internal analysis is a capabilities assessment profile. It is an in-depth evaluation of an organization’s capabilities in order to determine strengths and weaknesses. Dickson Chiu 2006

Identifying Distinctive Organizational Capabilities Step 1 Prepare current product-market profile. Identify sources of competitive advantage and disadvantage in the main product-market segments. Step 2 Step 3 Describe all the organizational capabilities and competencies. Sort the core capabilities and competencies according to strategic importance. Step 4 Capabilities assessment profile is done in two phases (as indicated in the previous slide). This figure illustrates the steps in phase I. Identify and agree on the key capabilities and competencies. Step 5 Dickson Chiu 2006

Criteria to Judge Organizational Strengths and Weaknesses Past Performance Trends Comparison Against Competitors Are organizational resources and capabilities strengths or weaknesses? To assess whether resources and capabilities are strengths or weaknesses and whether certain ones could be sources of sustainable competitive advantage, the four criteria listed above are used. Personal Opinions of Strategic Decision Makers or Consultants Specific Goals or Targets Dickson Chiu 2006

Why Do an Internal Analysis? It is the only way to identify an organization’s strengths and weaknesses It’s needed for making good strategic decisions Two important reasons for doing an internal analysis are listed. With the information from an internal analysis, strategic decision makers can make intelligent judgments about what competitive advantages the organization might currently have, what might potentially be developed into competitive advantages, and what might be preventing competitive advantages from being developed. Dickson Chiu 2006