1. Topic 3: Internal Analysis
The Identification of Strengths and Weaknesses

2. Learning Objectives
Understand resources, capabilities/distinctive competencies, and activities
Discuss how to assess a resource/capability
Discuss how to assess a firm’s financial performance
Explain the concept of organizational structure and describe the basic organizational forms

3. Internal Environment: Key Issues
Goals, performance, and strategy
Vision, mission, and culture
Financial goals and performance
What is the firm’s strategy at corporate and business levels?
Resources, capabilities, and activities
Organizational structure and processes
Competitive Advantage
Strengths Weaknesses
Competitive Disadvantage

4. Resources

5. Capabilities and Distinctive Competencies
The capacity to deploy resources that have been purposely integrated to achieve a desired end state.
Emerge over time through complex interactions among different resources.
Are often developed in specific functional areas.
Distinctive Competencies
Firm-specific strengths that allow a company to differentiate its products from those offered by rivals, and/or achieve substantially lower costs than its rivals.

6. Capabilities: An Example

7. Resource/Capability Assessment The VRIO Framework
Definition
Competitive Implication
Valuable
The resource/capability helps the firm neutralize threats or exploit opportunities
Competitive Parity
If the resource/capability is valuable and exploitable, but not rare
Rare
The resource/capability is not possessed by many others
Temporary Competitive Advantage
If the resource/capability is valuable, rare, and exploitable, but imitable
Inimitable
The resource/capability is not easy to copy
Causal ambiguity
Sustainable competitive advantage
If the resource/capability meets all four criteria
Organization
(Exploitable)
The company is organized to exploit the resource/capability

8. Activities The Firm Value Chain

9. Outsourcing Outsourcing How to Outsource Effectively?
The purchase of a primary activity or a support activity from an external supplier.
Few organizations possess the resources and capabilities required to achieve competitive superiority in all primary and support activities.
Effective outsourcing increases flexibility, mitigate risks, and reduce capital investment
How to Outsource Effectively?
Do Not outsource activities in which the firm itself can create and capture value.
Do Not outsource primary and support activities that are used to neutralize external threats or to utilize external opportunities.

10. Resources, Capabilities, Activities, and Value Creation
Creating value /Making profits
How to create value and make profits?
How to design activities and develop resources/capabilities?

11. Assessing Firm Financial Performance Value Creation
Profitability of a company depends on the:
value customers place on its products (reflecting the utility they get from a product, or, the happiness or satisfaction gained from consuming or owning the product)
price it charges for its products.
costs of creating those products.
More pricing options when customer value is high:
raising prices to reflect the value.
reducing prices to induce more customers to purchase its products.

12. Value Creation Model

13. Value Creation: Pricing Options

14. Assessing Firm Financial Performance Profitability

15. Analyzing Profitability: An Example

16. Assessing Firm Financial Performance Financial Ratios

17. Organizational Structure
The combination of the location of decision-making responsibilities, the formal division of the organization into subunits, and the establishment of integrating mechanisms to coordinate the activities of the subunits.
Basic Organizational Structures
Functional structure
Multidivisional structure
Matrix structure

18. Organizational Structure Three Components
Horizontal Differentiation (Organizational Units)
The formal division of the organization into subunits.
Subunits can be teams/projects, functions/departments, and divisions.
Vertical Differentiation (Vertical Relationship)
The location of decision making responsibilities within a structure, referring to centralization or decentralization
The number of layers in a hierarchy, referring to whether the organization is tall or flat
Integrating/Coordinating Mechanisms
Processes and procedures used for coordinating subunits
Integration/coordination approaches: direct contact; liaison roles; teams; informal mechanisms

19. Functional Structure: An Example
Head Office
R&D
Production
Marketing
HRM
Purchasing
Advantages
Simple and inexpensive
Rapid decision making
Effective in smaller firms and those with a single product category
Disadvantages
Accountability at the top
Poor communications among functional departments
Dysfunctional in multiproduct and multimarket firms

20. Multidivisional Structure: An Example

21. Multidivisional Structure Advantages and Disadvantages
Clear accountability and simplifying control
Facilitating comparison between divisions
Effective in multiproduct and multimarket firms
Disadvantages
Functional resources duplicated
Dysfunctional competition between divisions
Coordination across divisions can be difficult if cooperation is in the best interests of one’s own division

22. Matrix Structure: An Example
Corporate
Office
Product or Region A
Product or Region B
Product or Region C
Product or Region D
R&D
Operations
Marketing
Finance

23. Matrix Structure Advantages and Disadvantages
Multiple channels of communication
Functional resources shared
Facilitating learning
Disadvantages
Dual reporting channels
Dual sources of reward and punishment
Shared authority

24. The Internal Environment
Summary
Strengths
Weaknesses
Superior
Returns
Strategy
The Internal Environment
Goals, performance, and strategy
Resources, capabilities, and activities
Organizational structure and processes
Competitive Advantage
Competitive Disadvantage