lAssessing Strengths and Weaknesses: Internal Analysis

8/14/2019 lAssessing Strengths and Weaknesses: Internal Analysis

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Lecture Objectives

(1) Define internal analysis and discuss why it is important.(2) Describe the relationship between organizational resources,

organizational capabilities, core competencies, and distinctiveorganizational 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


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What is Internal Analysis? The process of identifying and evaluating

an organizations specific characteristics Resources, capabilities, and core competencies Looks at organizations

Current vision

Mission(s) Strategic & financial objectives Strategies


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Why 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.


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A Quick Review of

Organizational Resources Organizational resources are assets an

organization has for carrying out work activitiesand processes Financial resources

Current debt, credit lines, equity, cash reserves, etc.

Physical resources Plant & equipment, inventories, supplies, fixtures, etc.

Human resources

Management & employee skills, training, experiences, etc


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A Quick Review ofOrganizational Resources

Intangible resources Brand names, patents, trademarks, copyrights, etc.

Structural-cultural resources Culture, history, work systems policies, formal

reporting structures, etc

Human, intangible, and structural-culturalresources can be a source of competitiveadvantage Play important role in determining capabilities

or competencies and core competencies


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Organizational Capabilities Organizational capabilities/competencies

The complex and coordinated network of companyroutines and processes that determines howefficiently and effectively the organizationtransforms its resources into products (goods &

services) Involves complex pattern of coordination between

people, & between people and resources Its an internal activity that a company performs

better than other internal activities


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Organizational Capabilities

Organizational routines & processes: Regular, predictable, and sequential patterns of work

activity by organizational members

Sustainable Competitive Advantage (CA): The prolonged maintenance of competitive advantage Capabilities that are capable of leading to CA today may

not continue to do so as conditions & rivals change Dynamic capabilities

An organizations ability to build, integrate andreconfigure capabilities to address rapidly changingenvironments over time.


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Core Competencies Core competencies

A well-performed internal activity that is central , not peripheral, to a companys str ategy, competi ti veness,

and prof i tabi li ty Major value-creating skills and capabilities that

are shared across multiple product lines or multiple businesses

Results from the collaboration among different parts of anorganization

Gives a company a potentially valuable competitivecapability


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From Core Competencies toDistinctive Capabilities

Distinctive Capabilities Special and unique capabilities that distinguish

the organization from its competitors A competi tively valuable activity that a

company performs better than i ts r ivals

Allow a company to develop a sustainablecompetitive advantage and outperform itscompetition


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From Core Competencies toDistinctive 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 ways

Whats the relationship betweenorganizational capabilities, core competenciesand distinctive capabilities?


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Examples of Distinctive Capabilities Sharp Corporation

Expertise in flat-panel display technology Toyota

Low-cost, high-quality manufacturing capability andshort design-to-market cycles

Intel Corporation Ability to design and manufacture ever more

powerful microprocessors for PCs Motorola

Defect-free manufacture (six-sigma quality) of cell

phones


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Strengths and Weaknesses

Strengths Resources that an organization possesses and

capabilities that the organization has developed

Both can be e xploited and developed into asustainable competitive advantage

Weaknesses Resources and capabilities that are lacking or

deficient; and that Prevents an organization from developing a

sustainable competitive advantage


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How to Do an Internal AnalysisApproaches to internal analysis

(1) Value Chain Analysis(2) Competitive Strength Assessment(3) An Internal Audit

(4) Internal Environmental Analysis Process(5) Capabilities Assessment Profile


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(1) Value Chain Analysis Value Chain Analysis

Customers want (demand) some type of value fromthe goods and services they purchase or obtain

Customer value arises from(1) Uniqueness of product or service

(2) Low-priced product/service(3) Quick response to specific or distinctive customer needs

Allow assessment of cost competi ti veness oforganization with those of its rivals


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The Value Chain The value chain identifies the separate activiti es and

business processes performed to design, produce,market, deliver, and support a product/service and howwell they create customer value.

Consists of two types of activities

Primary activi ties : create customer value

Inbound logistics, Operations; Outboard logistics; Sales& Marketing; & Customer Service

Support activities: Support primary activities

Procurement; Technological development; HRM;General Administration (Firm infrastructure)


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A Typical Value Chain

OutboundLogisticsOperations

InboundLogistics

Sales andMarketing Service

ProfitMargin

Procurement; Product R&D, Technology

Human Resources Management

General Administration (Firm Infrastructure)

Prim ary A ct iv i t ies and Costs

Suppor tAct iv i t iesand Costs


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The Value Chain System

Activities,

Costs, &Margins ofSuppliers

InternallyPerformedActivities,Costs, &Margins

Activities,Costs, &

Margins ofForwardChannelAllies &

StrategicPartners

Buyer/UserValueChains

UpstreamValue Chain Downstream Value Chains

Firms OwnValue Chain


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Examples of Key Value ChainActivities

Soft Drinks IndustryProcessing of basic ingredientsSyrup manufacture

Bottling & can fillingWholesale distributionRetailing

Computer Software IndustryProgrammingDisk LoadingMarketing

Distribution


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The Value Chain System A companys cost competi ti veness

depends on how well it manages its valuechain relative to competitors

Three areas contribute to cost differences

1. Suppliers activities2. The companys own internal activities

3. Forward channel activities


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The Value Chain System

Assessing a companys cost competi ti veness involves comparing costs along the industrys valuechain

Suppliers value chains are relevant because Costs, quality, and performance of inputs provided by suppliers

influence a firms own costs and product performance

Forward channel allies value chains are relevant because Forward channel allies costs and margins are part of price paid

by ultimate end-user Activities performed affect end-user satisfaction


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Strategic Options for Correcting

Costs Competitiveness Supplier-related costs disadvantages:

Negotiate more favorable prices with suppliers

Work with suppliers to achieve lower costs

Integrate backward

Use lower-priced substitute inputs

Do a better job of managing linkages betweensuppliers value chains and firms own chain

Make up difference by initiating cost savings in other

areas of value chain


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Costs Competitiveness Forward channel allies costs disadvantages:

Push for more favorable terms with distributors andother forward channel allies

Work closely with forward channel allies andcustomers to identify win-win opportunities toreduce costs

Change to a more economical distribution strategy

Make up difference by initiating cost savings earlierin value chain


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Costs Competitiveness Firms own internal cost disadvantages:

Reengineer performance of high-cost activities or business

processes Eliminate some cost-producing activities altogether by

revamping value chain system (VCS) Relocate high-cost activities to lower-cost geographic areas

See if high-cost activities can be performed cheaper byoutside vendors/suppliers Invest in cost-saving technology Simplify product design Achieving savings in backward or forward portions of VCS


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From Value Chain Analysis to

Competitive Advantage A company can create competi tive advantage

by managing its value chain so as to

I ntegrate the knowledge and skills of employees incompetitively valuable ways

Leverage economies of learning or experience curveeffects

Coordinate related activities in ways that buildvaluable capabilities

Bui ld dominating exper tise in a value chain activitycritical to customer satisfaction or market success


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From Value Chain Analysis to

Competitive Advantage The strategy-making lesson of value chain

analysis is that sustainable competi tiveadvantage can be created by:

(1). Managing the value chain activities betterthan competitors; and

(2). Developing distinctive capabilities toserve the needs of customers better


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(2) Assessing Organizations

Competitive Strength How does the firm rank relative to key r ivals on each

industry KSF and relevant measure of competitive

strength (capabilities or core competencies)? Does the firm have a sustainable competi ti ve advantage or

disadvantage What is the ability of the firm to defend its posi tion in

light of Industry driving forces Competitive pressures Anticipated moves of rivals


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Assessing Organizations

Competitive Strength1. List industry key success factors and other relevant

measures of competitive strength

2. Rate firm and key rivals on each factor using ratingscale of 1 - 10 (1 = weak; 10 = strong)3. Decide whether to use a weighted or unweighted rating

system

4. Sum individual ratings to get overall measure ofcompetitive strength for each rival

5. Determine whether the firm enjoys a competitiveadvantage or suffers from competitive disadvantage


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Competitive Strength A weighted competitive strength analysis is

conceptually stronger than an unweighted

competitive strength analysis because All the strength measures are not equally important. E.g., in an industry with strong product differentiation,

the significant strength measures may be Brand awareness Reputation for quality Amount of advertising

Distribution capability, etc.


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Some KSF/Strength Measures

Quality/product performance Reputation/image

Manufacturing capability Technological skills Dealer network/Distribution channels

New product innovation Financial resources Relative cost position Customer service capability


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Competitive Strength What does a high competitive strength rating relative torivals mean? Strong competitive position & possession of competitive

advantages Opportunity for company to improve its long-term market

position

Good strategy entails Looking for opportunities to leverage company strengths into

competitive advantage Using company strengths to attack the competitive weaknesses

of rivals


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(3) Using an Internal Audit

Internal Audit A thorough assessment of an organizations

various internal functional areas Strategic decision makers use the internal audit

to assess the organizations resources and

capabilities from the perspectives of itsdifferent functions


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Using an Internal Audit Six primary functional areas

Production-operations Marketing Research & development Financial and accounting Management, including HRM Information System

Depending on products, markets, and industries,individual organizational structures may vary and,therefore, may emphasize different sets of functionalareas


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(5) Capabilities Assessment Profile

Resembles the internal environmental analysis Similarity: Focuses on deeper evaluation of S&W Difference: Focuses only on an firms capabilities

Analysis of capabilities is complex Not as easily identified as organizations function or

even the value creating primary & support activities Complex nature of capabilities makes it hard for

competitors to imitate


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Capabilities Assessment Profile

Analysis Consists of two phases: Phase I: Identify distinctive capabilities

Phase II: Develop and leverage distinctive capabilities Identifying Distinctive Organizational Capabilities

Step 1 : Prepare current product-market profile

Emphasize organization-customer interactions What is the organization selling? Who are the organization selling to? Is the organization providing superior customer value &

desirable benefits?


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Step 2: Identify sources of competitiveadvantage & disadvantage in the main product-

market segment Determine why customers choose the organizations

products vs. those of competitors Involves information on cost, product, and service

attributes When customers purchase What theyre actually purchasing What bundle of attributes satisfies their needs


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Capabilities Assessment Profile Step 3 : Describe all organizational capabilities &

competencies Examine resources, skills, & abilities of the various divisions Determine which resources, skills, & abilities lead to a

competitive advantage

Step 4 : Sort the core capabilities/competenciesaccording to strategic importance

Can capability provide wide access to a number of differentmarkets?

Does the capability provide tangible customer benefits? Is the capability difficult for competitors to imitate?


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Step 5 : Identify and agree on the key capabilities orcompetencies Provide basis for resource allocation

Classifying an Organizations S&W Past performance trends

Measures such as financial ratios, operations efficiency, etc,

Specific goal or targets

Organizations goals are statements of desired outcomes Comparison against competitors

How are competitors doing?

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lAssessing Strengths and Weaknesses: Internal Analysis