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WHAT IS AN INTERNAL ANALYSIS?

The process of evaluating an organization’s resources and

capabilities.

Provides information on organization’s assets, skills, and work

activities.

What is good? What is lacking?

Most Important - evaluating resources, capabilities, and core

competencies.

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INTRO TO INTERNAL ANALYSIS

Scanning and analysing the external environment for opportunities

and threats is not enough to provide an organization a competitive

advantage.

Analysts must also look within the corporation itself to identify

internal strategic factors—critical strengths and weaknesses that

are likely to determine whether a firm will be able to take

advantage of opportunities while avoiding threats.

This internal scanning, often referred to as organizational analysis,

is concerned with identifying and developing an organization’s

resources and competencies.

COMPONENTS OF INTERNAL ANALYSIS

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INTRO TO INTERNAL ANALYSIS

Resources are an organization’s assets and are thus the basic

building blocks of the organization - include tangible assets, such

as its plant, equipment, finances, and location, human assets, in

terms of the number of employees, their skills, and motivation, and

intangible assets, such as its technology (patents and copyrights),

culture, and reputation.

Capabilities refer to a corporation’s ability to exploit its resources

- consist of business processes and routines that manage the

interaction among resources to turn inputs into outputs.

INTRO TO INTERNAL ANALYSIS

A competency is a cross-functional integration and coordination of

capabilities.

A core competency is a collection of competencies that crosses

divisional boundaries, is widespread within the corporation, and is

something that the corporation can do exceedingly well. Thus, new

product development is a core competency if it goes beyond one

division.

When core competencies are superior to those of the competition,

they are called distinctive competencies.

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INTRO TO INTERNAL ANALYSIS

Four questions to evaluate a firm’s competencies:

1. Value: Does it provide customer value and competitive

advantage?

2. Rareness: Do no other competitors possess it?

3. Imitability: Is it costly for others to imitate?

4. Organization: Is the firm organized to exploit the resource?

INTRO TO INTERNAL ANALYSIS

It is important to evaluate the importance of a company’s

resources, capabilities, and competencies to ascertain whether they

are internal strategic factors - that is, particular strengths and

weaknesses that will help determine the future of the company.

This can be done by comparing measures of these factors with

measures of:

1. The company’s past performance,

2. The company’s key competitors,

3. The industry as a whole.

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INTRO TO INTERNAL ANALYSIS

It is important to evaluate the importance of a company’s

resources, capabilities, and competencies to ascertain whether they

are internal strategic factors - that is, particular strengths and

weaknesses that will help determine the future of the company.

This can be done by comparing measures of these factors with

measures of:

1. The company’s past performance,

2. The company’s key competitors,

3. The industry as a whole.

RESOURCES TO GAIN COMPETITIVE ADVANTAGE

Five-step, resource-based approach to strategy analysis:

1. Identify and classify the firm’s resources in terms of strengths

and weaknesses.

2. Combine the firm’s strengths into specific capabilities and

core competencies.

3. Appraise the profit potential of these capabilities and

competencies in terms of their potential for sustainable

competitive advantage and the ability to harvest the profits

resulting from their use. Are there any distinctive

competencies?

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RESOURCES TO GAIN COMPETITIVE ADVANTAGE

Five-step, resource-based approach to strategy analysis:

4. Select the strategy that best exploits the firm’s capabilities and

competencies relative to external opportunities.

5. Identify resource gaps and invest in upgrading weaknesses.

RESOURCES TO GAIN COMPETITIVE ADVANTAGE

Where do these competencies come from? A corporation can gain

access to a distinctive competency in four ways:

1. It may be an asset endowment, such as a key patent, coming

from the founding of the company. For example, Xerox grew

on the basis of its original copying patent.

2. It may be acquired from someone else. For example,

Whirlpool bought a worldwide distribution system when it

purchased Philips’s appliance division.

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RESOURCES TO GAIN COMPETITIVE ADVANTAGE

Where do these competencies come from? A corporation can gain

access to a distinctive competency in four ways:

3. It may be shared with another business unit or alliance

partner. For example, Apple Computer worked with a design

firm to create the special appeal of its personal computers and

iPods.

4. It may be carefully built and accumulated over time within the

company. For example, Honda carefully extended its

expertise in small motor manufacturing from motorcycles to

autos and lawnmowers.

DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE

Two characteristics determine the sustainability of a firm’s

distinctive competency(ies): durability and imitability.

Durability is the rate at which a firm’s underlying resources,

capabilities, or core competencies depreciate or become obsolete.

Imitability is the rate at which a firm’s underlying resources,

capabilities, or core competencies can be duplicated by others.

A core competency can be easily imitated to the extent that it is

transparent, transferable, and replicable.

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DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE

Transparency is the speed with which other firms can understand

the relationship of resources and capabilities supporting a

successful firm’s strategy.

Transferability is the ability of competitors to gather the resources

and capabilities necessary to support a competitive challenge.

Replicability is the ability of competitors to use duplicated

resources and capabilities to imitate the other firm’s success.

DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE

It is relatively easy to learn and imitate another company’s core

competency or capability if it comes from explicit knowledge, that

is, knowledge that can be easily articulated and communicated.

Tacit knowledge, in contrast, is knowledge that is not easily

communicated because it is deeply rooted in employee experience

or in a corporation’s culture.

Tacit knowledge is more valuable and more likely to lead to a

sustainable competitive advantage than is explicit knowledge

because it is much harder for competitors to imitate.

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DETERMINING THE SUSTAINABILITY OF AN ADVANTAGE

An organization’s resources and capabilities can be placed on a

continuum to the extent they are durable and can’t be imitated (that

is, aren’t transparent, transferable, or replicable) by another firm.

BUSINESS MODELS

A business model is a company’s method for making money in the

current business environment.

Composed of five elements:

Who it serves

What it provides

How it makes money

How it differentiates and sustains competitive advantage

How it provides its product/service

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BUSINESS MODELS

The simplest business model is to provide a good or service that

can be sold so that revenues exceed costs and expenses.

In order to understand how some of these business models work, it is

important to learn where on the value chain the company makes its

money.

Although a company might offer a large number of products and

services, one product line might contribute most of the profits.

VALUE CHAIN ANALYSIS

A value chain is a linked set of value-creating activities that begin

with basic raw materials coming from suppliers, moving on to a

series of value-added activities involved in producing and

marketing a product or service, and ending with distributors

getting the final goods into the hands of the ultimate consumer.

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INDUSTRY VALUE CHAIN ANALYSIS

The value chains of most industries can be split into two segments,

upstream and downstream segments.

An industry can be analysed in terms of the profit margin available at

any point along the value chain.

In analysing the complete value chain of a product, note that even if a

firm operates up and down the entire industry chain, it usually has an

area of expertise where its primary activities lie.

A company’s centre of gravity is the part of the chain that is most

important to the company and the point where its greatest expertise and

capabilities lie—its core competencies.

INDUSTRY VALUE CHAIN ANALYSIS

After a firm successfully establishes itself at this point by

obtaining a competitive advantage, one of its first strategic moves

is to move forward or backward along the value chain in order to

reduce costs, guarantee access to key raw materials, or to

guarantee distribution, called vertical integration.

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CORPORATE VALUE-CHAIN ANALYSIS

Each corporation has its own internal value chain of activities.

Porter proposes that a manufacturing firm’s primary activities

usually begin with inbound logistics (raw materials handling and

warehousing), go through an operations process in which a product

is manufactured, and continue on to outbound logistics

(warehousing and distribution), to marketing and sales, and finally

to service (installation, repair, and sale of parts).

CORPORATE VALUE-CHAIN ANALYSIS

Several support activities, such as procurement (purchasing),

technology development (R&D), human resource management,

and firm infrastructure (accounting, finance, strategic planning),

ensure that the primary value chain activities operate effectively

and efficiently.

Each of a company’s product lines has its own distinctive value

chain.

Because most corporations make several different products or

services, an internal analysis of the firm involves analysing a series

of different value chains.

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CORPORATE VALUE-CHAIN ANALYSIS

The systematic examination of individual value activities can lead

to a better understanding of a corporation’s strengths and

weaknesses.

According to Porter, “Differences among competitor value chains

are a key source of competitive advantage.”

Corporate value chain analysis involves the following three steps:

1. Examine each product line’s value chain in terms of the

various activities involved in producing that product or

service

CORPORATE VALUE-CHAIN ANALYSIS

2. Examine the “linkages” within each product line’s value

chain.

3. Examine the potential synergies among the value chains of

different product lines or business units.

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CORPORATE VALUE-CHAIN ANALYSIS

THANKS FOR YOUR ATTENTION…!