Internal Analysisyunan@muraelpiji.com

Lecture TopicsPurpose of Internal AnalysisCompetitive Advantage and Core CompetenceValue ChainFinancial AnalysisCombining Internal and External Analyses*

Purpose of Internal AnalysisAn organizations future success depends on its own internal conditions as well as external conditionsManagers need to be able to identifyStrengths that the company can relay on in order to competeWeaknesses that need to be corrected or minimized as competitive factors*

Managers must understand

*The role of resources, capabilities, and distinctive competencies in the process by which companies create value and profitThe importance of superior efficiency, innovation, quality, and responsiveness to customersThe sources of their companys competitive advantage (strengths and weaknesses)

Competitive AdvantageThe collection of factors that sets a company apart from its competitors and gives it a unique position in the industry/marketMeans to add value for stakeholdersFocus especially on adding value for customers

*

Core Competence(ies)A unique set of lasting capabilities that a company relies on to achieve competitive advantage and add valueInnovationEfficiencyCustomer ResponsivenessQualitySpecial Expertise*

The Value ChainA company is a chain of activities for transforming inputs into outputs that customers valueThe transformation process is composed of primary and support activities that add value to the product*

Value Chain*Service

Value Chain InterpretationRepresents a company or any organizationSimplified illustration of all activities that an organization must performFramework for analyzing a companys strengths and weaknessesMargin represents profit- expand margin byBeing able to charge a higher priceOperating at a lower cost within the Value Chain*

Primary Activities in the Value ChainActivities directly involved in producing, selling, distributing, and servicing product for buyer.Inbound logistics: receiving, storing, and distributing inputs for productionOperations: all activities involved in transforming inputs into final productsOutbound logistics: collecting, storing, distributing product to final buyerMarketing and Sales: activities used to get customers to buy company productsService: installation, repair, support, training for using a product *

Support Activities in the Value ChainActivities that enable the performance of primary activitiesFirm infrastructure: companywide support of entire value chain; includes quality of management, financial performance, strategy, organizational cultureHuman resource management: recruiting, hiring, training, reward systems for employeesResearch and development: design of products and processes that enhance company performance; not limited to equipmentProcurement: purchasing and managing inputs used in operations; developing and managing supplier relations

*

Applying Value Chain AnalysisFramework for identifying companys strengths and weaknessesMeans to focus on where the companys core competencies exist and can be used to achieve competitive advantage and add valueComparison with competitors reveals opportunities for improving companys competitive position

*

Resource-Based View (RBV)RBV is a method of analyzing and identifying a firms strategic advantages based on examining its distinct combination of assets, skills, capabilities, and intangiblesThe RBVs underlying premise is that firms differ in fundamental ways because each firm possesses a unique bundle of resourcesEach firm develops competencies from these resources, and these become the source of the firms competitive advantages *

Three Basic ResourcesTangible assets are the easiest resources to identify and are often found on a firms balance sheet Intangible assets are resources such as brand names, company reputation, organizational morale, technical knowledge, patents and trademarks, and accumulated experience Organizational capabilities are not specific inputs. They are the skills that a company uses to transform inputs into outputs *

What makes a resource valuable?4 Guidelines:Is the resource or skill critical to fulfilling a customers need better than that of the firms competitors? Resurgence of EnvironmentalismIs the resource scarce? Is it in short supply or not easily substituted for or imitated? Appropriability: Who actually gets the profit created by a resource? Durability: How rapidly will the resource depreciate? *

Elements of Scarcity Short SupplyAvailability of SubstitutesImitationIsolating Mechanisms: Physically Unique ResourcesPath-Dependent ResourcesCasual AmbiguityEconomic Deterrence

*

*Resource limitation

Using RBV in Internal AnalysisIt is helpful to: Disaggregate resourcesUtilize a functional perspectiveLook at organizational processesUse the value chain approach*

Applying the Resource Based View*

Making Meaningful ComparisonsManagers need objective standards to use when examining internal resources and value-building activitiesStrategists use the firms historical experience as a basis for evaluating internal factors Benchmarking, or comparing the way our company performs a specific activity with a competitor or other company doing the same thing, has become a central concern of managers in quality commitment companies worldwide *

Comparison with Key Success Factors in the IndustryThe key determinants of success in an industry may be used to identify a firms internal strengths and weaknessesA strategist seeks to determine whether a firms current internal capabilities represent strengths or weaknesses in new competitive arenas *

Financial AnalysisUses companys financial results to assess companys performanceRequires comparisons of results over multiple years and against industry standardsImportant tool to identify companys strengths and weaknesses and potential problem areas.*

Types of RatiosProfitabilityActivity EfficiencyLiquidityDebt - LeverageGrowth*

Analyzing Competitive Advantage and ProfitabilityBenchmarking company performance against that of competitors and the companys own historic performanceReturn on invested capital*Net profit = Total revenues Total costs

Ways to Increase ROICIncrease the companys return on salesReduce cost of goods soldReduce spending on sales force, marketing, general, and administrative expensesReduce R&D spendingIncrease sales revenue more than costsIncrease sales revenues from invested capitalReduce the amount of working capitalReduce amount of fixed capital*

Why Companies FailInertiaCompanies find it difficult to change their strategies and structuresPrior strategic commitmentsLimit a companys ability to imitate and cause competitive disadvantageThe Icarus paradoxA company can become so specialized based on past success that it loses sight of market realitiesCraftsmen, builders, pioneers, salesmen*

Combining Internal and External AnalysesInternal and External Analyses commonly referred to as SWOT:StrengthsWeaknessesOpportunitiesThreatsStrengths and Weaknesses identified from Internal AnalysisOpportunities and Threats identified from External Analyses*

Internal AnalysisStrengths and Weaknesses identified through the use of tools such as:Vision, Mission, ObjectivesStakeholder AnalysisCore CompetenciesValue ChainBuilding Blocks of Competitive AdvantageFinancial Analysis*

External AnalysisOpportunities and Threats identified through the use of tools such as:General Environment AssessmentFive Force AnalysisKey Success Factors in IndustryCompetitive Changes during Industry EvolutionStrategic GroupsNational Competitive Advantage

*

Results of Internal and External AnalysisRequires creative interpretation Understanding of companys competitive position in its industryIdentification of strategic issues the company facesStrategic issuesRepresent dangers to the companys long-term survivalSuggest areas where the company should concentrate its efforts in order to grow*

*Internal AnalysisStrengthsWeaknessesExternal AnalysisOpportunitiesThreatsStrategic IssuesStrategic AlternativesStrategyToolsTools