internal analysis s

8/15/2019 Internal Analysis s

1/44


2/44

Competitive Advantage

• A firm has Competitive Advantage if itsprofitability is greater than the averageprofitability of all the firms in the industry

• If it is able to maintain for longer period thenit is called Sustainable Competitive Advantage

• Given the external environment, a firm has tofind out what internal resources will giveSustainable Competitive Advantage


3/44

External Environment

What the Firm Might Do

Internal EnvironmentWhat the Firm Can Do

SustainableCompetitiveAdvantage


4/44

3–4

Creating Value

• By exploiting their competencies firms createvalue.

•Value is measured by:

– Product performance characteristics

– Product attributes for which customers are willing topay

• Firms create value by innovatively bundling andleveraging their resources and capabilities.


5/44

Competitive Advantage, ValueCreation, and Profitability

1. VALUE or UTILITY the customer gets from owningthe product

2. PRICE that a company charges for its products3. COSTS of creating those products

Consumer surplus is the “excess” utility aconsumer captures beyond the price paid.

Basic Principle: the more utility that consumersget from a company’s products or services, the

more pricing options the company has.

How profitable a company becomesdepends on three basic factors:


6/44

Value Creation per Unit


7/44

SWOT Analysis

• an analysis of an organization’s strengths andweaknesses alongside the opportunities andthreats present in the external environment


8/44

Limitations of SWOT Analysis

• Strengths may not lead to an advantage• SWOT does not prioritize factors

• SWOT’s focus on the external environment istoo narrow• SWOT gives a one-shot view of a moving

target

3-8


9/44

Resource-Based View (RBV)

RBV is a method of analyzing and identifying afirm’s strategic advantages based on examining itsdistinct combination of assets, skills, capabilities,and intangibles

The RBV’s underlying premise is that firms differin fundamental ways because each firm possessesa unique “bundle” of resourcesEach firm develops competencies from theseresources, and these become the source of thefirm’s competitive advantages

6-9


10/44

Three Basic Resources

1. Tangible assets are the easiest “resources” to identifyand/or quantify - are often found on a firm’s balancesheet

2. Intangible assets are “resources” such as brandnames, company reputation, organizational morale,technical knowledge, patents and trademarks

3. Organizational capabilities are not specific “inputs.”

They are the skills that a company uses to transforminputs into outputs

6-10


11/44

• When will the organization’s resources willprovide sustainable competitive advantage?


12/44

The VRIO Framework

If a firm has resources that are:

• valuable,

• r are, and

• costly to imitate, and…

• the firm is organized to exploit these resources,

then the firm can expect to enjoy a sustainedcompetitive advantage.


13/44

The VRIO Framework

• a resource or bundle of resources is subjected toeach question (VRIO) to determine the competitiveand economic implications of the resource

Applying the Tool

• each question is considered in a competitive

context• may also be applied to strategic initiatives

(new products, new markets, new strategy, etc.)


14/44

Applying the VRIO Framework

The Question of Value

• in theory: Does the resource enable the firmto exploit an external opportunity or neutralizean external threat?

• the practice: Does the resource result in an

increase in revenues (change demand curve),a decrease in costs (change cost curve), orsome combination of the two?


15/44


The Question of Rarity

• a resource must be rare enough that perfectcompetition has not set in

• if a resource is not rare, then perfect competition

dynamics are likely to be observed (i.e., nocompetitive advantage, no above normal profits)

• thus, there may be other firms that possess theresource, but still few enough that there is scarcity


16/44


The Question of Imitability

• if there are high costs of imitation, then the firmmay enjoy a period of sustained competitiveadvantage

» a sustained competitive advantage will last

only until a duplicate emerges if a firm has a competitive advantage, otherswill attempt to imitate it


17/44



Costs of Imitation

Unique Historical Conditions

• first mover advantages

• path dependence


18/44



Costs of Imitation

Causal Ambiguity

• causal links between resources andcompetitive advantage may not beunderstood

• bundles of resources fog these causallinks


19/44



Costs of Imitation

Social Complexity

• the social relationships entailed in

resources may be so complex thatmanagers cannot really manage themnor replicate them


20/44



Costs of Imitation

Patents

• patents may be a two-edged sword

• offer a period of protection if the firm isable to defend its patent rights

• required disclosure may actually decreasethe cost of imitation, and the timing


21/44


The Question of Organization• a firm’s structure and control mechanisms

must be aligned so as to give people abilityand incentive to exploit the firm’s resources

• examples: formal and informal reporting structures,management controls, compensation policies,

relationships, etc.• these structure and control mechanisms complement

other firm resources—taken together, they can help afirm achieve sustained competitive advantage


22/44

When Resources Provide CompetitiveAdvantage?

Add-Value?

No

Yes Rare? No

Yes Hard to

Imitate?

No

Yes

Source ofCompetitive Parity

Source of TemporaryCompetitive Advantage

Irrelevant

Source of SustainedCompetitive Advantage


23/44

Variations to VIRO

There must be no strategically equivalentvaluable resources that are themselves not rareor inimitable – Substitutability may take at least two forms

• Competitor may be able to substitute a similar resourcethat enables it to develop and implement the samestrategy

• Very different firm resources can become strategicsubstitutes


24/44


25/44

Core Competencies

• Competencies typically combine multiplekinds of Resources/Capabilities.

• Several core competencies may underlie abusiness unit.

• Several business units may draw from samecompetency


26/44

Risks of ignoring core competencies

• Opportunities for growth will be needlessly turned down.• May desensitize a company to its growing dependence on

outside suppliers of core products.• A company that fails to understand the core competence basis

for competition in its industry may be surprised by new entrantswho rely on competencies developed in other end markets.• May unwittingly relinquish valuable skills when they divest an

under-performing business• A company focused only on end products may fail to invest

adequately in new core competencies that can propel growth inthe future.

• As a company divides and fractures into smaller business units,competencies may become fragmented and weakened


27/44

Beware the risk of Core Rigidities

Competencies can lead to Rigidities

• Over commitment to a core competency canlead to rigidity

• Incentives and culture may reward currentcompetencies while thwarting development ofnew competencies.

• Technological change can cause strengths dueto prior coherence to become weaknesses


28/44

Value Chain Analysis

Value Chain analysis was first suggested byMichael Porter (1995) as a way of

presenting the construction of value asrelated to end customer.


29/44

Value Chain

• The term value chain describes a way of lookingat a business as a chain of activities thattransform inputs into outputs that customersvalue

6-29


30/44

Value Chain Analysis (VCA)

• Value chain analysis (VCA) attempts tounderstand how a business creates customervalue by examining the contributions of

different activities within the business to thatvalue• It also helps us to understand on how to

improve the value by- Performing these activities better (or)- At a lower cost than the competitors

• VCA takes a process point of view


31/44

Value Chain Analysis

• The value chain identifies the separate activities andbusiness processes performed to design, produce,market, deliver, and support a product/service andhow well they create customer value.

• Consists of two types of activities

– Primary activities

– Support activities


32/44

Primary Activities

Contribute to the physical creation of theproduct or service, its sale and transfer to thebuyer, and its service after the sale.

– inbound logistics, operations, outboundlogistics, marketing and sales, and service


33/44

Support Activities

Activities of the value chain that add valuethrough important relationships with bothprimary activities and other support activities

– procurement, technology development,human resource management, and generaladministration.


34/44


35/44

MARGIN

MARGIN

FIRM INFRASTRUCTURE

HUMAN RESOURCE MANAGEMENT

TECHNOLOGY DEVELOPMENT

PROCUREMENT

INBOUNDLOGISTICS

OPER- ATIONS

OUTBOUNDLOGISTICS

MARKET-ING

& SALESSERVICE

PRIMARY ACTIVITIES

SUP-PORT

ACTIV-ITIES

THE GENERIC VALUE CHAIN


36/44

Primary Activities

• Inbound logistics – Activities used to transport, receive, store, and disseminate

inputs to a product (materials handling, warehousing,inventory control, etc.)

• Operations – Activities necessary to convert the inputs provided by

inbound logistics into final product form (machining,packaging, assembly, etc.)

• Outbound logistics – Activities involved with collecting, storing, and physically

distributing the product to customers (finished goodswarehousing, order processing, etc.)


37/44

Primary Activities (cont’d)

• Marketing and sales – Activities completed to provide means through

which customers can purchase products and toinduce them to do so (advertising, promotion,distribution channels, etc.)

• Service – Activities designed to enhance or maintain a

product’s value (repair, training, adjustment,etc.)


38/44

Support Activities• Procurement

– Activities completed to purchase the inputs needed to produce a firm’sproducts

• Technological Development – Activities completed to improve a firm’s product and the processes used

to manufacture it (process equipment, basic research, product design, etc)• Human Resource Management

– Activities involved with recruiting, hiring, training, developing, andcompensating all personnel

• Firm infrastructure – Activities that support the work of the entire value chain (general

management, planning, finance, accounting, legal, government relations,etc.)


39/44

Conducting a VCA

1. Identify activities2. Allocate costs- using activity based costing3. Analyze the activities

6-39


40/44

Activity Based Costing in VCA

Activity-Based VCA approach would provide amore meaningful analysis of the procurementfunction’s costs and consequent value addedthan the traditional cost accounting approach

Existing financial management and accountingsystems in many firms are not set up to easilyprovide activity-based cost breakdowns


41/44

Analyzing Activities

• Each activity should be examined relative tocompetitors’ abilities and rated as superior,equivalent or inferior

• Focus on activities that differentiates thecompany from other competitors - Lower cost orunique value

• Keep in mind- the Industry, Position of firm inindustry value chain and objective of the firm

• Identify the activities where the firm’scompetitive strength is high as well as low


42/44

Assessing Organization’s CompetitiveStrength

• 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 competitiveweaknesses of rivals


43/44

Why Do a Competitive StrengthAssessment?

• Reveals strength of firm’s competitive position• Shows how firm stacks up against rivals, measure-

by-measure -- pinpoints the company’s competitivestrengths and competitive weaknesses

• Indicates whether firm is at a competitive advantage/ disadvantage against each rival

• Identifies possible offensive attacks (pit companystrengths against rivals’ weaknesses)

• Identifies possible defensive actions (a need tocorrect competitive weaknesses)


44/44

Limitations of VCA

• Why does the successful firm not buy theunsuccessful and teach it how to minimise costs oradditional features?

• Why does the successful firm not sell its expertisein cost reducing to less successful firms?

• Why does the unsuccessful firm not bid for the

executive(s) in charge of cost drivers from thesuccessful firm?

• They do happen but not always – why not always?

internal analysis s

Documents