sm internal analysis 1_3

STRATEGIC MANAGEMENT:INTERNAL ANALYSIS

•Key Topics1. Strengths and Weaknesses2. Competitive Advantage3. Resources, Capabilities and Distinctive

Competencies4. Competitive Advantage & Value Creation5. Value Chain6. Building Blocks of Competitive Advantage7. Sustaining Competitive Advantage

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The Big Picture: the strategy model

FIRMEnviron-ment

Strategy

Internal Analysis

Analysis

Implementation

FormulationThe Strategy Process


“In preparing for battle I have always found that plans are

useless, but planning is indispensable.”

- General Dwight D. Eisenhower

© RoyaltyFree/ Stockdisc/ Getty Images


Internal Analysis

The purpose of internal analysis is to pinpoint the strengths and weaknesses of the organization.

Strengths lead to superior performance. Weaknesses lead to inferior performance.

The purpose of strategy is to create superior performance (competitive advantage)


Internal Analysis: Strengths and Weaknesses

Internal analysis - along with the external analysis of the company’s environment - gives managers the

information to choose the strategies and business model to attain a sustained competitive advantage.

StrengthsOf the enterprise are assets that

boost profitability

Weaknesses Of the enterprise are liabilities that

lead to lower profitability

Internal Analysis


Building and sustaining a competitive advantage requires a company to achieve superior:

• Efficiency• Quality

• Innovations• Responsiveness to customers

Internal Analysis includes an assessment of: Quantity and quality of a company’s

resources and capabilities Ways of building unique skills

and company-specific or distinctive competencies


Internal Analysis: A Three-Step Process

1. Understand the process by which companies create value for customers and profit for themselves. Resources + Capabilities Distinctive competencies

2. Understand the importance of superiority in creating value and generating high profitability. Efficiency Quality

3. Analyze the sources of the company’s competitive advantage. (if any) Strengths – that are driving profitability Weaknesses – opportunities for improvement

Innovation Responsiveness to Customers


Competitive Advantage Competitive Advantage

• A firm’s profitability is greater than the average profitability for all firms in its industry.

Sustained Competitive Advantage• A firm maintains above average and superior

profitability and profit growth for a number of years.

The Primary Objective of Strategy is to achieve a

Sustained Competitive Advantage

as measured bySuperior Profit and Profit Growth.


Profitability in the Computer Industry, 1998-2003

Dell has achieved a sustained competitive advantage over its rivals.

Data Source: Value Line Investment Survey


Strategy, Resources, Capabilities, and Competencies

Figure 3.1

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Resource Based View of the Firm

(Some kinds of) RESOURCES+

(Some kinds of) CAPABILITIES

DISTINCTIVECOMPETENCIES


Resource Based View of the Firm

ALL companies have resources and capabilities

Only a FEW companies have distinctive competencies



Distinctive Competencies and Role of Resources & Capabilities

Resources• Tangible (physical) and intangible (non-physical)• Allow a company to create value for its customers• Must have skills to take advantage of the resources• Firm-specific and difficult-to-imitate resources as well as valuable resources that create strong demand for a company’s products lead to distinctive competencies

Capabilities • Coordinating resources & putting to productive use• Skills reside in the organization’s rules, routines and procedures• Product of its organization, processes & controls• Firm-specific capabilities to manage its resources lead to distinctive competencies

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Resources Resources• Tangible (physical) and intangible (non-physical)

Name some tangible and intangible resources you are likely to find in a business

• Allow a company to create value for its customers• Must have skills to take advantage of the resources• Firm-specific and difficult-to-imitate resources as well as valuable resources that create strong demand for a company’s products lead to distinctive competencies


CapabilitiesCapabilities • Coordinating resources & putting to

productive use• Skills reside in the organization’s rules,

routines and procedures• Product of its organization, processes &

controls

Name some capabilities of organizations• Firm-specific capabilities to manage its

resources lead to distinctive competencies



Distinctive Competencies to Gain Competitive Advantage

Distinctive Competencies Firm-specific strengths allow a company to differentiate its products and/or achieve substantially lower costs than its rivals in order to gain a competitive advantage.

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Competitive Advantage, Value Creation, and Profitability

1. VALUE or UTILITY the customer gets from owning the product

2. PRICE that a company charges for its products

3. COSTS of creating those products Consumer surplus is the “excess” utility a

consumer captures beyond the price paid.Basic Principle: the more utility that consumers get from a company’s products or services, the

more pricing options the company has.

How profitable a company becomes depends on three basic factors:


Value Creation per UnitFigure 3.2


Value Creation and Pricing Options

There is a dynamic relationship among utility,

pricing, demand, and costs.

Figure 3.3


Comparing Toyota and General Motors

Superior value creation requires that the gap between perceived utility (U) and costs of production (C)

be greater than that obtained by competitors.

Figure 3.4


The Value Chain

A company is a chain of activities for transforming inputs into outputs that customers value –

including the primary and support activities.

Figure 3.5

Do we know what these mean? Primary Activities

1.Research and Development2.Production3.Marketing and Sales4.Customer Service


Do we know what these mean? Support Activities

1. Company Infrastructure• Organizational structure, culture, control systems

2. Information Systems• Systems that provide information needed to

manage business3. Materials Management

• Logistics for materials flow4. Human Resources

• Right people in right place at right time



The Value Chain

A company is a chain of activities for transforming inputs into outputs that customers value –

including the primary and support activities.

Figure 3.5

The Value Chain Process: Western Perspective ?

R&D

Production

Marketing

Service

What could be a better perspective of the same process?


The Value Chain Process

What could be a different perspective of the same process?

What do the arrows mean ?

What do they say about how products are made?

What do they say about the flow of information in the organization?

Does R&D need to know anything that marketing knows?


The Value Chain Process: Western Perspective ?

R&D

Production

Marketing

Service

What could be a different perspective of the same process?


The Value Chain Process: An Asian Perspective ?


R & D

Customer Service

Production

Marketing


Internal Building Blocks of Competitive Advantage

The Generic Distinctive Competencies

Allow a company to:• Differentiate product offering• Offer more utility to customer• Lower the cost structure regardless of the industry, its products, or its services

Figure 3.6


Efficiency Measured by the quantity of inputs it

takes to produce a given output: Efficiency = Outputs / Inputs Productivity leads to greater efficiency

and lower costs:• Employee productivity• Capital productivity

Superior efficiency helps a company attain a competitive advantage

through a lower cost structure.


Quality

• Reliable and • Differentiated by attributes that customers

perceive to have higher value The impact of quality on competitive advantage:

• High-quality products differentiate and increase the value of the products in customers’ eyes.

• Greater efficiency and lower unit costs are associated with reliable products.

Superior quality = customer perception of greater value in a product’s attributesForm, features, performance, durability, reliability, style, design

Quality products are goods and services that are:


A Quality Map for Automobiles

When customers evaluate the quality of a product, they commonly measure it against two kinds of attributes:1. Quality as Excellence2. Quality as Reliability

Figure 3.7


Innovation Innovation is the act of creating

new products or new processes• Product innovation

» Creates products that customers perceive as more valuable and

» Increases the company’s pricing options• Process innovation

» Creates value by lowering production costsSuccessful innovation can be a major source of competitive advantage – by giving a company something unique,

something its competitors lack.


Responsiveness to Customers

Superior quality and innovation are integral to superior responsiveness to customers.

Customizing goods and services to the unique demands of individual customers or customer groups.

Enhanced customer responsiveness Customer response time, design,

service, after-sales service and supportSuperior responsiveness to customers

differentiates a company’s products and services and leads to brand loyalty and premium pricing.

Identifying and satisfying customers’ needs – better than the competitors


Competitive Advantage: The Value Creation Cycle

Figure 3.8


The Durability of Competitive Advantage

1.Barriers to ImitationMaking it difficult to copy a company’s distinctive competencies Imitating Resources Imitating Capabilities

2.Capability of Competitors Strategic commitment

Commitment to a particular way of doing business Absorptive capacity

Ability to identify, value, assimilate, and use knowledge3.Industry Dynamism

Ability of an industry to change rapidly

The DURABILITY of a company’s competitive advantage over its competitors depends on:

Competitors are also seeking to develop distinctive competencies that will give them a competitive edge.


Industry Dynamism, Punctuated Equilibrium and Competitive

Structure

Periods of long term stability

Periods of long term stability

Industry Structure

revolutionized by innovation

Figure 2.6Punctuated Equilibrium occurs when an industry’s long term stable structure is punctuated with periods of rapid change by innovation.


Why Companies Fail Inertia

• Companies find it difficult to change their strategies and structures

Prior Strategic Commitments• Limit a company’s ability to imitate and

cause competitive disadvantage The Icarus Paradox

• A company can become so specialized and inner directed based on past success that it loses sight of market realities

• Categories of rising and falling companies: • Craftsmen • Builders • Pioneers • Salespeople

When a company loses its competitive advantage, its profitability falls below that of the industry. It loses the ability to attract and generate resources.

Profit margins and invested capital shrink rapidly.


Avoiding Failure: Sustaining Competitive Advantage1. Focus on the Building Blocks of Competitive

Advantage Develop distinctive competencies and superior performance in:

Efficiency Quality Innovation Responsiveness to Customers

2. Institute Continuous Improvement and LearningRecognize the importance of continuous learning within the organization

3. Track Best Practices and Use BenchmarkingMeasure against the products and practices of the most efficient global competitors

4. Overcome InertiaOvercome the internal forces that are barriers to changeLuck may play a role in success,

so always exploit a lucky break - but remember:“The harder I work, the luckier I seem to get.” J P Morgan

The Big Picture: the strategy model

FIRMEnviron-ment

Strategy

Internal Analysis


“Developing a sound and healthy organization requires understanding the environment

as much as understanding the organization.”

- Gary Hamel

© RoyaltyFree/ Stockdisc/ Getty Images


Drivers of Profitability (ROIC)Figure 3.9


Ways to Increase ROICIncrease Company’s Return on Sales Increase sales revenue more than costs Reduce cost of goods sold Reduce spending on SG&A Sales, Marketing, General & Administrative Expenses Reduce R&D expenses Research & Development

Increase Capital Turnover Reduce the amount of working capital Inventory, Accounts Receivable, Payables Reduce the amount of fixed capital PPE - Property, Plant & Equipment

QuestionDefine the Vietnamese cell phone

industry: what are its principal products and/or services?

What are the minimum resources and capabilities needed to compete in this industry?


sm internal analysis 1_3

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