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Business Policy & Strategic Management Module 5

Internal Environmental Analysis


N.R.Govinda Sharma

BPSM: Module 5 Internal Analysis

Internal Environmental Analysis


Above-average return of a firm is a function of
External & Internal Environment

To what do you attribute the success of Cognizant to?


Is it the industry it is operating in (i.e., IT) Or, its capabilities and internal resources?
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IEA
If the success is attributable to industry alone, why is it that they are a number of IT start-up companies which fail?
Why, even a bellwether company like Infy is facing rough wind?

Research by Richard Rumelt & Associates, industry structure explains only 10% of variance in profit across companies (page 63 of text) This means, individual company difference explains much of the success
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Great companies
Only economic prosperity can produce progress. Prosperity arises out of innovation and enterprise, from the technological ingenuity and the skills that are housed in the great companies Indra Nooyi, Pepsico Chairman and CEO
(As quoted on page 46 in Strategic Management by Govinda Bhat and Govinda Sharma) BPSM: Module 5 Internal Analysis 4

Value Chain Analysis & Competitive Advantage


In this module, we study internal sources of competitive advantages Let us look at Value Chain Analysis as a tool for identifying sources of competitive advantage

BPSM: Module 5 Internal Analysis

Value Chain
Business is all about creating and capturing value Utility (to the consumer) is different from price (See pages 77-81 of text) Value = Utility (U) Cost (C)
The part of the value so created is captured by the firm in the form of profit
Profit = Price (P) Cost (C)

Consumer Surplus =U-P

The part that is available to the consumer is the Consumer Surplus


Consumer Surplus = Utility (U) Price (P)

Utility (U) Price (P) Cost (C)

Profit Margin = (Price Cost)

See pages 77-81 of text for a good understanding of pricing options

Cost (C), Including cost of capital

BPSM: Module 5 Internal Analysis

Advertisement that cause desire


Utility is a matter of perception Perception is the only reality Everything else is an illusion
Al Ries and Jack Trout

The utility can be increased by advertisement Equating the pleasure of drinking Pepsi to Nirvana!
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Value Chain Analysis


What is a company or a firm?
A company is a chain of activities for converting inputs into outputs that the customers value Create and capture a part of the value so created

Consider a car for illustration

Analysis_of_Midterm_2012

Value chain - Car

BPSM: Module 5 Internal Analysis

Value chain
Value gets added at
Design R&D Material procurement Production Distribution After sales

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Generic Value Chain


Support Activities

Firm Infrastructure Human Resources Management Technology Development


Margin

Value Chain - Margin at each Procurement activity


Inbound Logistics Operations Outbound Logistics Marketing & Sales Services

Margin

Primary Activities

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Margin
Concept of margin
At each stage of value chain, a margin is created Margin is the difference between the total value and collective cost for performing an activity

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Value Chain
The purpose of value chain analysis is to examine each activity and find out whether it is adding value or just cost
Do wholesalers add value or just a cost? Is it possible to dispense with wholesalers and distributors without affecting the value delivered?

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Dell Computers
Business model of Dell is based on the premise that computers can built to order and delivered directly to the customers The cost saved by cutting out wholesalers & dealers gave Dell savings in cost This gave Dell pricing options
Either he could have retained the savings with himself or Passed on the savings to customers
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Dells strategy
He chose to pass on the savings to customers and grew business
This was his strategy
Growth Strategy

Strategy is not necessarily always to maximise the profit


Survival / Stability strategy Growth strategy Retrenchment strategy Combination strategy or portfolio restructuring
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Socio-cultural factors
Dispensing wholesalers and retailers was made possible by use of internet for directly selling
This type of direct selling was not possible in China and India where customers want to touch and feel before purchase So, the strategy depends on the socio-cultural environment prevailing in the market

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Importance of value chain analysis


Purpose of the value chain analysis is to examine each activity to find out which one of the activity is adding value and Which other activity can be outsourced

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Outsourcing
Nike will perform many activities as part of business
Design the footwear Manufacture the footwear Market the footwear

Nike performs designing and marketing much better than manufacturing

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Outsourcing
Therefore, it chooses to outsource manufacturing to China and develops designing and marketing as its core competence Manufacturers in China can manufacture footwear better and cheaper than Nike In doing that Nike has to protect its intellectual property (design) through IPR (So, legal and political systems play an important role)
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Resources, Capabilities, Strategy and Competencies


Resources Build

Shape Distinctive Competencies Strategies Competitive Advantage Superior Profitability

Capabilities

Figure 3.1, pp 76,77 of text

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Building Blocks of Competitive Advantage


Superior Quality Superior Efficiency Competitive Advantage
Low Cost Differentiation

Superior Customer Responsiv eness


Fig 3.6, pp 85-89 of text

Superior Innovation
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Analysing Competitive Advantage COGS / Sales


ROS Walmart: 3.43% Target: 4.5% Walmart: 76.5% Target: 66.1% SG & A / Sales Walmart: 18.77% Target: 22.95%

ROIC Walmart: 14:1% Target: 10.6% Capital Turnover Walmart: 3.82 Target: 2.08
It is a ratio & not %

Working Cap / Sales Walmart: (-) 2.9 % Target: 11.24%

Fig 3.10, pp 93-95 of text

Plnt, Prprty & Equp / Sales Walmart: 25.9 % Target: 38.02%


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BPSM: Module 5 Internal Analysis

Durability of CA
Given time and skill, no competitive advantage is eternal
The essence of strategy lies in creating tomorrows competitive advantages faster than competitors mimic the ones you possess today Gary Hamel and C K Prahlad,
as quoted in Crafting and Executing Strategy by Thompson, Strickland, Gamble and Jain

Durability depends on three factors (pp 95 of text)


Barriers to imitation Capability of competitors Dynamism of the industry environment
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Barriers to imitation
Barriers depend on whether the competitor is trying to imitate
Resource or Capability

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Summary of the module


Research shows that industry structure explains only 10% of variance in profit across companies This means, individual company difference explains much of the success Thus the importance of internal analysis Value chain analysis is an important tool for internal analysis and helps us identify is adding value and which is adding just cost Activities that do not add significant value are candidates for outsourcing
Some one else specialises in that activity can perform it better and cheaper
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Summary of the module


Resources and capabilities help build the distinct competencies which shape the strategies but the relationship is not linear And hence new resources and competencies required by the strategies are to be built and therefore, the cycle continues Strategies lead to competitive advantages which lead to higher profitability Building blocks of competitive advantages are superior quality, superior efficiency customer responsiveness and superior innovation
Innovation is central to all the building blocks
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Summary of the module


A tool for analysing Competitive advantage and profitability between the companies is the Du Pont analysis No competitive advantage is permanent Durability of CA however, depends on barriers to imitation, capability of competitors, industry dynamism End of the module

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