Analysis of Internal Environment

Chapter-5

Chapter Objectives
Understand

the significance of the Internal Environment and Core Competencies for the strategies of multinational firms. Distinguish between the Positioning Perspective and the Resource Based Perspective. Conduct a Resource Audit and apply the VRIO framework to a firm Conduct a Value Chain and Value System Analysis Understand the importance of Comparative Analysis

Introduction
Many business writers believe that strategic

decision makers should focus on how a firm can leverage its resources, rather than on what the competitors and other stakeholders are doing.
Rumelts (1991) stated that only 4% of the

variance of return on assets was attributable to the influence of the industry, while 73% was due to business unit effect (unique firm resources)

Key Questions???
What type of unique resources and capabilities

they have?
What and who creates value within the firm? How the firms resources compare with those of

other firms?

Positioning Perspective
The focus on external business environment is

associated with the Positioning Perspective.

The Positioning Perspective assumes that the

external business environment determines a firms freedom to manoeuvre.

Firm must be market driven and externally

oriented
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Positioning Perspective
The successful firm must pay attention to the needs of customers and the actions of competitors, by adapting the companys strategy to its external environment.
The key to successful positioning is thorough and

continuous monitoring of the external business environment

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Positioning Perspective
Once a firm position itself in an attractive market,

it needs to respond to challenges by rival firms, it needs to react to shift in customer needs, and it needs to deal with product and price change by suppliers.
Therefore advocates of positioning perspective

suggest that external environment (business opportunity), not the internal resources, should be considered as the starting point for developing successful strategies.
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Criticism
Stalk et al. (1992) suggested that competition was a war of position when the world was characterized by DURABLE PRODUCTS, STABLE CUSTOMER NEEDS, WELL DEFINED NATIONAL AND REGIONAL MARKETS, AND CLEARLY IDENTIFIED COMPETITORS.
Thus the main criticism of positioning perspective is

that positioning can no longer lead to success in a world which is constantly changing. According to Stalk et al. (1992), the key to success is no longer Where a company chooses to compete but How.
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Resource-Based Perspective
The focuses on firm resources are associated

with the Resource-Based Perspective.

This approach assumes that a firm can use

superior resources and capabilities to modify the industry structure and/ or change the rules of the competitive game.

Positioning Vs. R.B.Perspective

The concept of STRATEGIC FIT suggests that

firms must adapt their resources and activities to take advantage of external business opportunities.
Hamel and Prahalad argued that the concept of

fit is unbalanced, and should be supplemented by the idea of strategy development by STRETCH.
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Strategic Stretch
The concept of Strategic Stretch suggests that

managers should try to identify and leverage the resources and competencies of the organization to yield new opportunities or to provide competitive advantage.
Creating stretch relates to a misfit between resources

and aspirations, and means going beyond what the business environment offers at a particular moment in time.

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Analyzing Firm Resources & Capabilities

Resources

Capabilities
Core Competencies VRIO framework

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Resources
Resources

are all assets, capabilities, organizational processes, firm attributes, information, knowledge etc. controlled by a firm that improve its efficiency and effectiveness.

firm-specific assets that are difficult if not

impossible to imitate

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Resources
Resources can be both- tangible as well as

intangible
A resource audit identifies and classifies the

resources controlled by the firm with a view to supporting the firms strategies.

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Capabilities
Resources are of limited use by themselves thus firms

need capabilities to combine resources in a meaningful way. Capabilities are complex bundles of skills and collective learning, exercises through organizational processes that ensure superior coordination of functional activities. Capabilities are about the firms ability to integrate different tangible and intangible resources in order to provide products or services to customers that are valued
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Core-Competence
Core competencies refer to the combination of

individual technologies and production skills that underlie a companys multiple production lines and critically underpin the firms competitive advantage.
Core competencies are about communication,

involvement, and a deep commitment to working across organizational boundaries.

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Core-Competence
The

concept of core competencies was originally devised by Prahalad and Hamel (1990), who argued that the success of the best international companies lay in core competencies underlying all their end products. E.g.-Honda. Thus the secret of success lay in interlinks between different business units based on a shared number of core assets.
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Core-Competence
The core competencies gave rise to a number of

core products, which in turn influenced the development of end products. Hence core competencies can help multinational firms to concentrate on centrally pursuing innovation and centrally initiating the development of new end products.
Focus on core competencies can help firms to think

of markets in novel ways, to use existing resources in new ways, and to develop new businesses.
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VRIO Framework
In order to identify a firms core competencies,

firms has to evaluate their resources on the basis of VRIO framework. Firms need to identify whether their resources and capabilities are Valuable, Rare, Costly to Imitate, and Exploited by the organization
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VRIO Framework
Valuable: whether resources and capabilities enable

the firm to respond to environmental threats and opportunities. Rareness: How many competing firms already possess particular valuable resources and capabilities? Imitability: how easily and cheaply competitors could imitate your product. Organization: Whether Firm is organized to exploit the full competitive potential of the resources and capabilities.

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VRIO Framework
Sustainable competitive advantage only arises if firms

have resources which combine all of these four attributes. For instance, Xerox demonstrates that it is not sufficient for a firm to spend vast sums on research and development or to have unique resources and capabilities. A firm must be market oriented and must be able to effectively coordinate all its activities to deliver value to the customer.

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Global Value Chain and Value System

With the onset of globalization firms have come under

immense pressure to obtain many value creating activities from outside the company.
Key questions: Which resources and capabilities the organization

should retain inside the company, and which should be obtained from outside the company Where the resources and capabilities should be located?
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Value Added
Value added is the difference between the cost

of inputs and the market value of outputs; it is the value that a firm adds to its bought-in materials and services through its own production and marketing efforts within the firm.
Knowledge about where value is created in the

firm can further help managers to take important investment decision.

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Value Chain Analysis

Value chain: the set of linked, value-creating activities a firm performs to design, produce, market, deliver, and support a product, i.e., the format and interactions amongst the various functions of a firm [Value chain analysis explains cost behavior and reveals existing and potential sources of product differentiation.] Interpreting the firm within the context of the value chain provides a strong tool to improve the accuracy of strategic analyses and decisions
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The Firm as a Value Chain

Primary Activities

Inbound logistics

Operations

Outbound Logistics

Sales & Marketing

Service

Profit Margin

Procurement Technology & Systems Development Human Resources Management

Support Activities

Firm Infrastructure

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Value Chain Analysis

Primary activities: that create and deliver the

product. Support activities: that aid the individuals and groups engaged in primary activities. Profit margin: reports the difference between the total revenue generated by sales and the total cost of the activities that led to those sales. The differences between total revenues generated and total costs incurred. Configuration is the way that managers arrange the activities of the value chain. Coordination is the way that managers connect the activities of the value chain.
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Value System
A value system is a wider system of creating value

which involves the value chains of the firms suppliers, distributors and customers. Value system analysis depicts the main activities inside and outside the firm, and aims to reveal the firms linkage with its suppliers value chain, its distributors value chains and its customers value chains. The value system concept is essentially an extension of the value chain concept to inter-firm relationship. A firms value chain and its value system must match its business strategy.
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Applying VC & VS Analysis

Allows firms to understand their organizations

cost structure Facilitate outsourcing decision; however, some activities may be obtained more cheaply in the market, but a firm should not relinquish an activity which is of critical strategic importance to its survival. E.g. Apricot Help firms to decide to move into new activities which promises a higher a value added (manufacturer becomes retailer)
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Value Chain and Global Location Decisions

Key QUESTIONS??? The general rule is that a firm should locate a

value activity in those countries that possess a comparative advantage in terms of a specific factor of production. Managers need to select location based on the distinction between labour intensive and capital intensive activities in the value chain
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VC Activities

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Comparative Analysis
An integral part of an internal firm analysis must be

comparison with their competitors.

Competitor intelligence- is the systematic collection of

information about rivals in order to assist the development of firm strategies. It is aimed at learning both about competitors strengths and weaknesses and about their likely future strategies and initiatives, as well as assessing the strengths and weaknesses of the firms own resources and capabilities relative to other firms.
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Comparative Analysis
Chen(1996) suggested that firm should compare

themselves with competitors along two dimensions in order to anticipate their strategic behaviour. Market commonality refers to the degree of presence that a competitor manifests in the markets where it overlaps with the firm. Resource similarity refers to the extent to which a given competitor possesses strategic endowments comparable in type and quantity to those of your firm.

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Comparative Analysis
Competitive intelligence and benchmarking can help the

firm to compare itself with others, so that managers avoid overestimating their own abilities. Benchmarking is the search for industry best practices that will lead to the superior performance of a company. The aim of benchmarking is to find better practice processes which show higher levels of performance, and which can be copied and adopted internally by the organization. Thus competitive intelligence may not only help you to assess the strengths of your own resources and capabilities, but may also help you to understand your competitors likely strategies.
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Conclusion
The example of Xerox demonstrates that it is not

sufficient for a firm to spend vast sums on research and development or to have unique resources and capabilities. A firm must be market oriented and must be able to effectively coordinate all its activities to deliver value to the customer. Hence, managers must pay equal attention to the internal firm environment and the external business environment. Neither the resource based perspective nor the positioning perspective can guide strategy development by itself.
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