V Importance of Internal Analysis

V Frameworks to Internal Analysis

V Techniques of Internal Analysis
V uesource Based View
V Bates and Eldredge Approach
V Ansoff·s Grid Approach
V Functional uesources Scanning
V 7 S Framework
V !omprehensive Analysis
× SWOT Analysis
× TOWS Analysis
× Value !hain Analysis
× Financial Analysis
× Key Factor uating
× Strategic Advantage Profile
× Balanced Scorecard
× IFE Matrix
V !omparative Analysis
× xistorical Analysis
× Industry Norms
× Benchmarking
 



By studying the external
Sociocultural environment, firms identify what
they 6
 

 




Opportunities and threats

 





Technological
i

External and Internal
Analyses
By studying the internal
environment, firms identify what
they 
 

Unique resources,
capabilities, and core
competencies
(sustainable competitive
advantage)
V It is also known as ¶Internal Audit/appraisal·
V It is a systematic and methodical analysis of
the strengths and weaknesses of a firm·s
internal resources and capabilities and also its
functional areas
V The process of identifying and evaluating an
organization·s specific characteristics
× uesources, capabilities, and core competencies
× Looks at organization·s
a !

vision
a Mission(s)
a Strategic & financial objectives
a Strategies
V Enables a firm to identify its strengths and
weaknesses.
V To exploit the opportunities that are in line with
its capabilities
V Enables a firm to make good strategic
decisions
V To correct important weaknesses and defend
against threats
V To assess capability gaps and take steps to
enhance its capabilities
V Information from internal environment provides
basis for developing strategic alternatives.




along with the external analysis of the company·s
environment,   
 
 
 


 
 


 
 
  



 

 

 


 




  
 




 
 



   


 




 


 

  


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V uesources and capabilities are the
primary sources of competitive
advantage and that firms are
heterogeneous in their resource and
capability base
V Popularized by Barney
uesources
‡ Tangible Components of the Resource-
‡ Intangible
‡ Brand Equity Based View

!apabilities

!ore
!ompetencies

!ompetitive Above-Average
Above-
Advantage ueturns
Introduction

Assumptions:
V Firms are unique bundles of resources
V uesources are relatively immobile
è &() is a method of analyzing and
identifying a firm·s strategic advantages
based on examining its distinct
combination of assets, skills, capabilities,
and intangibles
2. The uBV·s underlying premise is that
firms differ in fundamental ways
because each firm possesses a unique
´bundleµ of resources
3. Each firm develops competencies from
these resources, and these become the
source of the firm·s competitive
advantages
è a
 
are the easiest
´resourcesµ to identify and are often
found on a firm·s balance sheet
* 


 
 are ´resourcesµ
such as brand names, company
reputation, organizational morale,
technical knowledge and
accumulated experience
+ ,
 


 are not
specific ´inputs.µ They are the skills
that a company uses to transform
inputs into outputs
îhat if the firm does not possess necessary capabilities and resources?

‰ Develop the resources, capabilities, and value-creating

activities internally

‰ Acquire a firm that has the necessary core competencies,

resources or capabilities

‰ Outsource
‰ Outsource
‡ Gimits to the ability of firms to possess all resources and
capabilities in all primary and support activities.

ƥ Allows the firm to focus on a few critical activities

‰ Core Competencies

ƥ set of distinctive competencies that provide a firm with a

sustainable competitive advantage

ƥ Resources and capabilities serve as the foundation for core

competencies.

º f the firm has adequate resources and capabilities in the

appropriate activities then the firm has a core competency.

ƥ Not all firm resources and capabilities represent core

competencies.

ƥ How does a firm turn a core competency into a competitive

advantage and above-normal returns?
‰ Competitive Advantage

‡ Core competencies must meet all 4 of the conditions below

to allow a sustained competitive advantage.

ƥ Valuable
‡ Rare
ƥ costly to imitate
ƥ Non-substitutable
V Valuable resources help the firm
implement its strategy efficiently and
effectively.

V From a SWOT standpoint, valuable

resources exploit opportunities and
minimize threats in the firm·s
environment.

V May include resources such as property,

equipment, people and skills.
V A resource can be considered rare if it is
not widely available to competition.

V Thus, valuable resources that are

available to a large number of firms are
not rare. A good example is legal
expertise.

V uare resources may include a good

location, good managers/leaders, or
control of natural resources.
V Inimitable means that a resource cannot
be copied (at a price low enough to leave
profit).
V Three factors enhance inimitability:
× Unique historical conditions ² initial resources that
accompany the firm·s origin (location, knowledge)
× !ausal ambiguity ² If link between firm resources,
capabilities and competencies are not understood by
competitors; !ompetitors may not understand how a firm
uses its competencies to achieve a sustained competitive
advantage
× !omplex social relationships ² !apabilities may be a
function of complex social relationships between
customers and suppliers; Interpersonal relationships
between managers and subordinates
V Strategic resources that cannot be
replaced by common resources.
× !harismatic leader for a strategic plan

V Similar to substitutes in Porter·s 5 Forces

model.
 nternal Analysis

!ompetitive Performance
!onsequences Implications

  


    


 

 

    
 


   

  
 
    

 


 


  

    

 
!ompetitive advantage is a firm·s ability
to outperform its competitors (earn
higher profits).
The source of competitive advantage is
value creation for customers.
Sustained competitive advantage
comes from maintaining higher profits
than competitors over long periods of
time.
V Four Building Blocks
× Efficiency
× Quality
× Innovation
× !ustomer uesponsiveness
V Lead to !ompetitive Advantage
through:
× Low !ost Strategy
× Differentiation Strategy
 Efficiency
V @



 

V Productivity leads to greater efficiency
and lower costs:
× Employee productivity
× !apital productivity
× Productivity determined by factors such as:
a knowledge
a patents
a processes
a technology

Efficiency Low cost

X 0 
 
 are goods and services
that are:
‡& 
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perceived higher value

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V Product innovation
× !reates products that
customers perceive as more
valuable

× Increases the company·s
pricing options
V Process innovation
× !reates value by lowering
production costs





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A Enhanced customer responsiveness:

!ustomer response time, design, service,
after-sales service and support

   




 

   

The roots of competitive advantage:

0
V Never take for granted that core
competencies will continue to provide a
source of competitive advantage
V All core competencies have the potential
to become 


 
V !ore rigidities are former core
competencies that now generate inertia
and stifle innovation
'

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,
 


Management
Finance
Operations
V Grid for Internal Analysis
V uows- various functions
V !olumns- capabilities
V Strengths and Weaknesses of various
functions
'

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Marketing Warehousing uetail and Distribution Industrial
uetail outlets Wholesale chain marketing
Transportatio selling uetail chain Large
n Direct Inventory customer
Equipments industry distribution base
Data selling and control Decentralized
Processing Advertising control
and
Sales
Promotion
V !hecklist by Pearson and uobinson to
find out functional competence in
various functional areas
× Marketing
× Finance
× Operations
× xu
× Management
'

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Strategy
Structure
Systems
Shared
values
Skills
Style
staff
V Identify and classify firm·s resources in terms
of STuENGTxS and WEAKNESSES
V !ombine the firm·s STuENGTxS into specific
capabilities
V Appraise the profit potential of these
resources and capabilities
V Select the strategy that best exploits the
firm·s resources and capabilities relative to
external opportunities
V Identify resource gaps and invest in
overcoming weaknesses
A traditional approach to internal
analysis:
,a is an acronym for the internal
trengths and eaknesses of a firm
and the environmental ,pportunities
and ahreats facing that firm.
V ,a
 is a historically popular
technique through which managers
create a quick overview of a
company·s strategic situation.
V An 


 is a major favorable situation in
a firm·s environment
V A
 
is a major unfavorable situation in a
firm·s environment
V A 


 is a resource or capability
controlled by or available to a firm that gives it
an advantage relative to its competitors in
meeting the needs of the customers it serves
V A  
 is a limitation or deficiency in one
or more of a firm·s resources or capabilities
relative to its competitors that create a
disadvantage in effectively meeting customer
needs
 Strengths Weaknesses

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V A SWOT analysis can overemphasize
internal strengths and downplay
external threats
V A SWOT analysis can be static and
can risk ignoring changing
circumstances
V A SWOT analysis can overemphasize
a single strength or element of
strategy
V A strength is not necessarily a source
of competitive advantage
V SWOT analysis is a tool for helping assess
the current situation for the firm.
V xowever, we need to be able to
combine the information in the SWOT
analysis in a meaningful way to generate
alternative strategies that we might
pursue.
V The TOWS matrix is a tool designed to
match external opportunities and threats
with our internal strengths and
weaknesses
V Technique used in strategy formulation
for combining
× External analysis
a Opportunities
a Threats
× Internal analysis
a Strengths
a Weaknesses
  

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V  


 
 

 
× Inside the firm
× In the supply chain
V 
   

× Identify strengths and weaknesses
× Identify sources of competitive advantage
× Identify market opportunities
V Value !hain Analysis
× Allow assessment of 




 of
organization with those of its rivals
× !ustomers want (demand) some type of 
from the goods and services they purchase or
obtain
×  
  arises from
(1) Uniqueness of product or service
(2) Low-priced product/service
(3) Quick response to specific or distinctive customer
needs
V The value chain identifies the 






and business processes performed to design,
produce, market, deliver, and support a
product/service and how well they create
customer value.
V !onsists of
types of activities
× 3





 : create customer value
a Inbound logistics, Operations; Outboard logistics;
Sales & Marketing; & !ustomer Service
× — 





 
 

 
a Procurement; Technological development; xuM;
General Administration (Firm infrastructure)
3
 



 

Inbound Outbound Sales and Profit

Operations Service
Logistics Logistics Marketing Margin

Procurement; Product R&D, Technology

 
Human Resources Management





 
General Administration (Firm Infrastructure)
 Upstream Firm·s Own
Value !hain Value !hain Downstream Value !hains

Internally
Activities,
Performed Costs, &
Activities, Activities, Margins of
Costs, & Buyer/User
Costs, & Forward
Margins of Value
Margins Channel
Suppliers Chains
Allies &
Strategic
Partners
V A company·s 





depends on how well it manages its
 
relative to competitors
V Three areas contribute to cost
differences
è— 
activities
*The company·s own

 activities
+›  activities
V Assessing a company·s 





 involves comparing costs
along the industry·s value chain
V — 
value chains are relevant
because
× !osts, quality, and performance of inputs provided
by suppliers influence a firm·s own costs and
product performance
V ›
value chains are
relevant because
× Forward channel allies· costs and margins are part
of price paid by ultimate end-user
× Activities performed affect end-user satisfaction
V Optimization and coordination of
activities in the value chain
V Linkages exist between support activities
and primary activities and between
separate primary activities
V Linkages between suppliers· value chains
and a firms chain provide opportunities
for the firm to enhance competitive
advantage.
V Division of benefits between firm and its
suppliers is a function of supplier·s
bargaining power and reflecting in
supplier·s margins.
V Both coordination with suppliers and hard
bargaining are important to competitive
advantage.
V A firm·s differentiation stems from how its
value chain relates to its buyer·s chain.
V Differentiation derives fundamentally from
creating value for the buyer through a
firm·s impact on the buyer·s value chain.
V Value is created when a firm creates a
competitive advantage for its buyer.
V The buyer must perceive the value to pay
a premium price.
V A company can create 





by managing its value chain so
as to
× 

the knowledge and skills of employees in
competitively valuable ways
× G economies of learning or experience
curve effects
× !

 related activities in ways that build
valuable capabilities
× O





in a value chain
activity critical to customer satisfaction or market
success
V Margins
× 
 the value from performing value-creating
activities as cheaply as possible
× The basic idea is that the consumer is willing to pay
a certain amount for the value you create. This is
depicted as the size of the overall pentagon.
× The size of the individual activity boxes represents
the cost of performing those particular activities.
× Thus, the smaller the size of the individual activity
boxes relative to the value the consumer is willing
to pay, the greater the MAuGIN will be for the firm.
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V Liquidity ratios
V Leverage ratios
V Activity ratios
V Profitability ratios
V Key factors affecting organizational
functioning
V From functional areas

Balanced Score !ard

º Financial performance
º!ustomer Service
ºInternal business processes
ºOrganization·s capacity to learn
V Summary statement of the overview of
strengths and weaknesses in key
functional areas which will affect future
operations of the firm



   

 



 

Marketing
u and D
Operations
Inventory systems
xu
Finance
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V xistorical Analysis
V Industry Norms
V Benchmarking
V Internal
V !ompetitive
V Functional
V Generic