Chapter 4 Assessing Strengths and Weaknesses: Internal Analysis

Instructor: Moses Acquaah, Ph.D. 377 Bryan Building Phone: (336)334-5305 Email: [email protected]

Lecture Objectives
(1) Define internal analysis and discuss why it is important. (2) Describe the relationship between organizational resources, organizational capabilities, core competencies, and distinctive organizational capabilities. (3) Explain what organizational strengths and weaknesses are. (4) Define the value chain and describe the primary and support activities on the value chain. (5) Explain the strategic options for correcting cost competitiveness on the value chain system. (6) Discuss the steps in conducting a competitive strength assessment (7) Explain how to use the internal audit process (8) Discuss the features of an internal environmental analysis process (9) Describe the steps in capabilities assessment profile

What is Internal Analysis?

The process of identifying and evaluating an organizations specific characteristics
Resources, capabilities, and core competencies Looks at organizations
Current vision Mission(s) Strategic & financial objectives Strategies

Why Do an Internal Analysis?

Enables a firm to identify its strengths and weaknesses.

Enables a firm to make good strategic decisions.

Information from internal environment provides basis for developing strategic alternatives.

A Quick Review of Organizational Resources

Organizational resources are assets an organization has for carrying out work activities and processes
Financial resources
Current debt, credit lines, equity, cash reserves, etc.

Physical resources
Plant & equipment, inventories, supplies, fixtures, etc.

Human resources
Management & employee skills, training, experiences, etc

A Quick Review of Organizational Resources

Intangible resources
Brand names, patents, trademarks, copyrights, etc.

Structural-cultural resources
Culture, history, work systems policies, formal reporting structures, etc

Human, intangible, and structural-cultural resources can be a source of competitive advantage

Play important role in determining capabilities or competencies and core competencies

Organizational Capabilities
Organizational capabilities/competencies
The complex and coordinated network of company routines and processes that determines how efficiently and effectively the organization transforms its resources into products (goods & services) Involves complex pattern of coordination between people, & between people and resources Its an internal activity that a company performs better than other internal activities

Organizational Capabilities
Organizational routines & processes:
Regular, predictable, and sequential patterns of work activity by organizational members

Sustainable Competitive Advantage (CA):

The prolonged maintenance of competitive advantage Capabilities that are capable of leading to CA today may not continue to do so as conditions & rivals change

Dynamic capabilities
An organizations ability to build, integrate and reconfigure capabilities to address rapidly changing environments over time.

Core Competencies
Core competencies
A well-performed internal activity that is central, not peripheral, to a companys strategy, competitiveness, and profitability

Major value-creating skills and capabilities that

are shared across multiple product lines or multiple

businesses Results from the collaboration among different parts of an organization

Gives a company a potentially valuable competitive capability

Core Competencies
Types of Capabilities/Core Competencies
Skills in manufacturing a high quality product System to fill customer orders accurately and swiftly Fast development of new products Better after-sale service capability Superior know-how in selecting good retail locations Innovativeness in developing popular product features Merchandising and product display skills Expertise in an important technology Expertise in integrating multiple technologies to create whole families of new products

From Core Competencies to Distinctive Capabilities

Distinctive Capabilities
Special and unique capabilities that distinguish the organization from its competitors A competitively valuable activity that a company performs better than its rivals Allow a company to develop a sustainable competitive advantage and outperform its competition

From Core Competencies to Distinctive Capabilities

Characteristics of distinctive capabilities:
(1) Contribute to superior customer value and offers real benefits to customers (2) Difficult for competitors to imitate (3) Allow the organization to use that capability in a variety of ways

Whats the relationship between organizational capabilities, core competencies and distinctive capabilities?

Examples of Distinctive Capabilities

Sharp Corporation Expertise in flat-panel display technology Toyota Low-cost, high-quality manufacturing capability and short design-to-market cycles Intel Corporation Ability to design and manufacture ever more powerful microprocessors for PCs Motorola Defect-free manufacture (six-sigma quality) of cell phones

Strengths and Weaknesses

Strengths
Resources that an organization possesses and capabilities that the organization has developed Both can be exploited and developed into a sustainable competitive advantage

Weaknesses
Resources and capabilities that are lacking or deficient; and that Prevents an organization from developing a sustainable competitive advantage

How to Do an Internal Analysis

Approaches to internal analysis
(1) Value Chain Analysis (2) Competitive Strength Assessment (3) An Internal Audit (4) Internal Environmental Analysis Process (5) Capabilities Assessment Profile

(1) Value Chain Analysis

Value Chain Analysis
Customers want (demand) some type of value from the goods and services they purchase or obtain Customer value arises from
(1) Uniqueness of product or service (2) Low-priced product/service (3) Quick response to specific or distinctive customer needs

Allow assessment of cost competitiveness of organization with those of its rivals

The Value Chain

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

Consists of two types of activities

Primary activities : create customer value
Inbound logistics, Operations; Outboard logistics; Sales & Marketing; & Customer Service

Support activities: Support primary activities

Procurement; Technological development; HRM; General Administration (Firm infrastructure)

A Typical Value Chain

Primary Activities and Costs

Inbound Logistics

Operations

Outbound Logistics

Sales and Marketing

Service

Profit Margin

Procurement; Product R&D, Technology Human Resources Management General Administration (Firm Infrastructure) Support Activities and Costs

The Value Chain System

Upstream Value Chain Firms Own Value Chain

Downstream Value Chains

Activities, Costs, & Margins of Suppliers

Internally Performed Activities, Costs, & Margins

Activities, Costs, & Margins of Forward Channel Allies & Strategic Partners

Buyer/User Value Chains

Examples of Key Value Chain Activities

Soft Drinks Industry Processing of basic ingredients Syrup manufacture Bottling & can filling Wholesale distribution Retailing Computer Software Industry Programming Disk Loading Marketing Distribution

The Value Chain System

A companys cost competitiveness depends on how well it manages its value chain relative to competitors Three areas contribute to cost differences
1. Suppliers activities 2. The companys own internal activities 3. Forward channel activities

The Value Chain System

Assessing a companys cost competitiveness involves comparing costs along the industrys value chain Suppliers value chains are relevant because
Costs, quality, and performance of inputs provided by suppliers influence a firms own costs and product performance

Forward channel allies 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

Strategic Options for Correcting Costs Competitiveness

Supplier-related costs disadvantages:
Negotiate more favorable prices with suppliers Work with suppliers to achieve lower costs Integrate backward Use lower-priced substitute inputs

Do a better job of managing linkages between suppliers value chains and firms own chain
Make up difference by initiating cost savings in other areas of value chain

Strategic Options for Correcting Costs Competitiveness

Forward channel allies costs disadvantages:
Push for more favorable terms with distributors and other forward channel allies Work closely with forward channel allies and customers to identify win-win opportunities to reduce costs

Change to a more economical distribution strategy

Make up difference by initiating cost savings earlier in value chain

Strategic Options for Correcting Costs Competitiveness

Firms own internal cost disadvantages:
Reengineer performance of high-cost activities or business processes Eliminate some cost-producing activities altogether by revamping value chain system (VCS) Relocate high-cost activities to lower-cost geographic areas See if high-cost activities can be performed cheaper by outside vendors/suppliers Invest in cost-saving technology Simplify product design Achieving savings in backward or forward portions of VCS

From Value Chain Analysis to Competitive Advantage

A company can create competitive advantage by managing its value chain so as to
Integrate the knowledge and skills of employees in competitively valuable ways Leverage economies of learning or experience curve effects

Coordinate related activities in ways that build valuable capabilities

Build dominating expertise in a value chain activity critical to customer satisfaction or market success

From Value Chain Analysis to Competitive Advantage

The strategy-making lesson of value chain analysis is that sustainable competitive advantage can be created by: (1). Managing the value chain activities better than competitors; and

(2). Developing distinctive capabilities to serve the needs of customers better

(2) Assessing Organizations Competitive Strength

How does the firm rank relative to key rivals on each industry KSF and relevant measure of competitive strength (capabilities or core competencies)? Does the firm have a sustainable competitive advantage or disadvantage What is the ability of the firm to defend its position in light of
Industry driving forces Competitive pressures Anticipated moves of rivals

Assessing Organizations Competitive Strength

1. List industry key success factors and other relevant measures of competitive strength 2. Rate firm and key rivals on each factor using rating scale of 1 - 10 (1 = weak; 10 = strong) 3. Decide whether to use a weighted or unweighted rating system 4. Sum individual ratings to get overall measure of competitive strength for each rival 5. Determine whether the firm enjoys a competitive advantage or suffers from competitive disadvantage

Assessing Organizations Competitive Strength

A weighted competitive strength analysis is conceptually stronger than an unweighted competitive strength analysis because
All the strength measures are not equally important. E.g., in an industry with strong product differentiation, the significant strength measures may be
Brand awareness Reputation for quality Amount of advertising Distribution capability, etc.

Some KSF/Strength Measures

Quality/product performance Reputation/image Manufacturing capability Technological skills Dealer network/Distribution channels New product innovation Financial resources Relative cost position Customer service capability

Assessing Organizations Competitive Strength

What does a high competitive strength rating relative to rivals 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 competitive weaknesses of rivals

Why Do a Competitive Strength Assessment?

Reveals strength of firms competitive position Shows how firm stacks up against rivals, measureby-measure -- pinpoints the companys competitive strengths and competitive weaknesses Indicates whether firm is at a competitive advantage / disadvantage against each rival Identifies possible offensive attacks (pit company strengths against rivals weaknesses) Identifies possible defensive actions (a need to correct competitive weaknesses)

(3) Using an Internal Audit

Internal Audit
A thorough assessment of an organizations various internal functional areas Strategic decision makers use the internal audit to assess the organizations resources and capabilities from the perspectives of its different functions

Using an Internal Audit

Six primary functional areas
Production-operations Marketing Research & development Financial and accounting Management, including HRM Information System

Depending on products, markets, and industries, individual organizational structures may vary and, therefore, may emphasize different sets of functional areas

(4) Using an Internal Environmental Analysis Process

Assesses an organizations internal activities
Step 1: Survey strengths and weaknesses Step 2: Categorize these strengths & weaknesses (S&W) in terms of resources & capabilities Step 3: Investigate the potential of strengths to lead to competitive advantage Step 4: Evaluate the ability of these competitively resources & capabilities to serve as the basis for an appropriate competitive strategy

(5) Capabilities Assessment Profile

Resembles the internal environmental analysis
Similarity: Focuses on deeper evaluation of S&W Difference: Focuses only on an firms capabilities

Analysis of capabilities is complex

Not as easily identified as organizations function or even the value creating primary & support activities Complex nature of capabilities makes it hard for competitors to imitate

Capabilities Assessment Profile

Analysis Consists of two phases:
Phase I: Identify distinctive capabilities Phase II: Develop and leverage distinctive capabilities

Identifying Distinctive Organizational Capabilities

Step 1: Prepare current product-market profile
Emphasize organization-customer interactions What is the organization selling? Who are the organization selling to? Is the organization providing superior customer value & desirable benefits?

Capabilities Assessment Profile

Step 2: Identify sources of competitive advantage & disadvantage in the main productmarket segment
Determine why customers choose the organizations products vs. those of competitors Involves information on cost, product, and service attributes When customers purchase What theyre actually purchasing What bundle of attributes satisfies their needs

Capabilities Assessment Profile

Step 3: Describe all organizational capabilities & competencies
Examine resources, skills, & abilities of the various divisions Determine which resources, skills, & abilities lead to a competitive advantage

Step 4: Sort the core capabilities/competencies according to strategic importance

Can capability provide wide access to a number of different markets? Does the capability provide tangible customer benefits? Is the capability difficult for competitors to imitate?

Capabilities Assessment Profile

Step 5: Identify and agree on the key capabilities or competencies
Provide basis for resource allocation

Classifying an Organizations S&W

Past performance trends
Measures such as financial ratios, operations efficiency, etc,

Specific goal or targets

Organizations goals are statements of desired outcomes

Comparison against competitors

How are competitors doing?

Personal opinions of decision makers & consultants