SM Session 7-8 Internal Environment: October 15, 2019

SM Session 7-8 Internal
Environment
October 15, 2019
Pinpoints the strengths and
weaknesses of the organization.
Strengths
Internal Analysis Assets that boost profitability
Weaknesses
Liabilities that depress

profitability
It includes assessments of
● Firm’s resources
Internal Analysis gives
& capabilities
managers the information to ● Distinctive
choose the strategies and competencies
business model to attain a
sustained competitive
advantage.
Firm-specific strengths
Distinctive that allow a company to
differentiate its products
Competencies
from those offered by
rivals, and/or achieve
substantially lower costs.
Aimed at improving the
effectiveness of a company’s
operations.
Leads to a competitive
Functional Level Strategies advantage and superior
profitability and profit
growth.
Building or sustaining of competitive advantage requires a
company to achieve superior
● Efficiency
● Quality
● Responsiveness to customers
● Innovations
Competitive Advantage - firm’s profitability is greater than the
average profitability for all firms in its industry.
Sustained Competitive Advantage - firm maintains above average

and superior profitability and profit growth over a number of years.
ACHIEVING SUPERIOR EFFICIENCY
Measure of efficiency is
the quantity of inputs that
it takes to produce a given
output
Efficiency and Economies of Scale
§One source of economies of scale is the ability to

spread fixed costs over a large production volume.
§Another source is the ability of a company to produce in
large volumes to achieve a greater division of labor and
specialization.
Diseconomies of Scale
A company may encounter diseconomies of scale, which

are the unit cost increases associated with a large scale of
output.
Diseconomies of scale occur primarily because of increased

bureaucracy associated with large-scale enterprises and the
managerial inefficiencies that can result.
Managers must know when the extent of diseconomies of

scale begin to occur.
Efficiency and Learning Effects
Learning effects are cost savings that come from learning by doing.
Equally important, management in new manufacturing facilities typically learns

over time how best to run the new operation.
Learning effects tend to be more significant when a technologically complex task

is repeated because there is more to learn
The Experience Curve
The experience curve refers to the systematic lowering of

the cost structure, and consequent unit costs reductions
observed over the life of the product.
A company is likely to have a significant cost advantage
over its competitors because of its superior efficiency once it
is down the experience cost curve.
Three reasons managers should not become complacent
about efficiency-based cost advantages derived from
experience effects:
1. Neither learning effects nor economics of scale are sustained forever.
2. Cost advantages gained from experience effects can be made obsolete
by development of new technology.
3. Producing a high volume of output does not necessarily give a company
a lower cost structure.
Primary Roles of Value Creation Functions
Achieving Superior Quality
Quality is two dimensional:
Improving Quality Through Reliability
Roles Played in Implementing Reliability Improvement Methodologies
Achieving Superior Responsiveness to Customers
Customer responsiveness: giving customers what they

want, when they want it, and at a price they are willing to
pay - as long as the company’s long-term profitability is
not compromised.
Primary Roles of Functions in Achieving Superior Responsiveness to
Customers
Achieving Superior Innovation
Functional Roles for Achieving Superior Innovation
Value
A value chain is a set of activities that
a firm operating in a specific industry
performs in order to deliver a valuable
Chain product.
Value chain analysis (VCA) is a

process where a firm identifies its
primary and support activities that add
value to its final product and then
analyze these activities to reduce costs
or increase differentiation.
Value Chain
Building Blocks of Competitive
Advantage
Value Creation Per Unit
U - Utility to Customer
P - Price
C- Costs of Production
Value Creation Per Unit
Utility - Price
Value Created
= Consumer Surplus Consumer Surplus
Price - Cost
Price
Profit Margin
= Profit Margin
Cost
Value Created
Utility - Cost
Price
= Value Created
Cost
Value Creation and Pricing Options
Toyota vs General Motors
Which company creates more utiity?
Which company can charge higher

prices?
Which company is more profitable?
Which company has a lower cost

structure?
What leads to Superior Value Creation?
Ans: Gap between perceived utility (U)

and costs of production (C) be greater
than that attained by competitors
DRIVERS OF PROFITABILITY
Ways to increase ROIC
Durability of competitive advantage
1. BARRIERS TO IMITATION; difficult to copy,
distinctive competencies
-resources
-capabilities
1. CAPABILITY OF COMPETITORS; -strategic
commitment, absorptive capacity
2. INDUSTRY DYNAMISM; ability to change rapidly
Why companies fail?
1. Inertia- difficult to adapt strategies and structures
to changing conditions
2. Prior strategic commitments- limit ability to
imitate and cause competitive disadvantage
3. Icarus Paradox- so specialised or inner directed by
past success lose sight of market realities
4. Rising or falling industries- craftsmen, builders,
pioneers, sales people
Focus
Focuser strives to serve need of targeted niche market
segment where it has either low-cost or differentiated
competitive advantage
•Focuser selects specific market
based on:
Ø Geography
Ø Type of customer
Ø Segment of product line
Strategic Choices-
Focus •Focused company positions self
as either:
Ø Low-Cost or
Ø Differentiator
O Focuser protected from rivals to
extent can provide a product
Advantages of /service they cannot.
O Focuser has power over buyers
Focus because they cannot get same thing
elsewhere
Strategies O Threat of new entrants limited by
customer loyalty to focuser.
O Customer loyalty lessens threat
from substitutes.
O Focuser stays close to customers
and changing needs.
O Focuser at disadvantage to
powerful suppliers because it buys
Disadvantages in small volume (but may pass costs
of to loyal customers).
O Because of low volume, focuser
Focus may have higher costs than low-
cost company.
Strategies O Focuser’s niche may disappear
because of technological change or
changes in customers’ tastes.
O Differentiators will compete for
focuser’s niche.
Strategic managers must:
Competitive 1.Map their competitors
2.Better understand changes in
Positioning: industry
Strategic 3.Determine which strategies are

successful
Groups 4.Fine tune or radically alter
business models & strategies to
improve competitive position

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SM Session 7-8 Internal

Internal Analysis Assets that boost profitability

Liabilities that depress

Sustained Competitive Advantage - firm maintains above average

§One source of economies of scale is the ability to

A company may encounter diseconomies of scale, which

Diseconomies of scale occur primarily because of increased

Managers must know when the extent of diseconomies of

Equally important, management in new manufacturing facilities typically learns

Learning effects tend to be more significant when a technologically complex task

The experience curve refers to the systematic lowering of

Customer responsiveness: giving customers what they

Value chain analysis (VCA) is a

Which company creates more utiity?

Which company can charge higher

Which company is more profitable?

Which company has a lower cost

What leads to Superior Value Creation?

Ans: Gap between perceived utility (U)

Strategic 3.Determine which strategies are

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