Analyzing Company’s Internal Environment

Resource based view of a firm:

Resource based view of a firm is a management device used to assess the available amount of a
business’ strategic assets. In essence, the resource-based view is based on the idea that the
effective and efficient application of all useful resources that the company can muster helps
determine its competitive advantage.

Meaning of competitive advantage:

It is a superiority gained by an organization when it can provide the same value as its
competitors but at a lower price, or can charge higher price by providing greater value through
differentiation. Competitive advantage results from matching core competencies to the
opportunities.
Types of competitive advantage:

1) Cost competitive advantage:

This means that a company is able to provide/offer products or services to its customers for
less than competitor’s price. It is possible only when a the company has a lower cost of
doing
business.

2) Differentiation competitive advantage:

This can be achieved when a company provides products that customers perceive to be of
higher value than competitor’s products and such a company is able to charge a premium or

higher prices for its products.

Sources of competitive advantage:

1) Strong research and development capabilities

2) Access to intellectual properties
3) Exclusive re-selling or distribution rights
4) Ownership of capital equipment
5) Superior customer support
6) Low cost or high volume production
7) Superior database management and data processing capabilities
8) Strong marketing strategy
9) Access to working capital
10) Excellent management and operations team
11) Barriers to entry or Monopoly
VRIO framework:

VRIO is the initialism for the four question framework asked about a resource or capability to
determine its competitive potential:

 The question of value: “Is the firm able to exploit an opportunity or neutralize an external
threat with the resource/capability?

 The question of rarity: Is control of the resource/capability in the hands of a relative few?”

 The question of imitability: “Is it difficult to imitate, and will there be significant cost
disadvantage to a firm trying to obtain, develop or duplicate the resource/capability?

 The question of organization: “Is the firm organized, ready, and able to exploit the
resource/capability?” “Is the firm organized to capture value?”
 Competitive Advantage

Competitive advantages are conditions that allow a company or a country to produce a product or
service of equal value at a lower price or in a more desirable fashion.

These conditions allow the productive entity to generate more sales or superior margins compared
to its market rivals.

Competitive advantages are attributed to a variety of factors including cost structure, branding,
the quality of product offerings, the distribution network, intellectual property and customer
service.
 Competitive Parity
Competitive parity on the face of it means being on par with competition.

In the area of marketing, competitive parity refers to the optimal expenditure needed on branding
and advertising activities to stay on par with the competitors of a particular brand, product or
company as a whole. Promotional budget is allocated based on the scrutiny of optimal level of
market competition.
 
If we take the example of the FMCG war between Coca Cola and Pepsi, any new territory that
Coke or Pepsi tries to establish itself in, these brands check the competitor’s presence.
Accordingly, they budget their advertising and promotional expenses.

Competitive parity is a defensive strategy that is used by businesses to defend their reputation,
their brand and its positioning without resorting to the overspending of financial resources.
 Competitive Disadvantage

A competitive disadvantage is an unfavourable circumstance or condition that causes a firm to

underperform in an industry.

Disadvantages typically include things such as know-how, scale, scope, location, distribution,
quality, product features, process efficiency, productivity and costs.

Competitive disadvantage may be measured by benchmarking against a top competitor or

industry average for a particular factor.

Note: The term competitive disadvantage doesn’t necessarily imply that a firm is at a complete
disadvantage to other firms. For example, a particular firm may have a cost advantage and a
quality disadvantage.
 Core Competence
A core competence is a concept in management theory introduced by C. K. Prahalad and Gary
Hamel.

It can be defined as “ a harmonized combination of multiple resources and skills that distinguish a
firm in the marketplace” and therefore are the foundation of company’s competitiveness.

Characteristics of core competencies

An article “The Core Competence of the Corporation” lays down the characteristics as under:

1) The activity must provide superior value/benefits to the consumer

2) A core competency should not be easily replicated or imitated by competitors
3) It should be rare; it should be something not found in a competitor
 Distinctive Competitiveness
Distinctive competitiveness is afforded by a set of unique capabilities that certain firms possess
allowing them to make inroads into desired markets and to gain advantage over the competition;
generally, it is an activity that a firm performs better than its competitor/s.

Benchmarking as a method of competitive analysis

Benchmarking is an efficient and effective way to identify the potential of a cluster and to
develop strategic recommendations for its further development within a short time frame.

Benchmarking is a comparative analysis of structures, processes, products and services. It

compares an entity to peers in the same field of activity and/or to best practices from entities in
other areas.

The objective of benchmarking is to learn from better performing peers or other entities in order
to improve own structures, process, products and services.
 Value Chain Analysis Using Porter’s Model:

A value chain is a set of activities that a firm operating in a specific industry performs in order to
deliver a valuable product or service for the market. The concept comes through business
management and was first described by Michael Porter in his 1985 best-seller, Competitive
Advantage: Creating and Sustaining Superior Performance.
Primary Activities
1) Inbound logistics: arranging the inbound movement of materials, parts, and/or finished
inventory from suppliers to manufacturing or assembly plants,
warehouses, or retail stores

2) Operations: concerned with managing the process that converts inputs (in the forms of raw
materials, labor, and energy) into outputs (in the form of goods and/or services).

3) Outbound logistics: is the process related to the storage and movement of the final product and
the related information flows from the end of the production line to the
end user
4) Marketing and sales: selling a product or service and processes for creating, communicating,
delivering, and exchanging offerings that have value for customers, clients, and society at large.

5) Service: includes all the activities required to keep the product/service working effectively for
the buyer after it is sold and delivered.

Secondary Activities
1) Infrastructure: consists of activities such as accounting, legal, finance, control, public relations,
quality assurance and general (strategic) management.
2) Technological development: pertains to the equipment, hardware, software, procedures and
technical knowledge brought to convert inputs into outputs.
3) Human resources management: consists of all activities involved in recruiting, hiring, training,
developing, compensating and (if necessary) dismissing or
laying off personnel.
4) Procurement: the acquisition of goods, services or works from an outside external source
 Strategic Advantage Profile (SAP)

 Every firm has strategic advantages and disadvantages. For example, large firms have financial
strength but they tend to move slowly, compared to smaller firms, and often cannot react to
changes quickly.

No firm is equally strong in all its functions. In other words, every firm has strengths as well as
weaknesses.

Strategists must be aware of the strategic advantages or strengths of the firm to be able to choose
the best opportunity for the firm. On the other hand they must regularly analyze their strategic
disadvantages or weaknesses in order to face environmental threats effectively

The Strategist should look to see if the firm is stronger in these factors than its competitors.

When a firm is strong in the market, it has a strategic advantage in launching new products or
services and increasing market share of present products and services.
 Concepts of Stretch, Leverage and Fit
Stretch: As of today there is a misfit between resources and aspirations. So instead of looking at
resources, you will look at resourcefulness. To achieve you will stretch and make innovative use
of your resources.
Leverage refers to concentrating your resources to your strategic intent, accumulating learning,
experiences and competencies, in a manner that a scarce resource base can be stretched to meet
the aspirations that an organizational resources to its environment.
The strategic fit: is the traditional way of looking at strategy. Using techniques such as SWOT
analysis, which are used to assess organizational capabilities and environmental opportunities,
Strategy is taken as a compromise between what the environment has got to offer in terms of
opportunities and the counteroffer that the organization makes in the form of its capabilities.

Under fit, the strategic intent is conservative and seems to be more realistic, but you may not be
aware of the potential; under stretch and leverage it could be improbable, even idealistic, but then
you look at something far beyond present possibilities and look at the potential possibilities.
 The BCG Growth-Share Matrix

The BCG Growth-Share Matrix is a portfolio planning model developed by Bruce Henderson of
the Boston Consulting Group in the early 1970's.

It is based on the observation that a company's business units can be classified into four
categories based on combinations of market growth and market share relative to the largest
competitor, hence the name "growth-share".

Market growth serves as a proxy for industry attractiveness, and relative market share serves as a
proxy for competitive advantage. The growth-share matrix thus maps the business unit positions
within these two important determinants of profitability.
BCG Growth-Share Matrix
This framework assumes that an increase in relative market share will result in an increase in the
generation of cash. This assumption often is true because of the experience curve; increased
relative market share implies that the firm is moving forward on the experience curve relative to
its competitors, thus developing a cost advantage.

A second assumption is that a growing market requires investment in assets to increase capacity
and therefore results in the consumption of cash. Thus the position of a business on the growth
share matrix provides an indication of its cash generation and its cash consumption.

Henderson reasoned that the cash required by rapidly growing business units could be obtained
from the firm's other business units that were at a more mature stage and generating significant
cash.

By investing to become the market share leader in a rapidly growing market, the business unit
could move along the experience curve and develop a cost advantage. From this reasoning, the
BCG Growth-Share Matrix was born.
The four categories are:

• Dogs - Dogs have low market share and a low growth rate and thus neither generate nor
consume a large amount of cash. However, dogs are cash traps because of the money tied up
in a business that has little potential. Such businesses are candidates for divestiture.

•Question marks - Question marks are growing rapidly and thus consume large amounts of cash,
but because they have low market shares they do not generate much cash. The result is a large
net cash consumption. A question mark (also known as a "problem child") has the potential to
gain market share and become a star, and eventually a cash cow when the market growth slows.

If the question mark does not succeed in becoming the market leader, then after perhaps years
of cash consumption it will degenerate into a dog when the market growth declines. Question
marks must be analysed carefully in order to determine whether they are worth the investment
required to grow market share.
• Stars - Stars generate large amounts of cash because of their strong relative market share, but
also consume large amounts of cash because of their high growth rate; therefore the cash in
each direction approximately nets out. If a star can maintain its large market share, it will
become a cash cow when the market growth rate declines.
The portfolio of a diversified company always should have stars that will become the next
cash cows and ensure future cash generation.

• Cash cows - As leaders in a mature market, cash cows exhibit a return on assets that is greater
than the market growth rate, and thus generate more cash than they consume.
Such business units should be "milked", extracting the profits and investing as little cash as
possible. Cash cows provide the cash required to turn question marks into market leaders, to
cover the administrative costs of the company, to fund research and development, to service the
corporate debt, and to pay dividends to shareholders.
Because the cash cow generates a relatively stable cash flow, its value can be determined with
reasonable accuracy by calculating the present value of its cash stream using a discounted cash
flow analysis.
Under the growth-share matrix model, as an industry matures and its growth rate declines, a
business unit will become either a cash cow or a dog, determined solely by whether it had
become the market leader during the period of high growth.
While originally developed as a model for resource allocation among the various business units
in a corporation, the growth-share matrix also can be used for resource allocation among
products within a single business unit. Its simplicity is its strength - the relative positions of the
firm's entire business portfolio can be displayed in a single diagram.

Limitations
The growth-share matrix once was used widely, but has since faded from popularity as more
comprehensive models have been developed. Some of its weaknesses are:
• Market growth rate is only one factor in industry attractiveness, and relative market share is
only one factor in competitive advantage. The growth-share matrix overlooks many other
factors in these two important determinants of profitability.
• The framework assumes that each business unit is independent of the others. In some cases, a
business unit that is a "dog" may be helping other business units gain a competitive advantage.

• The matrix depends heavily upon the breadth of the definition of the market. A business unit
may dominate its small niche, but have very low market share in the overall industry. In such a
case, the definition of the market can make the difference between a dog and a cash cow.

While its importance has diminished, the BCG matrix still can serve as a simple tool for viewing
a corporation's business portfolio at a glance, and may serve as a starting point for discussing
resource allocation among strategic business units.
GE 9 Cell Model