Internal

Environment
3rd Lecture
MSc Agricultural
Economics and
Management

External and Internal Analyses

Environment

al
t
ob
en
Gl
m
on
vir
En

Competitor
Environment
Technological
General

Po
lit
ica
En
l/
v ir
Le
on
ga
m
l
en
t

Industry
Environment

l
ra
ne
ic
Ge
om
on
Ec

Ge
ne
De
ra
m
l
og
ra
ph
ic

Sociocultural

By studying the external

environment, firms identify
what they might choose to
do

Opportunities and
threats

External and Internal

Analyses
By studying the internal
environment, firms identify
what they can do

Unique resources,
capabilities, and core
competencies
(sustainable
competitive
advantage)

Challenge of Internal Analysis

How do we effectively manage current

core competencies while simultaneously
developing new ones?
How do we assemble bundles of
resources, capabilities and core
competencies to create value for
customers?
How do we learn to change rapidly?

Conditions Affecting Managerial Decisions

About Resources, Capabilities, and Core
Competencies

Uncertainty regarding characteristics of the

general and the industry environments,

competitors actions, and customers preferences

Complexity regarding the interrelated causes

shaping a firms environments and perceptions of

the environments

Intraorganizational Conflicts among

people making managerial decisions and those

affected by them

Choosing the right tools

for internal analysis

Start with simple techniques

Consider all tools and identify those likely to be useful
Define the competitive capabilities the enterprise needs
Identify the subsystems which support these capabilities
Identify core competence relative to competitive capabilities
Determine changes to enhance/improve core competence
Take a systemic view
Adjust the methods of analysis in the light of what is found

Some commonly used techniques

for internal analysis
Single Businesses
Resource Audit
Analysis of cost and profit
Benchmarking
Value Chain Analysis
Supply Chain Analysis

Multiple Businesses
Portfolio Analysis

Both Single and Multiple Businesses

Core Competencies
Shareholder Value Analysis

Resource Audit

Resources
Physical
Human
Financial
Other

Quality and Quantity

Unique resources
A good initial analysis

Internal Audit
Parallels process of external audit

Information from:
Management
Marketing
Finance/accounting
Production/operations
Research & Development
Management information Systems

Marketing
Marketing Functions
Customer analysis
Selling products/services
Product & service planning
Pricing
Distribution
Marketing research
Opportunity analysis

Finance/Accounting
Finance/Accounting Functions

Investment decision (Capital

budgeting)
Financing decision
Dividend decision

Production/Operations
Production/Operations Functions
Process
Capacity
Inventory
Workforce
Quality

Research & Development

Research & Development Functions

Development of new products

before competitors
Improving product quality
Improving manufacturing
processes to reduce costs

Management Information
Systems

Information Systems
Security
User-friendly
E-commerce

Analysis of Costs and Profit

Current sources of profits and trends

Recast standard reporting to give new insights
Pragmatic approach to get value from time and
effort spent
A good initial analysis
Single Businesses
Resource Audit
Analysis of cost and profit
Benchmarking
Value Chain Analysis
Supply Chain Analysis

Benchmarking

Objective comparison with best in class

Simple in theory - Hard in practice
Observed differences in performance may be due
to differences in parameters
Qualitative observations may be more valuable
than quantitative

Benchmarking - at three levels

Level of
benchmarking
Resources

Through
Resource audit

Examples of measures
Quantity of resources,
e.g.

revenue/employee

capital intensity
Quality of resources,
e.g.

qualifications of
employees

age of machinery

uniqueness (e.g.
patents)

Competences in
separate activities

Analysing activities

Sales calls/sales person

Output/ employee
Materials wastage

Competences
through
managing linkages

Analysing overall
performance

Market share
Profitability
Productivity

Value Chain Analysis

Basic Value chain

Elegant in theory
Time-consuming in practice
Revised value chain to reflect power of people
and knowledge

Value Creation

ar
gin

Service
Procurement

Human Resource Mgmt.

Firm Infrastructure

Support Activities

a
M

in
g
r

Technological Development

The Basic
Value Chain

Marketing & Sales

Outbound Logistics
Operations
Inbound Logistics
Primary Activities

To capitalize on the usefulness of the

Value Chain concept...

it is important to recognize that...

Value Chains are part of a Total Value System

Supplier Value Chain

Firm Value Chain

Channel Value Chain

Buyer Value Chain

Value Chains are part of a Total Value System

Firm Value Chain

Supplier Value Chain

Upstream Value
Perform valuable activities
that complement the firms
activities

Channel Value Chain

Buyer Value Chain

Value Chains are part of a Total Value System

Supplier Value Chain Firm Value Chain

Upstream
Value
Perform valuable activities
that complement the firms
activities

Buyer Value Chain

Channel Value Chain

Each firm must eventually find a

way to become a part of some
buyers value chain

Value Chains are part of a Total Value System

Supplier Value Chain

Firm Value Chain

Upstream Value
Perform valuable activities that
complement the firms activities

Channel Value Chain

Each firm must eventually

find a way to become a part
of some buyers value chain

Buyer Value Chain

Ultimate basis for differentiation is

the ability to play a role in a buyers
value chain

This creates VALUE!!

Value Chains are part of a Total Value System

Supplier Value Chain

Firm Value Chain

Upstream
Value
Perform valuable activities
that complement the firms
activities

Channel Value Chain Buyer Value Chain

Each firm must eventually find a way to

become a part of some buyers value
chain
Ultimate basis for differentiation is
the ability to play a role in a buyers
value chain
This creates VALUE!!

Value chains vary for firms in an industry,

reflecting each firms unique qualities:
History
Strategy
Success at Implementation

Outsourcing

Service
Procurement

Technological Development

Human Resource Mgmt.

Firm Infrastructure

Usually this is
because the
specialty supplier
can provide these
functions more
efficiently

M
ar
gi
n

in
g
ar
M

Support Activities

Outsourcing is the
purchase of some
or all of a valuecreating activity
from an external
supplier

Marketing & Sales

Outbound Logistics
Operations
Inbound Logistics
Primary Activities

Strategic Rationales for

Outsourcing

Improve Business Focus

lets company focus on broader business issues by

having outside experts handle various operational
details

Provide Access to World-Class Capabilities

the specialized resources of outsourcing providers

makes world-class capabilities available to firms in

a wide range of applications

Strategic Rationales for

Outsourcing

Accelerate Business Re-Engineering Benefits

achieves re-engineering benefits more quickly by

having outsiders--who have already achieved
world-class standards--take over process

Share Risks

reduces investment requirements and makes firm

more flexible, dynamic and better able to adapt to

changing opportunities

Strategic Rationales for

Outsourcing

Free Resources for Other Purposes

permits firm to redirect efforts from non-core

activities toward those that serve customers more
effectively

Outsourcing Issues

Greatest Value

outsource only to firms possessing a core competence

in terms of performing the primary or support activity
being outsourced

Evaluating Resources and Capabilities

dont outsource activities in which the firm itself can

create and capture value

Environmental Threats and Ongoing Tasks

do not outsource primary and support activities that

are used to neutralize environmental threats or
complete necessary ongoing organizational tasks

Outsourcing Issues

Nonstrategic Team of Resources

do not outsource capabilities that are critical to

their success, even though the capabilities are
not actual sources of competitive advantage

Firms Knowledge Base

do not outsource activities that stimulate the

development of new capabilities and
competencies

Revised Value Chain

Firms infrastructure
SUPPORT
ACTIVITIES

Technology trapping and commercialisation

Strategic Management

INFORMATION SYSTEMS & KNOWLEDGE MANAGEMENT

PRIMARY
ACTIVITIES

technical,
price,
basic skills,
management,
customer
place,
core
know-how,
marketing, promotion satisfaction,
technologies competence
sales,
loyalty
product
strategic
production
service
assets

HUMAN RESOURCE MANAGEMENT

PROCUREMENT AND SUPPLIER MANAGEMENT

revenue,
profit,
market
share,

Product portfolio matrices

RELATIVE MARKET SHARE
High

High

Stars

Low

Cash
cows

COMPETITIVE POSITION
Strong Average Weak

Low
Question
marks

MARKET
GROWTH

High
INDUSTRY
ATTRACTIVENESS
Med

Dogs
Low

(a) The original Boston Consulting

Group Matrix (BCG)

(b) Attractiveness matrix*

Product portfolio matrices

COMPETITIVE POSITION
Strong Average Weak
High

Development
STAGE OF
Growth
PRODUCT/
MARKET
EVOLUTION Shake-out

PUBLIC NEED
AND
SUPPORT +
FUNDING
ATTRACTIVENESS
Low

Maturity
Decline

(c) Product/market evolution matrix

Publicsector
star

Political
hot box

Golden
fleece

Back
drawer
issue

High

Low

ABILITY TO SERVE
EFFECTIVELY

(d) Public sector portfolio matrix

Portfolio Analyses
Over-coming some pitfalls:
Defining `high and `low (growth or share)
can be difficult
`Plot SBUs not products
Apply to market segments not whole markets
Assess the `role of each SBU
Consider wider resource implications - not just
cash
Dogs may have a positive role

Components of
Internal Analysis
Core
Competencies

Discovering Core
Competencies

Value Creation

Competitive
Advantage

Capabilities
Four Criteria
of Sustainable
Advantages

Resources
Tangible
Intangible

Valuable
Rare
Costly to Imitate
Nonsubstitutable

Value
Chain
Analysis

Outsource

Resources, Capabilities and Core

Competencies

Capabilities

Are the firms capacity to deploy

resources that have been
purposely integrated to achieve a
desired end state

Emerge over time through

complex interactions among
tangible and intangible resources

Often are based on developing,

carrying and exchanging
information and knowledge
through the firms human capital

Resources, Capabilities and Core

Competencies

Capabilities

The foundation of many

capabilities lies in:

The unique skills and

knowledge of a firms
employees
The functional expertise of
those employees

Capabilities are often

developed in specific
functional areas or as part of
a functional area

Resources, Capabilities and Core

Competencies

Core Competencies

Resources and capabilities that

serve as a source of a firms
competitive advantage:

Distinguish a company
competitively and reflect its
personality

Emerge over time through an

organizational process of
accumulating and learning how to
deploy different resources and
capabilities

Resources, Capabilities and Core

Competencies

Core Competencies

Activities that a firm performs

especially well compared to
competitors

Activities through which the firm

adds unique value to its goods or
services over a long period of
time

Building Sustainable Competitive

Advantage

Four Criteria of
Sustainable Competitive
Advantage

Valuable
Rare
Costly to imitate
Nonsubstituable

Building Sustainable Competitive

Advantage

Valuable capabilities

Help a firm neutralize

threats or exploit
opportunities

Rare capabilities

Are not possessed by

many others

Building Sustainable Competitive

Advantage

Costly-to-Imitate
Capabilities

Historical

Ambiguous cause

A unique and a valuable

organizational culture or
brand name
The causes and uses of a
competence are unclear

Social complexity

Interpersonal relationships,
trust, and friendship among
managers, suppliers, and
customers

Building Sustainable Competitive

Advantage

Nonsubstitutable Capabilities

No strategic equivalent

Core Competence as a Strategic

Capability
Resources
Inputs to a firms
production process

The source of

Capability
An integration of a
team of resources

Core Competence
A strategic
capability

Does it satisfy the

criteria of
sustainable
competitive
advantage?

Yes

No

Capability
A nonstrategic
team or resource

Sustainability
of Competitive Advantage

Sustainability of competitive advantage is a

function of:

the rate of core-competence obsolescence due to

environmental changes
the availability of substitutes for the core competence
the imitability of the core competence

Va
lu
ab
Ra le?
re
?
Co
s
Im tly
it a to
N te
on ?
su
bs
tit
ut
ab
le

Performance Implications

Competitive
Consequences

No

Yes

Yes

Yes

No

No

Yes

Yes

Performance
Implications

Competitive
Disadvantage

Below Average
Returns

Average Returns

No

No

No

Yes/
No

Competitive
Parity

No

Yes/
No

Above Average to
Temporary Competitive Advantage Average Returns

Yes

Sustainable Com- Above Average

petitive Advantage Returns

Yes

Core Competencies:
Cautions and Reminders

Never take for granted that core competencies

will continue to provide a source of competitive
advantage
All core competencies have the potential to
become core rigidities
Core rigidities are former core competencies that
now generate inertia and stifle innovation

The SWOT diagram may

summarise the results of analyses

Strengths
Threats

External
External
Analyses
Analyses

Internal
Internal
Analyses
Weaknesses Analyses
Opportunities

Strategic Assessment
of a business as a whole
Questions

What business are we really in?

What real customer needs do we satisfy?
What problem do we solve for our
customers?