Internal Environment

• Composed of:
– Structure
– Culture
– Resources

Omdeep Gupta, Strategic Management

 Structure

• Refers to the way a firm is organized in

terms of communication, authority, and
workflow
• Basic Forms of structures:
– Simple structure
– Functional structure
– Divisional structure

Omdeep Gupta, Strategic Management

Basic Organizational Structures:
Simple and Functional
I. Simple Structure

Owner-Manager

Workers

II. Functional Structure

Top Management

Manufacturing Sales Finance Personnel

Omdeep Gupta, Strategic Management

 Basic Structures of Corporations:
Divisional
III. Divisional Structure*

Top Management

Product Division A Product Division B

Manufacturing Finance Manufacturing Finance

Sales Personnel Sales Personnel

*Conglomerate structure is a variant of the division structure.

Omdeep Gupta, Strategic Management

 Internal Environment

• Composed of:
– Culture
– Structure
– Resources

Omdeep Gupta, Strategic Management

 Culture

• Refers to the pattern of beliefs, expectations,

and values shared by a firm’s employees
• Distinct attributes of organizational culture:
– Cultural intensity
– Cultural integration

Omdeep Gupta, Strategic Management

 Cultural intensity

• Refers to the degree in which the members

of each unit (department or division) in the
company subscribe to the same values or
norms. As a result, employees in a unit
with intensive culture tend to behave the
same.
• In general, older organizations tend to
display more intense culture.
Omdeep Gupta, Strategic Management
 Cultural integration
• Refers to the degree in which units (departments and
divisions) across a company tend to subscribe to the
same set of values and norms.
• Units within a companies with integrated culture
tend to be more uniformed with other units. As a
results, the units in a company with an integrated
culture tend to lack subcultures of their own.

Omdeep Gupta, Strategic Management

 Internal Environment

• Composed of:
– Resources
– Culture
– Structure

Omdeep Gupta, Strategic Management

 Resources
Refers to the assets of the firm including
physical assets, skills and knowledge within
the functional areas

Omdeep Gupta, Strategic Management

 Shifting the Focus of Strategy Analysis:
From the External to the Internal Environment

THE FIRM THE

Goals and INDUSTRY
Values ENVIRONMENT
Resources and
Capabilities STRATEGY •Competitors
Structure and STRATEGY •Customers
Systems •Suppliers

The The
Firm-Strategy Environment-Strategy
Interface Interface
Omdeep Gupta, Strategic Management
 Rationale for the Resource-based
Approach to Strategy

• When the external environment is subject to

rapid change, internal resources and capabilities
offer a more secure basis for strategy than
market focus.

• Resources and capabilities are the primary

sources of profitability.

Omdeep Gupta, Strategic Management

Canon: Products and Core Technical Capabilities

Precision Fine
Mechanics Optics

35mm SLR camera Plain-paper copier

Compact fashion camera Color copier
EOS autofocus camera Color laser copier
Digital camera Laser copier
Basic fax
Video still camera
Laser fax
Mask aligners Inkjet printer
Excimer laser aligners Laser printer
Stepper aligners Color video printer
Calculator
Notebook computer

Micro-
Electronics Omdeep Gupta, Strategic Management
 Eastman Kodak’s Dilemma

Resources & Capabilities Businesses

Chemical Imaging Film

1980’s •Organic Chemistry Cameras
•Polymer technology Fine Chemicals
•Optomechtronics
Pharmaceuticals
•Thin-film coatings
Brands Diagnostics
Global Distribution

1990’s DIVESTS: Eastman Chemical, Sterling Winthrop, Diagnostics

Need to build digital imaging Digital Imaging Products

capability (e.g. Photo CD System;
Advantix cameras & film
Omdeep Gupta, Strategic Management
The Links between Resources, Capabilities
and Competitive Advantage

INDUSTRY KEY
COMPETITIVE SUCCESS FACTORS
STRATEGY
ADVANTAGE
ORGANIZATIONAL
CAPABILITIES

RESOURCES
TANGIBLE INTANGIBLE HUMAN

•Financial •Skills/know-how
•Technology •Capacity for
•Physical •Reputation communication &
•Culture collaboration
•Motivation
Omdeep Gupta, Strategic Management
 Appraising Resources
RESOURCE CHARACTERISTICS INDICATORS

Financial Borrowing capacity Debt/ Equity ratio

Internal funds generation Credit rating
Tangible Net cash flow
Resources Physical Plant and equipment: Market value of
size, location, technology fixed assets.
flexibility. Scale of plants
Land and buildings. Alternative uses for
Raw materials. fixed assets

Technology Patents, copyrights, know how No. of patents owned

R&D facilities. Royalty income
Intangible Technical and scientific R&D expenditure
Resources employees R&D staff

Reputation Brands. Customer loyalty. Company Brand equity

reputation (with suppliers, customers, Customer retention
government) Supplier loyalty

Human Training, experience, adaptability, Employee qualifications,

Resources commitment and loyalty of employees pay rates, turnover.

Omdeep Gupta, Strategic Management

 The World’s Most Valuable Brands, 2006

Rank Company Brand Rank Company Brand

value value
($bn.) ($bn.)

1 Coca-Cola 67.5 11 Mercedes Benz 20.0

2 Microsoft 59.9 12 Citi 20.0
3 IBM 53.4 13 Hewlett-Packard 18.9
4 GE 47.0 14 American Express 18.6
5 Intel 35.6 15 Gillette 17.5
6 Nokia 26.5 16 BMW 17.1
7 Disney 26.4 17 Cisco 16.6
8 McDonald’s 26.0 18 Louis Vuitton 16.1
9 Toyota 24.8 19 Honda 15.8
10 Marlboro 21.2 20 Samsung 15.0

http://www.interbrand.com/best_brands_2007.asp Source: Interbrand

Omdeep Gupta, Strategic Management

 Defining Organizational Capabilities

Organizational Capabilities = firm’s capacity for

undertaking a particular activity. (Grant)

Distinctive Competence = things that an organization

does particularly well relative to competitors. (Selznick)

Core Competence = capabilities that are fundamental to a

firm’s strategy and performance. (Hamel and Prahalad)

Omdeep Gupta, Strategic Management

 Identifying Organizational Capabilities:
A Functional Classification
FUNCTION CAPABILITY EXEMPLARS
Corporate Financial management ExxonMobil, GE
Management Strategic control IBM, Samsung
Coordinating business units BP, P&G
Managing acquisitions Citigroup, Cisco
MIS Speed and responsiveness through Wal-Mart, Dell
rapid information transfer Capital One
R&D Research capability Merck, IBM
Development of innovative new products Apple, 3M
Manufacturing Efficient volume manufacturing Briggs & Stratton
Continuous Improvement Nucor, Harley-D
Flexibility Zara, Four Seasons
Design Design Capability Apple, Nokia
Marketing Brand Management P&G, LVMH
Quality reputation Johnson & Johnson
Responsiveness to market trends MTV, L’Oreal
Sales, Distribution Sales Responsiveness PepsiCo, Pfizer
& Service Efficiency and speed of distribution LL Bean, Dell
Customer Service Singapore Airlines
Caterpillar
 The Value Chain:
The McKinsey Business System

TECHNOLOGY PRODUCT DESIGN MANUFACTURING MARKETING DISTRIBUTION SERVICE

Omdeep Gupta, Strategic Management

 The Porter Value Chain

FIRM INFRASTRUCTURE
SUPPORT
HUMAN RESOURCE MANAGEMENT ACTIVITIES
TECHNOLOGY DEVELOPMENT
PROCUREMENT

INBOUND OPERATIONS OUTBOUND MARKETING SERVICE

LOGISTICS LOGISTICS & SALES

PRIMARY
ACTIVITIES

Omdeep Gupta, Strategic Management

 The Rent-Earning Potential
of Resources and Capabilities

THE EXTENT OF THE Scarcity

COMPETITIVE ADVANTAGE
ESTABLISHED Relevance

Durability
THE PROFIT
EARNING POTENTIAL SUSTAINABILITY OF THE Transferability
OF A RESOURCE OR COMPETITIVE ADVANTAGE
CAPABILITY Replicability

Property rights

Relative
APPROPRIABILITY bargaining power

Embeddedness

Omdeep Gupta, Strategic Management

 Assessing a Companies Resources
and Capabilities: The Case of VW
Importanc VW’s CAPABILITIES
RESOURCES Importance VW’s Relative
e Relative Strength
Strength
C1. Product
R1. Finance 6 4 9 4
development

R2. Technology 7 5 C2. Purchasing 7 5

C3. Engineering 7 9
R3. Plant and equipment 8 8

C4. Manufacturing 8 7
R4. Location 7 4
C5. Financial
6 3
management
R5. Distribution 8 5
C6. R&D 6 4

C7. Marketing & sales 9 4

C8. Government
4 8
relations
Omdeep Gupta, Strategic Management
 Appraising VW’s Resources and Capabilities

(Hypothetical only)

10 Key Strengths
Superfluous Strengths
C3
C8 R3
C4
Relative Strength

C2
5 R2 R5
R1 R4 C1
C6 C7
C5

Zone of Irrelevance Key Weaknesses

1
1 5 10
Strategic Importance Omdeep Gupta, Strategic Management
 Approaches to Capability Development

1) Acquire and develop the underlying resources. Especially human resources

--Externally (hiring)
--Internally through developing individual skills
2) Acquire/access capabilities externally through acquisition or
alliance
3) Greenfield development of capabilities in separate organizational unit (IBM &
the PC, Xerox & PARC, GM & Saturn)

4) Build team-based capabilities through training and team development (i.e.

develop organizational routines)

5) Align structure & systems with required capabilities

6) Change management to transform values and behaviors (GE, BP)
7) Product sequencing (Intel , Sony, Hyundai)
8) Knowledge Management (systematic approaches to acquiring, storing,
replicating, and accessing knowledge)

Omdeep Gupta, Strategic Management

Analyzing the Internal Environment
• Each firm possesses core competence
(internal resources) that are unique to it.
• A firm should identify what resources,
capabilities, and knowledge it has that may be
used to exploit market opportunities and
avoid potential threats.
• Resource-based view.

Omdeep Gupta, Strategic

Management
 Core Competencies and Market
Opportunities
4. Select a strategy that best
exploits the firm’s Strategy
capabilities relative to
external opportunities.

3. Appraise the profit

generating potential of
resources/capabilities in
terms of creating,
sustaining, and exploiting
competitive advantage.
Potential for 5. Identify resource gaps
sustainable that need to be filled.
competitive Invest in replenishing
advantage and augmenting the
firm’s resource base.

2. Identify the firm’s

capabilities
Capabilities
(What can the firm do?)

1. Identify the firm’s

resources and locate
areas of strength and Resources
weakness relative to
competitors.
Omdeep Gupta, Strategic
Management
 Resource Types: Tangible Resources
• Assets that can be quantified and observed.
• Include financial resources, physical assets,
and workers.
• Strategic assessment of tangible resources
should enable a firm to use fewer tangible
resources to support the same level of
business or to use the same resources to
expand the volume of business.

Omdeep Gupta, Strategic

Management
 Resource Types: Intangible Resources
• Difficult to quantify.
• Often provide the firm with strong
competitive advantage.
• Competitors find it difficult to purchase or
imitate these resources.
• Most strategically important intangibles:
– Reputation
– Technology
– Human Capital

Omdeep Gupta, Strategic

Management
 Analyzing the firm’s capabilities:

Functional Analysis

Value Chain Analysis

Benchmarking

Omdeep Gupta, Strategic

Management
 Analyzing Capabilities by Functional Areas
Functional Area Capability

Corporate Management Effective financial control systems

Expertise in strategic control of diversified corporation
Effectiveness in motivating and coordinating divisional
and business-
business-unit management
Management of acquisitions
Values--driven, in
Values in--touch corporate leadership
Information Management Comprehensive and effective MIS network, with strong
central coordination

Research and Capability in basic research

Development Ability to develop innovative new products
Speed of new product development
Omdeep Gupta, Strategic Management
 Analyzing Capabilities by Functional Areas
(continued)

Functional Area Capability

Manufacturing Efficiency in volume manufacturing

Capacity for continual improvements in production
processes
Flexibility and speed of response
Product Design Design capability
Marketing Brand management and brand promotion
Promoting and exploiting reputation for quality
Responsive to market trends
Sales and Distribution Effectiveness in promoting and executing sales
Efficiency and speed of distribution
Quality and effectiveness of customer service

Omdeep Gupta, Strategic Management

 A Simple Value Chain

Product
Technology Manufacturing Marketing Distribution Service
Design

Source Function Integration Prices Channels Warranty

Sophistication Physical Raw Materials Advertising Integration Dealer Support
Characteristics
Patents Capacity Promotion Inventory Availability
Aesthetics
Product Process Location Sales Force Warehousing Speed
Quality
Product Choices Procurement Package Transport Prices
Parts Production Brand
Omdeep Gupta, Strategic Assembly
Management
Benchmarking involves four stages:
1. Identifying activities or functions that are weak
and need improvement.
2. Identifying firms that are known to be at the
leading edge of these activities or functions.
3. Studying the leading-edge firms by visiting
them, talking to managers and employees, and
reading trade publications.
4. Using the information gathered to redefine
goals, modify processes, and acquire new
resources to improve the firm’s functions.
Omdeep Gupta, Strategic
Management