P R A V I N M A N D O R A G R O U P T U I T I O N S

INTERNAL ANALYSIS

CONCEPT OF INTERNAL ANALYSIS :

Internal analysis is the process by which the strategists examine the firm's marketing and
distribution, R&D, production and operations, corporate resources and personnel, and finance
and accounting factors to determine where the firm has significant strengths and weaknesses.

Internal diagnosis is the process by which strategists determine how to exploit the
opportunities and meet threats the environment is presenting by using strengths and repairing
weaknesses in order to build sustainable competitive advantages.

TOOLS FOR INTERNAL ANALYSIS :

Concept of BCG Matrix :

When an organisation grows, it adds more products to its basket. In this case, a single person or
department can not handle the whole basket. So business has to be divided into a many
separate units, each one is to be known as SBU (Strategic Business Unit).

Characteristics of SBUs :
 It has distinct set of customers, competitors.
 It has its own costing.
 It has a different business strategy.

SBUs are planned using 2 approaches : (i) Portfolio Analysis (BCG Matrix) (ii) Market
Attractiveness (GE9).

PORTFOLIO ANALYSIS : BCG MATRIX :

It was developed by Boston Consulting Group (BCG) in 1960. In this approach, SBUs are placed
in a 2 dimensional grid called a Portfolio matrix. It was then popularised by BCG Matrix.

BCG observed that the cash flows generated by an SBU was affected by its position on this
growth share matrix. This matrix has 4 cells, where SBUs are placed.

High
STARS QUESTION MARKS

MODEST + OR – CASH LARGE NEGATIVE CASH

FLOW FLOW
Growth
Rate CASH COWS DOGS

SURPLUS + CASH FLOW MODEST + OR – CASH

FLOW
Low

High Low

Cash Cows: (Lower-left quadrant):

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 High share, low growth SBUs are placed at this place.

 Experience of producing & marketing brands.
 Lower cost competition in relation to competitors.
 As growth rate is slow, no major investment is required in Fixed assets & working capital.
 As cash flows are more than needed, they support innovation & new product development of
other SBUs, placed in stars & question marks.

Stars: (Upper-left quadrant):

 They are placed in High growth markets.

 They generate enough cash for their needs.
 They switch to Cash Cows when the market growth rate slows down.

Question marks: (Upper-Right quadrant):

 They are also known as problem children.

 They have low share in high growth market.
 They do not have enough cash generation to maintain current market share or to gain the
market share.
 Market growth itself is an opportunity but to maintain or expand it, SBUs require huge cash
inflow. If they can manage it successfully, they will switch to stars otherwise become dogs.

Dogs: ( Lower-right quadrant):

 They neither generate cash nor do they need it.

 They show poor profitability.
 They are in decline stage in PLC.

Brand managers divert surplus cash flow from Cash Cows to support question marks, so that
they become stars tomorrow. So success sequence will be from Question marks to Stars, then
from Stars to Cash Cows & disaster sequence will be from Stars to Question marks, then from
Question marks to Dogs.

It is also true that market growth is not totally in the hands of marketers. So BCG expects
marketers to develop strategies based on market share.

Strategies:

 Build the Market share Strategy: This works good for stars & Question marks. The aim to
develop & improve market position.
 Hold the Market share Strategy: This works good for Cash cows & Stars. The aim is to preserve
the market position, so that cash flows are not affected.
 Harvest the Market share Strategy: This works good for dogs & selected Question marks with
no further capability to fight competition. It is also suitable for weak Cash Cows who are close
to the end of its life cycle. The aim is to get maximum short-term cash flow.

 Divesting the business Strategy: This works good for dogs, as the amount withdrawn from the
business can be utilized on better alternatives. This strategy can be adopted in case of selective
Question marks also.
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VALUE CHAIN

The value chain, also known as value chain analysis, is a concept from business management
that was first described and popularized by Michael Porter.

The Value chain concept can be useful in understanding how value is created or lost. The value
chain describes the activities within & around an organization which together create a product
or service. So a value chain is a chain of activities. Products pass through all activities of the
chain in order and at each activity the product gains some value. The chain of activities gives
the products more added value than the sum of added values of all activities.

The costs and value drivers are identified for each value activity. The value chain framework
quickly made its way to the forefront of management thought as a powerful analysis tool for
strategic planning. Its ultimate goal is to maximize value creation while minimizing costs.

VALUE CHAIN WITHIN AN ORGANISATION :

S A Firm Infrastructure
U C Human Resource Management
P T Technology Development
P I Procurement
O V
R I
T E
S

Inbound Operations Outbound Marketing Service

Logistics Logistics & Sales

PRIMARY ACTIVITIES

The value chain categorizes the generic value-adding activities of an organization in 2 parts.

 The “primary activities” : They are directly concerned with the creation or delivery of a product
or service. They can be grouped into five main areas : Inbound logistics, Operations
(production), Outbound logistics, Marketing and sales (demand), and Services (maintenance).

o Inbound logistics are the activities concerned with receiving, storing and distributing the inputs
to the product or service. They include materials: handling, stock control, transport, etc.

o Operations transform these various inputs into the final product or service: machining,
packaging, assembly, testing, etc.

o Outbound logistics collect, store and distribute the product to customers. For tangible products
this would be warehousing, materials handling, transport, etc. In the case of services, they may
be more concerned with arrangements for bringing customers to the service if it is a fixed
location (e.g. sports events).

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o Marketing and sales provide the means whereby consumers/users are made aware of the
product or service and are able to purchase it. This would include sales administration,
advertising, selling and so on. In public services, communication networks which help users
access a particular service are often important.

o Service includes all those activities which enhance or maintain the value of a product or service,
such as installation, repair, training and spares.

Each of these groups of primary activities is linked to support activities.

 Support activities : They help to improve the effectiveness or efficiency of primary activities.
They can be divided into four areas :

o Procurement : This refers to the processes for acquiring the various resource inputs to the
primary activities. As such, it occurs in many parts of the organisation.

o Technology development : All value activities have a 'technology', even if it is just know-how.
The key technologies may be concerned directly with the product (e.g. R&D, product design) or
with processes (e.g. process development) or with a particular resource (e.g. raw materials
improvements). This area is fundamental to the innovative capacity of the organisation.

o Human resource management. This is a particularly important area which transcends all
primary activities. It is concerned with those activities involved in recruiting, managing,
training, developing and rewarding people within the organisation.

o Infrastructure. The systems of planning, finance, quality control, information management, etc.
are crucially important to an organisation’s performance in its primary activities. Infrastructure
also consists of the structures and routines of the organisation which sustain its culture.

o In most industries it is rare for a single organisation to undertake in-house all of the value
activities from the product design through to the delivery of the final product or service to the
final consumer. There is usually specialisation of role and any one organisation is part of the
wider value system. The value system is the set of inter-organisational links and relationships
which are necessary to create a product or service. It is this process of specialisation within the
value system on a set of linked activities that often underpins excellence in creating best-value
products. So an organisation ought to be clear about what activities it ought to undertake itself.

However, since much of the cost and value creation will occur in the supply and distribution
chains, managers need to understand this whole process and how they can manage these
linkages and relationships to improve customer value. It is not sufficient to look at the
organisation’s internal position alone.

E.g., the quality of a consumer durable product (say a cooker or a television) when it reaches
the final purchaser is not only influenced by the linked set of activities which are undertaken
within the manufacturing company itself. It is also determined by the quality of components
and the performance of the distributors. The ability of an organisation to influence the
performance of other organisations in the value chain may be a crucially important competence
and a source of competitive advantage. As through IT, organisations gain improved knowledge
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about this wider value system and understand better where cost and value are created, they are
able to make more informed choices on issues such as:

 whether they should ‘make’ or buy a particular activity or component (this is the
outsourcing decision)
 who might be the best partners in the various parts of the value system
 what kind of relationship to develop with each partner (e.g. supplier or strategic alliance).

The concept has been extended beyond individual organizations. It can apply to whole supply
chains and distribution networks. The delivery of a mix of products and services to the end
customer will mobilize different economic factors, each managing its own value chain. The
industry wide synchronized interactions of those local value chains create an extended value
chain, sometimes global in extent. Porter terms this larger interconnected system of value
chains the "value system." A value system includes the value chains of a firm's supplier (and
their suppliers all the way back), the firm itself, the firm distribution channels, and the firm's
buyers (and presumably extended to the buyers of their products, and so on).

Capturing the value generated along the chain is the new approach taken by many
management strategists. E.g., a manufacturer might require its parts suppliers to be located
nearby its assembly plant to minimize the cost of transportation. By exploiting the upstream
and downstream information flowing along the value chain, the firms may try to bypass the
intermediaries creating new business models, or in other ways create improvements in its value
system.

ANSOFF MATRIX

The Ansoff Matrix, or Ansoff Box, is a business analysis technique that provides a framework
enabling growth opportunities to be identified. It can help you consider the implications of
growing the business through existing or new products and in existing or new markets. Each of
these growth options draws on both internal and external influences, investigations, and
analysis that are then worked into alternative strategies.

Prior to using the Ansoff Matrix your organization should conduct a SWOT analysis. The
SWOT analysis serves to identify the strengths and weaknesses of your organization, as well as
the external threats to it and the opportunities available to it. Once these have been identified
you can use the Ansoff Matrix to investigate the implications of your organization's current
strategy and those of any changes that are suggested by the SWOT analysis.

The usefulness of both the SWOT analysis and Ansoff Matrix depends on the quality and
accuracy of the market intelligence they are based on. This information is best supplied by
working managers who can provide accurate and up-to-date information on everything from
customer feedback to competitor activities.

The need for this information means that you may find yourself in strategy meetings, a
familiarity with the underlying business analysis techniques and jargon can help you to make a
valuable contribution by bringing your own area of expertise into the discussion.
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The Ansoff Matrix, created by the American planning expert Igor Ansoff, is a strategic planning
tool that links an organization's marketing strategy with its general strategic direction. It
presents four alternative growth strategies in the form of a 2x2 table or matrix. One dimension
of the matrix considers 'products' (existing and new) and the other dimension considers
'markets' (existing and new).

PRODUCTS
EXISTING NEW
EXISTING MARKET PEODUCT
PENETRATION DEVELOPMENT

MARKETS
MARKET DIVERSIFICATION
DEVELOPMENT

NEW

The resulting matrix offers a structured way to access potential strategies for growth. The
sequence of these strategies is

1. Market Penetration—Focus on selling existing products or services to existing markets to

achieve growth in market share.

The company is trying to expand its sales in the existing market. Existing products are sold to
existing customers. The product is not modified but the firm is seeking to increase its revenues
by means of promoting or repositioning its products. One has to convince potential clients and
divert competitors.

2. Market Development—Focus on developing new markets or market segments for existing

products or services.

The company is trying to increase its sales by introducing its products into new markets. A
range of existing products is introduced into new markets. Again the product is not modified, it
will just be sold to a new target (e.g. through export). By taking into account cultural
differences, the products may undergo minor changes.

3. Product Development—Focus on developing new products or services for existing markets.

The company is increasing its sales by introducing new or modified products on the market.
There will be several versions of the product (different styles, sizes, …). The new products are
sold to the customers through existing distribution channels.

4. Diversification—Focus on the development of new products to sell into new markets.

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In this case the company will launch new products for new customers. There are several
diversification strategies :

 Horizontal Diversification: The company is developing a new product or activity capable of

satisfying the same clientele, even if the new products are technologically independent of the
existing products.
 Vertical Diversification: The company starts to make the work of its suppliers and/or
customers.
 Concentric Diversification: The company develops new products/activities with a
complementary technology to existing products/activities. These products may attract a new
group of customers and there will be a transfer of key skills.
 Diversification by conglomerate: the company has different products/activities for various
markets. The firm now settles on a market where it has neither previous experience nor
industry but it could attract new groups of customers.

The matrix does not present you with a final decision as to whether or not to develop new
products or enter new markets, but it does provide you with an outline of alternative methods
by which you can achieve your mission or growth targets.

It is particularly useful in showing how you can develop a strategy for altering your market
position as well as increasing or improving your product range. The four different options are
not mutually exclusive and in certain circumstances your organization might want to combine
different elements.

1.MARKET 2.MARKET

PENETRATION LOW MODERATE DEVELOPMENT

RISK RISK

HIGH MEDIUM

4.DIVERSIFICATION RISK RISK 3.PRODUCT

DEVELOPMENT

The output from an Ansoff matrix is a series of suggested growth strategies that serve to set the
direction for the business & provide marketing strategies to achieve them. Each of the option
carries different amount of risk & investment.

RESOURCES :

Resources refer to inputs into a firm's value creation process. Resources could be either
tangible, or intangible. Tangible resources include plant and machinery, buildings (physical
resources), patents, brands, trademarks (technological resources), cash, and equity capital
(financial resources). Intangible resources include skilled human resources, intellectual

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resources such as innovative systems, or reputation resources such as goodwill. Most resources
are not firm specific, and can be easily acquired.

Capabilities, on the other hand, refer to the capacity of the firm to deploy its resources that have
been purposefully acquired. Capabilities are, therefore, a function of the firm's resources, their
application and organization, internal systems and processes, and firm-specific skill sets.
Capabilities are rarely unique, and can be acquired by other firms in that industry. Some of
these capabilities may become distinctive capabilities, when they differentiate that firm from
the competitors. Distinctive capabilities are visible to the competition, and can be imitated with
little effort.

To be a source of competitive advantage, a resource or capability must allow a firm either to

perform an activity in a manner superior to its competitors, or to perform a value-creating
activity that competitors cannot imitate. In other words, it should help the firm either do things
differently than the competitors, or do different things than them.

Core competence refers to that set of distinctive capabilities that provide a firm with a
sustainable source of competitive advantage. Core competencies emerge over time, and reflect
the firm’s ability to deploy different resources and capabilities in a variety of contexts to gain
and sustain competitive advantage.

Prahalad and Hamel (1990) have defined core competence as the collective learning and
coordination skills behind firm's product lines. Core competencies are the source of competitive
advantage, and enable a firm to introduce an array of products and services in the market.

Core competencies lead to the development of core products. These core products are used to
build a larger number of end-user products. For example, integrated circuits are core products
that can be used in a wide array of electronic end-products.

The matching of market opportunities with a firm's core competencies forms the basis for
launching new products, or entering new markets. Without core competence, a firm could be a
bunch of businesses with little or no synergy across different business units to build them into a
coherent business portfolio.

Core competencies arise from the integration of multiple technologies, and coordination of
diverse production skill. Three tests are used to identify a corporation’s core competence.

A core competence should : (i) be stretchable to a wide variety of markets (ii) contribute
significantly to end-product benefits/customer value, and (iii) are sufficiently superior to
substantively differentiate from the competitors.

Core competencies are not necessarily about high spending or investment in core technologies;
they are about effective coordination among all the groups/people involved in bringing the
product to the market through effective utilisation of core technologies & processes across a
wide variety of products/markets. Since development of core competencies is knowledge base,
its contribution towards sustained competitive advantage should not be taken for granted.

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Why resources are important :

The Resource Based View (RBV) is a method of analyzing and identifying a firm's strategic
advantages based on examining its distinct combination of assets, skills, capabilities, and
intangibles as an organization. The RBV's underlying premise is that firms differ in
fundamental ways because each firm possesses a unique bundle of resources—tangible and
intangible assets and organizational capabilities to make use of those assets. Each firm develops
competencies from these resources, and, when developed especially well, these become the
source of the firm's competitive advantages. Coke's decision to buy out weak bottling
franchisees and regularly invest in or own newer bottling locations worldwide has given Coke
a competitive advantage analysts estimate Pepsi will take at least 10 years or longer to match.
Coke's strategy for the last 15 years was based in part on the identification of this resource and
the development of it into a distinctive competence—a sustained competitive advantage. Let's
look at the basic concepts underlying the RBV.

Three Basic Resources: Tangible Assets, Intangible Assets, and Organizational Capabilities :

Executives charting the strategy of their businesses historically concentrated their thinking on
the notion of a "core competence." Core competence was seen as a capability or skill running
through a firm's businesses that—once identified, nurtured, and deployed throughout the firm
—became the basis for lasting competitive advantage. Executives, enthusiastic about the notion
that their job as strategists was to identity and leverage core competencies, encountered
difficulty applying the concept because of the generality of its level of analysis. The RBV
emerged as a way to make the core competency concept more focused and measurable—
creating a more meaningful internal analysis. Central to the RBV s ability to do this is the
delineation of three basic types of resources, some of which may become the building blocks for
distinctive competencies. These resources are defined below :

Tangible assets : are the easiest "resources" to identify and are often found on a firm's balance
sheet. They include production facilities, raw materials, financial resources, real estate, and
computers. Tangible assets are the physical and financial means a company uses to provide
value to its customers.

Intangible assets are "resources" such as brand names, company reputation, organizational
morale, technical knowledge, patents and trademarks, and accumulated experience within an
organisation. While they are not assets that you can touch or see, they are very often critical in
creating competitive advantage.

Organizational capabilities are not specific "inputs" like tangible or intangible assets; rather,
they are the skills—the ability and ways of combining assets, people, and processes—that a

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company uses to transform inputs into outputs. Dell Computer built its first 10 years of
unprecedented growth by creating an organization capable of speedy and inexpensive
manufacture and delivery of custom-built PCs. Gateway and Micron attempted to copy Dell for
most of that time but remain far behind Dell's diverse organizational capabilities. Dell
subsequently revolutionized its own "system", using the Internet to automate and customize
service, creating a whole new level of organizational capability that combines assets, people,
and processes throughout and beyond their organization. Concerning this organizational
capability, Michael Dell said. "Anyone who tries to go direct now will find it very difficult—like
trying to jump over the Grand Canyon." Finely developed capabilities, such as Dell's Internet-
based customer-friendly system, can be a source of sustained competitive advantage. They
enable a firm to take the same input factors as rivals (such as Gateway and Micron) and convert
them into products and services, either with greater efficiency in the process or greater quality
in the output, or both.

What Makes a Resource Valuable?

Once managers identify their firm's tangible assets, intangible assets, and organizational
capabilities, the RBV applies a set of guidelines to determine which of those resources represent
strengths or weaknesses—which resources generate core competencies that are sources of
sustained competitive advantage. These RBV guidelines derive from the idea that resources arc
more valuable when they

1. Are critical to being able to meet a customer's need better than other alternatives.

2. Are scarce—few others if any possess that resource or skill to the degree you do.

3. Drive a key portion of overall profits, in a manner controlled by your firm.

4. Are durable or sustainable over time.

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UNIT :III INTERNAL ANALYSIS • Resources, Capabilities, Competencies, Core Competencies •

Competitive Advantage • Why are resources important • Value chain( organization and
industry) • Ansoff Model • BCG Model

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