MODULE 1

UNIT 3: Internal Analysis

 Critical Success Factors,
 The Strategic Importance of Resources,
 Competencies and Core Competencies,
 Value Chain, Building Blocks of Competitive Advantage,
 Durability of Competitive Advantage,
 Avoiding Failures and Sustaining Competitive Advantage,
 The Role of Luck,
 Robustness,
 Benchmarking

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INTRODUCTION1
 Why, within a particular industry or market, do some companies outperform
others?
 What is the basis of their (sustained) competitive advantage?
o Efficiency, customer responsiveness, quality, and innovation are the
building blocks of competitive advantage
 Internal analysis is concerned with identifying the strengths and
weaknesses of the company.
 Internal analysis, coupled with an analysis of the company’s external
environment, gives managers the information they need to choose the
strategy and business model that will enable their company to attain a
sustained competitive advantage.

1 Adopted from “Strategic Management, Theory” (11th Ed) by Charles W. L. Hill, Gareth R. Jones, and Melissa A.
Schilling.
 Internal analysis is a three-step process.
o First, managers must understand the process by which companies
create value for customers and profit for the company. Managers must
also understand the role of resources, capabilities, and distinctive
competencies in this process.
o Second, they need to understand the importance of superior
efficiency, innovation, quality, and customer responsiveness when
creating value and generating high profitability.
o Third, they must be able to analyse the sources of their company’s
competitive advantage to identify what drives the profitability of
their enterprise, and where opportunities for improvement might lie.
 The three most important issues of Internal Analysis are:
o First: What factors influence the durability of competitive
advantage?
o Second: Why do successful companies sometimes lose their
competitive advantage?
o Third: How can companies avoid competitive failure and sustain their
competitive advantage over time?

BLUE OCEAN THINKING

Before delving in the understanding of Internal analysis it is important to
understand the space in which the firms operate. Differentiated views of
competitors and customers embodied in strategic groups and market segments
can be taken a step further by ‘Blue Ocean’ thinking2.
Blue Oceans are new market spaces where competition is minimised. On the
other hand, there is ‘Red Oceans’, where industries are already well defined
and rivalry is intense. Red Oceans are associated with bloody competition and
‘red ink’, in other words financial losses.
Whereas Blue Oceans evoke wide empty seas. Blue Ocean thinking, therefore,
encourages entrepreneurs and managers to be different by finding or creating
market spaces that are not currently being served. Strategy here is about
finding strategic gaps, opportunities in the environment that are not being

2 W. Chan Kim and Renée Mauborgne at INSEAD

 fully exploited by competitors. The strategy canvas is one framework that can
effectively assist this kind of Blue Ocean thinking. A strategy canvas compares
competitors according to their performance on key success factors in order
to develop strategies based on creating new market spaces.
Strategy Canvas highlights three particular things
1. Critical success factors (CSFs) are those factors that are either
particularly valued by customers or which provide a significant advantage
in terms of cost. Critical success factors are therefore likely to be an
important source of competitive advantage or disadvantage. The above
figure identifies five established critical success factors in the engineering
components segment/strategic group/industry

Critical success factors (CSF) those factors that are either particularly valued by customers or
which provide a significant advantage in terms of costs. [Sometimes called key success factors
(KSF)]

Strategy Canvas for a hypothetical Electrical Component Company

2. Value curves are a graphic depiction of how customers perceive
competitors’ relative performance across the critical success factors. In the
above figure, companies A and B perform well on cost, service, reliability and
quality, but less well on testing. They do not offer any design advice.
Company C has a radically different value curve, characteristic of a ‘value
innovator’.
3. Value innovation is the creation of new market space by excelling on
established critical success factors on which competitors are performing
badly and/or by creating new critical success factors representing
previously unrecognised customer wants. Company C is a value innovator.