CHAPTER 3

THE INTERNAL OPERATIONAL ENVIRONMENT OF BUSINESS

ANALYSIS OF FIRMS INTERNAL OPERATION

The company is known for its product and services And the reputation is carried
throughout the industry and the clients that it serves. the internal business environment is
defined as the evaluation in terms of respect awareness and knowledge and the emotional and
affective reactions of the various stakeholders. it is an intangible resource which the firm can
build capabilities and its core competencies.
The firm can develop intangible distinctions between itself from its rivals within each
reputational category. these resource assets could be the jump off point for the company to
build perceptual measures that provide signals to rivals and stakeholders for the competitive
value of the image in the industry. this value creating distinctions help the firm develop new core
competencies.
development of sustainable internal advantage rest with the organization top
management and operating managers as a strategic management is a the working of all people
in the firm. the internal management resources are the foundation for strategic actions and this
bundle of resources generate competitive advantage that leads to wealth generation and profit.
in the development of this competitive advantage, the management must develop a new
mindset to successfully accomplish the desired objective. the rapid change in the conduct of
business and the global economic opportunities are challenges for a new system of work values
and forward-thinking strategy.
the company is made up of all people in the structural organizational setup.the
manpower resources are assets for competitive advantage. They must not focus only on the
area of operation but on the increasing demand to view the entire operation. rapid
decision-making that was based on sustainable research findings must be made to cope with
new challenges for reforms, engineering and changes in the skills for new technology. the firm
must update it's knowledge base as the foundation of competitive advantage.
strategic positioning is the utilization of the bundle of heterogeneous resources,
capabilities and core competencies that can be use to create an exclusive market position. the
presence of firms resources is a source of capabilities that are the used by the firm to develop
its competitive advantage especially when such resources are not present in the competitors
disposals.
while productivity, quality control and total quality management have been used over
time to increase production efficiency, they did not result in sustainable Strategy to deliver the
desired profit and return of investment. the establishments of a sustainable strategic position is
created when the firm's satisfy their operational efficiency with its competencies and resource
capabilities.
CREATING CUSTOMER’S VALUE
The global standards for product and services create customer values that are measured
by product performance characteristics and the attributes for which customers are willing to pay
for. creating value is the source of the firm's potential to earn the desired profit objective.
customer value is created when they buy the product at reasonable price and based on quality
standards or high product differentiations. with the various products available in the market
customer value is difficult to gain but continuous improvement and sachet value formation and
forward planning will create new dimensions in customer value.
During the last decades strategic management process was concerned mainly with
understanding the competitors strategy and trying to counteract the same. this emphasis on the
competitors strategy underestimated the role of firms resources and capabilities and developing
the firm's competitive advantage. in the present business scenario the core competencies
combination of the market positioning strategy that could create customer value.
successful strategy needs to cultivate a deep understanding of the processes of
competition and the industry progress, together with the factors aligned to each corporate
advantage. The old advantage of the firm should not be taken as the crowning glory for as long
as new advantage should be developed as the corporate intelligence of the other firm may be
able to penetrate the firms old strategy. By emphasizing core competencies in the formulation of
strategic actions, firms must learn to compete principally on the basis of its specific differences
in products and service and they must keep the process of change.

THE CHALLENGE OF INTERNAL ANALYSIS

The challenges to the implementation of strategic actions may appear to be easy in the
surface. Deeply the strategic action must be the result of careful analysis of the business
conditions and the competitors strategy. The firms success is not rooted mainly in identifying the
problems, developing alternative strategies, and protecting the corporate resources but on how
effective the process of analysis and cooperative thinking done by all managers in crafting the
strategic action. Often times managers are pressured to deliver the quarterly earnings and not
on the underlying competitive strategies to remain at the upper level in the years ahead.
There are lots of management decisions that fail obviously because they see only the
surface of the internal problems. Sometimes pointing fingers roll the heads of corporate
managers. Failure to admit mistakes would ruin more the corporate image and profitability.
Decisions may be uncertain to make results but the important thing is for decision makers to
admit mistakes and learn from it. Learning is the process of reforms and the development of
new strategy. This learning process would avoid future mistakes and careful the next time
around to develop more strategic action that will give the firm its corporate advantage.

MANAGERIAL DECISION MAKING

Managerial decision making is affected by the following;

1. Uncertainty
 decisions are uncertain about the conditions of the general industry environment
as it keep changing over time. any changes in the environment would need new
approach and new strategy. the competitors actions are keeping on wrapped and
intelligence network is needed to verify their market strategy. the consumer preference
change rapidly as new products and service May be available in the market before the
firm's new product could reach the customers.

2. complexity
the universe of decision-making process is complex as the interrelated
environment is shaping so rapidly. information gathering needs time and effort and
decisions needed sufficient data for analysis. the perceptions of the business
environment needs careful study to make valuable decisions that will generate better
return on investments.

3. intra-organizational conflict
the structure of the organization is so designed that managers are task with
specific duties and responsibilities. managers are working closely with their
responsibilities and would like to protect their own identity in the organization. while
horizontal and vertical working relationships exist managers could not avoid protecting
their own personal interest.

Managers face uncertainty in terms of new proprietary technologies, the rapid changing
economic and political trends, transformation in social values and shifts in customer demands,
environmental uncertainty increases the complexity and range of issues to examine the internal
environment. individual managers are often times biased and this affects the decision process
that could have developed the firm’s foundation for competitive advantage. The
intra-organizational conflict arises when managers cannot nurture and accepts some group’s
decision.
Judgment must be used in making decision when affected by the factors discussed
above. It is the capacity to see through The possible consequences of the actions to be taken
after a thorough analysis Of the business environment and those of the competitors strategy. in
the exercise of judgment the decision maker must be willing to take intelligent risk in the timely
manner as the current competitive landscape can be very particular for the firm's competitive
advantage. timely judgment allows the firm to build a strong reputation and retain loyal
stakeholders who's support is linked to the above return on investments.
The rapid change in the global economy needed change in the value creating potential
of the firm’s resources and capabilities. Changes in the worlds economic structure affect the
firm’s power and social structure. The inertia for change must be kept constant and the firm
must remain focus on its competitive advantage. Denial for change can be an unconcious
coping mechanism. Management must initiate change in order to survive in the changing world
of business.
RESOURCES OF THE INTERNAL ENVIRONMENT

Resources are the internal capabilities of the firm which could in turn bida source of
corporate core competencies. it covers the wide spectrum of individuals social structure and
organizational system that operate harmoniously in the direction of its intent and mission.
corporate resources could be tangible and intangible as they are assets that can be used for
competitive advantage.

1. tangible assets could be classified as;

a. financial resources
This refers to the firm's cash flow assets that can be use in the operation
of the business. It is the capacity to borrow money from financial institutions and
generates internal funds to sustain the firm's growth potential. it refers also to the
wise use of money to finance ongoing operation and sustainable development.

b. organizational resources
it refers to the organizational structure that plans, organize, directs and
control the operation of the business. the formal and informal relationships are
put in place to guide the corporate operational dimensions.

c. physical resource
these are physical assets that are used in the operation of the business.
this refers to plant facilities, machinery and equipment and used to produce
products. this may also refer to tangible assets used in the delivery of goods
and other assets which can be used in other operations.

d. Technological resources
It refers to the technology such as system and procedures, patents,
corporate trademarks, copyright & trade secrets. this may also refers to new
inventions and innovation undertaken by the company to improve its products
and services to its clients.

2. Intangible resources are classified into;

a. human resources
it is one of the most important assets that the company could depend on
for competitive advantage. it refers to skills and knowledge base of the workers to
see and direct the corporate activities two words the profit objective of the firm. it
also refers to the ability to plan, organize, direct and control the organizational
routine of the firm. the organizational effectiveness of human resources could
bring in the desire competitive advantage.

b. innovation resources
 it is the capacity to bring in new ideas and innovative strategies that
would be necessary in the change process. it refers also to scientific innovations
in terms of pollution control and wise use of material resources. while this refer to
talents and skills of the human resources, this tangible assets can be used for
competitive advantage.

c. reputational resources
it refers to the reputation the firm has earned over time with its customers
and other stakeholders. it refers to the perceptions about product quality,
durability, and reliability. reputation is also built with the suppliers in terms of
mutual relationships that are both beneficial to both parties.

the management of the corporate resources is challenge to understand fully the statistic
value of their tangible and intangible resources. the strategic value of resources is measured in
terms of the degree by which they can contribute to the development of capabilities, core
competencies and they eventually their competitive advantage. Intangible resources are less
visible to competitors and difficult to copy or imitate.
For greater competitive advantage, firms could rely heavily on intangible resources as
the foundation of their competitive advantage. The human resources as intangible assets are
greater Powerblock that could be used effectively if the workers and managers share their
talents and skills for the benefit of the firm. the sharing of talents and skills multiply the core
capabilities of the firm that contribute to its profitability. training and development interventions
are avenue for the development of human resources that will enhance their work values.

THE FIRMS INTERNAL CAPABILITIES

Capabilities are the tangible and intangible resources that are purposely integrated to
achieve the desired results. this is critical to the pathways in the development of competitive
advantage. it is measured on its effectiveness in the utilization and integration in the
development, carrying, exchange of information and knowledge Through its human capital.
knowledge base is grounded in organizational interventions that enhance human capital to great
advantage. continued improvement and training will develop the value of human resources as
repetition and practice will develop leverage for competitive strategy.
there is the adage that the person who knows how will always have a job and a person
who knows why will always be the boss. combining the two sayings, the firm's that develops its
human assets will always be at the forefront of competition. These are capabilities that no
competitors in the industry could much as they are invisible to most firms. their functional
expertise is the foundation of strong capabilities to the challenges of competition.
the knowledge possessed by the human capital is the most significant investment of the
firm in its operation and may be the root of all competitive advantage. knowledge must be
harnessed effectively in operational strategy and transfer its usefulness to the greater corporate
advantage. effective management system of participative strategy would cultivate teamwork
and efficiency at work. people will participate effectively if they are involved.
 involvement is the motivational process that will Enhance the peoples talent and skills.
the challenge is to create an environment that allows people to fit their individual pieces of
knowledge in ways that will support its effort to create value to all its stakeholders. it must be
imbedded in people that working together will redound to their personal advantage as the
growth of the firm is also their growth in terms of benefits and stable income.
corporate strategies recommended the creation of training department that will develop
programs and developmental interventions that would develop the knowledge and skills of
people in the organization. the advent of new technology and machineries in the production of
goods need knowledgeable people to operate with precession and expertise. as we develop
the knowledge base of operation we develop simultaneously the values of work and ethical
standards that are the foundation of better organization. talent knowledge and skills must be
supported by work values to be effective at work.

INTERNAL CORE COMPETENCIES

Core competencies are internal and external resources and capabilities that serve as the
source of competitive advantage over rivals in the industry. it reflects personality among its
client and stakeholders and emerged over time through an organizational process of
accumulating and learning on how to deploy its resources and capabilities. core competencies
are the corporate crowning glory earned through concerted effort and actions. the firm is known
by its client and stakeholders to perform especially well compared to competitors as they add
value to its products and service.
Corporate assets do not necessarily mean to have value and the potential for
competitive advantage. Some resources and capabilities may result in incompetence as they
represent competitive areas in which the firm operates weakly against its competitors. Some
tangible and intangible resources may stifle or prevent the development of core
competencies,thereby Losing its competitive advantage. some firms may have limited financial
resources to buy facilities and equipment necessary to compete in the development of new
products. the firm must therefore scout for external opportunities rather than compete in the
areas where they are weak.
the development of internal competencies is developed through time and the concerted
effort of painstaking research and analysis. the strategic alliance of all involved in the process
must work hand in hand and effectively take actions that would create the firm's competitive
advantage. it is not the monopoly of top management but it must be cascade down to the last
employee in organizational ladder.

THE CRITERIA FOR SUSTAINABLE ADVANTAGE

the firm achieves a sustained competency when the competitors failed to duplicate the
products or services that the firm produced or fails in entering the firm’s market niche.
Competitors will always have an eye to copy the products that sell in the market and will just be
looking for the opportune time when the firm slows down its operational strategy.
 The length of time a firm can retain its competitive advantage is the function of
how quickly competitors can imitate the products of the firm and overtake its attribute in terms of
quality and features. This could be the case with the many electronic gadgets like cellular
phones that was dominated first by nokia in the philippines market. Some electronic gadgets
were replaced in the market over a short period , and innovation and imitation came into surface
in a matter of weeks, the competitors made new and better products available and these drive
the first in the industry to either shift to other ventures.

Four sustainable criteria for competitive advantage;

1. Valuable capabilities
It refers to the state of how the firm can exploit opportunities and
neutralize threats in the external environment. It is also the creation of value
among its customers and development of loyalty and patronage by sustaining the
products quality and innovative features. Customer needs and satisfaction is an
important dimension in sustaining market patronage.
Value capabilities are now challenged with the online purchasing through
the internet. Many would browse the web and look for product substitutes. It is,
therefore, necessary for firms to also use this medium to inform their clients that
they still manifest superiority in the industry. Marketing products and distributing
the same to the customer have greatly changed the landscape of purchasing
strategy.
2. Rare Capabilities
Rare products are difficult to imitate. Rare capabilities are possessed by
few (if any) by the competitors. Competitive advantage results only when firms
develop and exploit capabilities that differ from those shared with competitors.
Manila electric company (MERALCO) has no competitor in the distribution of
electricity in most part of the Luzon grid. PLDT used to be the sole telephone
company until competitors came into existence but on a limited scale.

3. Imitation Cost Capabilities

Costly capabilities are corporate competencies that other firms cannot
easily develop. Huge investment in capital base could be one reason for other
competitors to enter the venture if they are not certain on their return of
investments. Some firms are not certain on their capabilities and expertise to
enter a market where it is dominated by single players that acquire the necessary
managerial and operational stature.

The combination of one or four reasons for firms to costly imitate are:
a. Unique historical condition
It refers to the historical development of the firm that comes at the
right time and place in history. These are firms that were established in
the early period of development where they acquired rights and franchise,
and developed organizational culture in the early of operation. An
 example, the Manila Electric Company (MERALCO) was developed at the
time energy power is needed by the country in its development stage.
Penetration of the delivery needs huge investment and at the same time,
the firm has developed the organizational culture that is quite difficult to
imitate.

b. The firm is casually ambiguous

It refers to the condition when the competitors cannot clearly
understand how a firm uses its capabilities as the foundation for
competitive advantage. The value-creating strategy of the existing firm is
unique in nature and competitors are uncertain to duplicate its capabilities
and earn the desired profit objective.

c. Social Complexity
Social complexity means that the firm’s capabilities are the
product of complex social phenomenon. The internal personal
relationship, true and friendships among managers and employees are
the firm’s reputation with suppliers and customers. Suppliers and
customers have competitive advantage when they are taken cared of by
the firm.

d. Political Complexity and Government Regulations

Political connection in business operation is a competitive
advantage as the power to elect officials is also dictated by the business
community. Political connections also play a great role for competitors to
enter the market or the industry. Government regulations are also factors
in competitive advantage as some industries are controlled by the
government for efficient and effective delivery of service. Example of this
industry is in the power generation sector and the transportation business.

4. Non-substitutable Capabilities
This refers to condition where there is no strategic equivalent to the firm’s existing
capabilities. The existing firm has capabilities and resources where other firms cannot imitate
due to its uniqueness. the firm's strategic value of competitiveness increases as they become
more difficult to imitate or substitute.
the firm specific knowledge and trust relationship among executives, managers and
rank-and-file personnel are capabilities that are hard to identify in which finding a substitute
poses challenges to competitors. this value creating strategy is the bundle of benefits generated
by the firm through time with the protection of the corporate knowledge base and the creation of
sustainable level of customer relationships.

VALUE CHAIN ANALYSIS

 It is the value analysis of the process of understanding the parts of operation creating
value for the firm and the analysis of costs position in creating products that gives the
competitive advantage. it also identifies the multiple means to implement the chosen business
strategy. there are two important segments that need analysis of the business situation.
1. the primary activities are those that are related to product creation and delivery
which are the following;
a. inbound logistics is concerned with the internal costs related to the
operation such as finance and other overhead costs related to production.
b. operation is related to the efficiency and effectiveness in the
manufacturing of the product with the use of system and procedures that
generate economy.
c. outbound logistics is related to the effectiveness and efficiency in product
delivery to its customers at least cost to the firm.
d. marketing and sales is concerned with the development of creating a
greater share of the market through advertising, sales promotion and
effective client relations.
e. Service is concerned with after-sales services undertaken by the firm to
maintain reputable image and develop continuous customer patronage.
2. the support activities are activities that support the primary activities which are;
a. procurement is the activity related the purchasing, delivery, storage and inventory of the
products that will be used in the production of goods.
b. technological development is concerned with the technology that is applied in the
production and the efficiency by which they are used
c. human resource management is the recruitment, selection and the process of making
the workers productive in the development of products through motivation and the
development of moral values and work ethics.
d. firm infrastructure is related to the physical facilities like buildings, machineries and
other physical assets that are inherent in the firms operation, and with utmost economy.

the foregoing segments should be analyzed by the firm on how to move the products at
the most efficient and economical manner from the production line to the ultimate consumer.
The idea of the value analysis is for the firm to capture that value attached to production and
deliver of goods, and to gain the competitive advantage that generates the desired return on
investments.
The focus of value generating analysis to all sectors in the firm’s operation . the
propensity in the use of the internet in the delivery and marketing of goods should be included in
the analysis as the global and local marketing are linked to the computer age. The knowledge
base on the internet operation is increasingly necessary to compensate for the value add and
the marginal advantage that the internet strips from the traditional distribution system.

MATERIAL OUTSOURCING
 Outsourcing inputs to production is the process of getting materials from external
sources and the trend continuous as the rapid pace in the new global economy. effective
outsourcing develops value as few organizations possess the resources and capabilities
required to achieve competitive superiority in both primary and secondary support activities.
concentrating on the core business activities, the multiply score and develop product as they do
not have to invest in the production of menial support supplies needed in their production.
Outsourcing enriched the firm's competitive capability as they do not overextend in areas that
are not of their expertise and core values.
Outsourcing works effectively with the extensive internal capabilities as purchasing and
procurement needs extensive relations with external suppliers in acquiring inputs for production.
Relations with suppliers are developed with effective coordination in the delivery of materials on
time For production. just-in-time deliver system is practice most successful firms especially in
the automotive industry like toyota, which first ventured and experimented on the system.

Outsourcing needs managers and external outsourcing executives the following characteristics;
1. Technical competence in evaluating the materials needed
2. Effective communication and human relations with intended suppliers
3. Coordination and effective control in inventory management
4. Honest and highly committed in following agreements with suppliers
5. Possess the expertise to assist technical improvements in materials development

Other companies ventured in outsourcing the production of their products with low labor
cost countries like China, Vietnam, Thailand and the Philippines. While production cost in labor
has been achieved, the quality has been found to be less superior to those produced in the
home country in terms of design and workmanship due to the inferiority of material and the
technology used.