INTERNAL ANALYSIS

Internal analysis is the systematic evaluation of the key internal features of an organization.

The broad areas needed to be considered for internal analysis;

 The organization’s resources, capabilities/ competencies and their sustainability (Resource

based View)
 The way in which the organization configures and co-ordinates its key value-adding activities
(Value Chain Analysis)

Resource-Based View (RBV):

RBV is a method of analyzing and identifying a firm’s strategic advantages based on examining its
Resources, Capabilities/Competencies. The RBV’s underlying premise is that firms differ in fundamental
ways because each firm possesses a unique “bundle” of resources (Heterogeneity). Each firm develops
competencies from these resources, and these become the source of the firm’s competitive advantages.
Some of these resources and capabilities are inelastic in supply or costly to copy (Immobility)

Resources: Resources are assets employed in the activities and processes of the organization.

 They can be tangible (Machinery, Technology) or intangible (Patents, Reputation, Brand Image)
 They can be obtained externally or internally generated.
 They can be specific and non-specific:
 Specific resources can only be used for highly specialized purposes and are very important to the
organization in adding value to goods and services.
 Resources that are less specific are less important in adding value, but are more flexible.

Capabilities:

 They are firm-specific skills and organizational knowledge to optimally combine, manage and
leverage resources.
 Competences and capabilities will often be internally generated, but may be obtained by
collaboration with other organizations.
 Certain competences are likely common to competing firms within an industry or strategic
group.
 They are embedded in organizational routines (well-honed patterns of performing activities).
 They are often tacit (i.e. difficult to reduce to algorithms, procedural guides)

Core/Distinctive Competences:

Core competences or distinctive capabilities are combinations of resources and capabilities which are
unique to a specific organization and which are responsible for generating its competitive advantage.

Kay (1993) identified four potential sources of Core competences:

 Reputation (Apple)
 Architecture (i.e., internal and external relationship) (J&J)
 Innovation (Tesla)
 Strategic assets (Astra Zeneca, Pfizer)
 Resource Cycle

A FRAMEWORK FOR ANALYSIS: VRIO

Resource-based analysis of the firm determines which resources and capabilities result in which
strengths or weaknesses. Strategies are to be implemented which exploit (or build) strengths and avoid
(or eliminate) weaknesses.

Framework for analysis: VRIO - resources and capabilities should be

1. Valuable: A VALUABLE resource or capability contributes to fulfilment of customer's needs

2. Rare: Rarity of resources and capabilities refers to them being in short supply and inaccessibility
of firm’s to them.

3. Inimitable: Refers to inability of rivals to copy, imitate or duplicate a specific resource or

capability.

Depends upon:
Cost
Time
Causal ambiguity
 4. Organization: The following elements must be in place in order to effectively exploit the
resource(s) and/or capability(s):
 Structure
 Management and control systems
 Compensation policies
 Business processes
 Complementary resources and capabilities

Applying VRIO Framework:

1) Start with Functional domain wise Organizational Capability Profile (OCP):

Financial Capability factors

(a) Sources of funds

(b) Usage of funds

(c) Management of funds

Marketing Capability factors

(a) Product related

(b) Price related

(c) Promotion related

(d) Integrative & Systematic

(e) Distribution related

Operations Capability Factors

(a) Production system

(b) Operation & Control system

(c) R&D system

Personnel Capability Factors

(a) Personnel system

(b) Organization & employee characteristics

(c) Industrial Relations

General Management Capability factors

(a) General Management Systems

(b) External Relations

(c) Organization climate

Value Chain Analysis:
Tenets of Value Chain Analysis:

 Competitive advantage depends on the ability of the organization to organize its resources and
value-adding activities in a way that is superior to its competitors.
 Value chain analysis is a technique developed by Porter (1985) for understanding an
organization’s value-adding activities and relationship between them.

The Concept of a Company’s Value Chain:

 A company’s business consists of all activities undertaken in designing, producing, marketing,

delivering, and supporting its product or service
 A company’s value chain consists of a linked set of value-creating activities performed internally
 Value can be added in two ways:
 By producing products at a lower cost than competitors
 By producing products of greater perceived value than those of competitors.
The value chain contains two types of activities

Primary activities – where most of the value for customers is created

Support activities – facilitate performance of the primary activities

Primary activities:

1. inbound logistics: materials handling, warehousing, inventory control, transportation, inspection

2. operations: machine operating, assembly, packaging, quality testing and maintenance;

3. outbound logistics: order processing, warehousing, transportation and physical distribution

4. marketing and sales: advertising, promotion, selling, pricing, channel management;

5. service: installation, servicing, training, spare part management;

Support activities:

6. firm infrastructure: general management, planning, finance, legal, investor relations;

7. human resource management: recruitment, education, promotion, reward systems;

8. technology development: research & development, IT, product & process development;

9. procurement: purchasing raw materials, lease properties, supplier contract negotiations.

Characteristics of Value Chain Analysis:

 Combined costs of all activities in a company’s value chain define the company’s internal cost
structure
 Compares a firm’s costs activity by activity against costs of key rivals
 From raw materials purchase to Price paid by ultimate customer
 Pinpoints which internal activities are a source of cost advantage or disadvantage

Benchmarking Costs of Key Value Chain Activities

Focuses on cross-company comparisons of how certain activities are performed and costs associated
with these activities

 Purchase of materials
 Management of inventories
 Getting new products to market
 Performance of quality control
 Filling and shipping of customer orders
 Training of employees
 Marketing and selling

What Determines if a Company Is Cost Competitive?

Cost competitiveness depends on how well a company manages its value chain relative to how well
competitors manage their value chains

When costs are out-of-line, high-cost activities can exist in any of three areas in the industry value chain

1. Suppliers’ activities

2. Company’s own internal activities

3. Forward channel activities

Out-of-line, high-cost activities can be taken care of by:

 Eliminating some cost-producing activities altogether by revamping value chain system

 Relocate high-cost activities to lower-cost geographic areas
 See if high-cost activities can be performed
 cheaper by outside vendors/suppliers
  Invest in cost-saving technology
 Innovate around troublesome cost components
 Simplify product design
 Better integration vertically
 More efficient vendors & or channel

Evaluating internal factors including Industry factors using IFAS/IFEM:

Key Internal Factors Weight Rating Weighted Score

 Include both positive
(Strengths) & negative
factors (Weaknesses)
Consider about 10 to 15 key
factors
 
1.
2.
 
 
 
 
 Each key factor should be  The ratings in internal matrix  
assigned a weight ranging refer to how strong or weak
Multiply weight and
from 0.0 (low importance) each factor is in a firm. The
rating of each factor
to 1.0 (high importance). numbers range from 4 to 1,
The number indicates where 4 means a major
how important the factor strength, 3 – minor strength, 2 –
is if a company wants to minor weakness and 1 – major
succeed in an industry. If weakness. Strengths can only
there were no weights receive ratings 3 & 4,
assigned, all the factors weaknesses – 2 and 1.
would be equally
important, which is an
impossible scenario in the
real world. The sum of all
the weights must equal
1.0. Weight allocation has
to be a group exercise and
a consensual value to be
decided.

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