Strategic management

Internal Environment Analysis

Contents

The Internal Environment

Resources and capabilities that influence competitivity

The Value Chain

Elements of competitive advantage

Learning path
Strategy Current Business
Model
Formulation
Mission, Vision, Values & Goals
Chapter 01

External Analysis, Internal Analysis,

SWOT
Opportunities & Threats Strengths & Weaknesses
Strategic Choice
Chapter 02 Chapter 03

Functional Strategies,
Chapter 04
FEEDBACK

Business Strategies,
Chapters 05, 06 & 07
Global Strategies,
Chapters 08
Corporate Strategies,
Chapters 09 & 10

Strategy Governance & Ethics,

Implementation Chapters 11

Designing Organization Designing Organization

Structure Designing Organization Culture Controls
Chapters 12 & 13 Chapters 12 & 13 Chapters 12 &13
INTERNAL ENVIRONMENT
The Company and its Competitive Advantage.

• To stay successfully in the market , a Company needs to have at least

one Competitive Advantage over its rivals.
• The Competitive Advantage is developed through a good use of
internal resources.
• Companies have a bundle of resources that can be used to reach its
strategic objectives.
• The”heterogeneity of resources” is the variety of resources that each
Company posseses and in some cases it is a “unique” combination
which generates a Competitive Advantage.
What are the Resources and Capabilities that influence in competence?

• A RESOURCE is an asset that a Company possesses and controls .

• Unique resources may generate Competitive Advantage.
• Resources are of two types: Tangible and Intangible.

-Nowadays Intangible Resources tend to be more sophisticated and more valuable to produce
Competitive Advantages , for example the Value of Brands,
-Intangible assets are more difficult to detect and copy for competitors
-Paradoxically many Intangible Assets are not shown in the Finantial Statements.
Forum discussion

Intangible assets
Resources and Capacities that influence competitivity.

• CAPACITY is the hability of a Company to coordinate the use of its

resources to perform an activity in an efficient way.
• COMPETENCE is the product of experience and organizational
learning and represents a REAL proficiency in performing a task or
activity.
• CORE COMPETENCE is an Internal activity well performed that is
CENTRAL (not peripherical) to competitivity and profitability.
• DISTINCTIVE COMPETENCE is an activity completely valuable
that a Company performs better than its competitors and has the
potential of creating a Competitive Advantage.
• Give examples
RESOURCE BASED VIEW to reach Competitive Advantage(RBV)

Contends that to reach Competitive Advantage internal resources are more important
than external factors since the organization’s performance is determined by the
internal resources.

RBV states that the

combination, type,
Phisical Resources

Human Rsources

Organizacional Resources
• Plant • Employees • Organizational
• Equipment • Training structure quantity and nature
• Location • Experience • Planning Process of internal resources
• Technology • Knowledge • Organizational are more important
• Raw materials • Habilities Systems when formulating
• Inventories • Capacities • Company{s strategies to get
reputacion
• Machinery competitive
• Patents
• Trade marks advantage
• Data bases

Financial Resources Debt and financing capacity, Capacity to generate

internal revenue and funding
 2. Resources, Capacities and Core Competencies

•Knowledge, trust , managerial skills and organization’s

routines

Innovation Resources
• Ideas, scientific ability, innovation capacity

Reputation Resources
• Reputation among clients, quality, durability and reliability perception of the product
• Reputation among suppliers
• Interaction and customer relationship management (CRM)
2. Resources, Capacities and Core Competencies

• Capacity examples in a firm:

Distribution
• Effective use of skills to manage logistics
• e.i.: Wal – Mart, Microsoft, Dell.

Human Resources
• Motivation, Empowerment and Retention

Managerial Information Systems

• Effective inventory management throughout the
use of methods to gather information on site
 2. Resources, Capacities and Core Competencies

• Capacity examples in a firm:

Marketing
• Effective promotion of products using a brand. e.i: Procter & Gamble,
Polo Ralph Lauren, etc. •

Administration
• Capacity to have a vision of the future and an effective organizational
structure e.i. Pepsico.

Manufacturing
• Ability to create, design and produce reliable
products , e.i. Apple
Strengths and Weaknesses

Activities an organization can control

• Developed from adequate use of

resources, capacities and distinctive
Strengths competencies which lead to superior
profitability.

• Developed from inadequate use of

resources and lack of coordination for
Weaknesses the development of capacities or
distinctive abilities . Reduce
profitability.
Strengths and Weaknesses

C O M PA N Y

Some STRENGTHS Some WEAKNESSES

Management
• Sufficient Working Capital • Insufficient production
• Sound experience in capacity
Marketing
Research and • Defficient sales
developement forecast
• Increase of average Finance and • Low quality
purchases of clients. accounting distribution nets
• Certified sales personel • Defficient market
• Increasing profit/share. research capabilities
Production and
• Efficient productive Operations • Unattractice dividend
processes. policy
• Leadership in product
Research and • Delays in delivery of
innovation developement merchandise to stores.
• On line Inventory systems
.
Información
Systems
The four tests of the Competitive Power of
a Resource or Capacity to produce Competitive Advantage.

• 1.- Is the Resource or Capacity valuable competitively speaking?

• To be valuable it should be relevant for the strategy.
• Should bolster the Company to take advantage of opportunities and overcome threats.
• Help the firm neutralize threats and take advantage of the opportunities
• 2.-Is the Resource or Capacity rare and competitors lack of them?
• If competitors possess them they are not a source of competitive advantage.
• 3.- Is the Resource or Capacity hard to imitate?
• Organizational culture, trade mark or Brand

• 4.-Is the Resource or Capacity strategically unsustitutable.

• This characteristic implies that there should not be other kind of resources or capacities
with equal or major competitive power. No strategic equivalent
Relatioship of Competitive Advantage, Strategy,
Resources, Capacities and Competencies

Build

Resources

Core (distinctive) Competitive Superior

Strategies
Competencies Advantages Profitability

Capabilities Build
Competitive advantage, value creation, & profitability

Value Creation Per Unit

U = Utility to Consumer
U-P P = Price
C = Costs of Production

U
U – P = Consumer Surplus
P-C P – C = Profit margin
P U - C = Value created

C
Includes Cost of
C Capital per unit
 Competitive Positions Matrix

• The Company attains Competitive Advantage managing optimally its

costs and/or managing the Value that delivers to clients.
• Has lower costs than competitors and delivers equal or higher Value.
• Delivers higher Value than competitors with equal or less cost.
 Value Chain

• It is a series or
coordinated sequence of
functional activities
necessary to transform
inputs in finished
products or services that
client value and are
willing to pay for.
Components of the Value Chain
 Practical Use of Value Chain

• Can the VALUE CHAIN help us determine some sort of

strategies?
• Think about examples of companies whose activities you are
more familiar with and illustrate how the Value Chain of this
company could help determining a specific strategy.
• Might be a textile company , or a leather product company
 Primary Activities

• Inbound Logistics.-Activities, costs, and assets associated to receiving,

warehousing and distribute raw materials from suppliers, inspection and
inventory management.
• Operations.-Activities, costs, and assets associated with transforming raw
materials in finished products, packaging, equipment maintenance,
quality assurance, environment protection.
• Outbound Logistics.- Activities, costs, and assests referred to the phisical
distribution of finished products, warehousing, customer requests
processing, transport, and support to distribution nets.
• Marketing y commercialization.-Activities, costs, and assets related to
sales force, publicity, market research.
• Post-sales Service.-Activities, costs, and assets related to the assistance of
clients like instalation, delivery, repair and terchnocal assistance.
Support Activities

• Infraestructure.-Activities, costs, and assests related to general

administration, accounting and finance, legal and regulatory
matters, management of information systems, security.
• Human Resources Management.-Activities, costs and assets
associated with hiring, training, developement and compensation
to personnel.
• Technology Developement.-Activities, costs, and assets related to
R&D of product, its processing, design improvement, software
developement telecomunication systems, systems developement.
• Procurement (Purchasing),- Activities, costs, and assets related to
acquisitions arranged by the Company for all activities of the
Value Chain.
 Value Chain Management.

• Primary activities and Support activities of a Company

represent the main components of the internal cost structure.
• Cost competitivity of a Company depends not only upon its
Value Chain costs but also on the costs of the Value Chain of its
suppliers and distributors.
• A precise Competitivity evaluation of a Company requires that
managers should know about the whole system of the Value
Chain of the industry to deliver the product to the final
customer.
• Analyzing the Value Chain it can be found in what activity(ies) is
the company less efficient and as a consequence consider
outsourcing.
Definitions of basic accounting terms
Term Definition Source
Cost of Goods Sold • Total costs of producing products Income
(COGS) statement
Sales, General, and • Costs associated with selling products and Income
Administrative administering the company statement
Expenses ( SG&A)
R&D Expenses (R&D) • Research and development expenditure Income
statement

Working Capital • Amount of money the company has to work Balance

with in the short term: Current assets – sheet
current liabilities
Property, Plant, and • Value of investments in the property, plant, Balance
Equipment (PPE) and equipment that the company uses to sheet
manufacture and sell its products
• Also known as fixed capital

23
Definition of basic accounting terms
Term Definition Source
Return on Sales (ROS) • Net profit expressed as a percentage of sales Ratio
• Measures how effectively the company
converts revenue into profits
Capital Turnover • Revenues divided by invested capital Ratio
• Measures how effectively the company uses
its capitals to generate revenue
Return on Invested • Net profit divided by invested capital Ratio
Capital (ROIC)
Net Profit • Total revenues minus total costs before tax Income
statement
Invested Capital • Interest-bearing debt plus shareholders’ Balance
equity sheet

24
Drivers of profitability (ROIC)
COGS/Sales

Return On Sales SG&A/Sales

(Net Profit/Sales)

R&D/Sales

ROIC
Working
Capital/Sales
Capital Turnover
(Sales/Invested Capital)
PPE/Sales
ROIC = Return on Invested Capital
COGS = Cost of Goods Sold
SG&A = Sales General & Administrative Expenses
R&D = Research & Development Expenditure
PPE = Property, Plant & Equipment
 SWOT - Internal and External Analysis

SWOT
S W
Build on Erradicate

O Strengths to
exploit
Opportunities
Weaknesses
to exploit
Opportunities

Build on Erradicate
T Strengths to
avoid Threats
Weaknesses to
avoid Threats

https://www.youtube.com/watch?v=2xquSq0MSAc
SWOT analysis - Importance
1. It is a source of information for strategic planning.
2. Builds organization’s strengths.
3. Reverse its weaknesses.
4. Maximize its response to opportunities.
5. Overcome organization’s threats.
6. It helps in identifying core competencies of the firm.
7. It helps in setting of objectives for strategic planning.
8. It helps in knowing past, present and future so that by using past and
current data, future plans can be chalked out.
The Limitations of SWOT Analysis

• Strengths may not lead to an advantage

• SWOT’s focus on the external environment is too narrow
• SWOT gives a one-shot view of a moving target
• SWOT overemphasizes a single dimension of strategy

3-29
 Critical Success Factors

• A checklist of CSFs for the SWOT

analysis is shown on page 485 of
the textbook
 Reasons for failure of companies

Prior strategic
Inertia
commitments

The Icarus
paradox

Inertia https://www.youtube.com/watch?v=dJ3qjSzyIxQ
Icarus paradox https://www.youtube.com/watch?v=hY9THhsIXBc
31
Steps to avoid failure

Focus on the building blocks of competitive advantage

Institute continuous improvement and learning

Track best industrial practice and use benchmarking

Overcome inertia

The role of luck

32
 Ansoff Matrix
KNOWN PRODUCT UNKNOWN PRODUCT

KNOWN MARKET
Product
Penetration
development

UNKNOWN MARKET

Market
Diversification
development

https://www.youtube.com/watch?v=c5XjcTf6tLw&t=19s
 CONCLUSIONS

01 Distinctive competencies are the firm-specific strengths of a company.

02 The source of a competitive advantage is superior value creation.

To create superior value, a company must lower its costs or differentiate its products to
03 create more value and charge a higher price or do both.

The four building blocks of competitive advantage are efficiency, quality, innovation, and
04 responsiveness to customers.

Failing companies typically earn low or negative profits. Three factors seem to
05 contribute to failure: organizational inertia in the face of environmental change, the
nature of a company’s prior strategic commitments, and the Icarus paradox.
 REFERENCES

• Additional to Fred David’s “ Strategic Management” :

• Hill Ch.,Jones G., Schilling M. Strategic Management, 12 Ed. Cengage
Learning 2015 Chap 2 y Chap. 3
• Thompson A., Peteraf M. , Gamble J. , Strichland A. , Strategic
Management 20th Ed. Mc Graw Hill 2016. Chap 4.
THANKS