10/29/20

INTERNAL
ENVIRONMENT
ANALYSIS
Chapter 4
Assoc Prof. Dr. Lê Thái Phong
Faculty of Business Administration
Foreign Trade University
E: lethaiphong@ftu.edu.vn
T: 0975.055.299

Learning objectives
1. Understanding resources + capability +
distinctive/core competencies
2. Value creation of firm
3. Value chain analysis
4. Key success factors (KSFs)

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External and Internal Analysis

Macroeconomics
Economic OP
Political & Legal PO
EXTER
N AL an RTU
dT
HR NITIE
Technology
Socio-cultural EAT S
THE Demographic S
MACRO-ENVIRONMENT
STRATEGIC GROUPS
INDUSTRY STAGE of DEVELOPMENT
5 FORCES MODEL (Plus 1)
EXTERNAL
THE •Rivalry
•Barriers to entry
INDUSTRY •Suppliers
•Buyers
•Substitutes
•Complementors
THE •COMPETITOR ANALYSIS
COMPANY
COMPANY STAGE of DEVELOPMENT
INTER
NAL RESOURCES, COMPABILITY, DISTINCITIVE
STRE COMPETENCIES, VALUE CREATION
NG
WEA THS and •Efficiency
KNES •Innovation
SES •Customer Responsiveness
•Quality
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“Before leaders can set up a new

strategy, they must reach a
common understanding of the
current position of the company .”

- W. Chan Kim & Renee Mauborgne -

Internal environment analysis

• The aim of the strategy is to generate better
business results (competitive advantage).

The purpose of internal analysis is to pinpoint the

strengths and weaknesses of the organization.

Strengths Weaknesses
Lead to superior performance. Lead to inferior performance

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Internal environment analysis

• Internal analysis includes:
– Quality + quantity of resources + capabilities
– The method of construction of unique skills and
distinctive capacity of enterprises

Competitive advantage
• Competitive advantage
Firm’s ability to gain profitability that is greater than the
average profitability of the industry.
• Sustainable Competitive advantage
– Ability to maintain profitability and good profit growth that
is higher than average level of the industry for many years.
graduately develop better than dramatically jump
The main objective of the strategy is to
achieve a sustainable competitive advantage
which is measured by better profit and profit
growth rate.

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Competitive advantages
Dell achieved sustainable competitive advantage, in comparison with competitors

dell has sustainable

competitive advantages

Strategy and competitive advantage

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Resources

• THE ASSETS THAT ORGANISATIONS HAVE OR

CAN CALL UPON (from partners or suppliers)

• Tangible (visible): • Intangible

assets that can be (invisible): assets
seen, touch, and that cannot be seen,
quantified touch, and
quantified

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Types of Firm Resources

• Tangible resources are assets that are
relatively easy to identify:
– Physical assets: plant & facilities, location, machinery &
equipment

– Financial assets: cash & cash equivalents, borrowing capacity,

capacity to raise equity

– Technological resources: trade secrets, patents, copyrights,

trademarks, innovative production processes

– Organizational resources: effective planning processes &

control systems

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12 resources: what we have

Capability: what we do well

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Types of Firm Resources

• Intangible resources are difficult for
competitors to account for or imitate – are
embedded in unique routines & practices:
– Human resources: trust, experience & capabilities of
employees; managerial skills & effectiveness of work teams

– Innovation resources: technical & scientific expertise &

ideas; innovation capabilities

– Reputation resources: brand names, reputation for fairness

with suppliers; reliability & product quality with customers

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Example: FTU

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Capability
• Ability/Skills at coordinating its resources
and putting them into productive use
• Coming from organisational’s routines, rules,
and procedures (internal processes)
• Product of its organisational structure,
processes, control, and hiring systems

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Types of Firm Resources

• Organizational capabilities are competencies or
skills that a firm uses to transform inputs into
outputs; the capacity to combine and use
tangible & intangible resources, e.g.:
– Outstanding customer service
– Excellent product development capabilities
– Superb innovation processes & flexibility in
manufacturing processes
– Ability to hire, motivate, & retain human capital
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Capability
• Usually based on the development of, transfer,
and exchange of information, and knowledge
through human resources in enterprises
• Capacity foundation is the knowledge and
unique skills of staff in companies =>
professional skills of labour

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Capability
Functional areas Capabilities Examples

Supply chain •Effective procurement techniques Starbucks

•Effective logistic mgt techniques Wal-Mart

HRM •Motivate, empower, retain employees Royal Bank

Info System •Effective/Efficient inventory control via Wal-Mart

point-of-purchase data collection

Marketing •Effective promote brand name of Gillette

products
•Effective customer service McKensey

Management •Ability to envision the future Nordstrom

•Effective organisational structure GAP
•Effective culture WestJet

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Capability
Functional areas Capabilities Examples

Management •Design & production skill yielding Komatsu

reliable products
•Product & design quality GAP
•Production of technologically Matda
sophisticated automobile engines
•Product & production miniaturization Sony

R&D •Exceptional technological capability Corning

•Development of sophisticated Motion Control
elevator control solutions
•Rapid transformation of technology Nucor Steel
into new products & processes
•Knowledge of silver-halide materials Kodak

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Resources and capability

• RESOURCES
– What we have
• CAPABILITY
– What we do well

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Distinctive competencies hard to copy

• Firm-specific strengths that allow to:
– Differentiate its products from others
– And/or achieve substantially lower costs than
rivals

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Distinctive competencies

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Distinctive competencies
• JIT system
• Self-managing teams
• Reduce set-up times for complex equipment

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Resources, capability,
distinctive competencies
• (some) RESOURCES +
• (some) CAPABILITIES =
• DISTINCTIVE COMPETENCIES

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Resources, capability,
distinctive competencies
• YES: firm-specific valuable resources
• NO: capability
• NO: distinctive competencies

No need to possess massive

resources. So long as having
capability that no competitors

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Resources, capability,
distinctive competencies

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Resources, capability,
distinctive competencies

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Resources, capability,
distinctive competencies

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Resources, capability,
distinctive competencies

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Resources, capability,
distinctive competencies

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Resources, capability,
distinctive competencies

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Resources, capability,
distinctive competencies

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Resources, capability,
distinctive competencies
• 1984-1988
– Sales: $1.66b - $3.75b
– Net profit: $98m - $570m
– Market value: $1.8b - $10.3b
• Resources + capabilities
– Film library
– Brand name
– Film making skills (animation)

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Resources, capability,
distinctive competencies
• Strategies:
– Releasing classical characters
– Making full length movies:
• Lion King
• Aladin

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Groupwork
• Analyse internal environments of the chosen
firm
– Resources
Strengths
– Capabilities
Weaknesses
– Distinctive competencies

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Resource-based theory (RBV)

• A firm’s unique resources and capabilities
provide the basis for a strategy
• Resources and/or capabilities:
– Valuable
– Rare
– Inimitable
– Nonsubstitutable
VRIN

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Value
• Strategic capabilities are of value when they
provide potential competitive advantage in a
market at a cost that allow an org to realise
acceptable levels of return
– Taking advantage of opportunities & neutralising
threats
– Value to customer and organisation
– Providing potential competitive advantages
– cost: low enough to have return

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Rarity
• Rare capabilities are those possessed uniquely
by one or by a few others
– E.g. Patented products that give firm advantages
– Library: rare collection of books
– Retail store: prime location
• Rare capabilities need to provide two things:
– Meeting customer needs
– Sustainability

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hard to copy
Inimitability
• Those that competitors find difficult to imitate
or obtain
• Two conditions:
– Superior performance
– Linked competencies

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VRIN model
V R I N Concequences Significance
N N N N Disadvantages Profitability below
average
Y N N Y/N Equal (competitors) Averaged profitability
Y Y N Y/N Short-tern competitve Above average
advantage
Y Y Y Y/N Sustainable competitve Far above advantage
advantage

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Resource-based theory (RBV)

• The firm is organised to exploit the resources
and capabilities
• INTERNAL focus
5 forces: by Porter 2985
BRV: by Barney 1991

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Analysing the Environments

• Two Environments
• The External Environment (chapter 3)
• The Internal Environment (chapter 4)

• Successful strategy formulation requires the consideration of both

environments

• Why and How do we do this?

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External Analysis

Opportunities
and Threats

By studying the external environment, organisations

identify what they might choose to do.

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Internal Analysis

Unique resources,
capabilities, and
competencies
(required for sustainable
competitive advantage)

By studying the internal environment,

organisations identify what they can do

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The Industry Organisation (I/O) Model

of Above-Average Returns

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Industrial Organisation (I/0)

Model of Above-Average Returns

• Dominance of the External

Environment
• The industry in which an
organisation competes has a
stronger influence on the
organisation’s performance.
• A stronger influence than the
choices managers make inside
their organisations.

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I/O Model of
Above-Average Returns

The External Environment

Attractive Industry

Strategy Formulation

Assets and Skills

Strategy Implementation

Superior Returns

Superior Returns: earning above-

average returns

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Value creation for customers

• Company profitability depends on three
following basic factors
1. VALUE/UTILITY (customers get from
products)
2. Product PRICE
3. COST to make products
4. Consumer surplus is superior utility that
consumers gain exceeds the price they paid

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Value creation for customers

• Basic principle:

The higher the

utility, the more
pricing options
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Value creation for customers

perceive value

surplus

value
created

maximize value for customer

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Value creation for customers

more customers but each no right or wrong option: depends
customer make less money on taste of manager
fewer customers but each
customer make more money

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Value creation for customers

Creation of superior value requires the gap

between the utility gained (U) and production
costs (C) is greater than the competitors.
increase V - C

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Value-Chain Analysis
• Value-chain analysis looks at the sequential
process of value-creating activities
– Value is the amount buyers are willing to pay for
what a firm provides
– How is value created within the organization?
– How is value created for other organizations in
the overall supply chain or distribution channel?
– The value received must exceed the costs of
production

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add quote 9 (duolingo) R&D -> operation (API, data base, security, design, collaboration) ->
Marketing (launching) and sale -> customer services

R&D -> operating (improve, manage, develop, scale up)

Value chain analysis

R&D

Link directly to production

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Value-Chain Analysis
• Primary activities contribute to the physical
creation of the product or service; the sale &
transfer to the buyer; and service after the sale:
– Inbound logistics
– Operations
– Outbound logistics
– Marketing & sales
– Service

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Value-Chain Analysis
• Support activities either add value by
themselves or add value through important
relationships with both primary activities &
other support activities:
– Procurement
– Technology development
– Human resource management
– General administration

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Value chain analysis

Supporting
activity of above
framework

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Example: The Value Chain in Service

Organizations

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KEY SUCCESS FACTORS

Basic Concept
• KEY SUCCESS FACTORS (KSFs) are FACTORS that an
organisation must have to compete successfully in an
industry
• A KEY SUCCESS FACTOR can be
– Specific skill or talent
– Competitive capability
– Something a firm must do to satisfy customers
• Can be industry level or firm level

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INDUSTRY KEY SUCCESS FACTORS

• KSFs consist of the 3 - 5 really major
determinants of competitive success in
industry
• Identifying KSFs is top priority as they are good
cornerstones of a firm’s strategy
– Winning COMPETITIVE ADVANTAGE often
hinges on being distinctively better than
rivals at one or more of the KSFs

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INDUSTRY KEY SUCCESS FACTORS

• Example: Restaurant
• 1. Quality of food
• 2. Quality of service
• 3. Ambience

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FIRM KEY SUCCESS FACTORS

• FACTORS that make a firm successful
• You can identify different factors make your
firm successful
• You can identify different factors make your
competitors successful

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Work with your team

• Identify KEY SUCCESS FACTORS of the chosen
industry
• Identify your resources, capabilities, and
distinctive competencies
• Identify YOUR STRENGTHS AND WEAKNESS

usefulness
ease of use
innovation
model TAM

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Results of internal analysis

STRENGTHS WEAKNESSES
S1 T1
S2 T2
S3 T3

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Homework for your group

• Analyse internal environments of the chosen
firm
– Resources
Strengths
– Capabilities
Weaknesses
– Distinctive competencies
• Propose SO, ST, WO, WT strategies for the firm

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Groupwork
3 - 5 each S W O T ASF MODEL
STRENGTHS WEAKNESSES
S1 W1
S2 W2
S3 W3
OPPORTUNITIES SO strategies WO strategies
O1
O2
O3
THREATS ST strategies WT strategies
T1
T2
T3

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Thank you very much!

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