Strategic Management

Internal Analysis

Professor Robert Hattemer 1

Strategy Frameworks for the Internal Analysis

Internal Analysis
1. Experience Curve
2. Porter’s Value Chain
3. Strategic Capability: Resources and Competences, VRIO-Framework
4. Product-Life-Cycle
5. Portfolio-Analysis (BCG, 9-Field Matrix)
6. Competitive Analysis (Strategic Groups)

Create a fit between the organization’s potential and

the requirements in the external environment

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Chapter 1 1
 The Experience Curve

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Experience Curve

• According to empirical research: unit cost of production

declines by 20% to 30% for each doubling of cumulative
output.
• Related to the concepts Economies of Scale (more
efficient use of internal resources due to large volumes)
and the Learning Curve (results in time savings due to
larger volumes).
• Reasons for the decrease in unit costs are: scale
economies, learning effects, technological advances and
realization of cost savings potential due to process
optimization.

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Chapter 1 2
 Experience Curve

• Thanks to repeating certain tasks individuals and teams experience

learning effects that result in lower defect rates, shorter cycle times
and thus lower production costs.
• Improvements in physical plant and process design increase
productivity and lower unit costs.
• Product standardization facilitates the simplification of the
production process.
• The additional experience results in a better understanding of the
product and the processes, allowing for further modifications that
yield additional cost reductions.
• With an increase in production volumes, the company experiences
economies of scale.

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Experience Curve -- Criticism

• The experience curve merely suggests potential savings—a

company must have the skills and know-how to take
advantage of the potential
• Very strong focus on mass production neglects the market
dynamics that increasingly call for customized solutions
• Experience curves can differ significantly for different types of
products and they have less relevance for many services.

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Chapter 1 3
 Identifying Strategic Success Factors

• Value chain analysis: Value chains are a key source to

competitive advantage
• Analyze competitive position on the basis of comparing
the functional performance
– McKinsey: Technology, Product Design, Manufacturing,
Marketing, Distribution, Service
– Porter: distinguishes between
• Primary activities = directly tied to the production, selling and
distribution: Purchasing, Operations, Marketing & Sales, Distribution
Customer Service
• Supporting activities = organizational infrastructure, HR, R&D, IT
• Criticism: very strong functional perspective

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Porter’s Value Chain

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Chapter 1 4
 Value Chain: Critical Assessment
• The value chain is a useful tool to identify the most important activities of
a firm, i.e., what do they have to be good at to achieve a competitive
advantage. Hint: a look at income statement line items often tells you
very important activities.
• But, there are limitations:
• A very strong functional perspective
• The value chain has to be modified to reflect the typical activities in an
industry (e.g., a bank does not have inbound or outbound logistics)
• The division into primary and supporting activities needs to be modified to
the realities of each industry (e.g., R&D is a primary activity in the
pharmaceutical industry)
• The value chain does not consider a company’s resources and
competences that are used throughout the organization

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Strategic Capability

• The adequacy and suitability of the resources

and competences of an organization for it to
survive and prosper
– Tangible resources - physical assets,
financial, human resources
– Intangible resources - information,
reputation, knowledge, intellectual
capital (brands, patents, etc.)
– Competences: the activities and process used to deploy the
resources

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Chapter 1 5
 Strategic Capability Defined

• Threshold capabilities: needed to meet the requirements in a given

market and to compete at the same level as competitors
• Distinctive capabilities: resources and/or competences that create a
competitive advantage
• Dynamic capabilities: the company’s ability to change and recreate its
strategic capabilities in response to changing environments

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Resources and Competences

Compet-
Resources ences

Threshold Threshold Threshold

capabilities resources compet-
ences

Capabilities for Core

competitive Unique compet-
advantage resources ences

Source: Johnson et. al:Exploring Corporate Strategy, 2008

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Chapter 1 6
 Strategic Capability: Resources and Competences
• To survive and prosper, an organization
must:
– Meet the challenges of the environment
– Meet the critical success factors
• This requires strategic capability, which
depends on resources and competencies:
– These must reach a threshold level for the
organization to survive
– To achieve competitive advantage, the organization
must have unique resources and/or core
competencies
– Assess the resources and competences using the
VRIO framework

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Strategic Capability: Cost Efficiency

Economies Experience
of scale

Cost
efficiency

Supply Product & process

costs design

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Chapter 1 7
 Understanding Cost Efficiency
EXERCISE
• Divide into groups of 3 or 4 and brainstorm what Aldi does in each of the four
factors that contribute to cost efficiency and that have allowed the company to
maintain its competitive cost advantage for such a long period of time.

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Managing Strategic Capability

• Stretching and adding capabilities:

– Extending best practice
– Adding and changing activities
– Stretching competences
– Turning weaknesses into strengths
– Ceasing activities
– External capability development

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Chapter 1 8
 Resource-Based View: Core Competence Anaylsis

• Resources are assets, competencies, skills,

processes or knowledge controlled by the
company. If they provide a competitive
advantage, they are a strength.
• Evaluate each resource using VRIO framework
(Barney)
– Value: does it provide value to the customer, exploit
opportunities or neutralize threats in the environment?
– Rarity: is it unique or do others possess it, too?
– Imitability: is it costly for others to imitate?
– Organization: is the firm organized to exploit the
resource?

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VRIO Framework

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Chapter 1 9
 Core Competence

• What a company does particularly well when

compared to competitors

Engine technology: cars, Brand management, marketing and

motorcycles, lawn mowers, distribution of FMCGs.
sporting boats.

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From Theory to Practice

CASE STUDY: Dyson

• Work in groups of 3 or 4 and answer the following questions. You are encouraged to engage in further
research.
• Analyze the company’s strategic capabilities: resources and competences. Which are threshold, distinctive
and dynamic?
• Carry out a VRIO analysis for what you identified as unique resources and core competences. To what
extent does the company have strategic capabilities offering a sustained competitive advantage?
• How important is Mr.Dyson for the company?

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Chapter 1 10
 Managing Strategic Capability

• Managing people for capability development

– Targeted training and development
– HR policies to develop particular competences
– Develop people’s awareness
• Building dynamic capabilities (learning
organization)
– People’s intuition is important
– Different, even conflicting ideas welcome
– Experimentation should be the norm

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Strategic Capability Analysis -- Criticism

• It may be difficult to obtain good information to arrive at a

subjective assessment when applying the VRIO framework
• The VRIO elements appear to be somewhat correlated
• Individual resources and competences cannot be viewed on
a standalone basis, but have to be considered in a greater
context, i.e., as a set of activities

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Chapter 1 11
 Product Life Cycle

Saturation

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Characteristics During the PLC

Introduction Growth Maturity

Sales: Low Sales: Rapid growth Sales: Slow growth

Costs: High Costs: Declining Costs: Declining
Profit: Negative Profit: Rapid growth Profit: Declining
Competitors: Few Competitors: Increasing Competitors: Many
Marketing: Awareness Marketing: Preference Marketing: Loyalty
Customers: Innovators Customers: Early Adopters Customers: Early Majority

Saturation Decline

Sales: Slow decline Sales: Declining

Costs: Constant Costs: Declining
Profit: Declining Profit: Negative
Time
Competitors: Still many Competitors: Declining
Marketing: Life extension Marketing: Elimination
Customers: Late Majority Customers: Laggards

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Chapter 1 12
 The PLC in Strategic Planning

• The PLC is frequently used in marketing to make product

and other marketing mix decisions
• Relevance in strategic planning:
– Empirical proof of limited life cycles
– Focus on the different dynamics in revenues growth, profits,
cash flows during the individfual phases
– Highlights the need for a balanced portfolio with a stream of new
products
– Limitited use for forecasting
– Good applications for the development of sales strategies

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PLC --Criticism

• Better suited for marketing strategies than for business

strategies
• Care should be taken not to follow norm strategies in the
individual phases; otherwise a company#s moves may be
too predictable
• The duration of the individual phases and the entire PLC
differs significantly from product to product or industry to
industry. More studies for individual product types are
needed.
• The PLC serves as a very good theoretical concept

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Chapter 1 13
 Portfolio Analysis

• Organizations with multiple businesses, products or product lines

must make strategic decisions:
– How to allocate their resources for the long-term success of the
business
– In which businesses, products or product lines to invest
– How to diversify their risk
• Characteristics of portfolio analysis
– Decomposition of decision-making through the formation of strategic
business units or products
– Visual description of the organization‘s product portfolio
• Objective: Create a balanced business/product portfolio to
ensure future cash flows required to support sustained
success

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BCG Matrix

Question Marks Stars

?
10%
Dogs Cash Cow

0 1 10
Relative Market Share

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Chapter 1 14
 Characteristics of BCG Businesses/Products

Question Marks Small relative market share in growth markets; often new
business/products; require high investment; strategic decision:
build to Star or retreat?

Stars Market leaders in a growth market; often require considerable

investment (e.g. if approaching maturity stage in PLC);
strategic decision: extend or maintain position; aim for
growth that is at least equal to market growth
Cash Cows Market leader in a slow growth market; generate high cash
flow and profits; less investment; economies of scale; strategy:
hold position, „milk“ the cash to support stars and question
marks
Dogs Low market share in slow growth market; often businesses/
products in maturity or decline stage or inferior products; often
small profits or losses; strategy: harvest, liquidate or sell

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Developing a BCG Matrix

EXERCISE
• In a group of 2 or 3, use the following data to develop a BCG-Matrix for Alpha Company’s
product portfolio in the year 2022.
• Which additional factors would you take into consideration to make portfolio decisions?

Product 2021 Sales 2022 Sales Market Share Share Largest Market
2022 Competitor Growth
A 635 640 20% 15% 4%
B 320 355 15% 25% 12%
C 100 105 26% 28% 8%
D 260 250 8% 12% -2%
E 735 750 14% 28% 1%
Total 2,050 2,100

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Chapter 1 15
 Developing a BCG Matrix
EXERCISE
• Looking at the operating cash flow for the past two years, how does this affect your
recommendations?

Product 2021 Operating Cash Flow 2022 Operating Cash Flow

A 71 64
B 22 25
C (2) (10)
D 13 11
E 72 78
Total 176 168

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BCG Criticism

• The BCG is a very useful tool for portfolio analysis, but should not
be used alone for decision making, because:
– Market share and growth rate are not the only important factors for
attractiveness (profit, market size etc.)
– There may be important product interdependencies
– There may be too much emphasis on market share, which is not always
the appropriate strategy
– By definition, there can be only one Star and Cash Cow; not all dogs are
in fact dogs, but many dogs may still provide value to the business
(contribute to fixed costs, add value to other products, enhance the
brand); however, a matrix can also look at high versus medium and low
market share
– No consideration of competitive advantage
– Companies are usually not able to impact market growth
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Chapter 1 16
 BCG Matrix in Strategic Planning

• A good model for the analysis of product lines and business units
• Other factors besides market growth rate and market share must be
considered
• The BCG should be used with other strategic planning models
• The definition of markets or business units is often difficult. Markets
have to be clearly identifiable

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9 Field Matrix (also McKinsey or GE Matrix)

• Measure: ROI (rather than Cash Flow)

• Market attractiveness reflects environmental factors
• Those factors which can be controlled by the
organization can result in a competitive advantage
• Methodology:
– Determine market attractiveness: rate and weight relevant
external factors from low (1) to high (10)
– Determine relative competitive advantage: evaluate and weight
success factors

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Chapter 1 17
 Examples for Factors in the 9-Field Matrix

Market Attractiveness Competitive Advantage/Success

Factors
1.Market potential Purchasing
• Market size Production
• Market growth Distribution
2. Market structure Capital
• Competitors (number, size, Personnel
barriers) Technology
• Suppliers (power, reliability, price Planning
trends) Control
• Buyers (power, loyalty, price Information
sensitivity)
Structure
3. Type of product/service
Culture

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McKinsey: 9 Field Matrix

10
1 2 3
High

Norm Strategies
Market Attractiveness

4,7,8 = Harvest, sell,

liquidate
4 5 6 1,5,9 = Selective
Medium

strategy (offensive,
defensive, hold)
2,3,6 = Grow, invest
7 8 9
Low

0
Disadvantag Advantage
e Relative Competitive Advantage

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Chapter 1 18
 9-Field Matrix--Criticism

• As in the BCG, exact market definition is often difficult

• Selection and weighting of success factors is crucial
and difficult: use PIMS studies or other empirical data
• Intensive data requirements
• Well-suited to identifying relevant critical success
factors in a systematic fashion

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Analysis of Competitors

• Strengths and weaknesses are determined in

comparison to competitors and should focus on
core competencies
• 4 steps:
– Assess current strategies
– Understand customers’ perception of firm and
competitors
– Determine strengths and weaknesses in strategic
capability
– Identify future objectives and strategy of competitors
• Problems:
– Identifying relevant competitors
– Understanding substitution from the customer‘s
perspective
– Access to information

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Chapter 1 19
 Strategic Groups

• Strategic groups are groups of firms within industries

with similar strategic characteristics, following similar
strategies or competing on similar bases
• Major characteristics include:
– Scope of activities (e.g., product range, geographic
coverage etc.)
– Resource commitment (e.g. brands, marketing
spend, vertical integration etc.)
• Purpose: Identify market or competitive positions that
rival firms occupy and how strongly or weakly they are
positioned and to select a promising position.

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Developing a Strategic Group Map

• Identify the competitive characteristics that differentiate
firms in the industry. Typical variables include:
– Price/quality range (high, medium, low), geographic coverage
(local, regional, national, global), degree of vertical integration
(none, partial, full), product line breadth (narrow, medium, wide),
breadth of distribution channels (one, some, all), degree of
service offered (no frills, limited, full)
• Plot the firms on a two-variable map using pairs of these
differentiating characteristics
• Assign firms that fall in about the same strategy space to
the same strategic group
• Draw circles around each strategic group, making the
circles proportional to the size of the group‘s share of
total industry revenues

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Chapter 1 20
 Guidelines for Strategic Group Maps

• The two selected variables should not be

highly correlated
• The variables chosen as axes should expose
big differences in how rivals position
themselves to compete in the marketplace
• If more than two good variables can be used
for axes, several maps can be drawn to
provide different insights into the competitive
positioning relationships within the industry

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Strategic Group Map

Geographic Coverage
Gucci, Fendi,
High Chanel
Example: Selected
Retail Chains in the
Saks, USA
Neiman Polo RL
Markus
Price/Quality

Macy‘s,
Nordstrom Sears
Gap,
Ban. Rep

Kohl‘s Target
TJ Maxx
Wal-Mart,
Kmart

Source: adapted from

Low Thompson, Strickland: Crafting
and Executing Strategy, 2007
Few Locations Many Locations
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Chapter 1 21
 Example: Global Beer Industry
High Tier 1
Globals, e.g.,
Focused, e.g., InBev/SAB,
Bitburger
Kingfisher,
Tier 2 globals, Heineken:
e.g., Tsingtao,
Geographic Reach

Singha,Guinness M&As, deep

Kirin Brewery: portfolio
narrow product
line

Regional, e.g., Boston Brewing,

Yanjing

Smaller regionals, e.g., Sierra

Nevada, Schneider

Growth micro-brews, eg., Minerva, New

Belgium, Beer Lao
Low
Local micro-brews

Few Brands Product Line Many Brands

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Exercise: Strategic Group Maps

• In a small group, engage in research and decide on meaningful variables for the X-axis and Y-axis for one of the
following industries (to be assigned):
• Global mobile phone industry
• German food/household goods retailing industry
• European passenger airline industry
• German furniture retailing industry
• German bottled water industry
• Global PC/Lap-Top industry
• Global automotive industry
• German clothing retailing industry

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Chapter 1 22
 Benchmarking
• The search for industry “best practice” that leads to superior
performance
• Business process approaches taken by companies within and
across industries to address similar challenges
• Benefits:
– Identify quantifiable measures of relative performance
– Develop an understanding of what works well in other/related
industries
– Establish what is achievable from an improvement perspective
– Understand how other companies have designed their process
– Determine what not to do

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Strategy Profile
1. Goal: Contrast a company’s competitive strategy with that of major competitors
2. Process: Identify the key elements that define a company’s strategy (X-axis)

6
High
5
4
3 High/Low, does not indicate good vs bad
2
1 Body Shop
0 Cosmetics Industry
Low

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Chapter 1 23
 Strategy Profile
1. Goal: Contrast a company’s competitive strategy with that of major competitors
2. Process: Identify the key elements that define a company’s strategy (X-axis)

NOTE: Think not only of tangible

elements (e.g., price/quality,
product features or functionality)
but also of intangibles, such as
psychological benefits.

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Strategy Profile

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Chapter 1 24
 SWOT Analysis

Internal, External,
Present Future

+ Strengths Opportunities

- Weaknesses Threats

Source: Johnson et. al: Exploring Corporate Strategy, 2008

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TOWS Matrix

Strengths Weaknesses

SO strategic WO strategic options

options
Opportunities Overcome
Use strengths to weaknesses to take
take advantage of advantage of
opportunities opportunities

ST strategic
WT strategic options
options
Threats
Minimize
Use strengths to
weaknesses and
avoid threats
avoid threats

Source: adapted from: Johnson et. al: Exploring Corporate Strategy, 2014

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Chapter 1 25
 Summary of Strategic Analysis
Environment Organization
External Analysis Internal Analysis

- PESTEL - Value Chain

-5 Forces - Resources & Competences

- Porter’s Diamond - Learning Curve

- ILC - Strategic Groups

Strategic Objectives -Competitor Benchmarking

-Portfolio Analysis, PLC

Opportunities and Strengths and

Threats Weaknesses
Gap Analysis

Alternative Strategies, Scenario Planning

Strategy Selection
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Bibliography

Boddy, D.: Management: An Introduction, 6th Ed., Pearson, 2013

Johnson, G./Scholes, K./Whittington, R.: Exploring Corporate
Strategy, 9th Ed., Prentice Hall, 2012
Porter, Michael: Competitive Strategy: Techniques for Analyzing
Industries and Competition, Free Press, 2004
Porter, Michael: The Competitive Advantage of Nations, Free
Press, 1990
Thompson, A./Peteraf, M./Gamble, J./Strickland, J.: Crafting &
Executing Strategy, 19th ed., McGraw-Hill, 2013

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Chapter 1 26