STRATEGIC MANAGEMENT

Chapter 3
INTERNAL ANALYSIS
KNOWLEDGE OBJECTIVES
● Explain why firms need to study and
understand their internal organization.

● Define value and discuss its

importance.

● Describe the differences between

tangible and intangible resources.

● Define capabilities and discuss their

development.

● Describe four criteria used to

determine whether resources and
capabilities are core competencies.
KNOWLEDGE OBJECTIVES
● Explain how firms analyze their value
chain for the purpose of determining
where they are able to create value when
using their resources, capabilities, and
core competencies.

● Define outsourcing and discuss

reasons for its use.

● Discuss the importance of identifying

internal strengths and weaknesses.

● Discuss the importance of avoiding

core rigidities.
 Internal Analysis:
Strengths and Weaknesses
Internal analysis - along with the external analysis of
the company’s environment - gives managers the
information to choose the strategies and business
model to attain a sustained competitive advantage.
Strengths Weaknesses
Of the enterprise Of the enterprise
are assets that are liabilities that
boost lead to lower
profitability profitability
 Internal Analysis:
A Three-Step Process
1.Understand the process by which companies
create value for customers and profit for
themselves.
❖ Resources
❖ Capabilities
❖ Distinctive competencies
2.Understand the importance of superiority in
creating value and generating high profitability.
❖ Efficiency
❖ Quality
3.Analyze the sources of the company’s
competitive advantage.
❖ Strengths – that are driving profitability
❖ Weaknesses – opportunities for improvement
 Internal analysis
Internal analysis include assessment of:

 Quantity and quality of the resources and

capabilities of an enterprise

 The method of construction of unique skills and

distinctive capacity of enterprises
 Internal analysis

• What are the sources of competitive advantage?

• What is the link between strategy, competitive

advantage, and profitability?
 Competitive Advantage
 Competitive Advantage
 A firm’s profitability is greater than the average
profitability for all firms in its industry.

 Sustained Competitive Advantage

 A firm maintains above average and superior profitability
and profit growth for a number of years.

The Primary Objective of Strategy

is to achieve a Sustainable Competitive Advantage
which is measured by better Profit and Profit Growth.
Strategy, Resources, Capabilities, and
Competencies
 RESOURCES, CAPABILITIES,
AND CORE COMPETENCIES
RESOURCES
Distinctive
Competencies • Are the source of a firm’s
capabilities
• Are broad in scope
• Cover a spectrum of individual,
social, and organizational
Capabilities phenomena
• Represent inputs into a firm’s
production process
• Alone, do not yield a competitive
advantage, i.e., by themselves do
Resources
• Tangible
not allow firms to create value that
• Intangible
results in above-average returns
RESOURCES, CAPABILITIES,
AND CORE COMPETENCIES
TYPES OF RESOURCES
Tangible Resources
• Assets that can be seen, touched, and
quantified
Intangible Resources
• Assets rooted deeply in the firm’s
history, accumulated over time
• In comparison to ‘tangible’ resources,
usually can’t be seen or touched
Compared to tangible resources, intangible
resources are a superior source of core
competencies
RESOURCES, CAPABILITIES
AND, CORE COMPETENCIES
TYPES OF RESOURCES
Tangible Resources
• FINANCIAL RESOURCES - the firm’s capacity
to borrow and generate internal funds
• ORGANIZATIONAL RESOURCES - formal
reporting structures
• PHYSICAL RESOURCES - sophistication and
location of a firm’s plant and equipment;
distribution facilities; product inventory
• TECHNOLOGICAL RESOURCES - stock of
technology, such as patents, trademarks,
copyrights, and trade secrets
RESOURCES, CAPABILITIES
AND, CORE COMPETENCIES
TYPES OF RESOURCES
Intangible Resources
• HUMAN RESOURCES - knowledge; trust;
skills; collaborative abilities
• INNOVATION RESOURCES - scientific
capabilities; capacity to innovate
• REPUTATIONAL RESOURCES - brand
name; perceptions of product quality,
durability, and reliability; positive
reputation with stakeholders, e.g.,
suppliers/customers
 RESOURCES, CAPABILITIES,
AND CORE COMPETENCIES
Distinctive CAPABILITIES
Competenci ■ Emerge over time through complex
es interactions among tangible and
intangible resources
■ Stem from employees
• Unique skills and knowledge
Capabilities
• Functional expertise
■ Are activities that a firm performs
exceptionally well relative to rivals
Resources ■ Are activities through which the firm
• Tangible
• Intangib adds unique value to its goods or
le services over an extended period of
time
 RESOURCES, CAPABILITIES,
AND DISTINCTIVE
COMPETENCIES
CAPABILITIES (cont’d)
Distinctive
Competenci ■ Exist when resources have been
es purposely integrated to achieve a
specific task or set of tasks
■ Are often developed in specific
functional areas
Capabilities
•Distribution
•Human resources
•Management information systems
•Marketing
Resources •Management
• Tangible •Manufacturing
• Intangib •Research & Development
le
 RESOURCES, CAPABILITIES
AND, CORE COMPETENCIES

Examples of
Firms’
Capabilities
Tangible resources
Intangible resources
Intangible resources
Intangible resources
Leadership
 Value Creation, and
Profitability
How profitable a company becomes
depends on three basic factors:

1. VALUE or UTILITY the customer gets from owning the

product
2. PRICE that a company charges for its products
3. COSTS of creating those products
 Consumer surplus is the “excess” utility a consumer captures
beyond the price paid.

Basic Principle: the more utility that consumers

get from a company’s products or services,
the more pricing options the company has.
Value Creation per Unit
 Value Creation and Pricing Options
There is a dynamic
relationship among utility,
pricing, demand, and costs.

Copyright © Houghton Mifflin Company. All rights reserved.

 Comparing Toyota and
General Motors

Superior value creation requires that the gap between

perceived utility (U) and costs of production (C)
be greater than that obtained by competitors.
 The Value Chain

 The value chain is the chain of activities which

results in the final value of a business’s products.

 Value added, or margin is indicated by sales

revenue minus costs.

 Porter divided internal parts of organization into

primary and support activities
 Value chains operate a sequential process

Infrastructure
Support
activities Human resource management

Technology development

Procurement
Margin
Primary Inbound Production Outbound Sales Service
logistics logistics and
activities
marketing

Creating and combining components

Source: Porter, M. E. (1985). Competitive Advantage: Creating and

Sustaining Superior Performance. New York, Free Press.
 Primary activities in the Value
chain

Primary activities are those that directly contribute to production

of good or services and organization’s provision to customer
 Inbound Logistics: receiving, storing and distributing inputs
to the production part.
 Operations: transforming inputs into the final product form
 Outbound Logistics: collecting, storing, and distributing the
product or service to buyers
 Marketing & Sales: purchases of products and services by
end users and the inducements used to get them to make
purchases
 Service: providing service to enhance or maintain the value of
the product
 Support activities in the Value
chain

Support activities are those that aid primary activities, but do not
themselves add value
 Firm infrastructure: Typically supports the entire value chain
and not individual activities
 Human Resources Management: involved in the recruiting,
hiring, training, development, and compensation of all types
of personnel
 Technology Development: Relate
 d to a wide range of activities and those embodied in
processes and equipment and the product itself
 Procurement: purchasing inputs used in the firm’s value
chain
 Value chain analysis

 An organization can develop a competitive

advantage:
– in any of the primary or support activities OR
– in the way they are combined OR
– in the way internal activities are linked to the external
environment (with suppliers and forward channels)

 Functional Analysis
– How much value is produced by this area versus the cost of
producing that value?
 Building Blocks
of Competitive Advantage
The Generic
Distinctive Competencies 
Allow a company to:
• Differentiate product offering
• Offer more utility to customer
• Lower the cost structure
regardless of the industry,
its products, or its services

 

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3|
  Efficiency
 Measured by the quantity of inputs it takes to
produce a given output:
Efficiency = Outputs / Inputs
 Productivity leads to greater efficiency and lower
costs:
 Employee productivity
 Capital productivity

Superior efficiency helps a company

attain a competitive advantage
through a lower cost structure.
  Quality
Quality products are goods and services that are:
 Reliable and
 Differentiated by attributes that customers
perceive to have higher value
The impact of quality on competitive
advantage:
 High-quality products differentiate and increase
the value of the products in customers’ eyes.
 Greater efficiency and lower unit costs are
associated with reliable products.
Superior quality = customer perception
of greater value in a product’s
attributes
Form, features, performance, durability, reliability, style, design
A Quality Map for
Automobiles
When customers
evaluate the quality of a
product, they commonly
measure it against two
kinds of attributes:
1. Quality as Excellence
2. Quality as Reliability
  Innovation
Innovation is the act of creating
new products or new processes
 Product innovation
 Creates products that customers perceive as more
valuable and
 Increases the company’s pricing options
 Process innovation
 Creates value by lowering production costs
Successful innovation can be a major
source of competitive advantage –
by giving a company something unique,
something its competitors lack.
  Responsiveness to
Customers
Identifying and satisfying customers’
needs – better than the competitors
 Superior quality and innovation are integral to superior
responsiveness to customers.

 Customizing goods and services to the unique demands of

individual customers or customer groups.
 Enhanced customer responsiveness
Customer response time, design, service, after-sales service
and support

Superior responsiveness to customers differentiates a

company’s products and services and leads to brand
loyalty and premium pricing.
 Group work
 Carry out value chain analysis for Vinamilk
 Building SWOT analysis for Vinamilk basing on
previous activity in chapter 2-3